Item 1. Business
This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements involve a number of risks and uncertainties which are described throughout this Form 10-K, including: demand from and its relationships with its strategic partners and major customers, including ADC Telecommunications ("ADC"), AT&T Local Services ("ALS") formerly Teleport Communications Group, Motorola, Inc. ("Motorola"), Paradyne Corporation ("Paradyne") and XEL Communications, Inc. ("XEL"); limited order backlog and quarterly fluctuations; delays and cancellations of actual and projected customer orders; new product development and introductions by the Company and its competitors including products based on the technology licensed by the Company from Positron Fiber Systems Corporation ("Positron") and Switched Network Technologies ("SNT"); deregulation of, and legislation regarding the domestic and international telecommunications industry; continued success of competitive local exchange carriers ("CLECs") in taking market share from incumbent carriers in the U.S. business communications services market; market acceptance of the SlimLine, StreamLine and Q-155 products; rapidly changing technologies and the Company's ability to respond to them; the growth of demand for telecommunications services such as wireless, cellular and the Internet; competition; changes in the mix of products or customers or in the level of operating expenses; and other factors described throughout this Form 10-K, including under "Revenues" and "Other Factors That May Affect Future Operating Results" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of this Form 10-K. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The Company has identified, using asterisks (*) (italics in the non-EDGAR version of this Form 10-K), various sentences within this Form 10-K which contain such forward-looking statements, and words such as "believes", "anticipates", "expects", "intends" and similar expressions are intended to identify forward-looking statements, but these are not the exclusive means of identifying such statements. In addition, the section labeled "Other Factors That May Affect Future Operating Results" in Item 7 of this Form 10-K, which does not include asterisks (italics in the non-EDGAR version of this Form 10-K) for improved readability, consists primarily of forward-looking statements and associated risks. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business.
Overview
Premisys Communications, Inc. (the "Company" or "Premisys") designs, manufactures and markets integrated access products for telecommunications service providers. The Company pioneered the integrated access device ("IAD") equipment market with the introduction of the first of a family of integrated multiple access communications systems ("IMACS") products in December 1991. The IMACS products are designed to enable public carriers to provide their business customers with flexible, cost-effective and reliable access to telecommunications services. The IMACS products provide access to numerous services, including plain old telephone service ("POTS"), Centrex, digital data networks ("DDN"), integrated services digital networks ("ISDN"), frame relay, and asynchronous transfer mode ("ATM") services. The IMACS platform allows carriers to offer a variety of value-added services, switching technologies and transmission technologies to their business customers through a single access device. The IMACS products' modular design and standards-based architecture enable carriers to offer advanced telecommunications services more quickly and cost-effectively than single purpose access equipment and to enhance the manageability of their networks. In fiscal 1998, the Company introduced two new integrated access products, the SlimLine and the StreamLine, which address simpler, single T1 access applications, and, in fiscal 1999, the Company introduced the Q-155 broadband IAD that combines Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy ("SDH"), time division multiplexing ("TDM") and ATM technologies in a single platform.
The Company's products are distributed and serviced worldwide primarily through strategic distribution relationships with significant telecommunications equipment vendors. The Company considers its relationships with these telecommunications equipment suppliers to be strategic in that they enable the Company to gain access to public carriers worldwide, to establish the Company's products as essential value added elements of the public carriers' business communications solutions and, in some cases, to incorporate proprietary technology into the IMACS products. The Company's products are typically sold as access components of the suppliers' communications equipment solutions. The Company's strategic distribution relationships, from which the Company has derived most of its revenues to date, include ADC, ALS, Motorola and Paradyne. To a lesser degree the Company also sells its products directly to carriers and end user customers and through value-added reseller relationships.
Premisys Communications, Inc. was incorporated in California in July 1990, and Premisys Communications Pte. Ltd. was incorporated in August 1990 under the laws of Singapore to be its parent. Premisys Communications Holdings, Inc. was incorporated in California in January 1992 to serve as a holding company for both Premisys Communications Pte. Ltd. and Premisys Communications, Inc. This reorganization was completed in March 1992. Premisys Communications, Inc., a Delaware corporation, was incorporated in October 1994 to be the Delaware successor corporation to the California corporations Premisys Communications Holdings, Inc. and Premisys Communications, Inc. The Delaware reincorporation was effected in March 1995. As a result of the reincorporation, Premisys Communications Holdings, Inc. and Premisys Communications, Inc., a California corporation, merged with and into Premisys Communications, Inc., a Delaware corporation, and Premisys Communications Pte. Ltd. and Premisys Communications Limited, a United Kingdom corporation incorporated in May 1994, became wholly-owned subsidiaries of the Delaware corporation. The Company also has a wholly owned Canadian subsidiary formed in July 1997. The Company's principal executive offices are located at 48664 Milmont Drive, Fremont, California 94538, and its telephone number is (510) 353-7600.
Background
Industry Trends
The market for telecommunications products and services is changing rapidly because of deregulation and resulting competition, evolving requirements of business communications, the drive for higher capacity and more cost-effective technologies and services, and the shift from private to public networks. The resulting proliferation of value-added services and technologies has created the need for solutions that permit carriers' business customers to access the variety of telecommunications services provided by these carriers.
Deregulation and Resulting Competition. Deregulation and competition are accelerating throughout the worldwide telecommunications industry. In 1984, the United States government deregulated the domestic telecommunications industry and forced AT&T Corporation ("AT&T") to divest its monopoly and create the seven regional bell operating companies ("RBOCs"). Since that time, continuing domestic deregulation, including the Telecommunications Reform Act of 1996, has led to fierce competition for the provision of both long distance and local telecommunications services. In the long distance market, MCI WorldCom, Inc. ("MCI WorldCom"), U.S. Sprint Communications Company ("Sprint") and others have emerged as competitors to AT&T. In regional and local markets, the incumbent local exchange carriers ("ILECs") are facing stiff and intensifying competition from a variety of competitive access providers and CLECs, such as MCI WorldCom and ALS, formerly Teleport Communications Group Inc. ("Teleport"). Over the last several years, many new CLECs have been formed, have raised substantial capital to build new networks and have focused on servicing commercial customers. The international market is also opening up as a result of deregulation, privatization and the presence of new wireline and wireless Alternative Carriers ( the international equivalent of CLECs). The intense competition resulting from the deregulation of these markets requires carriers to differentiate themselves by offering enhanced value-added services based on new and emerging technologies.
Evolving Requirements of Business Communications. In recent years, businesses have become increasingly dependent on the flow of voice, data and video through various telecommunications systems. This increased dependence on telecommunications has resulted from several business trends: the growth of the Internet, the shift to client/server computing; the increase in local area and wide area networking; the demand for new telecommunications services such as video conferencing; and the increase in cellular telephone and facsimile use nationally and internationally. In addition, businesses have expanded beyond their traditional corporate walls to include remote sales offices, employees working at home, mobile offices and far-flung customers and suppliers. As a result, these businesses require telecommunications services that provide significantly higher bandwidth, the flexibility to choose among services with varying bandwidth and the ability to access such services from remote locations.
Drive for New Technologies and Services. The changing communications patterns of business users and the fierce competition among carriers have fueled a drive for technologies that allow carriers to provide additional value-added services and to effectively deliver a growing portion of communications services based on packet-switched networks. Carriers are under pressure to invest aggressively in new technologies that can deliver services quickly, reliably and cost-effectively. Having invested in new switching and transmission technologies, many carriers have initiated aggressive programs focused on expanding their access infrastructure to broadly deliver new services efficiently. In addition, carriers are offering a range of services (e.g., Internet access, ISDN, LAN interconnection, video conferencing) on a bundled basis to their business subscribers, and integrated access devices facilitate these offerings. Bundled services give business subscribers turnkey solutions that free them from the burden of managing their own private networks, and they often provide higher margins to carriers than other services.
The Shift from Private to Public Networks. During the 1980s, most large corporations established and maintained their own private networks to transmit voice and data because the data transmission services offered by public carriers were limited and expensive. To build these private networks, corporations leased transmission lines from the public carriers at fixed monthly rates and purchased vendor-specific networking equipment. However, these corporations are now increasingly favoring public carrier services as traditional and emerging carriers have improved the price, performance and range of services they offer. Corporations are also seeking to shift to the carriers the costs and burdens of maintaining the network infrastructure and the risks of investing in new technologies in the absence of a single technological standard.
Access to Telecommunications Services
In response to the industry trends described above, new and emerging public carriers are aggressively investing in switching and transmission technologies to construct new and to upgrade existing telecommunications networks. Telecommunications equipment suppliers are offering more sophisticated central office switching equipment that enables carriers to provide new, value-added services. In addition, carriers are upgrading to fiber optic networks to provide additional bandwidth to their customers. Traditionally, customer access to data and voice services had been provided by multiple single purpose access devices. This solution was adequate until recently because only a limited number of services were offered. However, with the proliferation of new switching and transmission technologies and services, the traditional approach for accessing carrier services via separate devices resulted in a very complex access solution that was expensive, consumed valuable space and was difficult to manage and maintain.
The diagram below illustrates the complexity of having numerous dedicated discrete access devices.
[Diagram of Inegrated Access Solution-OBJECT OMITTED]
The need has developed for a new generation of access equipment that enabled carriers to provide their business customers with flexible, cost-effective and reliable access to the increasing number of available public carrier services without requiring a different access device on the customer's premises for each technology or type of service. Accordingly, public carriers are looking for access devices that:
o Integrate circuit, packet and cell switching technologies and support wireless, fiber optic cable, coaxial cable and copper wire transmission technologies;
o Accommodate a variety of different business communications equipment types (such as PBXs, LAN routers, automatic call distribution devices and modems) at end-user locations;
o Operate within the carrier's existing network management system for operations, administration, maintenance and provisioning;
o Have the flexibility and open architecture to accommodate both the requirements of existing installed equipment and the technology developments of the future; and
o Are reliable, easy to maintain and can be configured and serviced remotely.
Such devices would facilitate faster connections to new services as they are offered and reduce the carriers' costs of providing these services.
The Premisys Solution
Since 1990, Premisys has been involved in developing integrated access devices that would enable public carriers to provide their business customers flexible, cost-effective and reliable access to present and future telecommunications technologies and services. The diagram below illustrates the advantages of a single IAD compared to the approach shown above using numerous dedicated discrete access devices.
[picture of integrated access solution]
The Company's IADs are designed to serve as a single connection point between a broad variety of carrier services, such as ISDN, frame relay and ATM, as well as various business communications equipment types, such as PBXs and LAN routers. The Company designs its products with high levels of system redundancy, ease-of-maintenance and hardware safety to conform to established reliability and maintenance standards, practices and processes. Premisys has four distinct IADs covering a wide range of needs and applications. The Company's flagship product was the IMACS. The architecture of the IMACS product line is designed to permit integrated access to a wide variety of voice and data services, independent of the carriers' switching or transmission technologies. The modular, software-based design of the IMACS product allows carriers to upgrade easily to new communications services as they become available. The IMACS product can be managed remotely and have remote testing, monitoring and diagnostic features that allow carriers to minimize expensive on-site testing and trouble shooting. In addition, the Company's IMACS products provide access to network management information, such as line performance, traffic volume, configuration and alarm data, to the carriers' existing network management systems. The IMACS product is based on open industry standards for multi-vendor interoperability and enables carriers to deliver a comprehensive set of services without building proprietary overlay networks or management systems.
In fiscal 1998, Premisys, in response to a growing demand for smaller, lower-cost IADs, introduced two new IADs with more limited feature sets, the StreamLine and the SlimLine. The StreamLine product is a scaled down version of the IMACS product. It is an IAD designed for deployment of multiple services at small business locations. Using a single T1/E1 access line, the StreamLine product has expansion slots for up to 4 IMACS compatible voice, data, ISDN or frame relay cards. Because of its compatibility with the IMACS product, the StreamLine minimizes the cost of carrying spare modules, reduces training costs and provides a migration path to the larger IMACS system.
The SlimLine product, the smallest of Premisys' IADs and designed for low-cost applications, accommodates a single T1 access line and is offered in two fixed configurations for rapid deployment of voice and data services. It comes in either 12 or 24 port voice and 2 port data configurations. The SlimLine, a plug-and-play product, has a sleek, low-profile chassis designed to minimize space requirements.
In fiscal 1999, the Company shipped its first Q-155 product. The Q-155 accommodates 72 T1/E1 access lines and is designed to deliver a variety of narrowband and broadband services to customers.
The design and features of the Company's IAD products provide carriers with four major benefits:
o Lower Cost. The integration of multiple switching technologies in a single IAD platform reduces carriers' costs of providing access to these technologies. These reductions are realized in part by eliminating the need for numerous dedicated discrete access devices, thereby decreasing equipment costs. In addition, the Company's IAD products are able to concentrate multiple sources of low and high-speed traffic into fewer high-speed channels, thereby increasing utilization of carrier network capacity. The Company's IAD products allow carriers to deliver multiple communications products and services, while minimizing their risks of technology obsolescence or incompatibility.
o Ability to Offer Services Rapidly. The scaleable, upgradeable design of the Company's IAD products enables carriers to add revenue generating services such as ISDN, frame relay and ATM, more quickly, cost-effectively and targeted to only those areas with demand.
o Remote Manageability. The remote management features of the Company's IAD products enhance the manageability of carriers' networks without requiring additional network management systems.
o Reliability. The redundancy, diagnostic, testing and monitoring features of the Company's IAD products enhance the reliability of carriers' networks.
Company Strategy
The Company's strategic objective is to establish itself as the leading worldwide provider of access equipment to public carriers for business services. The key elements of the Company's strategy are described below.
Focus on Public Carrier Access Market
The Company's IAD products were designed in anticipation of a shift from private to public networks. The Company believes that its IAD products were the first standards-based integrated access devices specifically targeted to the public carriers. The Company's IAD products are designed to deliver voice, data and video applications regardless of whether the carrier uses circuit, packet or cell switching technologies and whether the carrier network uses copper wire, fiber optic cable, coaxial cable or wireless transmission. In recent years, carriers have focused on upgrading existing or building new networks by investing in switching and transmission technologies. The remaining links needed by the carriers in order to offer these new services are access devices, and the Company believes that a single integrated access device offers carriers the most cost-effective access solution. Carriers that deployed the Company's IAD products into their networks during fiscal 1999 included:
Domestic Wireline Carriers International Carriers -------------------------- ---------------------- AT&T AT&T Network Services International AT&T Local Services Comcore (Russia) Alltel Mobile Communications DACOM (Korea) Cablevision Systems Corporation Macomnet (Russia) MCI/WorldCom Metrocom (Russia) MediaOne Saudi Telecommunications Company Southwestern Bell Telephone Company Telmex (Mexico) Telmos (Russia)
Domestic Wireless Carriers AT&T Airtouch Communications Bell Atlantic Nynex Mobile GTE Mobilnet Service Corporation Sprint Spectrum
Increase Market Penetration Through Strategic Relationships
The Company has focused on forming strategic relationships with leading telecommunications equipment suppliers in order to gain market acceptance and penetration of its IAD products. This distribution strategy has enabled the Company:
o To take advantage of distribution capabilities and established relationships between leading telecommunications equipment suppliers and their public carrier customers and thereby gain access to public carriers worldwide, which do not generally purchase important infrastructure equipment from smaller companies such as Premisys;
o To establish the IAD products as essential value-added elements of the public carriers' business communications solutions; and
o To incorporate proprietary next-generation technology developed by or with these strategic telecommunications equipment suppliers into one or more elements of the IAD products, which are then distributed by the telecommunications equipment suppliers.
The Company believes that the joint development of technology with certain of these strategic telecommunications equipment suppliers demonstrates the commitment of these suppliers to the Company's IAD product line and encourages a longer term relationship with the Company. Relationships with Paradyne, Lucent Technologies ("Lucent"), Motorola and others have allowed the Company to incorporate advanced technology into its IAD products and have broadened the Company's markets worldwide.
Market Premisys Access Solutions Directly to CLECs
The recent, rapid growth of CLECs has stimulated demand for IADs. In addition to supporting the efforts of its strategic distribution partners in servicing their CLEC customers, the Company's sales force also calls directly on CLECs. This direct coverage of CLECs ensures that these carriers are aware of the advantages of Premisys' access solutions and provides input to Premisys for defining new products and features. Purchases of Premisys products by CLECs are made through both strategic distribution partners and direct contact with the Company.
International Markets
A major portion of the telecommunications equipment market is outside of the United States. Although most of the Company's current revenues represent shipments to domestic telecommunications equipment suppliers, all of these companies market and distribute the Company's products worldwide. *Premisys intends to increase and diversify its sales in international markets. To achieve this goal, Premisys is in the process of ensuring that its IAD products meet international standards and is pursuing international strategic relationships. Premisys currently has international sales offices in Singapore, Hong Kong, China, Mexico and the United Kingdom.
Customers and Applications
Customers
A substantial majority of the Company's sales are to suppliers of telecommunications equipment with whom the Company has strategic relationships. These telecommunications equipment suppliers generally resell the Company's products to public carriers and end users. The Company also sells products to value-added resellers ("VARs"), distributors and systems integrators, and, to a much lesser degree, directly to carriers and end users. Certain of the Company's customers in fiscal 1999 are listed by channel in the table below.
Strategic Relationships ADC Paradyne Alcatel U.S.A., Inc. (1) Pulsecom Ericsson Telecom S.A. de C.V. Tadiran Microwave Networks Lucent UTStarcom Motorola XEL Communications Northern Telecom
(1) - Alcatel U.S.A., Inc. ("Alcatel") is the combination of Alcatel Network Systems, Inc. and DSC Communications Corp, ("DSC"), with whom the Company has had a strategic relationship. Alcatel completed the acquisition of DSC in September 1998.
Value-Added Resellers, Distributors and System Integrators
Datacraft Asia PSI Technologies Corporation Harris Corporation/Farinon Division Schmidt Telecom InComA Ltd. SRT Associates Integrated Telecommunication Telos Engineering Limited Technology Sdn. Bhd. Interlink Communication Systems Telsource Corporation Metro-Link Services Co. Ltd. Trends and Technologies MSN Communications Walker & Associates N.E.T. Federal
Direct
AT&T Local Services Nexcom S.A.de C.V. Cox Communications Ovation Powertel, Inc. Southwestern Bell Telephone Company MediaOne MCI/WorldCom Motorola Paging
Paradyne was the Company's first strategic partner and was its largest customer in fiscal 1999. Paradyne markets the Company's products, under its label, AccuLink Access Controller (AAC), primarily to Lucent and AT&T. In fiscal 1997, 1998 and 1999, Paradyne accounted for 30%, 15% and 29% of the Company's revenues, respectively. The Company's agreement with Paradyne gives Paradyne exclusive distribution rights to AT&T entities. See "-Results of Operations - Revenues" and "Other Factors That May Affect Future Operating Results - Relationship with Paradyne" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
AT&T Local Services was the Company's second largest customer in fiscal 1999. It accounted for less than 5% of the Company's revenues during fiscal 1997 and 1998, but accounted for 13% of the Company's revenues during fiscal 1999. Motorola accounted for 15%, 11% and 12% of the Company's revenues during fiscal 1997, 1998 and 1999, respectively. *The loss of any one or more of the Company's major customers would have a material adverse effect on the Company's business and operating results. *Any of the telecommunications equipment suppliers that market and sell the Company's products could elect to cease marketing and selling the Company's products, and there can be no assurance that these telecommunications equipment suppliers will continue to place orders with the Company or that the Company will be able to obtain orders from new telecommunications equipment suppliers or end users. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors That May Affect Future Operating Results - Indirect Channels of Distribution."
The Premisys Product Lines
Premisys Communications, Inc. offers a full family of integrated access devices: the IMACS, StreamLine, SlimLine and Q-155 products. The IMACS is the Company's flagship product and has the broadest range of services among the Company's IAD product family. The Company began shipping the IMACS in 1992, and it has represented a substantial majority of the Company's revenues through fiscal 1999. The StreamLine has a similar modular architecture as the IMACS and supports all IMACS user cards in a smaller chassis with a single T1/E1 design. Shipments of the StreamLine began in March 1998. The SlimLine is a single T1 voice and data IAD, offering a very small footprint and low price. It is a product that is easy to provision and is ideal for the small or remote office environment. Shipments of the SlimLine began in June 1998. In June 1998 the Company announced the Q-155 product, which is a multiple T1/E1 product that manages narrowband access devices, delivers broadband services, and acts as a gateway to both time division multiplexing ("TDM") and cell-based carrier networks. Shipments of the Q-155 began in March 1999. The tables below compare the capabilities and prices of these four product lines.
NARROWBAND PRODUCTS
[picture of SlimLine] [picture of StreamLine][picture of IMACS]
SlimLine StreamLine IMACS Network 1-8 T1/E1s TDM, Connections Single T1 Single T1/E1 Frame Relay, DS3 ATM - -------------------------------------------------------------------------------- User o 12 or 24 voice o User cards: o Server cards: Connections ports ISDN, FXS, FXO, Frame Relay, o 2 data ports FRAD, Data, IP PRI, ATM, ADPCM o User Cards: ISDN, FXS, FXO, Frame Relay, IP - -------------------------------------------------------------------------------- Management o Plug & play, o Remotely via o Remotely via front panel EMS & Telnet EMS & Telnet configuration o Full range of SNMP MIBs - -------------------------------------------------------------------------------- Other o TR-08 o TR-08 o Server Cards Functions o Drop & insert for Advanced o Voice functions compression o 0/1 o Modular design cross-connect o Redundancy o TR-08 o Modular design - -------------------------------------------------------------------------------- List Price Range $3,500 - $5,000 $7,000 - $12,000 $10,000 - $40,000
BROADBAND PRODUCTS
[picture of Q-155]
Q-155 Network 72 T1/E1s TDM Connections DS3/E3, OC3/STM 1 SONET/SDH - --------------------------------------------- User o HDSL Connections o T1/E1 & DS3/E3 o OC3C/STM 1 - --------------------------------------------- Management o Remotely via online o TL1 - --------------------------------------------- Key o 3/1/0 Cross Functions Connect o ATM Switch o GR-303/V5.2 - --------------------------------------------- List Price Range $50,000 - $100,000 - ---------------------------------------------
IMACS Products
The IMACS product is a modular, software-based platform that can be configured for delivering a wide variety of communications services. The product is designed for mission-critical applications and supports full redundancy for CPU, wide area network ("WAN") interfaces, power supplies and ringing generators. The components of the IMACS system architecture are the WAN modules, user modules, server modules and common equipment modules. The WAN modules provide the connections to the carrier network. The user modules connect user voice, data and video systems to the IMACS. The server modules process information flowing between user and WAN modules, performing tasks such as voice compression, ATM adaptation and inverse multiplexing. The common equipment modules contain the central processor and provide power and interface functions. Two versions of the IMACS with three unique chassis designs are available: the 3.x Host series, which does not have server modules and supports an intelligent channel bank application and the 5.x Host series, which offers the full functionality of an IAD. The chassis designs are the IMACS/600 and IMACS/900 which are front-access devices, and the IMACS/800 that can be accessed from the front and back. This allows the IMACS to work in any carrier environment. Environmentally hardened units are also available, including units designed for desert installation.
The Company also offers pre-configured versions of the IMACS to address specific applications. These pre-configured products include: the BRX, which offers carriers a cost-effective solution for provisioning ISDN BRI services to remote customers, and the CellDAX, which is configured to reduce the amount of equipment at the wireless cell site, decreasing bandwidth requirements and reducing operating costs.
StreamLine
The StreamLine product, like the IMACS, has a modular design and is software-based. It supports all of the User cards supported by the IMACS, but none of the Server cards, and accommodates one T1/E1 connection instead of IMACS' eight. It is also manageable via the same element management system ("EMS") that supports the IMACS. However, it only has half the footprint of the IMACS, thus making it ideal for space constrained collocation space and telco closets, and its fewer modules and lower selling price offers carriers an inventory control and cost benefit.
As with all Premisys products, StreamLine is standards based including the Bellcore Standard TR-08 protocol. The single T1/E1 design positions it for the small and medium business market that carriers are targeting, without losing the scalability offered by the IMACS.
SlimLine
The SlimLine product is designed for small or remote business offices seeking plug & play provisioning of integrated T1 service. It is offered in two fixed configurations - one with 12 voice channels and two V.35 data ports, and the other with 24 voice channels and two V.35 data ports. Either or both data ports can support a low cost router for Internet and Intranet service. The chassis is a pizza-box design with configuration done with front panel dip switches. Installation is very simple.
TR-08 support comes standard with either the 12 or 24 port voice configurations, supports FXS, loop and ground start, caller ID and an integral channel servicing unit ("CSU").
*A managed version of the SlimLine was introduced in June 1999 and is expected to begin shipping in the December quarter of fiscal 2000.
Q-155 Product Line
The Q-155 brings the benefits of IADs to broadband networks. This product is designed to increase the utilization of higher bandwidth services such as SONET or SDH fiber optic rings and to accept legacy TDM or advanced packet traffic and route it to the appropriate central office or data switch, again in any protocol required (SONET, SDH, ATM, TDM).
The Q-155 enables carriers to deliver a variety of broadband and narrowband services to their business customers with higher utilization of their transmission networks and reduced requirements for ports on their central office cross-connects and switches. The Q-155 has been developed utilizing technologies licensed from Positron in January 1997, and from technologies licensed from SNT in March 1998. First shipments of the Q-155 occurred in the quarter ended March 31, 1999.
The Q-155 is designed to complement the IMACS, StreamLine and SlimLine products as the Q-155 can integrate these devices into a total network solution. *With the addition of the Q-155 product line, Premisys products are expected to provide a full access product line, offering multiple price points from a single T1 to SONET/SDH speeds and are expected to enable Premisys to offer a complete solution to network access. For a discussion of certain risks related to these new products, see "Other Factors that May Affect Future Operating Results - Rapidly Evolving Technology" within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Network Management
The IMACS and StreamLine products offer a number of network management options that are based on open industry standards in order to provide easy integration with generic network management systems and interfaces, such as the Simplified Network Management Protocol ("SNMP"). They can be managed locally through an attached terminal or remotely through an integral modem. Network management messaging is supported locally through TCP/IP protocol standards, including support for Serial Line Interface Protocol ("SLIP"), and remotely through the virtual terminal TELNET protocol. Network management messaging can be sent across the network via a carrier's standards-based network infrastructure. The Q-155 can be managed remotely either online or via TL1 (command line interface).
The Company has also developed application software for the IMACS and StreamLine products called EMS and the new OnLine EMS. EMS' features include fault management and statistics, remote testing and diagnostics, surveillance management, performance monitoring, software-download, inventory reporting and configuration management. These features reduce the carrier's cost of providing multiple services to its business customers by allowing remote management and control.
Marketing, Sales and Distribution
The primary market for the Company's products is public telecommunications carriers, including major domestic carriers providing long distance and local service, competitive access providers, competitive local exchange carriers, wireless service providers, enhanced service providers and international carriers. The focus of the Company's sales strategy is to form and to support strategic relationships with telecommunications equipment suppliers, systems integrators and international distributors (collectively "Partners"). The Company also has relationships with distributors and sells its products directly to end users on a limited basis. The Company currently has sales staff in several locations across the United States and also maintains international sales offices in Singapore, Hong Kong, China, Mexico and the United Kingdom. The offices in Singapore, China and Hong Kong serve the Asia/Pacific region, the office in the United Kingdom serves Europe, the Middle East and Africa and the office in Mexico serves the Latin American region. The Company's sales staff supports the sales organizations of the telecommunications equipment suppliers that distribute and market its products. In addition, the Company's sales staff provides field system training, develops new strategic relationships and, where appropriate, sells directly to carriers and end users.
Strategic Relationships
The Company believes that the combination of technologies, services and support mechanisms needed to reach the world-wide market for the Company's products can best be provided through strategic relationships with leading partners. Many of these partners have established relationships with the public carriers and provide a broad range of services to these carriers through existing front-line service and support networks. Premisys seeks strategic relationships that offer (i) an established presence in the Company's primary markets, (ii) a product line that the IMACS product can complement to provide value-added networking solutions and (iii) a core technology that enables the telecommunications equipment suppliers to develop enhanced products with market differentiation that can be integrated with the IMACS platform.
The Company believes that the joint development of technology demonstrates the commitment of these partners to the IMACS product line and encourages a longer-term relationship with the Company. *The Company has completed joint development projects with Paradyne, Lucent, Northern Telecom, Alcatel and Motorola, which has led to IMACS products being sold as components of these companies' specific products.
The Company's agreements with partners generally grant non-exclusive licenses to distribute and, based on volume, provide for certain discounts on the purchase prices of the Company's products. *Any partner that markets and sells the Company's products could elect to cease marketing and selling the Company's products, and there can be no assurance that these partners will continue to place orders with the Company or that the Company will be able to obtain orders from new customers or end users. *The loss of any one or more of the Company's strategic partners would have a material adverse effect on the Company's business and operating results. The Company derived approximately 77%, 80% and 81 % of its revenues from its partners in fiscal 1997, 1998 and 1999, respectively. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations Revenues" and "- Other Factors That May Affect Future Operating Results Relationship with Paradyne."
Distributors
The Company also uses a select number of VARs, system integrators and distributors to market and sell its products. These customers generally sell the Company's products to smaller carriers and corporations accessing public networks as well as to service international markets where the VAR or distributor is located. The Company derived approximately 19%, 11% and 7% of its revenues from value added resellers and non-strategic distributors in fiscal 1997, 1998 and 1999, respectively.
Direct Sales
Direct sales by the Company to carriers and end users to date has represented a minor part of the Company's business. Generally, the Company sells directly only to carriers that have their own established support and service infrastructures and to end users within market segments where the Company's strategic telecommunications equipment suppliers, distributors and VARs cannot cost-effectively market and sell the Company's products. The Company derived approximately 4%, 9% and 12% of its revenues from direct sales in fiscal 1997, 1998 and 1999, respectively. *The Company intends to focus on and increase the proportion of its revenues that are derived directly from CLECs and Alternative Carriers. *The Company believes that large telecommunications equipment providers do not aggressively target these new and generally small carriers. *Moreover, the Company believes that its products are ideally suited to these new carriers because they offer bundled services, a range of technologies, protection of legacy investment and low cost implementation. *The Company intends to augment its technical support, training, collateral development and marketing to actively develop its direct sales capabilities. *However, there can be no assurance that such efforts will be successful. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors That May Affect Future Operating Results - Competition."
Customer Support
The partners that sell the Company's products directly to the end user provide the first level of customer support for the Company's products. The Company's personnel provide backup support and training. When a partner is not able to provide solutions to product problems, service personnel contact the Company's customer support group, which has hardware and software products configured to simulate networking problems. In some cases, the Company's customer support representatives dial into the end user network to assist directly in troubleshooting and problem isolation. Customer support representatives are available by telephone 24 hours a day, 7 days a week. The Company also provides on-site service when requested.
The Company's products have been designed to ensure that problems can be easily diagnosed. All voice and data modules contain integral testing suites that allow isolation of networking problems. The Company currently warrants its systems products against workmanship or defects for five years and its network management software products for 90 days. During the warranty period, Premisys repairs or replaces any failed system component at no charge.
The Company also provides technical training either at the sites of its strategic partners or at Company facilities. Training courses include the theory of operation, equipment diagnostics and the testing and troubleshooting of both the equipment and the network. Train-the-trainer courses are also offered to help the telecommunications equipment suppliers educate their support personnel.
Competition
The market for telecommunications products is highly competitive and subject to rapid technological change, regulatory developments and emerging industry standards. The Company believes that the principal competitive factors in the carrier access market are: support for multiple types of carrier services; conformance to public carrier standards for signaling, transmission, network management, reliability and safety; the development and rapid introduction of new product features; price/performance; quality of customer support; and installed base. The Company believes it has competed favorably to date with respect to these factors. *However, there can be no assurance that the Company will compete successfully in the future with respect to these or other factors.
The Company's principal competition to date for its IMACS products has been from major telecommunications equipment suppliers, such as Newbridge Networks Corporation ("Newbridge"), Tellabs, Inc. ("Tellabs") and World Access, Inc. ("World Access"), all of which offer broad lines of products including access devices for business applications. *The Company expects substantial additional competition from existing competitors as they develop products to compete with the functionality and flexibility of the Company's IMACS products. Premisys' SlimLine and StreamLine products have faced significant competition from Carrier Access Corporation ("CAC"), and to a lesser extent from Vina Technologies ("Vina"), Adtran, Inc. ("Adtran") and existing telecommunications equipment manufacturers selling channel bank and CSU/DSU (data servicing unit) products. In addition, the Company faces competition from companies who provide substitute, as opposed to direct replacement, solutions for the Company's IMACS, SlimLIne and StreamLine products. The primary competitors supplying substitute products include Advanced Fibre Communications ("AFC"), Alcatel, Lucent, Nortel and Reltec Corporation ("Reltec"). The Q-155 product competes with broadband access products offered or announced by a number of vendors including Fibex, which was recently acquired by Cisco, Accelerated Networks, Inc., Atmosphere Networks, Inc., other telecommunications equipment manufacturers selling multiplexer products and digital loop carriers ("DLCs") with the Bellcore Standard GR-303 protocol and other competitors, such as Pairgain Technologies, Inc. ("Pairgain") and Paradyne, that provide bundled voice and data services and solutions for better utilization of bandwidth. *Certain of the telecommunications equipment suppliers that market and distribute the Company's products may in the future develop other products that could be sold for selected applications for which the Company's products are currently provided. *Successful, timely development and market acceptance of such products could reduce the level of demand from these telecommunications equipment suppliers for the Company's products. *To the extent that current or potential competitors can expand their current offerings to include access to circuit, packet and cell switching in an integrated product, the Company's business and operating results could be materially adversely affected. Many of the Company's competitors have technical, financial, manufacturing and marketing resources significantly greater than those of the Company. In addition, many of such competitors have long-established relationships with public carriers. *There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future.
Manufacturing and Suppliers
The Company's manufacturing operations consist primarily of materials planning and procurement, module testing and quality control. The Company relies on contract manufacturers, primarily in the United States. The Company's reliance on third-party subcontractors reduces the Company's flexibility and responsiveness to changes. For example, contract manufacturers are not as quick as internal manufacturing organizations to react to new products or changes in product designs or product quantities. Use of contract manufacturers can expose Premisys to supply interruptions due to production, quality or financial problems of its contractors. *This loss of flexibility or supply interruption can result in shipment delays, which could have a material adverse effect on the Company's business and operating results. The Company believes, however, that by using a limited number of third-party subcontractors, it is in a better position to reduce product costs, acquire additional capacity and reduce its capital investment. All testing of the Company's products is performed by the Company at its Fremont, California facility. Products are rigorously tested using automated test equipment prior to shipment to customers. All printed circuit board assemblies are tested individually. To date, the Company has experienced no significant adverse affects on flexibility or responsiveness to changes due to the Company's use of third-party subcontractors.
Generally, the Company uses industry standard components for its products. It uses field programmable gate arrays with erasable programmable memory rather than custom integrated circuits in order to maximize its ability to customize products quickly for individual carriers and add product features. Certain components used in the Company's products, including microprocessors and communications chips that are manufactured by Motorola, Siemens AG, Xilinx, Lucent and National Semiconductor, are currently available from only one supplier. In the past, the Company has experienced shortages of certain of these and other components because of vendor production or quality problems and the inability of suppliers to increase delivery rates to meet the Company's requirements. In the past certain components have been in short supply within the Company's industry, and in such cases, Premisys must compete for these components with larger companies that often have longer established relationships with these vendors. Component shortages and delays have on occasion resulted in delays in the shipment of the Company's products, and the component shortages have also on occasion resulted in higher component costs. Certain components used in the Company's products require an order lead time of up to one year. *Other components that currently are readily available may become difficult to obtain in the future. *Failure of the Company to order sufficient quantities of these components in advance could prevent the Company from increasing production of products in response to customer orders in excess of amounts projected by the Company, which could have a material adverse effect on the Company's business and operating results. *Alternatively, ordering too much of a component in advance could lead to excess inventory, which could have a material adverse effect on the Company's business and operating results.
*An extended delay in deliveries of components or of finished printed circuit board assemblies would have a material adverse effect on the Company's business and operating results and possibly on its relationships with its customers. *Although Premisys typically maintains some reserve inventory of components, this inventory would not cover a significant delay in the delivery of such components.
Research and Development
During fiscal 1997, 1998 and 1999, total research and development expenditures were $10.5 million, $16.2 million and $19.8 million, respectively. All research and development expenditures are expensed as incurred. In addition, in fiscal 1997 and 1998 the Company incurred charges of $4.0 million and $4.4 million, respectively, for licenses to certain SONET and SDH based technologies and cell and packet technologies, respectively. See "Results of Operations - Acquired In-Process Technology" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K.
The telecommunications equipment market is characterized by rapidly changing technologies and frequent new product introductions, which include frame relay, ATM and new digital subscriber line technologies ("xDSL"). Standards for new services such as ATM and xDSL are still evolving. *As these technologies and related standards evolve, the Company may be required to modify its products or develop and support new versions of its products. *The rapid development of new technologies increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company's products. *The Company's success will depend to a substantial degree upon its ability to respond to changes in technology, industry standards and customer requirements. *This will require the timely selection, development and marketing of new products and enhancements on a cost-effective basis. *There can be no assurance that the Company will be successful in developing, introducing or managing the transition to new or enhanced products or that any such products will be responsive to technological changes or will gain market acceptance. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors That May Affect Future Operating Results - Rapidly Evolving Technology."
In fiscal 1997, 1998 and 1999, the Company's research and development activities focused on the development and release of the SlimLine, StreamLine and Q-155. The SlimLine and StreamLine were released in the quarters ended March 31 and June 30, 1998, respectively. The Q-155 was first shipped in the quarter ended March 31, 1999. Premisys licensed SONET/SDH technology from Positron in the quarter ended March 31, 1997 and licensed cell and packet switching technologies from SNT in the quarter ended March 31, 1998. The Company has integrated the technology licensed from Positron, and is continuing to integrate the technology licensed from SNT, into the Q-155.
*Products as complex as those offered by the Company may contain undetected errors or failures when first introduced or as new versions are released. *Such errors have occurred in the past year, and there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products after commencement of commercial shipments. *The occurrence of such errors have in the past resulted (including during fiscal 1997, 1998 and 1999), and could in the future, result in the loss or delay in market acceptance of the Company's products, which could have a material adverse effect on the Company's quarterly operating results and its market opportunities. *As the functionality and complexity of the Company's products continue to grow, the Company may experience an increased incidence of such errors or failures, as well as delays in introducing its products.
As of June 30, 1999, 122 employees were engaged in research and development programs, including hardware and software development, test and engineering support personnel. The Company believes that recruiting and retaining engineering personnel is essential to its success. *To the extent that the Company is not successful in attracting and retaining its technical staff, its business and operating results would be adversely affected. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors That May Affect Future Operating Results - Dependence on Key Personnel."
Government Regulation
*Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network services and therefore are expected to affect demand for such services and the telecommunications products that support such services. *Regulations and FCC rulings arising from the Telecommunications Reform Act of 1996 will impact service offerings and competitiveness in the communications marketplace, and thus could have an effect on the timing and size of the industry's investment in access equipment. *Tariff rates, whether determined autonomously by carriers or in response to regulatory directives, may affect the cost effectiveness of deploying public network services. *Tariff policies are under continuous review and are subject to change. *User uncertainty regarding future policies may also affect demand for telecommunications products, including the Company's products.
Governmental communications regulatory authorities have promulgated regulations that, among other things, set installation and equipment standards for private telecommunications systems and require that all newly installed hardware be registered and meet certain governmental standards. *The failure of the Company's products to comply with these standards, or any delays in compliance, could delay introduction of the Company's products, which could have a material adverse effect on the Company's business and operating results. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors That May Affect Future Operating Results - Industry Standards and Regulatory Matters."
Intellectual Property
The Company relies upon a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company currently holds one U.S. patent. This patent relates to the manner in which the various modules that are included within an IMACS communicate with one another and expires December 2012. The Company has also entered into confidentiality and invention assignment agreements with its employees, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. *There can be no assurance that these statutory and contractual arrangements will prove sufficient to deter misappropriation of the Company's technologies or independent third-party development of similar technologies. *The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely.
The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. *From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. There are no currently pending material claims that the Company's products, trademarks or other proprietary rights infringe the proprietary rights of third parties. *However, there can be no assurance that the Company will not receive communications from third parties in the future asserting that the Company's products infringe or may infringe the proprietary rights of third parties. In its distribution agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. *In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. *In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. *There can be no assurance that licenses from third parties would be available on reasonable commercial terms, if at all. *In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business and operating results would be materially adversely affected.
Employees
At June 30, 1999, Premisys employed 332 individuals on a full-time equivalent basis. Of these, 100 were involved in sales, marketing and customer support, 122 in research and development, 79 in manufacturing, and the remaining 31 in administration and finance. The Company also uses contractors and temporary workers. The Company considers its relations with its employees to be good and has not experienced any interruption of operations as a result of labor disagreements. *The Company's future success will depend on its ability to attract, motivate and retain highly skilled employees, the competition for whom is intense. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Factors That May Affect Future Operating Results - Dependence on Key Personnel."
Item 2.
Item 2. Properties
The Company's principal offices are located in two facilities, totaling 118,281 square feet, leased by the Company in Fremont, California. The leases on these facilities, which are classified as non-cancelable operating leases, expire on various dates through December 31, 2005. In addition, the Company leases a facility, totaling 29,840 square feet, in Fremont, California that it subleases under a three year sublease that commenced in April 1999. The Company also leases facilities in Florida, Colorado, Texas, Canada, Singapore, Hong Kong, the United Kingdom and China. The leases on these facilities, which are classified as non-cancelable operating leases, expire on various dates through December 31, 2005. Approximately 60% of the space in the Fremont, California facilities is used or reserved for manufacturing, product development and testing; the balance of the space is used or reserved for sales, marketing and other general administrative activities. See Note 9 of Notes to Consolidated Financial Statements. The Company believes that its present facilities are well maintained and are in good operating condition.
Item 3.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceeding.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the fourth quarter of fiscal 1999.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "PRMS." The Company's Common Stock commenced trading on the Nasdaq National Market on April 6, 1995. The following table lists the high and low closing prices during fiscal 1998 and fiscal 1999.
High Low
Fiscal 1998: First Quarter $ 25 1/4 $ 15 Second Quarter $ 33 1/4 $ 20 3/8 Third Quarter $ 29 3/4 $ 18 13/16 Fourth Quarter $ 32 1/4 $ 22 1/2
Fiscal 1999: First Quarter $ 25 7/8 $ 8 Second Quarter $ 15 3/8 $ 5 5/8 Third Quarter $ 12 1/8 $ 6 1/4 Fourth Quarter $ 10 1/2 $ 6 31/32
There were approximately 224 holders of record of the Company's Common Stock as of September 3, 1999.
Dividend Policy
The Company has not paid any cash dividends on its capital stock to date. *The Company currently anticipates that it will retain all future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.
Issuance of Put Warrants
On August 31, 1998, the Company's Board of Directors authorized the repurchase, at management's discretion, of up to 4.0 million shares of its Common Stock at market prices not to exceed $14.00 per share and as market and business conditions warrant. The primary purpose of this repurchase program was to increase stockholder value.
In connection with this program, on September 17, 1998 the Company sold 2.0 million put warrants to, and purchased 1.5 million call options from an independent third party. The Company used the proceeds from the sale of the put warrants to purchase call options in a transaction not requiring any cash outlay at the time. The put warrants entitled the independent party to sell shares of the Company's common stock to the Company at specified strike prices and exercise dates. Each of the warrants was exempt from registration under section 4 (2) of the Securities Act of 1933, as amended. Each transaction was privately negotiated and each offeree and purchaser was an accredited investor. No public offering or public solicitation was used by the Company in the placement of these warrants.
On January 26, 1999, the Company paid $762,000 to dissolve the obligation for 1.0 million put warrants and 0.75 million call options that were to expire on January 29, 1999. On September 10, 1999, the Company paid $3.7 million to dissolve the remaining 1.0 million put warrants and 0.75 million call options which were to expire on September 15, 1999. The expenses associated with the dissolution of these put warrants are reflected as a component of cash for the quarter ended March 31, 1999 and will be reflected in the same manner in the quarter ended September 30, 1999.
Item 6.
Item 6. Selected Financial Data
Year Ended June 30, (1) -------------------------------------------------- 1995 1996 1997 1998 1999 --------- -------- -------- -------- --------- (in thousands, except per share data) Consolidated Statements of Operations Data: Revenues $30,888 $73,912 $78,358 $102,298 $ 92,423 Income from operations 4,784 24,577 15,213 18,371 7,635 Net income $ 3,967 $16,788 $10,891 $ 13,715 $ 7,621 ========= ======== ======== ======== =========
Net income per share - Basic $ 0.60 $ 0.70 $ 0.44 $ 0.54 $ 0.31 ========= ======== ======== ========= ========= Net income per share-Diluted $ 0.18 $ 0.64 $ 0.41 $ 0.50 $ 0.30 ========= ======== ========= ========= ========= Shares used in computing net income per share Basic 6,622 23,876 24,722 25,569 24,600 ========= ======== ======== ======== ========= Diluted 22,246 26,389 26,498 27,495 25,384 ========= ======== ======== ======== =========
As of June 30, (1) -------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $42,963 $60,861 $73,224 $105,981 $ 84,434 Working capital 45,520 74,853 90,263 112,079 100,593 Total assets 52,621 87,522 107,101 138,757 126,624 Long-term debt 109 91 9 --- --- Total stockholder's equity $47,007 $77,580 $96,817 $120,776 $ 99,205
Quarterly Financial Data
The following table sets forth certain unaudited quarterly financial data for each quarter of fiscal 1998 and 1999. In the opinion of the Company's management, this unaudited information has been prepared on the same basis as the audited consolidated financial statements contained herein and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. *The operating results for any quarter are not necessarily indicative of results for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quarterly Fluctuations."
- --------------------------------- (1)The Company uses a fiscal year ending on the Friday closest to June 30. For ease of presentation, however, annual and quarterly periods during fiscal 1997, 1998 and 1999 are shown in this Form 10-K as ending on the last day of the last calendar month in such year and quarter, respectively.
(2)Includes a $4,431,000 charge for a technology license. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Acquired In-Process Technology" of this Form 10-K and Note 3 of Notes to Consolidated Financial Statements.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
As indicated in the first paragraph of Item 1, above, this Form 10-K contains certain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The Company has identified by asterisks (*) (or italics in the non-EDGAR version of this Form 10-K) various sentences within this Form 10-K which contain such forward-looking statements, and words such as "believes," "anticipates," "expects," "intends," "will" and similar expressions are also intended to identify forward looking statements, but these are not the exclusive means of identifying such statements. The forward looking statements included in this Form 10-K involve numerous risks and uncertainties which are described throughout this Form 10-K, such as those referenced in the first paragraph of Item 1, above, and other factors described throughout this Form 10-K, including under "Revenues" and "Other Factors That May Affect Future Operating Results" within this Item 7. The actual results that the Company achieves may differ materially from any forward looking statements due to such risks and uncertainties.
Overview
Premisys was founded in July 1990 and became a publicly owned corporation in April 1995. The Company develops, manufactures, and markets access products for use by telecommunications carriers for delivering a wide variety of voice and data services to its business customers.
The Company's products enable carriers to deliver multiple services with a single device. The Company's IMACS product supports a wide range of services and up to eight T1 or E1 connections. The Company's StreamLine product, which was derived from the IMACS, supports the same voice services and most of the data services offered by the IMACS, but has a single T1 connection. The Company's SlimLine product supports a limited number of voice and data services and has one T1 connection. The Company's Q-155 product is a broadband integrated access device combining TDM, ATM and SONET/SDH on a single platform which accommodates a wide range of voice and data services. Although the IMACS accounted for nearly all of the Company's revenues in fiscal 1997, 1998 and 1999, the Company's new products provide additional options in order to offer carriers more complete solutions to provide delivery of services to their business customers.
Most of the Company's products are deployed in new networks, typically built by new carriers, such as CLECs in the United States and new wireless service providers.
The Company sells its products worldwide, primarily through large telecommunications equipment suppliers, systems integrators and distributors. The Company derived 7%, 5% and 3%, respectively, of its revenues from direct sales to international customers in fiscal 1997, 1998 and 1999. (International sales through domestic suppliers and distributors are reflected in the Company's domestic revenues). *The Company intends to continue to expand its operations outside the United States and anticipates that direct sales to international customers will increase in the future, both in absolute dollars and as a percentage of the Company's revenues. In order to sell its products internationally, the Company must meet standards established by international telecommunications committees and telecommunications authorities in various countries. *Conducting business outside of the United States is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, currency conversion risks, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. See " - Other Factors That May Affect Future Operating Results - Indirect Channels of Distribution."
Results of Operations
Revenues
Revenues consist primarily of gross sales of products, less discounts and sales returns and allowances. Revenues in fiscal 1997, 1998 and 1999 were $78,358,000, $102,298,000 and $92,423,000, respectively. The majority of the revenue increase from fiscal 1997 to fiscal 1998 was primarily attributable to unit growth. The Company's list prices for its products did not change significantly from fiscal 1997 to fiscal 1998 and the average revenue to the Company per platform and module was relatively unchanged from fiscal 1997 to fiscal 1998. In addition, an important contributor to the Company's unit growth in fiscal 1998 was its success with one domestic CLEC in particular, MCI, through the Company's strategic relationship with ADC. From fiscal 1998 to fiscal 1999, revenues decreased by $9,875,000 or 10%. A significant portion of this decrease from fiscal 1998 to fiscal 1999 was due to a decrease in revenues from MCI through ADC. Unit volumes decreased slightly from fiscal 1998 to fiscal 1999 as first-time sales of the Company's SlimLine and StreamLine products were offset by lower sales of the Company's IMACS product line. Average sales prices of both platforms and modules decreased from fiscal 1998 to fiscal 1999 primarily due to increased pricing competition in the IAD market. Pricing is becoming more important as Telecommunications carriers compete for local access to small and medium sized businesses and, as a result, the carriers are demanding price reductions from access equipment suppliers. Although during the first three quarters of fiscal 1999 the Company recorded revenues comparable to or higher than the first three quarters of fiscal 1998, the Company experienced a large decrease in revenues for the quarter ended June 30, 1999 as compared to the quarter ended June 30, 1998. The decrease in revenues from $31,243,000 in the quarter ended June 30, 1998 to $15,284,000 in the quarter ended June 30, 1999 was due primarily to the Company's failure to obtain large orders it had expected during the quarter from three of its major OEM partners - Paradyne, Nortel Networks Corporation ("Nortel") and XEL - and the lack of revenues from MCI through ADC. The lack of anticipated orders from Paradyne and Nortel in the quarter ended June 30, 1999 was due to delays in the deployment of Premisys' products by their customers. XEL deferred orders of Premisys product during the quarter ended June 30,1999 while awaiting the completion of in-process upgrades implemented by Premisys. *The Company believes that the loss of MCI's business is due to MCI's merger with WorldCom. See "-Other Factors That May Affect Future Operating Results - Mergers of the Company's Customers." *The Company expects that revenues will grow slightly from fiscal 1999 to fiscal 2000. *However, the Company's expectations regarding future revenue levels are subject to numerous risks and uncertainties, including limited order backlog, the level of capital expenditures by CLECs and other carriers and its relationships with its strategic partners and the introduction of new products. See "-Other Factors That May Affect Future Operating Results -Indirect Channels of Distribution," "-Mergers of the Company's Customers" and "-Rapidly Evolving Technology."
The following table sets forth, for the periods indicated, the revenues generated by customers which accounted for 10% or more of the Company's revenues in either fiscal 1997, 1998 or 1999, 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
(a) - Amounts not provided as revenues for the period were less than 10% of the total. (1) - AT&T Local Services ("ALS") was formerly known as Teleport Communications Group ("Teleport").
As illustrated in the table above, the Company sells a substantial majority of its products to a limited number of customers, which generally resell the Company's products to public carriers and end users. *The loss of any one or more of the Company's major customers would have a material adverse effect on the Company's business and operating results. *Any of the telecommunications equipment suppliers that market and sell the Company's products could elect to cease marketing and selling the Company's products, and there can be no assurance that these telecommunications equipment suppliers will continue to place orders with the Company or that the Company will be able to obtain orders from new telecommunications equipment suppliers or end users. See "-Other Factors That May Affect Future Operating Results - Indirect Channels of Distribution."
Gross Profit Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 Gross Profit $51,096,000 31% $66,712,000 (16%) $55,763,000 As a percentage of Revenues 65% 65% 60%
Cost of revenues consists of component costs, compensation costs and overhead related to the Company's manufacturing operations and warranty expenses. Gross profit improved from fiscal 1997 to fiscal 1998 primarily as a result of increased unit volumes. Gross margin was relatively unchanged from fiscal 1997 to fiscal 1998. Gross profit and gross margin decreased from fiscal 1998 to fiscal 1999 primarily as a result of lower average sales prices for platforms and modules and first-time sales of the Company's lower-margin SlimLine and StreamLine products. *The Company expects its gross margins for fiscal 2000 to decline somewhat from the 60% realized in fiscal 1999 due primarily to changes in product mix. *However, achievement of the Company's expectations is subject to a number of uncertainties, including customer mix, the mix and volume of products sold and the Company's ability to realize expected revenue levels.
Research and Development Expenses
Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 Research and development expenses $10,519,000 54% $16,205,000 22% $19,823,000 As a percentage of 13% 16% 21% revenues
Research and development expenses consist of personnel costs, contract development fees, consulting, testing, supplies and depreciation expenses. All software development costs have been expensed in the period in which they were incurred. Research and development expenses increased $5,686,000, or 54%, from fiscal 1997 to fiscal 1998 and $3,618,000, or 22%, from fiscal 1998 to fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was primarily due to additional personnel for the purpose of expanding the Company's product line and, to a lesser extent, increased consulting and supply expenses. The increase from fiscal 1998 to fiscal 1999 was primarily due to additional personnel for the purpose of expanding the Company's product line and, to a lesser extent, increased depreciation expenses. In fiscal 1999, the Company's development activities focused primarily on the development of the Q-155 and SlimLine products. See "-Other Factors That May Affect Future Operating Results - Rapidly Evolving Technology." Research and development expenses increased as a percentage of the Company's revenues from 13% in fiscal 1997 to 16% in fiscal 1998 and to 21% in fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was the result of the increased research and development activities discussed above. The increase in expenses as a percentage of revenues from fiscal 1998 to fiscal 1999 was primarily due to the fact that while research and development expenses grew as planned, the Company's revenues did not. *The Company anticipates that the amount of these expenses will increase in fiscal 2000, but as a percentage of revenues, will decrease slightly in fiscal 2000 as compared to fiscal 1999. *However, the expected decrease in research and development expenses as a percentage of revenues is subject to, among other things, the Company's ability to achieve revenue expectations.
Acquired In-Process Technology
In the quarter ended March 31, 1997, the Company executed a technology license agreement with Positron. The Company licensed certain SONET and SDH based technologies for use in its future products, including the Q-155, which was first shipped in the quarter ended March 31, 1999.
The licensed technology includes the right to modify and manufacture products which are based on Positron's OSIRIS-155Mb/s SONET/SDH products. The licensed technology also includes the right to use and manufacture Positron proprietary application-specific integrated circuits (ASICs), and training and integration assistance on all design materials.
The Company will pay Positron $4 million of license fees over three years. Positron will also be paid a royalty on the Company's products utilizing the licensed technology up to a maximum of $4 million. Thus, total payments to Positron will be between $4 million and $8 million. The Company expensed the $4 million of license fees in the quarter ended March 31, 1997, resulting in a $0.09 per share earnings reduction. Payments of license fees to Positron in fiscal 1997, 1998 and 1999 totaled $2.0 million, $1.0 million and $1.0 million, respectively. *If the Company is unsuccessful in marketing the product or if customers do not accept the product, this technology has no alternative use. See "-Other Factors That May Affect Future Operating Results - Rapidly Evolving Technology."
In the quarter ended March 31, 1998, the Company announced the execution of a technology license agreement with SNT. SNT's technologies will provide the Company with a non-blocking switching core expandable to 11.6 Gbs, ATM interfaces to OC-3 and OC-12, 10/100MB Ethernet/Fast Ethernet interfaces, and related software. *The Company intends to use these technologies to develop broadband ATM and IP multiservice platforms. *However, there can be no assurance that the Company will be able to integrate successfully this technology into its products. *If the Company is unsuccessful in developing the product, this technology has no alternative use. See "-Other Factors That May Affect Future Operating Results - Rapidly Evolving Technology."
The Company paid a total of $4.4 million for licensing SNT technologies and related software. The Company expensed these fees as a purchase of in-process research and development in the quarter ended March 31, 1998 resulting in a $0.10 per share earnings reduction. The Company also received options to license future releases of SNT software for additional fees. To date the Company has not purchased any additional software releases from SNT.
Selling, General and Administrative Expenses
Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 Selling, general and administrative expenses $21,364,000 30% $27,705,000 2% $28,305,000 As a percentage of 27% 27% 31% revenues
Selling expenses consist principally of compensation costs for sales and marketing personnel (including sales commissions and bonuses), travel expenses, customer support expenses, trade show expenses and advertising expenses. General and administrative expenses consist primarily of compensation expenses for administration, finance and general management personnel, as well as legal and accounting fees. Selling, general and administrative expenses increased $6,341,000, or 30%, from fiscal 1997 to fiscal 1998 and $600,000, or 2%, from fiscal 1998 to fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was primarily the result of increased staffing, primarily for sales, and associated expenses, such as payroll taxes and sales commissions and to a lesser extent increased occupancy and travel expenses. The increase from fiscal 1998 to fiscal 1999 was primarily the result of increased staffing, primarily for sales, and associated expenses, such as payroll taxes and sales commissions and to a lesser extent increased occupancy expenses, partially offset by lower trade show and travel expenses. Selling, general and administrative expenses as a percentage of the Company's revenues was unchanged at 27% in fiscal 1997 and 1998. Selling, general and administrative expenses increased as a percentage of the Company's revenues to 31% in fiscal 1999. The increase in these expenses as a percentage of revenues from fiscal 1998 to fiscal 1999 was due to the fact that while selling, general and administrative expenses grew as planned, the Company's revenues did not. *The Company anticipates that the amount of these expenses will decrease somewhat in fiscal 2000, and will decrease as a percentage of revenues in fiscal 2000 as compared to fiscal 1999. *However, the expected decrease in selling, general and administrative expenses as a percentage of revenues is subject to, among other things, the Company's ability to achieve revenue expectations.
Interest and Other Income, Net Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 Interest and other $2,641,000 29% $3,399,000 5% $3,573,000 income, net As a percentage of 3% 3% 4% revenues
Interest and other income, net consists of interest income, interest expense and, to a much lesser extent, foreign currency gains and losses. The increase in interest and other income, net for all comparison periods was primarily due to increased interest income from cash balances invested in high grade, marketable fixed income securities versus lower yielding bank money market accounts.
Provision for Income Taxes Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 Provision for income taxes $6,963,000 16% $8,055,000 (55%) $3,587,000 As a percentage of income before income taxes 39% 37% 32%
The Company's provision for income taxes represents estimated federal and state income taxes. The Company's effective income tax rate for fiscal 1997 was 39% which was less than the combined federal and state statutory rate as a result of tax-exempt interest income from the Company's municipal securities portfolio and anticipated utilization of research and development tax credits available in fiscal 1997. The Company's effective income tax rate for fiscal 1998 was reduced to 37% due to increased tax exempt income from the Company's municipal securities portfolio. The Company's effective income tax rate for fiscal 1999 was reduced to 32% as a larger portion of the Company's pre-tax income came from tax exempt income from the Company's municipal securities portfolio. *The Company anticipates that its effective income tax rate of 32% will remain unchanged in fiscal 2000.
Net Income per Share Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 Net income $10,891,000 $13,715,000 $7,621,000 Net income per share $0.41 22% $0.50 (40%) $0.30 (diluted) Shares used in computing diluted net 26,498,000 4% 27,495,000 (8%) 25,384,000 income per share
Net income per share in fiscal 1997 was reduced by $0.09 as a result of the $4 million of license paid to Positron, as discussed above. The increase in net income per share from fiscal 1997 to fiscal 1998 was due to an increase in net income, which was a result of the rate of growth of the Company's revenues being greater than the rate of growth in the Company's operating expenses. This increase in net income per share was slightly offset by a greater number of weighted average common shares and common share equivalents used to calculate net income per share. Net income for fiscal 1998 was reduced by license fees paid to SNT, as discussed above. The Company expensed $4.4 million of license fees for the SNT agreement in fiscal 1998, which reduced reported net income per share in fiscal 1998 by $0.10. The decrease in net income per share from fiscal 1998 to fiscal 1999 was due to a decrease in net income, resulting from a decrease in revenues in fiscal 1999, as discussed above, and an increase in operating expenses in fiscal 1999, also discussed above.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal years beginning after June 15, 2000. The Company does not expect the adoption of SFAS 133 to have a material impact on its results of operations.
Liquidity and Capital Resources Fiscal % Change Fiscal % Change Fiscal 1997 1998 1999 ---------- -------- ----------- --------- ----------- Net cash provided by operating activities $9,233,000 189% $26,675,000 189% $1,246,000 Year end cash, cash equivalents and short-term$73,224,000 45% $105,981,000 45% $84,434,000 investments Year end working capital $90,254,000 24% $112,079,000 24% $100,593,000
In fiscal 1999, net cash of $1.2 million was provided by operating activities primarily due to net income and a decrease in accounts receivable, offset by an increase in inventories and a decrease in accounts payable. The increase in inventories during fiscal 1999 was the result of lower than expected product sales during the fiscal year, primarily during the quarter ended June 30, 1999, as discussed above.
The Company purchased $4.2 million of property and equipment in fiscal 1999, primarily for computers and peripherals and machinery and equipment. Financing activities used $18.6 million of cash in fiscal 1999, primarily due to the repurchase of Common Stock. Cash used in the Common Stock repurchase was partially offset by cash provided by the issuance of Common Stock in connection with the Company's employee benefits plan.
At June 30, 1999, the Company's principal sources of liquidity included $84 million of cash, cash equivalents and short-term investments, and the Company had working capital of approximately $100.6 million. The Company has no significant capital spending or purchase commitments other than normal purchase commitments and commitments under facilities and capital leases. *The Company believes that available funds and anticipated cash flows from operations will satisfy the Company's projected working capital and capital expenditure requirements through at least the next 18 months.
On August 31, 1998, the Company's Board of Directors authorized the 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 market and business conditions warrant. As of June 30, 1999, the Company had repurchased for cash 2.4 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. On January 26, 1999, the Company paid $762,000 to dissolve the obligation for 1.0 million put warrants and 0.75 million call options that were to expire on January 29, 1999. On September 10, 1999, the Company paid $3.7 million to dissolve the remaining 1.0 million put warrants and 0.75 million call options which were to expire on September 15, 1999. The expenses associated with the dissolution of these put warrants are reflected as a component of cash for the quarter ended March 31, 1999 and will be reflected in the same manner in the quarter ended September 30, 1999.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal years beginning after June 15, 2000. The Company does not expect the adoption of SFAS 133 to have a material impact on its results of operations.
Other Factors That May Affect Future Operating Results
As referenced in the first paragraph of this Item 2, this section consists primarily of forward looking statements and associated risks but, for improved readability, does not include asterisks (or italics in the non-EDGAR version of this Form 10-K).
COMPETITION. The market for telecommunications products is highly competitive and subject to rapid technological change. The Company's principal competition for the market segment served by the Company's IMACS products comes from major telecommunications equipment suppliers, such as Newbridge, Tellabs and World Access, which offer a broad line of products including access devices for business applications. The Company's principal competition for the market segment served by the Company's SlimLine and StreamLine products includes CAC, Adtran, Vina and existing telecommunications equipment manufacturers selling channel bank and CSU/DSU products. In addition, the Company faces competition from companies who provide substitute, as opposed to direct replacement, solutions for the Company's IMACS, SlimLine and StreamLine products. The primary competitors for such substitute products include AFC, Alcatel, Lucent, Nortel and Reltec. The Company has experienced and expects substantial additional competition from existing competitors as they continue to 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 from new startups focusing on the access equipment market. The Q-155 product competes with broadband access products offered or announced by a number of vendors including Fibex, which was recently acquired by Cisco, Accelerated Networks, Inc., Atmosphere Networks, Inc., other telecommunications equipment manufacturers selling multiplexer products and digital loop carriers with the Bellcore Standard GR-303 protocol and other competitors, such as Pairgain and Paradyne, that provide bundled voice and data services and solutions for better utilization of bandwidth. 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 either do or may compete with the Company's products. Other telecommunications equipment suppliers that market and distribute the Company's products may in the future develop or acquire products that could be sold for selected applications for which the Company's products are currently provided. Successful development or acquisition of such products could reduce the level of demand from these telecommunications equipment suppliers for the Company's products. In addition, the Company believes that there will be an increase in the intensity of price competition in the markets served by the Company's products. Thus, while unit volumes are expected to increase, the Company believes that the rate of increase of revenues will be lower than the rate of increase in units. While the Company has recently begun selling is 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. As a result, the Company may find it more difficult to achieve expected levels of revenues and profitability.
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, including the quarters ended September 30, 1998, December 31, 1998 and March 31, 1999. 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 effect 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.
DEPENDENCE ON KEY PERSONNEL. The Company's success to date has been significantly dependent on the contributions of its senior officers and other key employees. The loss of the services of any one of the Company's senior officers or key employees could have a material adverse effect on the Company's business and operating results. The Company's success also depends to a significant extent on its ability to attract and retain additional highly-skilled technical, managerial and sales and marketing personnel, the competition for whom is intense.
INDIRECT CHANNELS OF DISTRIBUTION. Substantial portions 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 thc 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 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. In addition, the Company's financial results for the quarter ended June 30, 1999 were also adversely affected primarily as a result of the Company's failure to obtain large orders it had expected during the quarter from three of its major OEM partners - Paradyne, Nortel and XEL. Similar delays may occur in the future and would have a significant 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 "-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. There can be no assurance that any future delays would not have an adverse effect.
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, availability and 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 product and 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 quarters ended March 31, 1997 and June 30, 1999) 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. The Company has on several occasions, including the quarters ended September 30, 1998, December 31, 1998 and June 30, 1999 experienced such an unforecasted revenue shortfall and was not able to compensate for it through expense reductions. 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.
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 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 type of products provided by the Company serve a vital function, to grow. However, 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 future product 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. The Company anticipates that it also may see a deferral of expenditures for its products by GTE in connection with its anticipated merger. In addition, the Company anticipates that the slowdown in expenditures may persist for multiple quarters following the mergers. The increased buying power wielded by these merged carriers and by merged equipment suppliers, such as Alcatel and DSC Communications Corp. ("DSC"), is also likely to place added competitive price pressure on equipment manufacturers such as Premisys.
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 and cost effective products and enhancements. The Company has licensed certain technology from Positron for inclusion in the Company's Q-155 products, which were announced in June 1997. The Company began field trials for this product in the quarter ending December 31, 1998 and shipped its first Q-155 product in the quarter ended 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 the first quarter of calendar 2000. 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. The Company may also experience delays in connection with its product development efforts, which can impact expected operating results. For example, the Company's shipment of its new SlimLine product had been delayed for several quarters due to hardware and software revisions necessary to make the product more acceptable in the marketplace. 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. Shipments to Paradyne have represented a significant portion of the Company's revenues, including in fiscal 1999, and continue to represent a significant portion of the Company's revenues in fiscal 2000. Neither Paradyne nor Lucent is 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.
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.
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 CERTA1N 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 four 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; (3) product readiness, addressing the Company's product functionality, which includes customer support of the installed base of the Company's products; and (4) customer readiness, addressing the preparedness of our customer base. 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 for becoming ready for the Year 2000.
Internal infrastructure readiness: An assessment of internal 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 November 1999. In addition to applications and information technology hardware, the Company is testing 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 all of its preferred suppliers. Most of the respondents are in the process of developing remediation plans. Based on interactions with and assurances from suppliers, the Company believes that supplier issues that potentially affect the Company's products have been resolved.
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, both past and present, are Year 2000 compliant.
Customer readiness: The Company sells a substantial portion of its product to large, publicly traded companies who themselves are addressing Year 2000 compliance issues. Premisys has been working directly with these customers, who are also our strategic distribution partners or major distributors, to resolve any issues between them and the Company. The Company has also reviewed their readiness statements as filed in public documents with the Securities and Exchange Commission. Based on these efforts, the Company believes that Year 2000 issues will not materially affect shipment of products to these customers. However, there can be no assurances that unforeseen problems or problems with customers of Premisys' partners or distributors will not occur and have a material impact on the Company's revenues in the future. In the event that any of the Company's significant customers do not successfully and timely achieve Year 2000 compliance of their own products, the Company's business and operations could be adversely affected. Use of the Company's products in connection with customer products which are not Year 2000 compliant, including non-compliant hardware and software, may result in inaccurate exchange of dates, performance problems or system failure. If the businesses of the Company's significant customers are materially and adversely affected by Year 2000 issues, the Company's business will also be materially and adversely affected to the extent that such customers delay, postpone or cancel orders for the Company's products as they divert resources to fixing their own Year 2000 compliance problems. In addition, the Company believes that the businesses of the Company's strategic partners may be adversely affected to the extent that the Year 2000 compliance concerns of their own end user customers affect the purchasing patterns of such customers in the short-term. Such end user customers may defer purchases of telecommunications equipment generally until early in the next millennium to avoid Year 2000 problems. Any such deferral of purchases could reduce demand for the Company's products by the Company's strategic partners, which could have a material adverse effect on the Company's business, operating results and financial condition.
General Risk Factors: The Company's Year 2000 project is currently in the remediation phase. The Company believes that, in spite of their assurances, its greatest potential risks are associated with its suppliers. 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. The Company is at the remediation phase for its operations and infrastructure, and, while the Company cannot foresee any significant problems or issues, it cannot predict whether or not significant problems or issues will be identified in the future. The Company has determined the extent of contingency planning that may be required, but it cannot be sure that additional actions will not be necessary. Based on the status of the assessments 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 developed remediation for all problems or completely implemented or tested some 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 plans, or may find that the costs of these activities exceed current expectations. 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 satisfactorily resolve Year 2000 issues related to its products in a timely manner, it could be exposed to liability to third parties.
RISKS FROM CONVERSION TO SINGLE EUROPEAN CURRENCY. On January 1, 1999, certain member states of the European Economic Community fixed their respective currencies to a new currency, commonly known as the Euro. During the three years beginning on January 1, 1999, business in these countries will be conducted both in the existing national currency, such as the French Franc or the Deutsche Mark, as well as the Euro. Companies operating in or conducting business in these countries will need to ensure that their financial and other software systems are capable of processing transactions and properly handling the existing currencies and the Euro. Based on the current level of direct international business being conducted by the Company, the Company does not expect that introduction and use of the Euro will materially affect the Company's business. However, if the Company encounters unexpected opportunities and/or difficulties, the Company's business could be adversely affected, including the inability to bill customers and to pay suppliers for transactions denominated in the Euro and the inability to properly record transactions denominated in the Euro in the Company's financial statements.
STOCK PRICE FLUCTUATIONS. All of the above factors are difficult for the Company to forecast, and these or other factors, such as changes in earnings estimates by securities analysts, can materially affect the Company's stock price for one quarter or a series of quarters. Further, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices of securities of many high technology companies. These fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of the Company's Common Stock. There can be no assurance that the trading price of the Company's Common Stock will remain at or near its current level.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, in the normal course of business, is subject to the risks associated with foreign currency exchange rates, fluctuations in the market value of its fixed income securities available-for-sale, and changes in interest rates.
To date, the Company's exposure to foreign currency fluctuations has been minimized through the denomination of its foreign sales, and hence its accounts receivable, in US dollars as well as the use of letters of credit when warranted. The Company funds its international operations from US dollar bank accounts on an as needed basis and, accordingly, does not keep significant amounts of funds in foreign currencies. Presently, the Company does not hedge foreign currency exposures for its non-dollar denominated operating expenses in Europe, Asia, Canada and Latin America as such amounts have not been material in relation to the Company's domestic operating expenses. Until fiscal 1997, the Company purchased a substantial amount of its modules from one foreign supplier. Today, substantially all of these modules are sourced in the United States. There has been no significant change in the Company's exposure to foreign currency fluctuations during fiscal 1999, as compared to fiscal 1998.
The Company also maintains a portfolio of marketable, fixed income securities, available for sale, of various issuers, types and maturities. Substantially all of the portfolio consists of municipal securities. The Company limits its exposure to interest and credit risk by establishing and strictly monitoring clear policies and guidelines for its fixed income portfolio. The maximum allowable maturity for any one investment is 3 years and the maximum allowable duration of the portfolio is limited to 1.5 years. The guidelines also establish credit quality standards and limits on exposure to one issue, issuer and type of instrument. The fair market value of the Company's fixed income securities portfolio at June 30, 1999 was $81 million, with the corresponding unrealized gain included as a component of shareholders' equity. The average weighted duration of the portfolio increased from 0.99 years at June 30, 1998 to 1.20 years at June 30, 1999.
The following table presents the hypothetical change in the aggregate fair market value of the Company's fixed income securities portfolio at June 30, 1999 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 Funds Increase in Federal Funds Rate Rate --------------------------------------------------------- Change in Federal Funds (150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS Rate (BPS) - -------------------------------------------------------------------------------- Change in Securities $1,479 $976 $474 ($488) ($969) ($1,443) Valuation ($000's)
The Company also has a potential obligation at June 30, 1999 related to put warrants. The potential obligation was dissolved on September 10, 1999. See Note 6, "Put Warrants," of Notes to Condensed Consolidated Financial Statements in this Form 10-K.
Item 8.
Item 8. Financial Statements and Supplementary Data
Quarterly supplementary data is included as part of Item 6, "Selected Financial Data." The Company's consolidated financial statements required by this item are set forth below.
PREMISYS COMMUNICATIONS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Accountants 33 Consolidated Balance Sheet as of June 30, 1998 and 1999 34 Consolidated Income Statement for the years ended June 30, 1997, 1998 and 1999 35 Consolidated Statement of Stockholders' Equity for the years ended June 30, 1997, 1998 and 1999 36 Consolidated Statement of Cash Flows for the years ended June 30, 1997, 1998 and 1999 37 Notes to Consolidated Financial Statements 38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Premisys Communications, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Premisys Communications, Inc. and its subsidiaries at June 30, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP San Jose, California July 22, 1999 except for Note 6, which is as of September 10, 1999.
PREMISYS COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share data)
ASSETS
June 30, --------------------------- 1998 1999 ------------ ---------- Current assets: Cash and cash equivalents $31,006 $ 3,982 Short-term investments 74,975 80,452 Accounts receivable, net 12,208 8,459 Inventories 3,859 15,231 Deferred tax assets 7,355 7,895 Prepaid expenses and other assets 657 1,368 ------------ ----------
Total current assets 130,060 117,387
Property and equipment, net 8,392 9,053 Other assets 305 184 ------------ ----------
$138,757 $126,624 ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Accounts payable $ 6,969 $ 5,759 Accrued liabilities 10,277 10,020 Income taxes payable 735 1,015 ----------- ----------
Total current liabilities 17,981 16,794 ----------- ----------
Commitments (Note 9)
Put Warrant obligations --- 10,625 ----------- ----------
Stockholders' equity: Preferred Stock, $0.01 par value, 2,000 shares authorized; no shares issued or outstanding --- --- Common stock, $0.01 par value, 100,000 shares authorized; 25,974 and 26,478 shares issued and outstanding 260 265 Additional paid-in capital 85,230 78,336 Treasury Stock --- (22,303) Retained earnings 35,286 42,907 ----------- ----------
Total stockholders' equity 120,776 99,205 ----------- ----------
$138,757 $126,624 =========== ==========
The accompanying notes are an integral part of these financial statements.
PREMISYS COMMUNICATIONS, INC. CONSOLIDATED INCOME STATEMENT (in thousands, except per share data)
Year Ended June 30, ------------------------------- 1997 1998 1999 ---------- --------- --------- Revenues $ 78,358 $ 102,298 $ 92,423 Cost of revenues 27,262 35,586 36,660 ---------- ----------- ----------
Gross profit 51,096 66,712 55,763 ---------- ----------- ---------- Operating expenses: Research and development 10,519 16,205 19,823 Acquired in-process technology 4,000 4,431 --- Selling, general and administrative 21,364 27,705 28,305 -------- --------- --------
Total operating expenses 35,883 48,341 48,128 ---------- ----------- ----------
Income from operations 15,213 18,371 7,635 Interest and other income, net 2,641 3,399 3,573 ----------- ---------- ----------
Income before income taxes 17,854 21,770 11,208 Provision for income taxes 6,963 8,055 3,587 ---------- ----------- ----------
Net income $ 10,891 $ 13,715 $ 7,621 ========== =========== ==========
Net income per share Basic $ 0.44 $ 0.54 $ 0.31 ========== =========== ========== Diluted $ 0.41 $ 0.50 $ 0.30 ========== =========== ==========
Shares used in computing net income per share Basic 24,722 25,569 24,600 ========== =========== ========== Diluted 26,498 27,495 25,384 ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
PREMISYS COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
The accompanying notes are an integral part of these financial statements.
PREMISYS COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
The accompanying notes are an integral part of these financial statements.
PREMISYS COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Premisys Communications, Inc. and its subsidiaries, (together, the "Company"), design, manufacture and market integrated digital access products for telecommunications service providers. The Company's products assist domestic and international public carriers in building, expanding and managing their worldwide telecommunications networks for their business customers.
Summary of Significant Accounting Policies
Management estimates and assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of Premisys Communications, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The U.S. dollar is the functional currency of Premisys Asia, Premisys Canada and Premisys Europe. Exchange gains and losses resulting from transactions denominated in currencies other than U.S. dollars are included in net income. To date, the resulting gains and losses have not been material.
Cash, cash equivalents and short-term investments
Cash and cash equivalents include cash, money market funds and certain municipal securities with a maturity of three months or less when purchased. All of the Company's short-term investments, consisting principally of municipal securities, have been classified as available-for-sale. Under this classification the investments are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. At June 30, 1998 and 1999, such unrealized gains and losses were not significant.
Inventories
Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out (FIFO) method.
Property and equipment
Property and equipment are stated at cost, and depreciation is computed using the straight-line method over their estimated useful lives, which range from two years for computer equipment and purchased software to five years for machinery and equipment and furniture and fixtures. Leasehold improvements are amortized using the straight-line method based upon the shorter of the estimated useful lives (all of which are currently five years) or the remaining lease term.
Revenue recognition
The Company recognizes revenue upon shipment of product to customers provided no significant obligations remain and collectibility is probable. Certain distributors have sales agreements allowing limited rights to return product without penalties. In such cases the Company recognizes revenue upon sales of the product by the distributor to its customers.
Software development costs
Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Software development costs incurred subsequent to the establishment of technological feasibility will be capitalized, if material. To date, all software development costs incurred subsequent to the establishment of technological feasibility have been immaterial, and therefore no software development costs have been capitalized.
Warranty expense
Upon product shipment, the Company provides for the estimated cost that may be incurred under its various product warranties.
Net income per share
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net income per share, 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.
Fiscal year
The Company uses a 52/53 week accounting year that ends on the Friday closest to June 30. For purposes of financial statement presentation, each fiscal year is considered to have ended on June 30.
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investment by owners and distribution to owners. For the years ended June 30, 1997, 1998 and 1999, the comprehensive income of the Company did not differ significantly from the net income.
Derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal years beginning after June 15, 2000. The Company does not expect the adoption of SFAS 133 to have a material impact on its results of operations.
NOTE 2 - BALANCE SHEET COMPONENTS
June 30, -------------------- 1998 1999 --------- ---------- (in thousands) Accounts receivable: Trade accounts receivable $ 12,408 $ 8,621 Less: allowance for doubtful accounts (200) (162) --------- ----------
$ 12,208 $ 8,459 ========= ========== Inventories: Raw materials $ 582 $ 1,376 Work-in-process 676 1,476 Finished goods 2,601 12,379 --------- ----------
$ 3,859 $15,231 ========= ========== Property and equipment: Machinery and equipment $ 4,355 $ 5,691 Computers and purchased software 4,931 7,263 Furniture and fixtures 2,074 2,406 Leasehold improvements 2,402 2,628 --------- ----------
13,762 17,988 Less: accumulated depreciation (5,370) (8,935) --------- ---------- $8,392 $9,053 ========= ========== Accrued liabilities: Employee compensation $ 3,960 $ 2,792 Warranty 3,842 4,475 Other 2,475 2,753 --------- ----------
$ 10,277 $ 10,020 ========= ==========
NOTE 3 - ACQUIRED RESEARCH AND DEVELOPMENT IN-PROCESS
In the quarter ended March 31, 1997, the Company executed a technology license agreement with Positron. The Company licensed certain SONET and SDH based technologies for use in its future products, including the Q-155, which was announced in June 1997 and began shipping in the quarter ended March 31, 1999. The licensed technology includes the right to modify and manufacture products which are based on Positron's OSIRIS-155Mb/s SONET/SDH products. The licensed technology also includes the right to use and manufacture Positron proprietary application-specific integrated circuits (ASICs), and training and integration assistance on all design materials.
The Company paid Positron $4 million of license fees over three years. Also, Positron is to be paid a royalty on the Company's products utilizing the licensed technology up to a maximum of $4 million. The Company expensed the $4 million of license fees as acquired research and development in process in the quarter ended March 31, 1997. Payments of license fees to Positron in fiscal 1997, 1998 and 1999 totaled $2.0 million, $1.0 million and $1.0 million, respectively.
In the quarter ended March 31, 1998, the Company announced the execution of a technology license agreement with SNT. SNT's technologies will provide the Company with a non-blocking switching core expandable to 11.6 Gbs, ATM interfaces to OC-3 and OC-12, 10/100MB Ethernet/Fast Ethernet interfaces, and related software. The Company intends to use these technologies to develop broadband ATM and IP multiservice platforms.
The Company paid a total of $4.4 million for licensing SNT technologies and related software. The Company expensed these fees as acquired research and development in-process in the March 31, 1998 quarter. The Company also received options to license future releases of SNT software for additional fees. To date the Company has not purchased any additional software releases from SNT.
NOTE 4 - INCOME TAXES
The provision for income taxes consists of the following:
Year Ended June 30, --------------------------------------
1997 1998 1999 ----------- ----------- ---------- Current: (in thousands) Federal $ 9,058 $ 6,230 $ 3,000 State 2,138 1,891 1,043 Foreign 59 82 84 ----------- ---------- ----------- 11,255 8,203 4,127 ----------- ----------- ----------
Deferred: Federal (3,467) (216) (442) State (825) 68 (98) ----------- ---------- ----------- (4,292) (148) (540) ----------- ----------- ----------
$ 6,963 $ 8,055 $ 3,587 =========== =========== ==========
Deferred income taxes reflect the tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company's deferred tax assets are as follows:
June 30, ------------------------
1998 1999 ----------- --------- (in thousands) Financial accruals not yet deductible $ 5,265 $ 6,683 Capitalized purchased technology 2,076 1,212 Capitalized research and development expenses 14 0 ----------- --------- $ 7,355 $ 7,895 =========== =========
A reconciliation of the income tax provisions computed at the United States federal statutory rate to the effective tax rate is as follows:
Year Ended June 30, --------------------------------------------- 1997 1998 1999 --------------- -------------- -----------
Federal statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 6.1 6.1 5.8 Tax exempt interest income (4.8) (5.0) (10.3) Other 2.7 0.9 1.5 --------------- -------------- -----------
Effective tax rate 39.0% 37.0% 32.0% =============== ============== ===========
NOTE 5 - NET INCOME PER SHARE
Following is a presentation of the Basic and Diluted EPS computations for the periods presented below:
NOTE 6 - PUT WARRANTS
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. On January 26, 1999, the Company paid $762,000 to dissolve the obligation for 1.0 million put warrants and 0.75 million call options that were to expire on January 29, 1999. On September 10, 1999, the Company paid $3.7 million to dissolve the remaining 1.0 million put warrants and 0.75 million call options which were to expire on September 15, 1999.
NOTE 7 - STOCKHOLDERS EQUITY AND BENEFIT PLANS
Repurchase of stock
On August 31, 1998, the Company's Board of Directors authorized the 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 market and business conditions warrant. As of June 30, 1999, the Company had repurchased for cash 2.4 million shares at market prices ranging from $6.69 to $10.94 per share.
Stockholder rights plan
On September 17, 1998, the Company's Board of Directors ("Board") adopted a Stockholder Rights Plan ("Plan") designated to protect the long-term value of the Company for its stockholders during any future unsolicited acquisition attempt. Pursuant to the Plan, the Board declared a dividend of one preferred share right ("Right") for each share of the Company's Common Stock outstanding on October 5, 1998. Each Right becomes exercisable to purchase one one-hundredth (1/100) of a share of Series A Junior Participating Preferred Stock at an exercise price of $80.00. The Rights will expire on September 18, 2008. The Company may redeem the Rights at a price of $0.001 per Right.
Stock option plans
In March 1992, the Company adopted a Stock Option Plan (the "1992 Option Plan"). The 1992 Option Plan provides for the granting of incentive stock options and nonqualified stock options to employees at prices not less than the fair market value and not less than 85% of the fair market value of the Company's Common Stock, respectively, on the date of grant. While previously issued options remain outstanding under the 1992 Option Plan, the Company can no longer issue new options out of the 1992 Option Plan.
On November 16, 1994, the Company's Board of Directors approved the 1994 Stock Option Plan (the "1994 Option Plan"). Under the terms of the 1994 Option Plan, 6,460,000 shares of the Company's Common Stock are reserved for issuance at exercise prices not less than the fair value of the Company's Common Stock at the date of grant. The incentive and nonqualified stock options have ten-year terms, and vest over a period determined by the Board of Directors, but not to exceed five years. Options granted to date have vesting terms of four years. The 1994 Option Plan will terminate ten years after its adoption unless terminated earlier by the Board of Directors.
In February 1995, the Company's Board of Directors adopted, and the Company's stockholders approved, the 1995 Directors Stock Option Plan ("Directors Plan"), which provides for the automatic grant of options to purchase shares of Common Stock to non-employee directors of the Company ("Eligible Directors"). The maximum number of shares of Common Stock that may be issued pursuant to options granted under the Directors Plan is 240,000. Pursuant to the terms of the Directors Plan, each Eligible Director who becomes a member of the Board and who has not otherwise received options in connection with his Board service will automatically be granted an option to purchase 24,000 shares of Common Stock on the date the Eligible Director first joins the board. Each Eligible Director will automatically be granted an additional option for 6,000 shares of Common Stock annually. Each Grant will vest as to 25% of the shares per year thereafter, so long as the non-employee director remains a member of the Board. Options granted under the Directors Plan expire ten years from the date of grant. The exercise price of options under the Directors Plan must be equal to the fair market value of the Company's Common Stock on the date of grant. The Directors Plan will terminate in February 2005, unless sooner terminated by the Board.
On March 19, 1997 the Compensation Committee of the Board of Directors approved offering employees the right to amend outstanding stock options granted under the Company's 1994 Stock Option Plan. The amended stock options have an exercise price equal to the closing price of the Company's Common Stock on April 23, 1997 and a new vesting schedule beginning on the same date with a duration equal to that of the original option. Corporate officers were excluded from this option repricing offer. Employees elected to amend options for approximately 1,051,000 shares; the new exercise price was $8.1875 per share. In the summary table below, these options are included in shares granted and shares canceled in fiscal 1997.
A summary of transactions relating to all of the Company's option plans is as follows:
The following table summarizes information concerning outstanding and exercisable options as of June 30, 1999:
Options Outstanding Options Exercisable ----------------------------------- ---------------------- Weighted Weighted Weighted Remaining Average Average Range of Number Contractual Life Exercise Number Exercise Exercise Prices Outstanding (in years) Price Exerciseable Price
$0.10 - $7.13 1,091,662 7.90 $ 5.46 475,354 $3.40 $7.19 - $8.56 985,692 7.76 $ 8.14 418,368 $8.10 $8.69 - $9.19 1,147,813 9.06 $ 9.00 257,921 $9.00 $9.25 - $17.25 824,688 9.24 $ 12.71 92,391 $12.08 $17.88 - $51.00 1,140,017 8.50 $ 24.55 472,294 $25.29 =========== ============ $0.10 - $51.00 5,189,872 8.48 $ 12.10 1,716,328 $11.88 =========== ============
Stock Purchase Plan
In February 1995, the Company's Board of Directors approved the 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the terms of the Stock Purchase Plan, all employees of the Company may contribute, through payroll deductions, up to 10% of their annual compensation toward the purchase of the Company's Common Stock. The Company has reserved 400,000 shares for issuance under the Stock Purchase Plan. The purchase price per share is 85% of the lesser of (a) the fair market value of the Common Stock on the first day of the offering period, as defined, or (b) the fair market value of the Common Stock on the last day of the offering period, as defined. The Stock Purchase Plan will terminate ten years after its adoption unless terminated earlier by the Board of Directors.
Pro forma net income and earnings per share
Pro forma information regarding net income and earnings per share is required by SFAS 123. This information is required to be determined as if the Company had accounted for its employee stock options, including shares issued under the Stock Purchase Plan (collectively the "options") granted subsequent to June 30, 1995, under the fair value method of that statement. The fair value of options granted in fiscal 1997, 1998 and 1999 reported below have been estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable.
Had stock-based compensation cost for the options been determined based on the fair value at the grant dates using the Black-Scholes model as prescribed by SFAS 123, the Company's Results of Operations for the years ended June 30, 1997, 1998 and 1999 would have been as follows:
Year Ended June 30, -------------------------------------------- 1997 1998 1999 (in thousands except per share data) Net income/(loss): As reported $10,891 $13,715 $7,621 Pro forma $2,371 $3,474 $(107) Earnings per share -- basic: As reported $0.44 $0.54 $0.31 Pro forma $0.10 $0.14 $0.00 Earnings per share -- diluted As reported $0.41 $0.50 $0.30 Pro forma $0.09 $0.13 $0.00
The pro forma effect on net income and earnings per share for fiscal 1997, 1998 and fiscal 1999 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal 1996.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:
Year Ended June 30, -------------------------------------------- 1997 1998 1999 ---- ---- ---- Stock option plans: Expected dividend yield 0.0% 0.0% 0.0% Expected stock price 65.0% 65.0% 65.0% volatility Risk free interest rate 6.4% 5.6% 5.7% Expected life of 3.09 3.57 3.04 options (years)
Stock purchase plan: Expected dividend yield 0.0% 0.0% 0.0% Expected stock price 65.0% 65.0% 65.0% volatility Risk free interest rate 5.4% 5.3% 4.9% Expected life of 0.50 0.50 0.50 options (years)
The weighted average estimated grant date fair value, as defined by SFAS 123, for options granted under stock option plans during fiscal 1997, 1998 and 1999 was $7.51, $11.18 and $10.20 per share, respectively. The weighted average estimated grant date fair value, as defined by SFAS 123, for purchase rights granted under the Stock Purchase Plan during fiscal 1997, 1998 and 1999 was $7.46, $5.75 and $5.29 per share, respectively.
401(k) Plan
The Company adopted a 401(k) plan for its employees whereby currently eligible employees may contribute up to 15% of their earnings, on a pre-tax basis, subject to the maximum amount permitted by the Internal Revenue Code. Under the 401(k) plan, the Company may make contributions at the discretion of the Board of Directors. During fiscal 1997,1998 and 1999, the Company matched employee contributions up to $800 per contributor per plan year.
NOTE 7 - SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company operates in one business segment, providing telecommunications access equipment.
The following is a summary of the Company's operations:
Year Ended June 30, 1997 1998 1999 ------------- -------------- ------------- (in thousands) Revenues from third party customers: United States $ 72,679 $ 97,358 $ 89,554 Asia 3,452 2,996 873 Europe 355 954 717 Latin America 1,872 990 1,279 ------------- -------------- ------------- $ 78,358 $ 102,298 $ 92,423 ============= ============== =============
Income (loss) from operations: United States $ 15,114 $ 18,060 $ 9,949 Asia 1,025 1,216 (829) Europe (1,706) (796) (1,586) Latin America 780 (109) 101 ------------- -------------- ------------- $ 15,213 $ 18,371 $ 7,635 ============= ============== =============
June 30, ----------------------------- 1998 1999 ------------- ------------- (in thousands) Identifiable assets: United States $ 137,104 $ 123,950 Asia 307 385 Canada 646 1,533 Europe 683 453 Latin America 17 303 ============ ============= $ 138,757 $ 126,624 ============ =============
The Company derived 7%, 5% and 3% of its revenues from direct sales to international customers in fiscal 1997, 1998 and 1999, respectively.
NOTE 8 - CONCENTRATION OF SALES AND CREDIT RISK
The following table summarizes the percentage of revenues accounted for by the Company's significant customers:
Year Ended June 30, ----------------------------------------- 1997 1998 1999 ---- ---- ---- Paradyne 30% 15% 29% ALS(1) (a) (a) 13% Motorola 15% 11% 13% ADC Telecommunications 12% 29% (a) DSC 10% (a) (a)
(a) - Amounts not provided as revenues for the period were less than 10% of the total. (1) - AT&T Local Services ("ALS") was formerly known as Teleport Communications Group ("Teleport").
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, municipal securities and trade accounts receivable. The Company's investment policy limits the amount of credit exposure to any one financial institution or commercial issuer. The Company has not experienced any material losses on its investments.
The Company generally extends 30-day credit terms to its customers, which is consistent with industry business practices. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of all accounts receivable. The Company has not experienced any material write-offs of uncollectible accounts receivable.
NOTE 9 - COMMITMENTS
The Company's principal offices are located in two facilities, totaling 118,281 square feet, leased by the Company in Fremont, California. The leases on these facilities, which are classified as non-cancelable operating leases, expire on various dates through December 31, 2005. In addition, the Company leases a facility, totaling 29,840 square feet, in Fremont, California that it subleases to a third party under a three year sublease that commenced in April 1999. The lease on this facility, which is classified as a non-cancelable operating lease, expires in December 2005.The Company also leases facilities in other locations. The leases on these facilities, which are classified as non-cancelable operating leases, expire on various dates through December 31, 2005.
Future minimum lease payments under all noncancelable operating leases are as follows:
Year Ending June 30, (In thousands) 2000 $ 2,192 2001 2,157 2002 2,144 2003 2,167 2004 2,104 Thereafter 1,184 ------------ Total minimum payments $ 11,948 ============
Rent expense under facility leases totaled $941,000, $1,365,000 and $2,350,000 during fiscal 1997, 1998 and 1999, respectively.
In addition, the Company leases certain equipment under long-term lease agreements that are classified as capital leases. These capital leases expire at various dates through 2001. Property and equipment at June 30, 1998 and 1999 include assets acquired under capitalized leases of $351,000 and $172,000, with related accumulated amortization of $272,000 and $70,000, respectively. Future minimum payments under capitalized leases are not material.
NOTE 10 - SUBSEQUENT EVENTS
Effective July 2, 1999, Peter Hauser resigned. Mr. Hauser was the Company's Senior Vice-President of International Sales.
Effective August 16, 1999, Carol H. Sharer was appointed to serve on the Company's Board of Directors.
Effective July, 1999, Lip-Bu Tan and Marino Polestra resigned from the Company's Board of Directors.
PART III
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information required by this Item is incorporated by reference from the section titled "Directors/Nominees" under "Proposal No. 1 - Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting and Compliance" from the definitive proxy statement to be filed with the Securities and Exchange Commission relative to the Company's annual meeting of stockholders to be held in December 1998 (the "Definitive Proxy Statement").
Item 11.
Item 11. Executive Compensation.
Information required by this Item is incorporated by reference from the sections titled "Director Compensation" under "Proposal No. 1 - Election of Directors" and "Executive Compensation" and "Employment Agreements" from the Definitive Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this Item is incorporated by reference from "Security Ownership of Certain Beneficial Owners and Management" from the Definitive Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Information required by this Item is incorporated by reference from "Certain Relationships and Related Transactions" from the Definitive Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) The following financial statements and schedules are filed as part of this report:
Financial Statements See index included in Part II, Item 8.
(a)(2) and (d) Financial Statement Schedules All schedules are omitted because they are not applicable, or the required information is included in the financial statements or notes thereto.
(a)(3) and (c). The following exhibits are filed herewith or incorporated by reference:
Exhibit Number Exhibit Title
2.01 Premisys California Acquisition Agreement between Premisys Communications Holdings, Inc. and Premisys Communications Pte. Ltd., dated as of March 12, 1992, and exhibits thereto.(1) 2.02 Exchange Agreement by and among Premisys Communications Holdings, Inc. and the shareholders, warrant holders and noteholders of Premisys Communications Pte. Ltd., dated as of March 12, 1992, and material exhibits thereto.***(1) 2.03 Form of Agreement and Plan of Merger by and among the Registrant, Premisys Communications Holdings, Inc. and Premisys Communications, Inc.(1) 3.01 Registrant's Amended and Restated Certificate of Incorporation as filed with the Delaware Secretary of State on April 12, 1995.(2) 3.02 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Premisys Communications, Inc.(4) 3.03 Certificate of Designations Specifying the Terms of the Series A Junior Participating Preferred Stock of Premisys Communications, Inc. (15) 3.04 Registrant's Bylaws, as amended.(1) 4.02 Investors' Rights Agreement, dated as of March 12, 1992, as amended June 15, 1992, October 22, 1993, December 14, 1993, February 18, 1994 and May 9, 1994 among Registrant and various investors.(1) 4.03 Waiver Relating to and Amendment of Investors' Rights Agreement dated as of July 24, 1995 among Registrant and various investors.(3) 4.04 Rights Agreement dated September 18, 1998 between Registrant and ChaseMellon Shareholder Services LLC, as Rights Agent. (15) +10.01 Registrant's 1992 Stock Option Plan and related documents.(1) +10.02 Registrant's 1994 Stock Option Plan and related documents.(10) +10.03 Registrant's 1995 Directors Stock Option Plan and related documents.(1) +10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents.(1) +10.06 Founders Agreement by and among Registrant, Raymond Lin, Boris Auerbuch and Marcus Auerbuch, dated as of March 12, 1992.**(1) 10.08 Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers.(1) 10.09 Warranty and Indemnification Agreement by and among Raymond Lin, Boris Auerbuch and Registrant dated as of August 2, 1990.(1) 10.10 Agreement for Purchase and Sale of Assets by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of January 1, 1992, including Bill of Sale.(1) 10.11 Technology Cost and Risk Sharing Agreement by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of January 1, 1992.(1) 10.12 Agreement Regarding Payment by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of September 30, 1992.(1) 10.13 Technology Cost and Risk Sharing Agreement Amendment by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of July 1, 1995. (6) 10.15 Option Agreement by and between Registrant and AT&T Paradyne Corporation, dated as of December 4, 1992.(1) 10.16 Series C Preferred Stock Purchase Agreement by and between Registrant and AT&T Paradyne Corporation, dated as of December 14, 1993 and material exhibits thereto.***(1) 10.18 Lease Agreement by and between Registrant and Aetna Life Insurance Company, dated October 4, 1993, as amended to date.(1) 10.19 OEM Agreement by and among Premisys Communications Holdings, Inc., Premisys Communications, Inc., a California corporation, and AT&T Paradyne Corporation, dated as of December 4, 1992, as amended July 8, 1993, March 17, 1994 and May 24, 1994.**(1) 10.20 Extension Agreements by and among Premisys Communications Holdings, Inc., Premisys Communications, Inc., a California corporation, and AT&T Paradyne Corporation, dated as of June 30, 1993 and July 12, 1993 and September 30, 1993.**(1) 10.21 Co-Development Agreement between Registrant and AT&T Paradyne Corporation, dated as of September 30, 1993, as amended November 9, 1993 and May 25, 1994.**(1) 10.22 Private Label Purchase/Resale Agreement by and between Registrant and DSC Technologies Corporation, effective as of March 31, 1994.**(1) 10.23 Purchase/Resale Agreement by and between Registrant and ADC Telecommunications, Inc., effective as of January 1, 1994.**(1) 10.24 Manufacturing Agreement by and between Registrant and Eltech Electronics Technology (M) SDN BHD (Malaysia) as of July 22, 1996.**(6) 10.26 Original Equipment Manufacturer (OEM) Volume Purchase Agreement between Registrant and Motorola, Inc. dated December 21, 1994.**(1) +10.27 Employment Agreement by and between Premisys Communications Holdings, Inc. and Riley R. Willcox dated as of February 10, 1994.(1) 10.28 Amendment No. 4 to OEM Agreement by and among Premisys Communications Holdings, Inc., Premisys Communications, Inc., a California corporation, and AT&T Paradyne Corporation dated as of March 6, 1995.**(1) +10.29 Registrant's Management Salary and Incentive Plan for the Fiscal Year Ended June 30, 1996.(3) 10.30 Lease Agreement by and between Premisys and Berg & Berg Enterprises, Inc., dated October 24, 1995, for the premises located at 48700 Milmont Drive, Fremont, California.(16)*** 10.31 Amendments Number 5 and 6 to OEM Agreement by and between Premisys Communications, Inc., a Delaware Corporation and AT&T Paradyne Corporation, dated as of April 1, 1995. (5)** +10.32 Registrant's Management Incentive Plan for the fiscal year ended June 30, 1997.(6) 10.33 Amendment Number 7 and 8 to OEM Agreement by and between Premisys Communications, Inc., a Delaware Corporation, and Paradyne Corporation, dated as of December 2, 1996.**(9) 10.34 First Amendment to Lease Agreement by and between Premisys Communications, Inc. and Berg & Berg Enterprises, Inc., dated September 17, 1996, for the premises located at 48800 Milmont Drive, Fremont, California (formerly 48700 Milmont Drive, Fremont, California). (8) 10.35 Second Amendment to Lease Agreement by and between Premisys Communications, Inc. and Aetna Life Insurance Company, dated August 9, 1996. (7)
10.36 Manufacturing Agreement by and between Premisys Communications, Inc. and CMC Mississippi, Inc. as of January 9, 1997. (11)** 10.37 Amendment Number 9 OEM Agreement by and between Premisys Communications, Inc., a Delaware Corporation and AT&T Paradyne Corporation, dated as of May 13, 1997. (11)** 10.38 Employment Agreement by and between Premisys Communications Inc. and Nicholas Williams dated as of March 31, 1997. (11) +10.39 Registrant's Management Incentive Plan for the fiscal year ended June 30, 1998. (11) 10.40 License Agreement dated December 27, 1996 between Premisys Communications, Inc. and Positron Fiber Systems Corporation. ** (11) +10.41 Employment Status Change Agreement by and between Premisys Communications, Inc. and William J. Smith dated as of October 31, 1997. (12) +10.42 Employment Agreement by and between Premisys Communications, Inc. and Peter Hauser dated as of January 5, 1998. (13) 10.43 Third Amendment to Lease Agreement by and between Premisys Communications, Inc. and Aetna Life Insurance Company, dated January 8, 1998. (14) +10.44 Employment Status Change Agreement by and between Premisys Communications, Inc. and Riley R. Willcox dated as of July 16, 1998.(16) +10.45 Employment Agreement by and between Premisys Communications, Inc. and John J. Hagedorn dated as of June 1, 1998.(16) +10.46 Amendment to Employment Agreement by and between Premisys Communications, Inc. and John J. Hagedorn dated as of July 14, 1998.(16) +10.47 Registrant's Management Incentive Plan for the fiscal year ended June 30, 1999.(16) 10.48 Lease Agreement by and between Registrant and Aetna Life Insurance Company, dated June 4, 1998 for the premises located at 48634 Milmont Drive, Fremont, California.(16) 10.49 First Amendment to Lease Agreement by and between Premisys Communications, Inc. and Aetna Life Insurance Company dated July 20, 1998 for the premises located at 48634 Milmont Drive, Fremont, California.(16) 10.50 OTC Issuer Stock Option Master Agreement with amendment dated September 9, 1998.(17) +10.51 Registrant's Management Incentive Plan for the fiscal year ended June 30, 2000. 10.52 Master Purchase Agreement between Premisys Communications, Inc., a Delaware corporation, and Teleport Communications Group Inc., dated as of October 15, 1997.* 21.01 List of Registrant's subsidiaries. 23.01 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 24.01 Power of Attorney (See page 53 of this Form 10-K). 27.01 Financial Data Schedule. - -----------
(1) Incorporated herein by reference to the exhibit bearing the same number in the Registrant's Registration Statement on Form 8-A (No. 0-25684) filed with the Securities and Exchange Commission on September 22, 1998.
(2) Incorporated by reference to Exhibit 3.01 to the Registrant's Form 10-Q (File No. 0-25684) for the quarter ended March 31, 1995 filed May 22, 1995.
(3) Incorporated by reference to the exhibit bearing the same number in Registrant's Form S-1 Registration Statement filed August 1, 1995 (File No. 33-95266).
(4) Incorporated by reference to Exhibit 3.05 in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended December 29, 1995 filed February 12, 1996.
(5) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended March 29, 1996 filed May 3, 1996.
(6) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-K (File No. 0-25684) for the fiscal year ended June 28, 1996 initially filed September 26, 1996.
(7) Incorporated by reference to the exhibit bearing the number 10.33 in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 27, 1996 filed November 10, 1996.
(8) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 27, 1996 filed November 10, 1996.
(9) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended December 27, 1996 filed February 9, 1997.
(10) Incorporated by reference to Exhibit 4.04 in Registrant's Form S-8 Registration Statement filed January 15, 1999 (File No. 333-70739).
(11) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-K (File No. 0-25684) for the fiscal year ended June 27, 1997 initially filed September 25, 1997.
(12) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 26, 1997 filed November 10, 1997.
(13) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended December 26, 1997 filed February 2, 1998.
(14) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended March 27, 1998 filed May 1, 1998.
(15) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 8-A (File No. 0-25684) filed September 22, 1998.
(16) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-K (File No. 0-25684) for the fiscal year ended June 26, 1998 filed September 24, 1998.
(17) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 25, 1998 filed November 25, 1998.
+ Management contract or compensatory plan or arrangement.
* Confidential treatment has been requested with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
** Confidential treatment was received with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
*** Certain exhibits to the exhibit will be furnished supplementally to the Securities and Exchange Commission upon its request.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 24th day of September, 1998.
PREMISYS COMMUNICATIONS, INC.
By: /s/Nicholas J. Williams ------------------------------ Nicholas J. Williams Chief Executive Officer
Each person whose signature appears below constitutes and appoints Nicholas J. Williams and John J. Hagedorn, jointly and severally, his true and lawful attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date Principal Executive Officer:
/s/Nicholas J. Williams Chief Executive Officer, September 23, 1999 - ----------------------------- President, Chief Operating Nicholas J. Williams Officer and a Director
Principal Financial Officer:
/s/John J. Hagedorn Senior Vice President, September 23, 1999 - ----------------------------- Finance and Administration John J. Hagedorn Chief Financial Officer and Secretary
Principal Accounting Officer:
/s/Robert W. Dilfer Vice President and Controller September 23, 1999 - ----------------------------- Robert W. Dilfer
Additional Directors:
/s/Raymond C. Lin Chairman of the Board of September 23, 1999 - ----------------------------- Directors Raymond C. Lin
/s/Boris J. Auerbuch Director September 23, 1999 - --------------------------------- Boris J. Auerbuch
/s/Carol H. Sharer Director September 23, 1999 - --------------------------------- Carol H. Sharer
/s/Edward A. Keible Director September 23, 1999 - --------------------------------- Edward A. Keible
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
EXHIBITS to Form 10-K Under THE SECURITIES ACT OF 1933 -----------
PREMISYS COMMUNICATIONS, INC.
Exhibit Index Exhibit Number Exhibit Title
2.01 Premisys California Acquisition Agreement between Premisys Communications Holdings, Inc. and Premisys Communications Pte. Ltd., dated as of March 12, 1992, and exhibits thereto.(1) 2.02 Exchange Agreement by and among Premisys Communications Holdings, Inc. and the shareholders, warrant holders and noteholders of Premisys Communications Pte. Ltd., dated as of March 12, 1992, and material exhibits thereto.***(1) 2.03 Form of Agreement and Plan of Merger by and among the Registrant, Premisys Communications Holdings, Inc. and Premisys Communications, Inc.(1) 3.01 Registrant's Amended and Restated Certificate of Incorporation as filed with the Delaware Secretary of State on April 12, 1995.(2) 3.02 Certificate of Amendment of Amended and Restated Certificate of Incorporation of Premisys Communications, Inc.(4) 3.03 Certificate of Designations Specifying the Terms of the Series A Junior Participating Preferred Stock of Premisys Communications, Inc. (15) 3.04 Registrant's Bylaws, as amended.(1) 4.02 Investors' Rights Agreement, dated as of March 12, 1992, as amended June 15, 1992, October 22, 1993, December 14, 1993, February 18, 1994 and May 9, 1994 among Registrant and various investors.(1) 4.03 Waiver Relating to and Amendment of Investors' Rights Agreement dated as of July 24, 1995 among Registrant and various investors.(3) 4.04 Rights Agreement dated September 18, 1998 between Registrant and ChaseMellon Shareholder Services LLC, as Rights Agent. (15) +10.01 Registrant's 1992 Stock Option Plan and related documents.(1) +10.02 Registrant's 1994 Stock Option Plan and related documents.(10) +10.03 Registrant's 1995 Directors Stock Option Plan and related documents.(1) +10.04 Registrant's 1995 Employee Stock Purchase Plan and related documents.(1) +10.06 Founders Agreement by and among Registrant, Raymond Lin, Boris Auerbuch and Marcus Auerbuch, dated as of March 12, 1992.**(1) 10.08 Form of Indemnity Agreement entered into by Registrant with each of its directors and executive officers.(1) 10.09 Warranty and Indemnification Agreement by and among Raymond Lin, Boris Auerbuch and Registrant dated as of August 2, 1990.(1) 10.10 Agreement for Purchase and Sale of Assets by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of January 1, 1992, including Bill of Sale.(1) 10.11 Technology Cost and Risk Sharing Agreement by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of January 1, 1992.(1) 10.12 Agreement Regarding Payment by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of September 30, 1992.(1) 10.13 Technology Cost and Risk Sharing Agreement Amendment by and between Premisys Communications, Inc., a California corporation, and Premisys Communications Pte. Ltd., dated as of July 1, 1995. (6) 10.15 Option Agreement by and between Registrant and AT&T Paradyne Corporation, dated as of December 4, 1992.(1) 10.16 Series C Preferred Stock Purchase Agreement by and between Registrant and AT&T Paradyne Corporation, dated as of December 14, 1993 and material exhibits thereto.***(1) 10.18 Lease Agreement by and between Registrant and Aetna Life Insurance Company, dated October 4, 1993, as amended to date.(1) 10.19 OEM Agreement by and among Premisys Communications Holdings, Inc., Premisys Communications, Inc., a California corporation, and AT&T Paradyne Corporation, dated as of December 4, 1992, as amended July 8, 1993, March 17, 1994 and May 24, 1994.**(1) 10.20 Extension Agreements by and among Premisys Communications Holdings, Inc., Premisys Communications, Inc., a California corporation, and AT&T Paradyne Corporation, dated as of June 30, 1993 and July 12, 1993 and September 30, 1993.**(1) 10.21 Co-Development Agreement between Registrant and AT&T Paradyne Corporation, dated as of September 30, 1993, as amended November 9, 1993 and May 25, 1994.**(1) 10.22 Private Label Purchase/Resale Agreement by and between Registrant and DSC Technologies Corporation, effective as of March 31, 1994.**(1) 10.23 Purchase/Resale Agreement by and between Registrant and ADC Telecommunications, Inc., effective as of January 1, 1994.**(1) 10.24 Manufacturing Agreement by and between Registrant and Eltech Electronics Technology (M) SDN BHD (Malaysia) as of July 22, 1996.**(6) 10.26 Original Equipment Manufacturer (OEM) Volume Purchase Agreement between Registrant and Motorola, Inc. dated December 21, 1994.**(1) +10.27 Employment Agreement by and between Premisys Communications Holdings, Inc. and Riley R. Willcox dated as of February 10, 1994.(1) 10.28 Amendment No. 4 to OEM Agreement by and among Premisys Communications Holdings, Inc., Premisys Communications, Inc., a California corporation, and AT&T Paradyne Corporation dated as of March 6, 1995.**(1) +10.29 Registrant's Management Salary and Incentive Plan for the Fiscal Year Ended June 30, 1996.(3) 10.30 Lease Agreement by and between Premisys and Berg & Berg Enterprises, Inc., dated October 24, 1995, for the premises located at 48700 Milmont Drive, Fremont, California.(16)*** 10.31 Amendments Number 5 and 6 to OEM Agreement by and between Premisys Communications, Inc., a Delaware Corporation and AT&T Paradyne Corporation, dated as of April 1, 1995. (5)** +10.32 Registrant's Management Incentive Plan for the fiscal year ended June 30, 1997.(6) 10.33 Amendment Number 7 and 8 to OEM Agreement by and between Premisys Communications, Inc., a Delaware Corporation, and Paradyne Corporation, dated as of December 2, 1996.**(9) 10.34 First Amendment to Lease Agreement by and between Premisys Communications, Inc. and Berg & Berg Enterprises, Inc., dated September 17, 1996, for the premises located at 48800 Milmont Drive, Fremont, California (formerly 48700 Milmont Drive, Fremont, California). (8) 10.35 Second Amendment to Lease Agreement by and between Premisys Communications, Inc. and Aetna Life Insurance Company, dated August 9, 1996. (7)
10.36 Manufacturing Agreement by and between Premisys Communications, Inc. and CMC Mississippi, Inc. as of January 9, 1997. (11)** 10.37 Amendment Number 9 OEM Agreement by and between Premisys Communications, Inc., a Delaware Corporation and AT&T Paradyne Corporation, dated as of May 13, 1997. (11)** 10.38 Employment Agreement by and between Premisys Communications Inc. and Nicholas Williams dated as of March 31, 1997. (11) +10.39 Registrant's Management Incentive Plan for the fiscal year ended June 30, 1998. (11) 10.40 License Agreement dated December 27, 1996 between Premisys Communications, Inc. and Positron Fiber Systems Corporation. ** (11) +10.41 Employment Status Change Agreement by and between Premisys Communications, Inc. and William J. Smith dated as of October 31, 1997. (12) +10.42 Employment Agreement by and between Premisys Communications, Inc. and Peter Hauser dated as of January 5, 1998. (13) 10.43 Third Amendment to Lease Agreement by and between Premisys Communications, Inc. and Aetna Life Insurance Company, dated January 8, 1998. (14) +10.44 Employment Status Change Agreement by and between Premisys Communications, Inc. and Riley R. Willcox dated as of July 16, 1998.(16) +10.45 Employment Agreement by and between Premisys Communications, Inc. and John J. Hagedorn dated as of June 1, 1998.(16) +10.46 Amendment to Employment Agreement by and between Premisys Communications, Inc. and John J. Hagedorn dated as of July 14, 1998.(16) +10.47 Registrant's Management Incentive Plan for the fiscal year ended June 30, 1999.(16) 10.48 Lease Agreement by and between Registrant and Aetna Life Insurance Company, dated June 4, 1998 for the premises located at 48634 Milmont Drive, Fremont, California.(16) 10.49 First Amendment to Lease Agreement by and between Premisys Communications, Inc. and Aetna Life Insurance Company dated July 20, 1998 for the premises located at 48634 Milmont Drive, Fremont, California.(16) 10.50 OTC Issuer Stock Option Master Agreement with amendment dated September 9, 1998.(17) +10.51 Registrant's Management Incentive Plan for the fiscal year ended June 30, 2000. 10.52 Master Purchase Agreement between Premisys Communications, Inc., a Delaware corporation, and Teleport Communications Group Inc., dated as of October 15, 1997.* 21.01 List of Registrant's subsidiaries. 23.01 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 24.01 Power of Attorney (See page 53 of this Form 10-K). 27.01 Financial Data Schedule. - -----------
(1) Incorporated herein by reference to the exhibit bearing the same number in the Registrant's Registration Statement on Form 8-A (No. 0-25684) filed with the Securities and Exchange Commission on September 22, 1998.
(2) Incorporated by reference to Exhibit 3.01 to the Registrant's Form 10-Q (File No. 0-25684) for the quarter ended March 31, 1995 filed May 22, 1995.
(3) Incorporated by reference to the exhibit bearing the same number in Registrant's Form S-1 Registration Statement filed August 1, 1995 (File No. 33-95266).
(4) Incorporated by reference to Exhibit 3.05 in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended December 29, 1995 filed February 12, 1996.
(5) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended March 29, 1996 filed May 3, 1996.
(6) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-K (File No. 0-25684) for the fiscal year ended June 28, 1996 initially filed September 26, 1996.
(7) Incorporated by reference to the exhibit bearing the number 10.33 in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 27, 1996 filed November 10, 1996.
(8) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 27, 1996 filed November 10, 1996.
(9) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended December 27, 1996 filed February 9, 1997.
(10) Incorporated by reference to Exhibit 4.04 in Registrant's Form S-8 Registration Statement filed January 15, 1999 (File No. 333-70739).
(11) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-K (File No. 0-25684) for the fiscal year ended June 27, 1997 initially filed September 25, 1997.
(12) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 26, 1997 filed November 10, 1997.
(13) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended December 26, 1997 filed February 2, 1998.
(14) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended March 27, 1998 filed May 1, 1998.
(15) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 8-A (File No. 0-25684) filed September 22, 1998.
(16) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-K (File No. 0-25684) for the fiscal year ended June 26, 1998 filed September 24, 1998.
(17) Incorporated by reference to the exhibit bearing the same number in Registrant's Form 10-Q (File No. 0-25684) for the quarter ended September 25, 1998 filed November 25, 1998.
+ Management contract or compensatory plan or arrangement.
* Confidential treatment has been requested with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
** Confidential treatment was received with respect to certain portions of this agreement. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
*** Certain exhibits to the exhibit will be furnished supplementally to the Securities and Exchange Commission upon its request.
Exhibit 10.51 Management Incentive Plan for FY2000 Premisys Communications, Inc. Compensation Committee of Board of Directors July 22, 1999
I. Participation A. Participants ("Participants") are executives and managers that have an impact of the overall success of the Company. B. Participants must be full-time, regular employees as of the last day of each bonus period to earn a bonus. C. Participants of the Management Incentive Plan can not participate in profit sharing plan. II. Bonus Formula A. The target individual bonuses are set as a percentage of annual salaries and reflect bonuses paid to individuals in comparable positions at other companies and their responsibilities at Premisys. B. Operating Profit in all calculations for non-Engineering participants is the consolidated operating profit before accruals for Management Bonus and the Profit Sharing Plans ("Pre-bonus Operating Profit"). C. Operating Profit in all calculations for Engineering participants is the consolidated product line gross profit less Engineering expense and before accruals for Management Bonus and the Profit Sharing Plans ("Pre-bonus Operating Profit"). D. The basis of earning bonuses varies with the responsibilities of the manager: 1. CEO and CFO - Company performance; measured as actual Pre-bonus Operating Profit versus plan 2. Senior VP Sales - product revenue (through his sales commission plan), individual goal accomplishments and actual Pre-bonus Operating Profit versus plan 3. All other participants - combination of actual Pre-bonus Operating Profit versus plan and achievement of individual goals, with specific portions of their bonuses tied to the accomplishment of each goal. E. The Company performance bonuses that are tied to actual Pre-bonus Operating Profit versus plan will be calculated as follows: 1. The earned bonus is the product of individual bonus percentage of planned Pre-bonus Operating Profit times the actual Pre-bonus Operating Profit. 2. If actual Pre-bonus Operating Profit versus plan is120% or more of Plan for the complete fiscal year, the earned bonus is the product of individual bonus percentage of planned Pre-bonus Operating Profit times the ratio of the actual/planned Pre-bonus Operating Profit times the actual Pre-bonus Operating Profit. 3. Individual Bonuses are capped at two times target dollar bonuses. F. Bonuses based upon the accomplishmentof individualgoals will be determined by the CEO in conjunction with the individual's direct manager. The target levels represent bonuses to be paid upon achievement of goals on a timely basis; to the degree goals are accomplished later or earlier than expected, and to the degree the goal completion represented lesser or greater effort than expected, actual bonuses can be from zero to 150% of the target levels. G. No bonus payments to executive officers are made if actual Pre-bonus Operating Profit is less than 75% of Plan. H. For all non-executive officer participants, no bonus payments based on Pre-bonus Operating Profit are made if actual Pre-bonus Operating Profit is less than 75% of Plan, and no bonus payments based on individual goals are made if actual Pre-bonus Operating Profit is less than 50% of Plan I. Management bonuses will be calculated for the first half and the second half of each fiscal year and be paid within 30 days after the end of each six-month period. III. Authorization A. The Plan and participation must be approved at the beginning of each fiscal year by the Compensation Committee of the Board of Directors. B. The Compensation Committee of the Board of Directors has the authority to adjust amounts paid out based upon corporate performance based upon its assessment of the overall accomplishments of the management team.
Exhibit 10.52 ** Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
MASTER PURCHASE AGREEMENT
This Agreement is between Premisys Communications, Inc., a Delaware corporation (hereinafter called "Vendor"), having its office at 48664 Milmont Drive, Fremont, California 94536 and Teleport Communications Group Inc. (hereinafter called "Customer") having a place of business at One Teleport Drive, Suite 301, Staten Island, New York 10311.
WITNESSETH:
WHEREAS, Teleport Communications Group Inc. (TCG) is currently engaged in establishing metropolitan area networks ("MANS") to provide local communications services in various cities throughout the United States, and
WHEREAS, the entities which will establish such MANS (individually, a "MANS Entity") may either be wholly or partly owned by TCG, and
WHEREAS, Vendor and TCG wish to set forth a standard set of general terms and conditions which will facilitate the ability to obtain the Products and/or Services (listed in Exhibit A) which may be purchased from time to time from Vendor by any MANS Entity, and
WHEREAS, as used herein the term TCG or Customer shall include, where applicable, Teleport Communications Group, Inc. and such other MANS Entities which are wholly or partly owned by TCG;
NOW THEREFORE, it is mutually agreed as follows:
1. ORDERS
1.1 All orders are subject to acceptance and acknowledgment at PREMISYS' California office. PREMISYS will use its best efforts to acknowledge CUSTOMER's order using PREMISYS' Sales Order Acknowledgment form within twenty-four (24) hours. This Agreement supersedes the terms of CUSTOMER's Purchase Order and preprinted terms on Premisys' Order Acknowledgment.
Orders shall:
(a) be in writing on paper with CUSTOMER's form (can be received via facsimile transmission); electronic transmission of orders are acceptable if they meet all of the conditions in this Section 1;
(b) include CUSTOMER's purchase order number and/or a signature of an authorized employee of CUSTOMER (to be provided by CUSTOMER);
(c) adhere to the terms and conditions as in Section 3 of this Agreement;
(d) have correct equipment and options description (including item numbers and part numbers if shown for that item in the price list);
(e) have correct purchase price in accordance with Exhibits A and of this Agreement or any amendments hereto;
(f) provide tax status for each "ship to" location including exemption certificate number if tax exempt, either on the order or separate notice prior to shipment;
(g) have firm shipment schedules, with shipment date, extended not more than ninety (90) days from date of order; and
(h) specify exact "ship to" and "invoice to" place of business.
1.2 All orders shall be sent to:
PREMISYS Communications, Inc. ATTN: Customer Service 48664 Milmont Drive Fremont, CA 94538 Phone: (510) 353-7600 Fax: (510) 353-7601
1.3 Delivery - Within two (2) business days after acceptance of order providing such orders are approximately as forecasted. PREMISYS will endeavor and use best commercial efforts to ship such orders within twenty-four (24) hours of acceptance and other short-term orders requested by CUSTOMER for products and quantities as shown in Exhibits E and F.
1.4 Shipment of Orders
1.4.1 All shipments shall be accompanied by a detailed packing list which will reference the PREMISYS part number for the Product, the purchase order number the shipment is against, the customer item number, and the quantity in each shipment covered by the packing list.
1.4.2 All shipment containers shall be marked and identified with the necessary shipping information, including name and address of CUSTOMER or other designated consignee, and consignor.
1.4.3 CUSTOMER may specify carrier and mode of transportation on each individual purchase order. All shipments shall be made freight collect. If CUSTOMER fails to indicate the carrier and mode of transportation, CUSTOMER grants PREMISYS authority to select carrier and mode of transportation required to meet CUSTOMER's delivery requirements.
1.4.4 Vendor will pack the Products purchased hereunder for transport in accordance with its commercial standards and will deliver the Products to a carrier of the mode of transportation selected by Vendor unless otherwise agreed upon by the parties.
1.4.5 Products will be shipped to Customer's specified delivery point FOB shipping point, freight prepaid and billed. Such prepaid transportation charges will be so identified as a separate line item on Vendor's invoice or will be separately billed to Customer on NET 30 DAY terms if applicable due to special handling requested by Customer.
2. PRICES
(a) Products
The price of the Products during the term of this Agreement shall be as listed in Exhibit A.
(b) Services
(1) Prices for Training and Installation shall be those contained in Exhibit A.
(2) Prices for Services not listed in Exhibit A shall be those contained in Vendor proposals issued from time to time.
(c) Volume Discounts; forecasts
(1) There shall be no minimum purchase requirement.
(2) Customer will be invoiced only for Products ordered by Customer via Purchase Orders. Customer has no liability for Product purchases beyond issued Purchase Orders.
(3) Customer shall submit to Vendor a six month (6) month rolling forecast of Product purchases which will be updated quarterly and is non-binding.
PREMISYS shall sell the Products to CUSTOMER without right of return except as expressly provided in Exhibit "B" attached hereto.
3. PAYMENT
Payment for Products shall be due NET THIRTY (30) DAYS from the date of invoice by Customer. Such invoice shall be sent to Customer at the time of shipment of the Products. Payment for Services ordered by the Customer and performed by Vendor shall be due net thirty 30 days from the Vendor's invoice date by Customer. Vendor shall give Customer a two percent (2%) discount on all Products and Services if payment is made by Customer within ten (10) days from the invoice date. No penalties will be imposed for orders for which payment has been made within sixty (60) days.
4. TRANSFER OF TITLE AND RISK OF LOSS; SOFTWARE LICENSE
(a) Title to the Products, except for software, shall pass from Vendor to Customer upon delivery by the Vendor to the carrier. In the event of loss or damage during shipment, the Vendor will take the action to resolve such issues with the carrier, including any and all insurance claims. If lost Products cannot be recovered within twenty-four (24) hours,Vendor will replacesuchlost products and any damaged productsat no additionalcost to Customer.Customer willassist Vendor in asserting any claim against the involved carrier. Any damaged or recovered Products or paid claims will be returned to Vendor.
(b) Title to software shall remain with Vendor. Unless otherwise stipulated by Vendor, Vendor grants to Customer a fully paid up, non-exclusive, nontransferable license to use the software solely in conjunction with Vendor-provided Products. The software and license to use such software is considered Vendor proprietary information. The foregoing license does not include any right of Customer to sublicense or assign the software without the prior written approval of Vendor.
Customer may only make copies sufficient for backup operational logistics.
5. LABOR HARMONY; ACCESS TO CUSTOMER PREMISES
Customer shall familiarize Vendor with the labor/management relationships at Customer working sites, and Vendor shall conduct its activities in such a manner as to avoid: (i) any interruption of work and services at the Customer sites; and (ii) any interference with the work or activities of other parties. Whenever Vendor has knowledge of any actual or potential labor dispute, it shall immediately give the MANS Entity notice thereof and all relevant information it has with respect thereto. Vendor assumes the risk for any disruption of the work due to a labor dispute caused directly by an act or omission of Vendor, and such labor dispute, or the settlement thereof, shall not be grounds for any change in the terms of this Agreement. In the event of an actual or potential labor dispute, Vendor agrees to cooperate with the Customer to minimize the effect such disruption may have at such site. Vendor shall be responsible for its costs in resolving or averting any such labor dispute.
6. TAXES
(a) Prices for Products and, if applicable, software do not include any state, federal, county or local sales, or use taxes applicable to the sale, delivery, or use of said Products, and the Customer expressly agrees to pay to vendor (in addition to the Prices specified), the amount of any such taxes that may be imposed upon and therefore payable by Vendor as shall be determined by the shipping destination specified in the Customers Purchase Order.
All sales and use taxes, will be itemized separately on the invoice and billed to the Customer by Vendor unless Customer has supplied valid tax exemption certificates or equivalent legal waiver documents.
(b) All other taxes of every nature and kind, including without limitation franchise, net or gross income, license, occupation, or property taxes on Vendor-owned property shall be the responsibility of Vendor and Customer shall have no obligation to Vendor therefor.
(c) Customer shall have the right to pay tax under protest for the levy of any such sales or use taxes and, in-such event, Vendor shall provide such assistance and information as may be required by any taxing authority in connection with such protest and appeals.
7. DOCUMENTATION
(a) At no additional charge, Vendor will furnish one manual for each enclosure ordered. The instruction books shall contain sections on theory, operation, installation, and maintenance of the equipment.
(b) In the event that Vendor is contracted by Customer to engineer and/or install equipment, Vendor documentation will include engineering drawings covering physical installation, wiring, and connectivity, and, if applicable, as-built drawings.
9. WARRANTIES
(a) Hardware Warranty
1. All Product is warranted to perform, when given normal, proper and intended usage, substantially in accordance with the published release specifications for each Product and, except for Licensed Software, against defects in materials and workmanship.
2. PREMISYS warrants to Customer only that to the extent that any Product delivered under this Agreement is hardware, such Product shall be free from defects in workmanship and materials under normal use and service for a period of five (5) years from date of PREMISYS shipment of the Product to CUSTOMER. PREMISYS makes no warranty to anyone other than Customer including no warranty to any customer of Customer except as set forth in PREMISYS' limited warranty accompanying delivery of Product, if any. CUSTOMER may assign its warranty to its customers subject to the terms of this section.
If during the stated warranty period any defect in material, workmanship or design is discovered in any Product covered by the above warranty PREMISYS shall, at PREMISYS' sole option, (1) repair or replace any such Products which are returned by Customer or (2) refund (or credit at Customer's option) the purchase price provided that: (a) PREMISYS is promptly notified in writing upon discovery of such defect, which notice shall contain a reasonable explanation of any alleged deficiency and be delivered to PREMISYS prior to the expiration of the applicable warranty period; (b) such Product is promptly returned to PREMISYS after issuance of a return material authorization (RMA) by PREMISYS, freight prepaid to PREMISYS' Warranty Repair Department; and (c) PREMISYS is satisfied upon examination that claimed deficiencies actually exist and were not caused by accident, misuse, neglect, alteration, improper installation, improper repair, improper testing, lightning, fire, flood, or earthquake. No troubles found (NTF) will be billed at a charge of $100 per occurrence. PREMISYS shall have twenty (20) business days to make repairs to or replace Products found to be defective. Unauthorized modifications or alterations of Product shall invalidate this warranty. PREMISYS shall return all Products repaired or replaced under warranty freight prepaid to Customer.
(3) Limitations of Warranty
CORRECTION OF DEFECTS BYREPAIR, REPLACEMENT,SERVICE OR REFUNDWILL BE AT VENDOR'S OPTION AND CONSTITUTE FULFILLMENT OF ALL OBLIGATIONS TO CUSTOMER FOR BREACH OF WARRANTY.
Vendor assumes no warranty liability with respect to defects in the product caused by:
(i) Other manufacturer's equipment purchased by Vendor and resold to Customer will be limited to that manufacturer's warranty. Vendor shall assign the manufacturer's warranty to Customer. Vendor assumes no warranty liability for other manufacturer's equipment furnished by Customer.
(ii) No agent, Customer, or representative is authorized to make any warranties on behalf of Vendor or to assume for Vendor any other liability in connection with any Vendor Product or Service.
(b) Software Program License And Warranty
1. License
1.1 Subject to the following terms and conditions PREMISYS grants to CUSTOMER and CUSTOMER accepts a perpetual, non-exclusive license to use the object code software provided by PREMISYS (the Licensed Program) only with PREMISYS equipment with all copyright, patent and intellectual property rights remaining the sole property of PREMISYS.
1.2 CUSTOMER shall receive software support and upgrades for the Licensed Program in accordance with the applicable then current PREMISYS software support policy in effect and upon payment of any applicable fees.
2. Protection and Security of Licensed Programs
2.1 CUSTOMER acknowledges and agrees that the Licensed Program contains proprietary and confidential information of PREMISYS and/or its third party supplier. CUSTOMER agrees to protect the confidential and proprietary nature of the Licensed Program in the same manner that it protects its own confidential information of like value, provided that CUSTOMER will in all cases use reasonable care to protect the Licensed Program.
2.2 CUSTOMER shall not use, print, copy, translate, adapt, create derivative works from, record, transmit, display, disclose, publish, encumber by way of security interest or otherwise pledge or transfer, modify, assign, distribute, rent, loan or make available to any third party the Licensed Program in whole or in part, except as expressly provided in this Agreement.
2.3 CUSTOMER shall refrain from and shall prevent others from decompiling or applying any procedure to the Licensed Program, including reverse engineering or any similar process, in order to derive and/or appropriate for use, the source code or source listings for the Licensed Program.
3. Term
3.1 This Agreement shall become effective for each Licensed Program upon delivery of the Licensed Program to CUSTOMER.
3.2 PREMISYS may terminate said license upon notice to CUSTOMER if CUSTOMER breaches any provision of this Agreement and fails to cure such breach within thirty (30) days of notice thereof, or if CUSTOMER becomes bankrupt, makes an assignment for the benefit of creditors or a trustee is appointed for CUSTOMER, or if the assets of CUSTOMER vest in or become subject to the rights of any trustee, receiver, board, tribunal, commission or any body, corporate or person, other than CUSTOMER, or if bankruptcy, reorganization or insolvency proceedings are instituted against CUSTOMER and are not dismissed within 30 days.
4. Limited Warranties
4.1 PREMISYS warrants that when the Licensed Program is delivered that it will function substantially in accordance with the functional description set out in the applicable portion of the version of the user manual supplied with the License Program when used in accordance with such user manual. This warranty will be conclusively deemed to be satisfied unless CUSTOMER gives PREMISYS notice within 90 days of the date PREMISYS ships the original copy of such Licensed Program that the warranty has not been met, in which case PREMISYS shall have the opportunity to make repeated efforts within a reasonable time to satisfy its obligations under this warranty. If, after repeated efforts, CUSTOMER notifies PREMISYS that this warranty has not been met, PREMISYS will take back the Licensed Program and refund to CUSTOMER all amounts paid by CUSTOMER hereunder with respect to such Licensed Program.
4.2 THE WARRANTY SET OUT IN SECTION 4.1 SHALL CONSTITUTE THE SOLE LIABILITY OF PREMISYS AND THE SOLE REMEDY OF CUSTOMER FOR ANY FAILURE OF ANY PROGRAM TO FUNCTION AS WARRANTED.
4.3 EXCEPT AS EXPRESSLY PROVIDED HEREIN THERE ARE NO WARRANTIES, CONDITIONS OR REPRESENTATIONS EXPRESS OR IMPLIED BY STATUTE, USAGE, CUSTOM OF THE TRADE OR OTHERWISE WITH RESPECT TO THE LICENSED PROGRAMS PROVIDED BY PREMISYS HEREUNDER, INCLUDING BUT NOT LIMITED TO, WARRANTIES OR REPRESENTATIONS OF WORKMANSHIP, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR DURABILITY, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, PREMISYS DOES NOT WARRANT THAT THE LICENSED PROGRAM WILL MEET ALL OF CUSTOMER'S NEEDS OR THAT OPERATION OF THE LICENSED PROGRAM WILL BE ERROR FREE.
5. LIMITATION OF LIABILITY
5.1 EXCEPT FOR THIRD PARTY CLAIMS IN NO EVENT WHATSOEVER, REGARDLESS OF THE FORM OR CAUSE OF ACTION WHETHER IN CONTRACT OR TORT (INCLUDING NEGLIGENCE) OR THE NUMBER OF CLAIMS ASSERTED, SHALL PREMISYS, ITS EMPLOYEES, DIRECTORS, OFFICERS AND AGENTS TOTAL COLLECTIVE LIABILITY TO CUSTOMER FOR ALL CLAIMS EXCEED THE AMOUNT PAID UNDER THIS AGREEMENT FOR THE LICENSED PROGRAM THAT IS THE SUBJECT MATTER OF OR THAT IS DIRECTLY RELATED TO CAUSE OF ACTION, PROVIDED THAT IN NO EVENT SHALL THE TOTAL COLLECTIVE LIABILITY OF PREMISYS, ITS EMPLOYEES, OFFICERS, AGENTS AND DIRECTORS EXCEED THE AMOUNT PAID TO PREMISYS PURSUANT TO THIS AGREEMENT.
5.2 PREMISYS, ITS EMPLOYEES, AGENTS, OFFICERS AND DIRECTORS SHALL NOT BE LIABLE IN ANY WAY WHATSOEVER, WHETHER AS A RESULT OF A CLAIM OR ACTION IN CONTRACT OR TORT, INCLUDING NEGLIGENCE OR OTHERWISE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOST PROFITS OR LOST BUSINESS REVENUE, LOST BUSINESS, FAILURE TO REALIZE EXPECTED SAVINGS, OR OTHER COMMERCIAL OR ECONOMIC LOSS OF ANY KIND WHATSOEVER, OR FOR ANY DAMAGES, DIRECT OR INDIRECT, SPECIAL OR CONSEQUENTIAL ARISING OUT OF ANY CLAIM AGAINST CUSTOMER BY ANY PERSON WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE AND WHETHER OR NOT PREMISYS, ITS EMPLOYEES, AGENTS, OFFICERS OR DIRECTORS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES WHICH ARE IN ANY WAY RELATED TO THIS AGREEMENT OR THE LICENSED PROGRAM.
6. Patent, Copyright, Trade Name and Trade Secret Infringement
6.1 PREMISYS shall defend any suit alleging the infringement of any patent, copyright or trade secret which is brought against CUSTOMER on account of its use of the Licensed Program and shall pay all reasonable legal costs and expenses incurred by CUSTOMER in conjunction therewith and satisfy all monetary judgments and decrees against CUSTOMER, provided that CUSTOMER notifies PREMISYS within ten (10) business days of the date any such claim becomes known to CUSTOMER, that PREMISYS shall have sole control of the defense or settlement of such actions, and that CUSTOMER provides such assistance and cooperation to PREMISYS as is reasonably requested.
6.2 In the event CUSTOMER is enjoined from its use of PREMISYS' Licensed Program due to proceeding based upon any infringement of any patent, copyright or trade secret, PREMISYS shall either:
i) promptly renderthe Licensed Program non-infringing and capable of providing services as intended, or
ii) procure for CUSTOMER the right to continue using the Licensed Program, or
iii) replace the Licensed Program with a non-infringing version, or
iv)remove the Licensed Program and refund the purchase price, less a monthly usage fee equal to one sixtieth of the license for each month that CUSTOMER has had use of the Licensed Program.
6.3 The foregoing constitutes the entire liability of PREMISYS to CUSTOMER with respect to infringement of patents, copyrights, and trade secrets for Products purchased pursuant to this Agreement and PREMISYS hereby disclaims any implied warranty of non-infringement.
7. Miscellaneous
7.1 Notwithstanding anything else in this Exhibit, PREMISYS shall not, in any way whatsoever, be held liable or responsible for any failure by it to meet its obligations or responsibilities under this Exhibit where such failure results from causes beyond PREMISYS' reasonable control.
7.2 This Exhibit constitutes the entire understanding between PREMISYS and CUSTOMER with respect to the licensing of the Licensed Programs to CUSTOMER by PREMISYS and supersedes all prior oral and written communications with respect to the Licensed Programs licensed under this Exhibit. This Exhibit may be amended or modified only by means of a written Agreement signed by both PREMISYS and CUSTOMER.
7.3 If any provision of this Exhibit shall be held to be invalid, illegal or unenforceable, such provision shall be severed therefrom and the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
7.4 CUSTOMER shall comply with all export regulations pertaining to the Licensed Program in effect from time to time. In particular, without limiting the generality of the foregoing, CUSTOMER hereby warrants that it will not directly or indirectly export, re-export or transship the Licensed Program or such other information, media or products in violation of or otherwise in contravention of the export laws, rules and regulations.
(c) Disclaimer of Warranty and Limitation of Remedies
1. Customer understands and agrees as follows:
THE ABOVE WARRANTIES REPLACES ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, AND ALL OTHER OBLIGATIONS OR LIABILITIES OF VENDOR, INCLUDING ANY WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. ALL OTHER WARRANTIES ARE DISCLAIMED AND EXCLUDED BY VENDOR.
THE FOREGOING WILL BE THE SOLE AND EXCLUSIVE REMEDY FOR BREACH OF WARRANTY IN CONTRACT, OR OTHERWISE. THIS LIMITATION APPLIES TO ALL SERVICES AND PRODUCTS DURING AND AFTER THE WARRANTY PERIOD. IN NO EVENT WILL VENDOR BE LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR COMMERCIAL LOSSES EVEN IF VENDOR HAS BEEN ADVISED THEREOF.
10. SUPPORT SERVICES
Vendor shall provide the following services:
** Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
10.1 NO CHARGE SERVICES
(a) Vendor's Service Engineers to resolve, via telephone, technical questions/issues on a [ ** ] basis, and to ship emergency parts within [ ** ] of request.
(b) Distribution of service bulletins that describe Products changes. Distribution shall take place to Customer within two (2) workdays of bulletin preparation.
(c) Order Administration for parts and warranty issues.
(d) Training for up to eight (8) qualified technicians at Vendor's Facilities in the operational theory, technical parameters, installation and/or maintenance,and testmethods foreachtype of Product acquired by Customer and by Related Companies. Such training shall be provided,mutually agreed,forthe firstof such acquisitions by Customer,and shallbe providedto Customer's and the Related Company's employeesor their contractors'employees. If training class is canceledor rescheduled within one(1) week of the commencement date, Customer will pay Seller's non-recoverable costs incurred in connection therewith. In addition, Seller will offer to provide at Seller's training facility such training for three(3) employees of Customer,each Related Company, or their contractors for each type of Product acquired by Customer as to such training, Customer or Related Company, as applicable, shall pay such employees, travel and living expenses.
10.2 BILLABLE SERVICES
(a) Except as provided above, training courses at vendor's facility or Customer's facility shall be provided in Vendor's Price List (section 4.03) for such services. The cost to Customer for training at Customer's facility shall not exceed the reasonable expenses associated with the trainer's travel, lodging and meals.
(b) Repair of customer-returned units at the then current vendor price list in effect for such services when the products are returned out of warranty.
(c) Provision of loaner modules for restoring service during outages.
(d) Emergency on-site engineering support, with Customer's costs limited to Vendor's standard rates and the reasonable expenses associated with travel, lodging and meals.
(e) Cost of emergency parts and shipping as described in Exhibit B.
11. SPARES
** Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
(a) Vendor agrees to offer for sale and provide to Customer, at reasonable rates and deliveries then in effect, replacement and spare parts for a [ ** ] period commencing on the delivery date for the last item of Products under this Agreement.
In the event that Vendor is unable to commit within thirty (30) days to supply to Customer a specified spare part or equivalent replacement within 180 days from the date a Customer's order is received, Customer may require Vendor to supply all plans, drawings, technical specifications, parts list, and other documents as Customer may require in order to obtain or manufacture a substitute or equivalent part. Vendor shall use best efforts to meet a shorter delivery date for spares.
12. INVENTORY
Vendor shall maintain an inventory of sets of Products at its facility as described in Exhibit E. Customer shall have access to this inventory for emergency service purposes on a [ ** ] basis, and Vendor shall deliver to a shipping carrier inventory for such purposes within [ ** ] of Customer's written authorized request. Vendor will invoice Customer upon shipment under the terms of this agreement.
13. FUTURE ENHANCEMENTS
Any future enhancements developed for the Product(s) purchased under this Agreement will be available and offered for sale to Customer at the then-current catalog price, less any applicable discounts.
14. EXCUSABLE DELAY
Vendor will not be liable for delays in performance or a failure to perform hereunder due to unforeseen circumstances or causes beyond its control including, but not limited to, inability to obtain material, labor or manufacturing facilities, acts of God, acts of any government, wars, riots, fires, floods, accidents, strikes, embargoes, or delays on the part of Vendor's suppliers for said reasons. In the event of such delays the Purchase Order schedules shall be extended for such additional period of time as is determined to be equitable by the parties.
If such a delay in performance or failure to perform forces an interruption of more than fifteen (15) days, Customer may elect to cancel the Purchase Order(s) without penalty to Customer and without any financial obligation other than to pay for Products actually delivered.
15. CONFIDENTIALITY OF INFORMATION
(a) Should private information ofeither theCustomer orVendor be required by the other in performanceof this Agreement,the party receiving such private information (Recipient hereafter) agrees to maintain same in confidence andto take precautions reasonably necessaryto protect same from third parties and any purpose inconsistent with the Agreement. Precautions taken shallbe deemed reasonable if at least equivalent to Recipient's precautions with respect to its own private information. Private information shallmean technical orbusiness informationor data conveyed in written, graphic, or other permanent tangible form.
The foregoing confidentiality restrictions, however, shall not extend to any part of the private information which:
(1) was already known to the recipient at the time of disclosure hereunder and as can be confirmed by written documentation;
(2) was knownor was generally available tothe public atthe time of disclosure hereunder;
(3) becomes known or generally available to the public (other than by act of Recipient subsequent to its disclosure hereunder);
(4) is disclosed or made available in writing to Recipient by a third party having a bona fide right to do so;
(5) is independently developed by Recipient without the use of the private information as can be established by written documentation; or,
(6) is required by law to be released.
(b) The provisions of this Section 16 shall survive beyond the termination of this Agreement.
16. ASSIGNMENT
(a) Vendor shall not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of Customer, which consent shall not be unreasonably withheld. However, Vendor may make such assignment without Customer's approval in case of merger or acquisition.
(b) Customer may assign this Agreement or any of its rights or obligations except for obligations of payments due to a parent company, affiliate or subsidiary.
(c) The terms and conditions of this Agreement shall pass to the benefit of and be binding upon the successors and assigns of the parties.
17. PATENT INDEMNITY
Vendor agrees that it will defend, at its own expense, all claims and suits against Customer for infringement (or alleged infringement) of any United States patent, or patents covering, or alleged to cover, Vendor-supplied Product(s). Vendor agrees that it will pay all sums which, by settlement, final judgment or decree in any such claims or suits, may be assessed against Customer on account of such infringement, provided that Vendor shall be given (i) immediate written notice of any claims of any such infringement and of any suits brought or threatened against Customer and (ii) authority to assume the sole defense thereof through its own counsel (and at its expense) and to compromise or settle any suits so far as this may be without prejudice to the right of the Customer to continue the use, as contemplated, of the Product(s) furnished or to be furnished. If in any such suit so defended the Product(s) is held to constitute an infringement and its use is enjoined, or if in the light of any claim of infringement Vendor deems it advisable to do so, Vendor may procure the right to continue the use of the same for the Customer, or replace the same with a non-infringing Product(s) , modify same so as to be non-infringing, or accept the return of Product(s) and refund the price therefor to Customer.
18. COPYRIGHT INDEMNITY
Vendor agrees that it will defend, at its own expense, all claims and suits against Customer for infringement (or alleged infringement) of any United States Copyrights covering or alleged to cover, Vendor-supplied Product(s). Vendor agrees that it will pay all sums which, by settlement, final judgment or decree in any such claims or suits, may be assessed against Customer on account of such infringement, provided that Vendor shall be given (i) immediate written notice of any claims of any such infringement and of any suits brought or threatened against Customer and (ii) authority to assume the sole defense thereof through its own counsel (and at its expense) and to compromise or settle any suits so far as this may be without prejudice to the right of the Customer to continue the use, as contemplated, of the Product(s) furnished or to be furnished. If in any such suit so defended the Product(s) is held to constitute an infringement and its use is enjoined, or if in the light of any claim of infringement Vendor deems it advisable to do so, Vendor may procure the right to continue the use of the same for the Customer, or replace the same with a non-infringing Product(s), modify same so as to be non-infringing, or accept the return of Product(s) and refund the price therefor to Customer, and refund the purchase price, less a charge for equal to one sixtieth (1/60) of the purchase price of the Product for each month that Customer enjoyed beneficial use, and accept the return of such equipment.
19. NOTICES
(a) All notices or communications of any kind made or required to be given pursuant to this Agreement shall be in writing and delivered by personal service to an officer of the other party or sent by telegraph or by certified mail, returned acknowledgement required postage prepaid. Notices shall be addressed as follows unless either party gives notice to the other party of a change of address:
To PREMISYS: To CUSTOMER:
PREMISYS Communications, Inc. Teleport Communications Group, Inc. 48664 Milmont Drive One Teleport Drive , Suite 301 Fremont, CA 94538 Staten Island, NY 10311 ATTN: CONTROLLER ATTENTION: GENERAL COUNSEL
(b) Either party may change such address or change the designation or title of the individuals by written notice issued and delivered as above.
20. INSURANCE
(a) Vendor, at its sole cost and expense, shall secure and keep in force, at all times while this Agreement is in place the following insurance coverage and their respective minimum limits:
(1) Workmen's Compensation Employer's Liability Insurance
(a) Worker's Compensation - Statutory Limits, unless Seller maintains a qualified self-insured status and so certifies to Customer.
(b) Employer's Liability - $100,000 per occurrence.
(2) Comprehensive General Liability Insurance
(a) Combined Bodily Injury Liability and Property Damage Liability - Limits of not less than $1,000,000 per occurrence.
(b) This policy must include coverage extensions for (i) Contractual Liability (to cover the indemnification provision at Section 21 of this Agreement), (ii) Products Liability (which shall be maintained for not less than one year following completion of the services pursuant to this contract), (iii) Independent Contractor's Liability, and (iv) Broad Form Property Damage Liability.
(3) Automobile Liability Insurance
(a) Bodily Injury Liability and Property Damage Liability limits of $1,000,000 per occurrence.
(b) This policy shall cover all owned, non-owned and hired vehicles that are or may be used by Vendor and its employees in the performance of this Agreement.
** Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
(4) Excess Liability Insurance
Excess or umbrella liability policy(ies) with limits of at least $1,000,000 per occurrence should be maintained, covering losses in excess of the above listed coverage (other than Workers' Compensation) and limits.
The above limits of liability may be provided by a combination of primary and excess policies, at vendor's election.
(b) [ ** ]
(1) [ ** ]
(2) [ ** ]
(c) All insurance required by this clause shall be issued only by insurance companies licensed in the state or states where the work or services covered by this Agreement is to be performed.
(d) Vendor shall provide Customer with certificates of insurance prior to commencement of the work covered by this contract and for each policy renewal during the course of this contract.
(e) The insolvency, bankruptcy, or failure of any insurance company carrying insurance for Vendor or failure of any such insurance company to pay claims due shall not relieve Vendor of any of it obligations in respect of the provision of insurance or indemnification.
21. INDEMNIFICATION
Vendor shall take all necessary and reasonable precautions to prevent the occurrence of any injury (including death) to any person, or damage to any property, arising out of any negligent acts or omissions of Vendor or Vendor's employees, agents, representatives, or subcontractors in connection with the furnishing of the Products or any Services purchased by Customer hereunder and to the extent that any injury or damage is due to such acts or omissions, Vendor shall indemnify and hold harmless Customer against any loss, claim, damage, liability, expense (including reasonable attorneys, fees), or cause of action arising out of any such act or omission.
22. TERM
This Agreement will be in effect for a period of two (2) years commencing on the effective date of the Agreement unless terminated sooner by either party. This Agreement may be extended beyond the initial term of the Agreement by written agreement of the parties. This Agreement shall apply to all Products and Service for which orders have been placed and acknowledged for delivery prior to the expiration of the term of this Agreement whether or not delivered as of that date.
23. TERMINATION
(a) Termination by Customer - Customer shall have the right to terminate this Agreement, upon 30 days written notice to Vendor, for any reason. Upon termination under this section, Customer shall be obligated to pay for Products already ordered and/or Services already performed. Customer shall have no other obligations under this section.
(b) Termination by Vendor - Vendor shall have the right to terminate, upon written notice to Customer, the unperformed portion of this Agreement in the event of one or more of the following conditions:
(1) Customer is in default under any material provision of this Agreement and such default continues unremedied for thirty (30) days after written notice of the existence of such default shall have been received by Customer for Vendor, or
(2) A decree or order for relief of Customer is entered by a court of competent jurisdiction in any involuntary case involving Customer under any bankruptcy, insolvency, or similar law now or hereafter in effect, or a receiver, liquidator, assignee, custodian, trustee, sequestrator, or other similar agent is appointed for Customer or for any substantial part of Customer's affairs is ordered, or a petition is filed with respect to Customer in any involuntary case, which petition is not dismissed for a period of sixty (60) days or is dismissed or suspended pursuant to Section 305 of the Federal Bankruptcy Code (or any corresponding provision of any future United States Bankruptcy law), or
(3) Customer commences a voluntary case under any bankruptcy, insolvency or other similar law now or hereafter in effect, or Customer consents to the entry of an order for relief in any involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar agent for Customer or for any substantial part of Customer's assets or property, or Customer makes any general assignment for the benefit of creditors, or Customer takes any action preparatory to or otherwise in furtherance of any of the foregoing, or Customer fails generally to pay Customer's debts as such debts become due.
24. SOURCE CODES
In the event that Vendor is placed in or files for bankruptcy or ceases to carry on business on a regular basis and such event is not cured in sixty (60) days, Vendor agrees, where applicable, (1) to furnish to Customer all source programs and associated documentation ("Software Source Materials") required for maintenance, modification or correction of Customer's installed base of the most current version of the Software provided to Customer, (2) to grant Customer a non-exclusive, royalty-free, perpetual license to use such Software Source Materials solely with Products furnished hereunder; and (3) should Customer's use of the Software Source Materials involve the practice of any invention covered by a United States patent of Vendor, Vendor agrees not to assert such patent against Customer in connection with the maintenance, modification or correction of the Software. Customer will not resell or otherwise transfer the Software Source Materials to another party.
25. COMPLIANCE WITH LAWS
(a) The Vendor shall giveall requisite notices tothe proper authorities, obtain all permits and licenses made necessary by the Products and Services supplied underthis Agreementand shall comply with all laws, rules and regulations pertaining to such Products and Services, including without limitationthe FederalOccupational Safetyand Health Act and all rules and regulations issued pursuant to such act. If requested the Vendorshall provide Customer withany required approval certificates.
(b) Without limiting the foregoing,Vendor warrants thatthe Products sold under the terms of this Agreement are safe in normal use or transportation,are non-toxic,and present no hazard to persons or the environment,and may be disposed of without special precaution.Vendor agrees to provide notification of any new Product that isor contains toxicor hazardous substances or present's ahazard in transportation, and further shall provide Customer with product data sheets setting forth procedures for use, transportation, and disposal of such Product(s). All hazardous materials containers shall be properly labeled.Vendor agreesto indemnify and hold Customer harmless for any expense incurredor judgment obtained against Customerby reason ofthe use,transportation,or disposal ofthe products furnishedby Vendor and further agreesto indemnifyand hold Customer harmless fromany claims, demands,judgments,costs and expenses which Customershall incur under theComprehensive Environment Response,Compensation and Liability Act of 1980;The Consumer Product Safety Act of 1972; the Toxic Substance Control Act;the Occupational Health and Safety Act and the Radiation Control Act;andany amendments theretoby reason ofCustomer's purchase and resale of the Product(s) furnished by Vendor pursuant to this Agreement.
(c) When Product(s) furnished under this Agreement are subject to Part 68 of the Federal Communications Commission's Rules and Regulations, as may be amended from time to time, Vendor warrants that such material is registered under and complies with Part 68 of the Federal Communications Commission's Rules and Regulations, including, but not limited to, all labeling and customer instruction requirements. Vendor agrees to indemnify and hold Customer harmless from any liability, claims, or demands (including the costs, expenses and reasonable attorney's fees on account thereof) that may be made because of Vendor's noncompliance with Part 68 of the Federal Communications Commission's Rules and Regulations.
(d) Product(s) shall comply, to the extent applicable, with the requirements of Subpart J of Part 15 of the FCC Rules and Regulations, as may from time to time be amended, including, but not limited to, those sections concerning the labeling of such Product(s) and the suppression of radio frequency and electromagnetic radiation to specified levels. Should the Product(s), despite meeting standards set forth in the FCC Rules and Regulations, generate harmful interference to radio communications, Vendor shall provide to Customer information relating to methods of suppressing such interference. In the event such interference cannot reasonably be suppressed, Vendor shall, at the option of Customer, accept return of the Product(s) and refund to Customer the price paid for such Product(s). Nothing in this section shall be deemed to diminish or otherwise limit Vendor's obligations under the section entitled "Warranties".
(e) Product(s) shall comply to the extent applicable with the requirements of the National Electrical Code which requires listing under UL 1459 and the associated regulations which may be amended from time to time. Vendor warrants that Product(s) provided hereunder shall comply, and in the event of noncompliance, Customer shall have the option to return products and Vendor shall refund Customer the prices paid without penalty or restock charge and shall indemnify from any damages which may be incurred or assessed due to the Product(s) not complying with these requirements.
26. COURSE OF DEALING
Except as otherwise provided herein, no trade usage, prior course of dealing or course of performance shall be part of or shall be used in the interpretation or construction of this Agreement.
27. NO SPECIAL DAMAGES
Neither Customer nor Vendor will be liable to the other for special, indirect and/or consequential damages (including lost revenues or profits) as a result of its performance or failure to perform under this Agreement.
28. TITLES
The clause titles used herein are for convenience only and shall not be construed as part of this Agreement or used in interpreting or construing this Agreement.
29. COUNTERPARTS
This document may be executed in one or more counterparts, each of which shall be deemed to be an original.
30. MOST FAVORED CUSTOMER
If Vendor, during the term of this agreement, provides products to another party under more favorable pricing, Vendor agrees to make such favorable pricing available to Customer, under like terms, commitments, and conditions for similar quantities of product type.
31. ENTIRETY OF AGREEMENT
This Agreement consists only of this document including Exhibits A, B, C, D, E and F upon which the parties have affixed their signatures and those documents specifically incorporated herein by reference. This Agreement as so constituted is the entire Agreement between the parties with respect to the subject matter hereof and supersedes all other previous statement, communications or agreements, whether oral or written, including press releases, advertising and sales literature. No modification, alteration or waiver of any provision hereof shall be binding upon the parties unless evidenced in writing and signed by both parties.
32. WAIVER
Failure of Customer to seek redress for breach of or to insist upon the strict performance of any provision of this Agreement on one or more occasions shall not prevent a subsequent act, which would have originally constituted a breach, from having all the force and effect of a breach. The receipt and acceptance of payment by Customer shall not be deemed a waiver of such breach. Failure of Customer to enforce any provision of this Agreement shall not be deemed a waiver of any such provision. No provision of this Agreement shall be deemed to have been waived by Customer unless such waiver is in writing signed by a duly authorized Representative of Customer.
33. SURVIVAL OF OBLIGATIONS
The terms and provisions contained in this Agreement that by their sense and context are intended to survive the performance thereof by the parties hereto shall survive the completion of performance and termination of this Agreement, including, but not limited to, patent infringement and indemnity.
34. SEVERABILITY
A determination by a court of competent jurisdiction that any provision of this Agreement or any part hereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or other provisions of this Agreement which shall remain in full force and effect.
35. GOVERNING LAW
The terms and conditions hereof, in their formation, construction and interpretation, shall be governed by the laws of the State of Delaware. In the event any of these provisions hereof become subject to revision or nullification by ruling of an appropriate Court of jurisdiction, the remaining terms and conditions contained herein shall continue in full force and effect.
36. NEUTRAL DRAFTING
No rules of construction requiring interpretation against the drafter shall apply in the interpretation of this Agreement.
Premisys Communications, Inc. Teleport Communications Group Inc.
By \s\ R. Alan Fyffe By \s\ John Hunt
Title VP North American Sales Title VP - Engineering ------------------------------------ -----------------------------------
Date 10-15-97 Date 10-9-97
APPROVED BY TCG CORPORATE PURCHASING DATE 10/8/97 BY \s\ GF
APPROVED AS TO FORM LEGAL DEPARTMENT DATE 10/9/97 BY \s\ MLG
** Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
EXHIBIT A
UNIT PRICE LIST AND DISCOUNT TERMS
1. CUSTOMER agrees to provide PREMISYS with a monthly rolling six (6) month forecast within twenty-one (21) calendar days after the start of each new calendar month.
2. Discount shall be [ ** ] from PREMISYS' unit list price as attached. Such discounts are not applicable to any Cable Products, Accessories, Services or Special Pricing Packages as indicated in the price list.
3. PREMISYS reserves the right to renegotiate the discounts at the end of each term for any renewals or extensions of this Agreement.
** Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.
Company Confidential Page 1 September `99 Teleport Transfer Price List
EXHIBIT B
ADVANCE REPLACEMENT SERVICE OPTION
1.0 If during the warranty period, any defect is discovered in any product covered by the warranty, PREMISYS shall, at the request of the CUSTOMER, immediately ship an advance replacement of such products providing that:
1.1. CUSTOMER has submitted Premisys Advance Replacement Authorization Agreement Form (Exhibit B-1) purchase order for this service.
1.2. CUSTOMER requests advance replacement service (via fax or e-mail) in memo that provides: name of requester, name of CUSTOMER, shipping address, description of apparent defect, model number and quantity of products to be replaced and returned, serial numbers of products to be returned, and blanket purchase order number.
1.3. PREMISYS responds to request (via fax or e-mail) providing RMA number, shipping instructions for products to be returned, and a sales order acknowledgment for the advance replacements.
1.4. Such product is returned to PREMISYS no more than thirty (30) days after issuance of a return material authorization (RMA) by PREMISYS. If the product with the defect is not returned within thirty (30) days, PREMISYS will invoice the CUSTOMER for the purchase price of product and the CUSTOMER will pay the invoice according to the contractual payment terms.
1.5. PREMISYS is satisfied upon examination that claimed deficiencies actually exist and were not caused by accident, misuse, neglect, alteration, improper installation, improper repair, improper testing, lightning, power surges, fire, flood, or earthquake. (Unauthorized modification or unauthorized or improper alteration of products shall invalidate the warranty.) If this examination reveals that the claimed deficiencies were not covered by the warranty, PREMISYS will invoice the CUSTOMER for the purchase price of product and the CUSTOMER will pay the invoice according to the contractual payment terms.
1.6. CUSTOMER pays a fee of $275 per advance replacement product. This fee will not be charged if the product being replaced was shipped to the CUSTOMER within sixty (60) days of the reported discovery.
1.7. CUSTOMER pays the freight expense on the returned product; PREMISYS pays the freight expense for the advance replacement.
EXHIBIT B-1 [Premisys Logo] ADVANCE REPLACEMENT AUTHORIZATION FORM
This Agreement is made this day of 19 , between Premisys ----- ------------- --------- Communications, Inc. (Premisys) and , ---------------------------------------------- (CUSTOMER).
VENDOR CUSTOMER
TO: Premisys Communications, Inc.FROM: 48664 Milmont Drive Fremont, CA 94538 Telephone 510/353-7600 Telephone FAX 510/353-7601 FAX
CUSTOMER requests an advance replacement, under the conditions of Premisys' hardware warranty, for:
- -------------------------------------------------------------------------------- Product Serial Number Reason for Return Price - -------------- --------------------- --------------------------- ----------- - -------------- --------------------- --------------------------- -----------
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CUSTOMER agrees to either return the products listed above within 30 days or pay for the products shipped to him under this Agreement in accordance with Premisys standard sales terms and conditions which are FOB Fremont, CA and net 30 days from invoice date.
Unless the failed product was shipped to CUSTOMER by Premisys within sixty (60) days of the date of this Agreement, there is a $275.00 charge per unit for this advance replacement service. CUSTOMER agrees to pay this charge in addition to any charges that CUSTOMER may be obligated to pay per this Agreement.
Customer Purchase Order Number: Customer authorized signature:
Print Name Signature
Title
EXHIBIT C
EQUIPMENT UPGRADE POLICY
1. This policy describes the responsibilities of PREMISYS and the Customer with respect to hardware and software upgrades that are required to resolve demonstrated problems with the equipment. These are known as "problem fix upgrades". Hardware and software upgrades whose purpose is to enhance the functionality of the equipment ("feature upgrades") are quoted by PREMISYS on a case-by-case basis and are not covered by this policy.
2. For software problems that are reported by the Customer, verified and/or recreated by PREMISYS and which are fixed on a subsequent revision of software, PREMISYS shall provide to the Customer two (2) master copies of the software revision that incorporates the fix. The software will be accompanied by a completed "Engineering Change Request (Software)" form which, among other information, states the severity of the problem ("Class of Change") and a non-binding recommendation to the Customer on the handling of the change in the field ("Field Effectivity Status"). The decision on the deployment, if any, of the software fix to one or more end-users in the field is the responsibility of the Customer and all costs associated with that deployment will be borne entirely by the Customer. This paragraph describes the totality of PREMISYS' responsibilities which are limited to the provision of the two master sets of software and of the accompanying Engineering Change Request (ECR) notification.
3. For hardware problems that are reported by the Customer, verified and/or recreated by PREMISYS and which are fixed by a hardware modification to the card, module or subsystem, PREMISYS shall provide to the Customer a completed "Engineering Change Request (Hardware)" form which, among other information, states the severity of the problem ("Class of Change"). The Class of Change defines PREMISYS' responsibilities with regard to the performance of the hardware upgrade to units that are already installed in the field.
a. If the assigned Class of Change is "A", then PREMISYS will perform the required hardware upgrade to affected units at no charge. b. If the assigned Class of Change is "AC" or "AR", then PREMISYS will perform the required hardware upgrade to effected units at no charge if the Customer so requests in writing within thirty (30) days of receipt of the associated ECR. c. If the assigned Class of Change is "B" or "D", then PREMISYS will not upgrade any installed units at no charge. At the Customer's request, PREMISYS will quote such upgrades on a case-by-case basis.
In all instances where the Class of Change obligates PREMISYS to perform no-charge hardware upgrades, the Customer shall request and receive a Return Authorization and shall promptly return all parts requiring the upgrade, freight prepaid to PREMISYS' Warranty Repair Department. PREMISYS shall have twenty (20) business days to perform the upgrade and return the part, freight prepaid, to the Customer.
4. For enhancements or new feature upgrades, the Customer may send the Product to be upgraded freight prepaid to PREMISYS' Warranty Repair Department. The Customer must issue a purchase order for the upgrade cost as specified in PREMISYS' then current upgrade price list. A Return Authorization must be included with the Product sent to PREMISYS. The upgraded Product will be returned to the Customer within twenty (20) business days.
5. Advance Replacement Service. If necessary, the Customer may request an advance replacement exchange for the unit to be upgraded for those cases in which the Customer can not wait the standard return period. The Customer may arrange for this service as follows:
o Secure a Return Authorization for the Product to be exchanged.
o Issue a purchase order for the Product required at PREMISYS' then current list price plus the cost of the upgrade and a $275 exchange service fee.
o Upon receipt of the proper purchase order, PREMISYS will ship to the Customer an upgraded Product for exchange. Upon receipt of the Product the Customer should immediately return the exchanged Product in the same container.
o Upon receipt of the returned Product PREMISYS will issue a credit against the Customers purchase order for the list price of the returned Product.
If the exchanged Product is not returned within thirty (30) days the Customer will be invoiced for the Product shipped at the list price and Customer agrees to pay said invoice due upon receipt.
CLASS CHANGE DEFINITIONS
Class A Changes
A. Changes which are (1) needed to correct (a) conditions which result in safety hazards, or (b) conditions which result in noncompliance with federal registration or radiation requirements or other federal, state or local safety regulations or UL requirements; and (2) judged by Customer severe enough to have to be made to all hardware in process, in stock or installed.
Class AC Changes Changes which are (1) needed to correct (a) inoperative electrical or mechanical conditions, or unsatisfactory maintenance or operating conditions, or (b) conditions which result in safety hazards, where the conditions in (a) or (b) are caused by circuit combinations or options which exist only on certain hardware; (2) needed to compensate for marginal (worse circuit) cases where the inoperative or unsatisfactory conditions exist on certain hardware and cannot be associated with specific circuit combinations or options. Such changes shall be made on Products in process and if requested by Customer on Products in stock or returned to an authorized repair center.
Class AR Changes Changes which are needed to correct unsatisfactory electrical, mechanical or operating conditions, which may be allowed to exist on a temporary basis. Such changes shall be made to Products in process, except that in some cases, if Customer gives written consent, Products may be shipped for a period of time specified by Customer without incorporating the change at that time to Products in process. If Customer requests that such changes be made to Products in stock or already installed, supplier shall make such changes.
Class B - Enhancements
B. Changes which are sufficiently important to require their application to Products being manufactured (as soon as reasonably possible) and/or which may also be recommended for application to existing stock and installations in the field. Examples of this class of changes may include, but are not limited to:
a) Providing new features that directly affect Product operability.
b) Providing design improvements which result in better service capabilities, longer life or improved operability margins.
c) Providing changes in design which result in important cost savings to Customer.
Class BU Changes For conditions of a mandatory nature, for example, the fulfillment of future federal registration or future compatibility requirement or for conditions of sufficient importance to be intended for universal application. Such changes would only be required of Products in process.
Class D Changes - Non-Customer Affecting
D. Other changes not sufficiently important to justify application to Products being manufactured within any specified time frame and not sufficiently important to recommend for application to existing stock and installations in the field.
EXHIBIT D
DIAGNOSTIC SUPPORT SERVICES
I. PREMISYS' RESPONSIBILITIES
PREMISYS will provide at no charge the following support services only to CUSTOMER during the term of this Agreement.
A. Dial-in Diagnostics:
PREMISYS shall provide, during its principal period of service (PPS), a dial-in diagnostic service which will allow PREMISYS technical support engineers remote dial-in access to an End User node in order to perform on-line diagnostics and problem determination. Problem determination and resolution will be performed with CUSTOMER not the End User. PREMISYS will make every reasonable effort to respond to service requests within 30 minutes.
B. Network Emergency Assistance:
1. A "Network Emergency" shall be defined as the failure of a previously operating PREMISYS Product which renders the Network inoperable. 2. PREMISYS will provide access to PREMISYS technical support engineers via a telephone "Hot Line" to assist CUSTOMER with Network Emergencies twenty-four (24) hours a day, seven (7) days a week. 3. PREMISYS reserves the right to invoice CUSTOMER at the time and material rates then in effect, for support services requested by CUSTOMER outside the PPS which is determined not to be a Network Emergency.
C. "Principal Period of Support" ("PPS") means the period of 8 a.m. to 10 p.m. Eastern Standard Time, Monday through Friday, excluding PREMISYS observed holidays.
D. Problem Resolution
For each network emergency, PREMISYS will assign a systems engineer to follow through and report status to CUSTOMER until such time as the problem is resolved.
II. RESPONSIBILITIES OF CUSTOMER
A. CUSTOMER Support Staff:
1. CUSTOMER shall maintain a technically competent staff sufficiently trained to provide direct support of PREMISYS Products to the End User. At least one CUSTOMER technical support representative must attend PREMISYS' training program prior to the date of any support services request.
2. CUSTOMER shall designate in writing (by name, title, address and phone number) to PREMISYS a primary technical support representative.
(i) the CUSTOMER support representative shall be the primary contact with PREMISYS for all support services provided hereunder.
(ii)CUSTOMER may designate in writing to PREMISYS up to two (2) alternate technical support representatives who will be authorized to place support calls with PREMISYS.
(iii) CUSTOMER agrees that only the primary or alternate technical support representatives will request support services provided hereunder and that such representatives will be knowledgeable in the support of the Products.
(iv)CUSTOMER may change primary and alternate technical support representative(s) by issuing written notice to PREMISYS.
B. When use of the PREMISYS dial-in diagnostics capability is requested by CUSTOMER and/or determined by PREMISYS to be necessary:
1. CUSTOMER shall insure that a telephone line is available to be attached to the integral modem on the End User node.
2. CUSTOMER shall obtain from the End User and be responsible for all necessary authorizations for remote access by PREMISYS to the End User node.
3. CUSTOMER agrees that during any such remote access PREMISYS shall at all times be acting as an agent for CUSTOMER.
C. CUSTOMER shall use system support provided hereunder only in support of its End Users and any internal Products used by CUSTOMER.
III. GENERAL PROVISIONS
All PREMISYS test and diagnostic software and documentation, whether on CUSTOMER's site, accessible by remote inquiry or incorporated into the Products, shall be and remain the confidential and proprietary property of PREMISYS.
EXHIBIT E
EMERGENCY INVENTORY
I. TCG ITEM# 15453 Redundant AC System (AC/RG and CPU) Quantity - 5 Kits
- -------------------------------------------------------------- Qty. Part # Description - -------------------------------------------------------------- - -------------------------------------------------------------- 1 891823 Universal 18-slot Enclosure (Imacs800) - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8901 AC Power Supply - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8903 -48V DC Converter - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8906 -48v Ring Generator - -------------------------------------------------------------- - -------------------------------------------------------------- 1 8926 Dual T1 Interface card w/modem - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8804 IMACS CPU 4T1/E1 (RCON bus-connect) - -------------------------------------------------------------- - -------------------------------------------------------------- 60343 CPU firmware, Host version 3.4.3 - -------------------------------------------------------------- - -------------------------------------------------------------- 60101 TCP/IP, SNMP Software Option - -------------------------------------------------------------- - -------------------------------------------------------------- 60102 TR08 Software Option - -------------------------------------------------------------- - -------------------------------------------------------------- 1 8010 Dual WAN T1/E1 Card - -------------------------------------------------------------- - -------------------------------------------------------------- 2 812 Single WAN T1/E1 CSU - --------------------------------------------------------------
II. TCG ITEM# 15454 Redundant DC System (DC/RG and CPU) Quantity - 15 Kits
- -------------------------------------------------------------- Qty. Part # Description - -------------------------------------------------------------- - -------------------------------------------------------------- 1 891823 Universal 18-slot Enclosure (Imacs800) - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8902A DC Power Supply - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8906 -48v Ring Generator - -------------------------------------------------------------- - -------------------------------------------------------------- 1 8926 Dual T1 Interface card w/modem - -------------------------------------------------------------- - -------------------------------------------------------------- 2 8804 IMACS CPU 4T1/E1 (RCON bus-connect) - -------------------------------------------------------------- - -------------------------------------------------------------- 60343 CPU firmware, Host version 3.4.3 - -------------------------------------------------------------- - -------------------------------------------------------------- 60101 TCP/IP, SNMP Software Option - -------------------------------------------------------------- - -------------------------------------------------------------- 60102 TR08 Software Option - -------------------------------------------------------------- - -------------------------------------------------------------- 1 8010 Dual WAN T1/E1 Card - -------------------------------------------------------------- - -------------------------------------------------------------- 2 812 Single WAN T1/E1 CSU - --------------------------------------------------------------
EXHIBIT F
QUICK DELIVERY INVENTORY
Quantity of 15 units each is to be maintained as quick delivery inventory for unforecasted orders.
Premisys Part Number Description
8108 8 port, 2 wire E&M/TO card 8119 8 port, 4 wire extended range E&M/TO card 8128 8 port, 2 wire, 900 Ohm FXS card 8129 8 port, 2 wire, 600 Ohm FXS card 8139 8 port, 2 wire, 600 Ohm FXO card 8000 Single T1/E1 WAN card 8010 Dual T1/E1 WAN card 8014 Dual T1/E1 WAN card (1x3 Redundancy) 811 DSX plug in module 812 CSU plug in module (T1) 8215 4 port, RS530/V.35 HSU card 8202 2 port, RS530/V.35 HSU card 8212 2 port, V.35 HSU card 8220 10 port, RS232C/V.24 subrate card/(supports async/sync & DS0a/DS0b configurations) 8228 BnR Concentrator card/(supports both B7r & B4r formats) 8228 BnR Concentrator 8231 10 port, RS232, HDLC Sync/Async FRAD card 8247 5 port, OCU-DP card/(Expandable to 10 ports with 845 module) 845 OCU-DP 5 port expansion module 8249 2 port, OCU-DP card with error correction 8254 4 port, OCU-DP/G.703 card 8260 8 port, 2 wire ISDN BRI "U" interface card 8800 2 T1/E1, BCON Bus-connect Non-Redundant CPU card 8801 8 T1/E1, XCON Cross-connect Redundant CPU card 8804 4 T1/E1, RCON Bus-connect Redundant CPU card 8920 8 T1/E1, Interface card w/2400bps modem 8925 2 T1/E1, Interface card w/o modem 8926 2 T1/E1, Interface card w/2400bps modem 8901 AC Power Supply, 120/240vac 8902A DC Power Supply 8903 Power Converter, 120vac to -48vdc 8906 Ring Generator, -48vdc 8916 Imacs 600 Enclosure w/install kit/(Front loading chassis, wall mountable) 891823 Imacs 800 Enclosure w/install kit/(Front and rear loading chassis, rack mount unit) 8871 ADPCM Server card
EXHIBIT 21.01
LIST OF REGISTRANT'S SUBSIDIARIES
Country of Name Organization Percentage Owned by Registrant - ------------------------------------- ----------------- ---------------------- Premisys Communications Pte Ltd Singapore 100% Premisys Communications Limited United Kingdom 100% Premisys Communications (Canada) Canada 100% Inc.
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-90938, File No. 333-4060, File No. 333-49991 and File No. 333-70739) of Premisys Communications, Inc. of our report dated July 22, 1999, except for Note 6 which is as of September 10, 1999 appearing on page 33 of this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP San Jose, California September 21, 1999
EXHIBIT 27.01