<PAGE> 1
FILED PURSUANT TO RULE 424(B)(4)
Registration No. 333-4010
PROSPECTUS
3,700,000 SHARES
LOGO
COMMON STOCK
Of the 3,700,000 shares of Common Stock offered hereby, 2,000,000 are being
sold by the Company and 1,700,000 are being sold by the Selling Stockholders.
The Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
VRLK.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C> <C>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------
Per Share................ $16.00 $1.12 $14.88 $14.88
- -------------------------------------------------------------------------------------------------
Total(3)................. $59,200,000 $4,144,000 $29,760,000 $25,296,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 555,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$68,080,000, $4,765,600 and $38,018,400, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about June 14, 1996, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST OPPENHEIMER & CO., INC.
June 10, 1996
<PAGE> 2
[INSIDE FRONT COVER PHOTOGRAPHS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
Verilink(R) and the Verilink logo are registered trademarks of the Company.
This prospectus contains other product names and trade names and trademarks of
the Company and of other organizations.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Verilink Corporation develops, manufactures and markets integrated access
products for telecommunications network service providers and corporate end
users. The Company's Access System 2000 product line provides flexible access
solutions for a broad range of network services. Verilink designed the Access
System 2000 with modular hardware and the Company's software-based Advanced
Programmable Architecture(TM) to enable its customers to access increased
network capacity and to adopt new communications services in a cost-effective
manner. The Company's strategy is to continue to increase the functionality of
the Access System 2000 product line as its customers access new network services
and migrate to emerging telecommunications technologies.
Corporate and consumer demand for data, voice and video transmission
services is expanding worldwide, creating a need for both increased bandwidth
and new communications services. In response, network service providers, such as
interexchange and local exchange carriers, and providers of Internet, personal
communications and cellular services, are offering a wide range of public
network services. In addition, these companies face an increasingly competitive
environment as deregulation of the telecommunications industry continues. These
developments are creating a need for flexible network access equipment which
enables customers to access a broad array of network services and provides a
migration path to new and emerging technologies.
Verilink's Access System 2000 provides significant benefits over single
purpose network access devices. The Access System 2000 is designed to enable
customers to access increased network capacity and adopt new technologies
incrementally, without investing in entirely new hardware, by adding modular
circuit cards and downloading software. The Access System 2000 provides
integrated access to low speed services, fractional T1/E1 services, and T1, E1,
T3, frame relay and SMDS services, with ATM and ISDN products under development.
Verilink sells its products through a direct sales force and resellers. The
Company intends to enlarge its sales and support organization in order to expand
its customer base and enter international markets. The Company also sells single
purpose network access devices for selected applications. The Company's
customers include MCI, CompuServe, Northern Telecom and QUALCOMM. In the nine
months ended March 31, 1996, MCI and CompuServe accounted for 25% and 18% of the
Company's sales, respectively. Other than MCI and CompuServe, no customer
accounted for more than 10% of the Company's revenue in the nine months ended
March 31, 1996 or fiscal 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Customers."
Certain technical terms and acronyms used in this Prospectus are defined in
the "Glossary of Terms" beginning on page 51.
Verilink was founded in 1982. The Company's address is 145 Baytech Drive,
San Jose, California 95134 and its telephone number is (408) 945-1199.
3
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THE OFFERING
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<S> <C>
Common Stock offered by the Company..................... 2,000,000 shares
Common Stock offered by the Selling Stockholders........ 1,700,000 shares
Common Stock to be outstanding after the offering....... 12,566,104 shares(1)
Use of proceeds......................................... For general corporate purposes,
including working capital, purchase
of capital equipment and possible
acquisitions.
Nasdaq National Market symbol........................... VRLK
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales........................ $28,539 $30,696 $28,007 $36,533 $31,447 $22,753 $28,678
Gross profit................. 10,258 13,049 11,887 17,647 14,620 10,392 14,608
Income (loss) from
operations................ (5,955) 137 (955) 2,869 347 145 1,754
Net income (loss)............ $(3,921) $ 33 $(1,390) $ 2,263 $ 448 $ 207 $ 1,764
Net income (loss) per
share..................... $ (0.41) $ 0.00 $ (0.16) $ 0.23 $ 0.04 $ 0.02 $ 0.16
Shares used to compute net
income (loss) per
share(2).................. 9,514 8,649 8,579 9,900 10,676 10,632 11,115
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
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ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 3,652 $32,612
Working capital................................................... 7,347 36,307
Total assets...................................................... 15,471 44,431
Total stockholders' equity........................................ 9,418 38,378
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding as of March 31,
1996. Excludes 1,024,498 shares reserved for issuance pursuant to the
exercise of stock options outstanding as of March 31, 1996 having a weighted
average exercise price of $0.75 per share. See "Management -- Stock Plans"
and Note 7 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing net
income (loss) per share.
(3) Adjusted to reflect the sale of 2,000,000 shares offered by the Company
hereby and the application of the estimated net proceeds therefrom.
--------------------------------------------------
Unless otherwise indicated, the information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, and (ii) has been
adjusted to reflect a 2-for-1 stock split and a proportionate increase in the
number of authorized shares effected prior to the date of this Prospectus.
4
<PAGE> 5
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby.
Dependence on Recently Introduced Products and Products Under
Development. The Company's future results of operations are highly dependent on
market acceptance of existing and future applications for the Company's Access
System 2000 product line. The Access System 2000 product line represented
approximately 65% of sales in the nine months ended March 31, 1996. Increased
market acceptance of the Company's Access System 2000 products is dependent on a
number of factors, not all of which are in the Company's control, including the
continued growth in the use of bandwidth intensive applications, continued
deployment of new telecommunications services, market acceptance of integrated
access devices in general, the availability and price of competing products and
technologies, and the success of the Company's sales efforts. Failure of the
Company's products to achieve increased market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations. Some of the more important applications for this product line,
particularly for ISDN and ATM applications, are in early stages of development.
Failure to introduce these and other planned products in a timely manner could
cause companies to purchase products from competitors and have a material
adverse effect on the Company's business, financial condition and results of
operations. Due to a variety of factors, the Company may experience delays in
developing its planned products. New products may require additional development
work, enhancement, testing or further refinement before they can be made
commercially available by the Company. The Company has in the past experienced
delays in the introduction of Access System 2000 product applications and
enhancements due to a variety of internal factors, such as reallocation of
priorities, difficulty hiring sufficient numbers of qualified personnel and
unforseen technical obstacles, as well as to changes in customer requirements.
Although the Company does not believe that such delays have had a material
adverse effect on its customer relationships, such delays have deferred the
receipt of revenue from the products involved. If the Company's Access System
2000 products have performance, reliability or quality shortcomings, then the
Company may experience reduced orders, higher manufacturing costs, delays in
collecting accounts receivable and additional warranty and service expenses. See
"-- Need to Expand Sales Organization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Products" and
"Business -- Research and Development."
Customer Concentration. A small number of customers have accounted for a
majority of the Company's sales in each of the past several fiscal years. In the
nine months ended March 31, 1996, MCI Communications Corp. and CompuServe Corp.
accounted for 25% and 18% of the Company's sales, respectively, and the
Company's top five customers accounted for 58% of the Company's sales. In fiscal
1995, MCI and CompuServe each accounted for 14% of the Company's sales and the
Company's top five customers accounted for 47% of sales. In fiscal 1994, MCI
accounted for 20% of the Company's sales, and the Company's top five customers
accounted for 46% of sales. Other than MCI and CompuServe, no customer accounted
for more than 10% of the Company's revenue in the nine months ended March 31,
1996 or fiscal 1995. There can be no assurance that the Company's current
customers will continue to place orders with the Company, that orders by
existing customers will continue at the levels of previous periods, or that the
Company will be able to obtain orders from new customers. The Company's
customers are typically not contractually obligated to purchase any quantity of
products in any particular period. Product sales to major customers have varied
widely from year to year. In some cases, major customers have abruptly
terminated purchases of the Company's products. For example, sales of the
Company's single purpose network access products to AT&T Paradyne Corporation
represented 24% of sales in fiscal 1993, but declined to 11% and 2% of sales in
fiscal 1994 and 1995, respectively, due to the decision by AT&T Paradyne to
focus its sales efforts on competing products developed within the AT&T
organization. In addition, sales to Stratacom, Inc. for provision of network
management capabilities in a system sold to another AT&T business unit accounted
for 9% of the Company's sales during fiscal 1995. Sales to Stratacom ceased
during the second half of fiscal 1995 due
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<PAGE> 6
to the decision by such AT&T business unit to internally provide such management
functionality in its system. Loss of, or a material reduction in orders by, one
or more of the Company's major customers would materially adversely affect the
Company's business, financial condition and results of operations. See
"-- Competition," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business -- Customers" and "Business -- Sales and
Marketing."
Fluctuations in Quarterly Operating Results. The Company's sales are
subject to quarterly and annual fluctuations due to a number of factors. Most of
the Company's sales are in the form of large orders with short delivery times.
The Company's ability to affect and judge the timing of individual customer
orders is limited. Recently, the Company has experienced large fluctuations in
sales from quarter to quarter due to a wide variety of factors, such as delay,
cancellation or acceleration of customer projects, and other factors discussed
below. The Company's sales for a given quarter may depend to a significant
degree upon planned product shipments to a single customer, often related to
specific equipment deployment projects. The Company has experienced both
acceleration and slowdown in orders related to such projects, causing changes in
the sales level of a given quarter relative to both the preceding and subsequent
quarters. Sales to MCI and CompuServe, the Company's two largest current
customers, have varied by as much as $1 million and $700,000, respectively,
between consecutive quarters, and sales to other current customers have also
varied by as much as $800,000 from quarter to quarter.
Delays or lost sales can be caused by other factors beyond the Company's
control, including late deliveries by other vendors of components in a
customer's system, changes in implementation priorities, slower than anticipated
growth in demand for the services that the Company's products support and delays
in obtaining regulatory approvals for new services. Delays and lost sales have
occurred in the past and may occur in the future. Operating results in recent
periods have been adversely affected by delays in receipt of significant
purchase orders from customers and the termination of sales to Stratacom. 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. These and
similar delays or lost sales could materially adversely affect the Company's
business, financial condition and results of operations. See "-- Customer
Concentration," "-- Dependence on Component Availability and Key Suppliers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for that quarter. To achieve its sales
objective, the Company is dependent upon obtaining orders in a quarter for
shipment in that quarter. Furthermore, the Company's agreements with its
customers typically provide that they may change delivery schedules and cancel
orders within specified timeframes, typically up to 30 days prior to the
scheduled shipment date, without significant penalty. The Company's customers
have in the past built, 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 customers to reduce their inventory levels
could lead to reductions in purchases from the Company. These reductions, in
turn, could cause fluctuations in the Company's operating results and could have
an adverse effect on the Company's business, financial condition and results of
operations in the periods in which the inventory is reduced.
The Company's industry is characterized by declining prices of existing
products, therefore continual improvement of manufacturing efficiencies and
introduction of new products and enhancements to existing products are required
to maintain gross margins. In response to customer demands or competitive
pressures, or to pursue new product or market opportunities, the Company may
take certain pricing or marketing actions, such as price reductions, volume
discounts, or provision of services at below-market rates. These actions could
materially and adversely affect the Company's operating results.
Operating results may also fluctuate due to factors such as the timing of
new product announcements and introductions by the Company, its major customers
or its competitors, delays in new
6
<PAGE> 7
product introductions by the Company, market acceptance of new or enhanced
versions of the Company's products, changes in the product or customer mix of
sales, changes in the level of operating expenses, competitive pricing
pressures, the gain or loss of significant customers, increased research and
development and sales and marketing expenses associated with new product
introductions, and general economic conditions. 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, financial condition and results of
operations for one quarter or a series of quarters. The Company's expense levels
are based in part on its expectations regarding future sales and are fixed in
the short term to a large extent. Therefore, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in sales.
Any significant decline in demand relative to the Company's expectations or any
material delay of customer orders could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to sustain profitability on a
quarterly or annual basis. In addition, it is possible that in some future
quarter, the Company's operating results may be below the expectations of public
market analysts and investors. In such event the price of the Company's Common
Stock would likely be materially and adversely affected. See "-- No Prior
Market, Stock Price Volatility," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Research and
Development."
Need to Expand Sales Organization. Currently the Company sells its
products to a small number of customers through a relatively small sales force.
The Company's strategy is to distribute its products to a broader customer base,
which will require the Company to significantly expand its sales force. There
can be no assurance that the Company will be able to recruit, train, motivate
and manage additional qualified sales personnel with the requisite experience
and knowledge. Availability of qualified sales personnel is limited, and
competition for experienced sales personnel in the network access and
telecommunications equipment industries is intense. The failure to timely expand
the Company's sales force could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Customer
Concentration," "-- Management of Growth" and "-- Dependence on Key Personnel."
Dependence on Component Availability and Key Suppliers. On-time delivery
of the Company's products depends upon the availability of components and
subsystems used in its products. The Company depends in part upon suppliers to
manufacture, assemble and deliver components in a timely and satisfactory
manner. The Company obtains several components and licenses certain embedded
software from single sources. There can be no assurance that these suppliers
will continue to be able and willing to meet the Company's requirements for any
such components. The Company generally does not have any long-term contracts
with such suppliers, other than software vendors. Any significant interruption
in the supply of, or degradation in the quality of, any such item could have a
material adverse effect on the Company's results of operations. The Company has
no current plans to significantly expand its supplier base.
Purchase orders from the Company's customers frequently require delivery
quickly after placement of the order. Because the Company does not maintain
significant component inventories, delay in shipment by a supplier could lead to
lost sales. The Company uses internal forecasts to determine its general
materials and components requirements. Lead times for materials and components
may vary significantly, and depend on factors such as specific supplier
performance, contract terms and general market demand for components. If orders
vary from forecasts, the Company may experience excess or inadequate inventory
of certain materials and components. From time to time, the Company has
experienced shortages and allocations of certain components, resulting in delays
in fulfillment of customer orders. Such shortages and allocations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Fluctuations in Quarterly Operating Results,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Manufacturing and Quality."
7
<PAGE> 8
Competition. The market for network access and telecommunications
equipment is highly competitive, and the Company expects competition to increase
in the future. This market is subject to rapid technological change, regulatory
developments and emerging industry standards. The Company faces different
competitive environments for its Access System 2000 products than for its single
purpose network access products.
The market for integrated access devices such as the Company's Access
System 2000 is newly emerging and is subject to rapid change. The Company
believes that the primary competitive factors in this market are the development
and rapid introduction of new product features, price/performance, support for
multiple types of communications services, network management, reliability and
safety, and quality of customer support. There can be no assurance that the
Company's new products and products under development will be able to compete
successfully with respect to these or other factors. The Company's principal
competition to date for its current Access System 2000 products has been from
Digital Link Corporation, Kentrox, a division of ADC Telecommunications (both in
Kentrox's own products and products supplied to Kentrox by Premisys
Communications, Inc.), and Larscom, a subsidiary of Axel-Johnson. As the Company
develops new products for the Access System 2000 line, the Company expects to
increasingly compete with Premisys. The Company expects additional competition
from companies that are currently competitors in the market for the Company's
single purpose network access products, as such companies develop new products.
In addition, the Company expects substantial competition from companies in the
computer networking market and other related markets such as Newbridge Networks
Corporation and Ascend Communications, Inc. To the extent that current or
potential competitors can expand their current offerings to include products
that have functionality similar to the Company's products and planned products,
the Company's business, financial condition and results of operations could be
materially adversely affected.
The Company believes that the market for its single purpose network access
products is mature. The Company believes that the principal competitive factors
in this market are price, installed base and quality of customer support. In
this market, the Company primarily competes with Adtran, Inc., Digital Link,
Kentrox and Larscom. There can be no assurance that such companies or other
competitors will not introduce new products at a lower price and/or that provide
greater functionality than the Company's single purpose network access products.
In addition, the Company anticipates that competitors and customers may develop
products that could be used for selected applications for which the Company's
products are currently provided. Successful, timely development of such products
could reduce the level of demand for the Company's products. The Company does
not expect to spend significant resources, if any, on research and development
of its single purpose network access products. There can be no assurance that
the Company's single purpose network access products will be competitive in the
future. AT&T Paradyne, a company that had been a major customer in fiscal 1993,
developed a product for use in applications addressed by one of the Company's
single purpose network access products and subsequently substantially reduced
orders for the Company's products.
Many of the Company's current and potential competitors have substantially
greater technical, financial, manufacturing and marketing resources than the
Company. In addition, many of the Company's competitors have long-established
relationships with network service providers. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Competition" and "Business -- Research and
Development."
Rapid Technological Change. The network access and telecommunications
equipment markets are characterized by rapidly changing technologies and
frequent new product introductions. 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 and customer requirements. This will require the timely
selection, development and marketing of new products and
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enhancements on a cost-effective basis. The development of new, technologically
advanced products is a complex and uncertain process, requiring high levels of
innovation. The development of new products for the integrated access market
requires competence in the general areas of telephony, data networking, network
management and wireless telephony as well as specific technologies such as SMDS,
ATM and ISDN. Further, the communications industry is characterized by the need
to design products which meet industry standards for safety, emissions and
network interconnection. With new and emerging technologies and service
offerings from network service providers, such standards are often changing or
unavailable. As a result, there is a potential for product development delay due
to the need for compliance with new or modified standards. 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. 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. The Company's business,
financial condition and results of operations would be materially adversely
affected if the Company were to be unsuccessful, or to incur significant delays,
in developing and introducing such new products or enhancements. See
"-- Dependence on Recently Introduced Products and Products under Development"
and "Business -- Research and Development."
Management of Growth. The Company has recently experienced and may
continue to experience growth in the number of its employees and the scope of
its operations. In particular, the Company intends to increase its sales,
marketing and support staff. These increases will result in increased
responsibilities for management. To manage potential future growth effectively,
the Company must improve its operational, financial and management information
systems and must hire, train, motivate and manage a growing number of employees.
The future success of the Company also will depend on its ability to increase
its customer support capability and to attract and retain qualified technical,
sales, marketing and management personnel, for whom competition is intense. In
particular, the current availability of qualified sales and engineering
personnel is quite limited, and competition among companies for such personnel
is intense. The Company is currently attempting to hire a number of sales and
engineering personnel and has experienced delays in filling such positions.
During strong business cycles, the Company expects to experience continued
difficulty in filling its needs for qualified sales, engineering and other
personnel. There can be no assurance that the Company will be able to
effectively achieve or manage any such growth, and failure to do so could delay
product development cycles or otherwise have a material adverse effect on the
Company's business, financial condition and results of operations. See "-- Need
to Expand Sales Organization," "-- Dependence on Key Personnel,"
"Business -- Employees" and "Management."
Compliance with Regulations and Evolving Industry Standards. The market
for the Company's products is characterized by the need to meet a significant
number of communications regulations and standards, some of which are evolving
as new technologies are deployed. In the United States, the Company's products
must comply with various regulations defined by the Federal Communications
Commission and standards established by Underwriters Laboratories and Bell
Communications Research. For some public carrier services, installed equipment
does not fully comply with current industry standards, and this noncompliance
must be addressed in the design of the Company's products. Standards for new
services such as frame relay and ATM are still evolving. As these standards
evolve, the Company will be required to modify its products or develop and
support new versions of its products. 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, financial condition and
results of operations.
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. Tariff rates, whether
determined by network service providers or in response to regulatory directives,
may affect the cost
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<PAGE> 10
effectiveness of deploying communication services. Such policies also affect
demand for telecommunications equipment, including the Company's products.
Risks Associated With Entry into International Markets. The Company has
had minimal direct sales to international customers to date. The Company has
little experience in international markets, but intends to expand the sales of
its products outside of the United States and to enter certain international
markets, which will require significant management attention and financial
resources. Conducting business outside of the United States is subject to
certain risks, including longer payment cycles, unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, greater difficulty in accounts receivable collection and potentially
adverse tax consequences. To the extent any Company sales are denominated in
foreign currency, the Company's sales and results of operations may also be
directly affected by fluctuations in foreign currency exchange rates. In order
to sell its products internationally, the Company must meet standards
established by telecommunications authorities in various countries, as well as
recommendations of the Consultative Committee on International Telegraph and
Telephony. A delay in obtaining, or the failure to obtain, certification of its
products in countries outside the United States could delay or preclude the
Company's marketing and sales efforts in such countries, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."
Risk of Third Party Claims of Infringement. The network access and
telecommunications equipment industries are 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. The Company has not conducted a formal patent
search relating to the technology used in its products, due in part to the high
cost and limited benefits of a formal search. In addition, since patent
applications in the United States are not publicly disclosed until the patent
issues and foreign patent applications generally are not publicly disclosed for
at least a portion of the time that they are pending, applications may have been
filed which, if issued as patents, would relate to the Company's products.
Software comprises a substantial portion of the technology in the Company's
products. The scope of protection accorded to patents covering software-related
inventions is evolving and is subject to a degree of uncertainty which may
increase the risk and cost to the Company if the Company discovers third party
patents related to its software products or if such patents are asserted against
the Company in the future. Patents have been granted recently on fundamental
technologies in software, and patents may issue which relate to fundamental
technologies incorporated into the Company's products. The Company may 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 typically agrees to indemnify its
customers for any expenses or liabilities, generally without limitation,
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 acceptable 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, financial condition and results
of operations would be materially adversely affected. See
"Business -- Intellectual Property and Other Proprietary Rights."
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 and technologies. The Company has been issued certain U.S. and Canadian
patents with respect to limited aspects of its single purpose network access
technology. The Company has not obtained significant patent protection for its
Access System 2000 technology. There
10
<PAGE> 11
can be no assurance that third parties have not or will not develop equivalent
technologies or products without infringing the Company's patents or that the
Company's patents would be held valid and enforceable by a court having
jurisdiction over a dispute involving such patents. 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 deter misappropriation of the Company's technologies or
discourage independent third-party development of similar technologies. In the
event such arrangements are insufficient, the Company's business, financial
condition and results of operations could be materially adversely affected. 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 misappropriation of the Company's
technology and products more likely. See "Business -- Intellectual Property and
Other Proprietary Rights."
Dependence on Key Personnel. The Company's future success will depend to a
large extent on the continued contributions of its executive officers and key
management, sales and technical personnel, including Leigh S. Belden, the
Company's President and Chief Executive Officer, and Steven C. Taylor, the
Company's Chief Technical Officer. The Company does not maintain key man life
insurance on any of such persons and none of such persons has an employment
agreement with the Company, except for insurance on and contracts with Mr.
Belden and Mr. Taylor. Each of the Company's executive officers, and key
management, sales and technical personnel would be difficult to replace. The
loss of the services of one or more of the Company's executive officers or key
personnel, or the inability to continue to attract qualified personnel could
delay product development cycles or otherwise have a material adverse effect on
the Company's business, financial condition and results of operations. See
"-- Management of Growth," "Business -- Employees" and "Management."
Control of the Company; Antitakeover Effects of Certain Charter
Provisions. Upon the consummation of this offering, the current officers,
directors and holders of five percent or more of the Company's Common Stock will
own approximately 66% of the outstanding Common Stock. Accordingly, these
stockholders, if they were to act as a group, would be able to elect all of the
Company's directors, increase the authorized capital and otherwise control the
policies of the Company. Upon the closing of this offering, the Company's Board
of Directors will have the authority to issue up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of shares of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present intention to issue shares of Preferred
Stock. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change of control of the
Company. Furthermore, certain provisions of the Company's Amended and Restated
Certificate of Incorporation, including provisions that provide for the Board of
Directors to be divided into three classes to serve for staggered three-year
terms, may have the effect of delaying or preventing a change of control of the
Company, which could adversely affect the market price of the Company's Common
Stock. See "Management," "Principal and Selling Stockholders," and "Description
of Capital Stock."
No Prior Market; Stock Price Volatility. Prior to this offering, there has
been no public market for the Company's Common Stock. The initial public
offering price was determined by negotiations among the Company, the Selling
Stockholders and the representatives of the Underwriters. There can be no
11
<PAGE> 12
assurance that an active public market for the Common Stock will develop or be
sustained after the offering or that the market price of the Common Stock will
not decline below the initial public offering price. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarter to quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to patents or proprietary rights, general conditions
in the telecommunication network access and equipment industries, changes in
earnings estimates by analysts, or other events or factors. In addition, the
stock market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many technology companies and which
have often been unrelated to the operating performance of such companies. The
Company's sales or operating results in future quarters may be below the
expectations of public market securities analysts and investors. In such event,
the price of the Company's Common Stock would likely decline, perhaps
substantially. These Company-specific factors or broad market fluctuations may
materially adversely affect the market price of the Company's Common Stock. See
"Underwriting."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the
prevailing market price of the Common Stock. In addition to the 3,700,000 shares
of Common Stock offered hereby, as of the date of this Prospectus (the
"Effective Date"), based upon shares outstanding as of March 31, 1996, there
will be approximately 8,866,104 shares of Common Stock outstanding, all of which
are "restricted" shares (the "Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"). Approximately 50,672 Restricted Shares
will be eligible for sale immediately following the Effective Date in reliance
on Rule 144(k) promulgated under the Securities Act. Beginning 90 days and 180
days after the Effective Date, approximately zero and approximately 2,671,758
additional Restricted Shares, respectively, will first become eligible for sale
in the public market pursuant to Rules 144 and 701 promulgated under the
Securities Act, as a result of the expiration of certain lock-up agreements with
the Underwriters, or due to a combination of the foregoing. Of the Restricted
Shares that will first become eligible for sale in the public market
approximately 180 days after the Effective Date, approximately 848,000 shares
will be subject to certain volume limitations and other resale restrictions
pursuant to Rule 144. Beginning 270 days after the Effective Date, approximately
4,812,838 additional shares will become eligible for sale subject to the
provisions of Rule 144 upon the expiration of agreements not to sell such shares
entered into between the Underwriters and such stockholders. In addition,
outstanding options to purchase approximately 4,310 shares will be vested and
exercisable, and the shares issuable upon exercise thereof eligible for sale, 90
days following the Effective Date, and options to purchase an additional
approximately 318,014 shares will be vested and exercisable, and the shares
issuable upon exercise thereof eligible for sale 180 days following the
Effective Date, upon expiration of certain lock-up agreements. In addition, the
Commission has proposed revisions to Rule 144 and Rule 144(k), the effect of
which would be to shorten the holding period under Rule 144 from two years to
one year and to shorten the holding period under Rule 144(k) from three years to
two years. If enacted, these proposed revisions would increase, potentially
substantially, the number of shares that would be available for sale in the
public market 180 days after the Effective Date. Any shares subject to lock-up
agreements may be released at any time without notice by Hambrecht & Quist LLC.
The Company intends to file a registration statement on Form S-8 to
register approximately 1,524,498 shares of Common Stock reserved for issuance
under its Amended and Restated 1993 Stock Option Plan and to register 300,000
shares of Common Stock reserved for issuance under its Employee Stock Purchase
Plan. Shares of Common Stock issued pursuant to these plans after the effective
dates of registration statements will be available for sale in the public
market, subject to expiration of the lock-up agreement with the Underwriters and
to Rule 144 volume limitations applicable to affiliates. See "Shares Eligible
for Future Sale."
Dilution to Purchasers in Offering. Purchasers of the Common Stock will
experience immediate and substantial dilution in net tangible book value per
share of the Common Stock from the initial public offering price per share. See
"Dilution."
12
<PAGE> 13
Forward-looking Statements. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements include the Company's plans to introduce ISDN and ATM functionality
on the Access System 2000 platform and the timing of such introduction, the
Company's expectation that the percentage of its sales represented by Access
System 2000 products will increase, and the Company's plans to develop new
products, expand its sales force, expand its customer base and enter
international markets. Such forward-looking statements also include the
Company's expectations concerning factors affecting the markets for its
products, such as demand for increased bandwidth, the migration from private to
public networks, growth in the corporate use of the Internet, deregulation and
increased competition, the introduction of a wide range of new communication
services and technologies (including the potential deployment of ATM and
wireless product and service developments) and growth in the international
market for network access solutions. Actual results could differ from those
projected in any forward-looking statements for the reasons detailed in the
other sections of this "Risk Factors" portion of the Prospectus. The
forward-looking statements are made as of the date of this Prospectus, and the
Company assumes no obligation to update the forward-looking statements, or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
being offered by the Company hereby are estimated to be approximately
$28,960,000 ($37,218,000 if the Underwriters' over-allotment option is exercised
in full). The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
The principal purposes of this offering are to improve the Company's
financial position by obtaining additional working capital, to create a public
market for the Company's Common Stock and to facilitate future access by the
Company to public equity markets. The net proceeds to the Company are expected
to be used for general corporate purposes, including working capital, and
purchase of capital equipment. The Company has budgeted approximately $3 million
for capital expenditures through the end of fiscal 1997. The Company may also
use a portion of the net proceeds to fund acquisitions of complementary
businesses, products or technologies. Although the Company has in the past
reviewed potential acquisition opportunities, there are no current agreements or
negotiations with respect to any such transactions. Pending such uses, the net
proceeds of this offering will be invested in investment grade, interest-bearing
instruments.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not intend to pay dividends in the foreseeable future. In addition, the
Company's existing loan agreement prohibits the Company from paying cash
dividends without the lender's consent. See Note 3 of Notes to Consolidated
Financial Statements.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996, and the capitalization of the Company as adjusted to give effect to
the sale of shares of Common Stock offered by the Company and the receipt of the
estimated net proceeds therefrom. This table should be read in conjunction with
the consolidated financial statements and notes thereto and "Selected
Consolidated Financial Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000 shares
authorized, no shares issued and outstanding,
actual; 1,000,000 shares authorized, no shares
issued and outstanding, as adjusted............... $ -- $ --
Common Stock, $.01 par value; 20,000,000 shares
authorized, 10,566,104 shares issued and
outstanding, actual; 40,000,000 shares authorized,
12,566,104 shares issued and outstanding, as
adjusted(1)....................................... 106 126
Additional paid-in capital........................... 5,632 34,572
Notes receivable from stockholders................... (1,427) (1,427)
Treasury Stock; 3,352,710 shares of Common Stock at
cost.............................................. (7,320) (7,320)
Deferred compensation related to stock options....... (873) (873)
Retained earnings.................................... 13,300 13,300
------- -------
Total stockholders' equity........................ 9,418 38,378
------- -------
Total capitalization......................... $ 9,418 $38,378
======= =======
</TABLE>
- ------------------------------------
(1) Excludes, at March 31, 1996, 1,024,498 shares subject to outstanding options
and 506,858 shares available for future issuance under the Company's 1993
Stock Option Plan. In addition, in April 1996, the Company's Board of
Directors approved a 500,000 increase in shares reserved for issuance under
the 1993 Stock Option Plan and reserved 300,000 shares for issuance under a
newly-adopted Employee Stock Purchase Plan. See "Management -- Stock Plans"
and Note 7 of Notes to Consolidated Financial Statements.
14
<PAGE> 15
DILUTION
At March 31, 1996, the Company's net tangible book value was $9,418,000 or
approximately $0.89 per share. Net tangible book value per share represents the
amount of total tangible assets less total liabilities divided by 10,566,104
shares of Common Stock outstanding at March 31, 1996. Dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the offering made hereby and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the offering. After giving effect to the sale of 2,000,000 shares of Common
Stock offered by the Company hereby and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
March 31, 1996 would have been $38,378,000 or $3.05 per share. This represents
an immediate increase in net tangible book value of $2.16 per share to existing
stockholders and an immediate dilution in net tangible book value of $12.95 per
share to the purchasers of Common Stock in the offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $16.00
Net tangible book value per share before the offering.......... $0.89
Increase per share attributable to new investors............... 2.16
------
---
Pro forma net tangible book value per share after the offering...... 3.05
-------
--
Dilution per share to new investors................................. $12.95
=========
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
the differences between the existing stockholders and purchasers of shares in
the offering with respect to the number of shares purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
-------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... 10,566,104 84.1% $ 4,388,000(2) 12.1% $ 0.42
New investors(1)................... 2,000,000 15.9 32,000,000 87.9 16.00
---------- ----- ---------- -----
Total............................ 12,566,104 100.0% $36,388,000 100.0%
========== ===== ========== =====
</TABLE>
The above computations assume no exercise of options after March 31, 1996.
At March 31, 1996, there were outstanding options to purchase an aggregate of
1,024,498 shares of Common Stock at a weighted average exercise price of $0.75
per share. To the extent that outstanding options are exercised, there will be
further dilution to new investors. See "Capitalization," "Management -- Stock
Plans," "Management -- Executive Compensation" and Note 7 of Notes to
Consolidated Financial Statements.
- ------------------------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 8,866,104 shares, or approximately
70.6% (approximately 67.6%, if the Underwriters' over-allotment option is
exercised in full) of the total number of shares of Common Stock to be
outstanding after this offering and will increase the number of shares held
by new investors to 3,700,000, or approximately 29.4% (approximately 32.4%
if the Underwriters' overallotment option is exercised in full) of the total
shares of Common Stock to be outstanding after the offering. See "Principal
and Selling Stockholders."
(2) Includes $1,427,000 in outstanding promissory notes issued to the Company in
payment for shares of Common Stock.
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus. The consolidated statement of operations
data for the fiscal years ended June 30, 1993, 1994 and 1995 and the nine months
ended March 31, 1996, and the consolidated balance sheet data as of June 30,
1994 and 1995 and March 31, 1996 are derived from, and are qualified by
reference to, the Company's consolidated financial statements audited by Price
Waterhouse LLP, independent accountants, included elsewhere in this Prospectus.
The consolidated statement of operations data for the years ended June 30, 1991
and 1992 and the consolidated balance sheet data as of June 30, 1991, 1992 and
1993 are derived from audited consolidated financial statements not included
herein. The Company's consolidated statement of operations data for the nine
months ended March 31, 1995 are derived from the Company's unaudited
consolidated financial statements which are included elsewhere herein. The
unaudited financial statements have been prepared by the Company on a basis
consistent with the Company's audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
historical results are not necessarily indicative of the results of operations
to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales................................... $28,539 $30,696 $28,007 $36,533 $31,447 $22,753 $28,678
Cost of sales........................... 18,281 17,647 16,120 18,886 16,827 12,361 14,070
------- ------- ------- ------- ------- -------
Gross profit.......................... 10,258 13,049 11,887 17,647 14,620 10,392 14,608
------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.............. 7,507 5,056 5,481 5,975 6,484 4,770 5,059
Selling, general and administrative... 8,706 7,856 7,361 8,803 7,789 5,477 7,795
------- ------- ------- ------- ------- -------
Total operating expenses......... 16,213 12,912 12,842 14,778 14,273 10,247 12,854
------- ------- ------- ------- ------- -------
Income (loss) from operations........... (5,955) 137 (955) 2,869 347 145 1,754
Interest and other income, net.......... 14 (87) 157 24 141 81 65
------- ------- ------- ------- ------- -------
Income (loss) before income taxes....... (5,941) 50 (798) 2,893 488 226 1,819
Provision (benefit) for income taxes.... (2,020) 17 592 630 40 19 55
------- ------- ------- ------- ------- -------
Net income (loss)....................... $(3,921) $ 33 $(1,390) $ 2,263 $ 448 $ 207 $ 1,764
======= ======= ======= ======= ======= =======
Net income (loss) per share............. $ (0.41) $ 0.00 $ (0.16) $ 0.23 $ 0.04 $ 0.02 $ 0.16
======= ======= ======= ======= ======= =======
Shares used to compute net income (loss) 9,514 8,649
per share(1).......................... 8,579 9,900 10,676 10,632 11,115
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 941 $ 358 $ 931 $ 6,161 $ 3,243 $ 3,652
Working capital........................ 4,242 3,711 3,082 5,358 5,695 7,347
Total assets........................... 12,917 10,989 10,891 15,029 12,617 15,471
Long-term debt, net of current 985 488
portion.............................. 329 172 -- --
Total stockholders' equity............. 6,379 6,195 4,737 6,988 7,433 9,418
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in computing net
income (loss) per share.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Over the past several years, Verilink has transitioned its business from
supplying single purpose network access and termination equipment to supplying
integrated network access systems. From its inception in December 1982 through
fiscal 1988, Verilink engaged primarily in the development, marketing and
support of T1 data service units/channel service units ("DSU/CSUs") and T1
diagnostic equipment. In fiscal 1989, the Company began the design of its
integrated access product line, the Access System 2000. Since fiscal 1990, the
Company has committed significant resources to expand the features and
functionality of the Access System 2000 product line, which efforts now
represent nearly all of the Company's product development activities. In fiscal
1992, the Company introduced its first Access System 2000 product application, a
modular T1 DSU/CSU. Sales related to the Company's Access System 2000 product
line represented 50% and 65% of total sales in the nine months ended March 31,
1995 and 1996, respectively. Sales of Access System 2000 products, including
recently developed applications, are expected to represent an increasing
percentage of future sales. See "Risk Factors -- Dependence on Recently
Introduced Products and Products Under Development."
The Company's business is characterized by the concentration of sales to a
limited number of customers. Sales to the Company's top five customers accounted
for 46%, 47% and 58% of sales in fiscal 1994, fiscal 1995 and the nine months
ended March 31, 1996, respectively. These customers are network service
providers ("NSPs") and resellers. Sales to NSPs generally relate to the
deployment of equipment for specific projects. Sales for these projects are
often difficult to forecast due to a relatively long sales cycle and
acceleration or delays in the timing of such projects. The Company has
experienced fluctuations in both annual and quarterly sales due to the timing of
receipt of customer orders and decisions by major customers to cease marketing,
purchasing and reselling the Company's products. Sales of the Company's single
purpose network access products to AT&T Paradyne represented 24% of sales in
fiscal 1993 but declined to 11% and 2% of sales in fiscal 1994 and 1995,
respectively, due to the decision by AT&T Paradyne to focus its sales efforts on
competing products developed within the AT&T organization. In addition, sales to
Stratacom for provision of network management capabilities in a system sold to
another AT&T business unit accounted for approximately 9% of the Company's sales
during fiscal 1995. Sales to Stratacom ceased during the second half of fiscal
1995 due to the decision by such AT&T business unit to internally provide such
management functionality in its system. Since the Company continues to have
significant sales to a small number of customers, similar sales fluctuations may
occur in the future. See "Risk Factors -- Customer Concentration."
The Company sells its products primarily in the United States to NSPs
through a direct sales force and through a variety of resellers, including OEMs,
VARs and distributors. International sales to date have not been significant.
The Company intends to expand the marketing of its products generally and to
commence sales outside the United States.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE ENDED
30, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 57.6 51.7 53.5 54.3 49.1
------ ------ ------ ------ ------
Gross margin.......................... 42.4 48.3 46.5 45.7 50.9
------ ------ ------ ------ ------
Operating expenses:
Research and development................. 19.6 16.4 20.6 21.0 17.6
Selling, general and administrative...... 26.3 24.1 24.8 24.1 27.2
------ ------ ------ ------ ------
Total operating expenses.............. 45.9 40.5 45.4 45.1 44.8
------ ------ ------ ------ ------
Income (loss) from operations.............. (3.5) 7.8 1.1 0.6 6.1
Interest and other income, net............. 0.6 0.1 0.4 0.4 0.2
------ ------ ------ ------ ------
Income (loss) before income taxes.......... (2.9) 7.9 1.5 1.0 6.3
Provision for income taxes................. 2.1 1.7 0.1 0.1 0.2
------ ------ ------ ------ ------
Net income (loss).......................... (5.0)% 6.2% 1.4% 0.9% 6.1%
====== ====== ====== ====== ======
</TABLE>
The following table summarizes sales by product line for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENT DATA)
<S> <C> <C> <C> <C> <C>
Sales:
Access System 2000............... $ 6,665 $15,881 $16,519 $11,274 $18,702
Other products and services...... 21,342 20,652 14,928 11,479 9,976
------- ------- ------- ------- -------
Total............................ $28,007 $36,533 $31,447 $22,753 $28,678
======= ======= ======= ======= =======
Access System 2000, as a percent
of total....................... 24% 43% 53% 50% 65%
</TABLE>
Nine Months Ended March 31, 1995 and 1996
Sales. Sales for the nine months ended March 31, 1996 increased by 26% to
$28.7 million as compared with sales of $22.8 million for the nine months ended
March 31, 1995. This was primarily due to an increase of 66% in sales of Access
System 2000 products resulting from increased sales to MCI and CompuServe
associated with expansion of their networks, as well as the initial shipment of
a new product for PCS applications. This increase was offset in part by a
decline in sales of other products and service revenue of 13%, or $1.5 million,
between these two periods, primarily due to reduced sales by resellers. The
Company has not made significant investment in the development of non-Access
System 2000 products during recent years and consequently expects such sales to
decline as a percentage of sales. See "Risk Factors -- Competition."
During the nine months ended March 31, 1996, sales to MCI, CompuServe and
the Company's top five customers accounted for 25%, 18% and 58% of sales,
respectively. Sales to MCI, CompuServe and the Company's top five customers
accounted for 11%, 14% and 49%, respectively, of sales during the nine months
ended March 31, 1995. See "Risk Factors -- Customer Concentration."
18
<PAGE> 19
Gross Profit. Gross profit for the nine months ended March 31, 1996
increased by 41% to $14.6 million for the nine months ended March 31, 1996, as
compared with gross profit of $10.4 million for the nine months ended March 31,
1995. This increase was primarily due to increased sales volume as well as lower
per unit component costs for the Access System 2000. Gross margin increased from
46% to 51% between these two periods, due to improved material costs for Access
System 2000 products and lower manufacturing overhead expenses, as a percentage
of sales, due to greater sales volume.
Research and Development. Research and development expenses consist
primarily of salaries and other personnel-related expenses, material costs for
development of product prototypes, equipment depreciation, facility expenses and
spending related to outside consultants. Research and development expenses
increased by 6%, to $5.1 million for the nine months ended March 31, 1996 as
compared to $4.8 million for the nine months ended March 31, 1995, primarily due
to increased compensation expense, but decreased as a percentage of sales from
21% to 18% over the same period due to increased sales volume. The Company
believes that a significant level of investment in product research and
development is required to remain competitive and, accordingly, anticipates that
research and development expenses in fiscal 1997 will increase from fiscal 1996
levels. All research and development costs have been charged to operations as
incurred.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of personnel-related expenses, travel, advertising,
promotion and outside professional services. Personnel-related expenses include
salaries, sales commissions, bonuses and profit-sharing. Selling, general and
administrative expenses increased by 42%, to $7.8 million for the nine months
ended March 31, 1996, as compared to $5.5 million for the nine months ended
March 31, 1995, primarily due to incentive compensation, including commissions
and the amortization of deferred compensation expense related to the Company's
stock option plan that was recorded in the third quarter of fiscal 1996. As a
percentage of sales, selling, general and administrative expenses increased from
24% in the nine months ended March 31, 1995 to 27% in the nine months ended
March 31, 1996. The Company expects selling, general and administrative expenses
to increase in absolute terms in the future due to expenses associated with an
increased sales force and the legal, accounting and administrative expenses
associated with public company reporting requirements.
Provision for Income Taxes. The provision for income taxes of $19,000 for
the nine months ended March 31, 1995 represented minimum state income and
franchise taxes. The provision for income taxes of $55,000 for the nine months
ended March 31, 1996 represented an effective tax rate of 3%, primarily due to
the recognition of previously reserved deferred tax assets based on carryback
capacity and, to a lesser extent, expectations of future income in the next
twelve months. As of March 31, 1996, the Company had fully recognized its
deferred tax assets and, therefore, expects to provide for taxes at
approximately the statutory rate on future earnings, if any.
Fiscal Years Ended June 30, 1993, 1994 and 1995
Sales. Sales increased 30% from $28.0 million in fiscal 1993 to $36.5
million in fiscal 1994, primarily due to an increase in sales of Access System
2000 products of $9.2 million, including $3.6 million to MCI for implementation
of its frame relay network. This increase was offset by a decrease of $2.6
million in non-Access System 2000 sales to AT&T Paradyne. Sales decreased 14%
from $36.5 million in fiscal 1994 to $31.4 million in fiscal 1995, primarily due
to the decrease in sales of non-Access System 2000 products, including a $3.4
million decrease in sales to AT&T Paradyne. Sales of Access System 2000
increased by $638,000, which included a decrease in sales to MCI of $3.0
million. During fiscal 1993, 1994 and 1995, sales to MCI accounted for 13%, 20%
and 14%, respectively, of the Company's sales. In addition, AT&T accounted for
24% and 11% of the Company's sales during fiscal 1993 and 1994, respectively,
and CompuServe accounted for 14% of the Company's sales during fiscal 1995. See
"Risk Factors -- Customer Concentration."
19
<PAGE> 20
Gross Profit. Gross profit increased 48% from $11.9 million in fiscal 1993
to $17.6 million in fiscal 1994 due to the increase in sales volume as well as
product cost reductions. Gross margin improved from 42% in fiscal 1993 to 48% in
fiscal 1994 due to changes in product mix and a lower rate of manufacturing
overhead expenses as a result of the increased sales volume. Gross profit
decreased 17% from $17.6 million in fiscal 1994 to $14.6 million in fiscal 1995
primarily due to the decrease in sales volume. Gross margin declined from 48% in
fiscal 1994 to 46% in fiscal 1995 due to changes in product mix and a higher
rate of manufacturing overhead expenses as a result of the reduced sales level,
even though such expenses declined in amount.
Research and Development. Research and development expenses increased 9%
from $5.5 million in fiscal 1993 to $6.0 million in fiscal 1994, primarily due
to increases in salaries and other personnel-related expenses due to a decision
by the Company to more rapidly develop new products. Research and development
expenses increased by 9% from $6.0 million in fiscal 1994 to $6.5 million in
fiscal 1995, primarily due to material costs for development of product
prototypes.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 20% from $7.4 million in fiscal 1993 to $8.8 million in
fiscal 1994, primarily due to increased profit-sharing expenses. These expenses
declined by 12% from $8.8 million in fiscal 1994 to $7.8 million in fiscal 1995,
primarily due to a reduction in such profit-sharing expenses, which was
partially offset by increased personnel-related expenses as a result of staff
additions, primarily in sales and marketing.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $592,000 during fiscal 1993 even though it incurred a loss before
income taxes, as a result of providing a valuation allowance for deferred tax
assets due to uncertainty regarding realization of these assets. During fiscal
1994, the Company recorded a provision for income taxes of $630,000, or 22% of
income before taxes, which included a tax benefit of $659,000 related to a
reduction in the valuation allowance for deferred tax assets. During fiscal
1995, the Company recorded a tax provision of $40,000, representing minimum
state income and franchise taxes.
20
<PAGE> 21
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
information for the seven quarters in the period ended March 31, 1996.
Management believes that this information has been prepared on the same basis as
the audited consolidated financial statements appearing elsewhere in this
Prospectus and all necessary adjustments (consisting only of normal recurring
adjustments) have been included to present fairly the unaudited quarterly
results when read in conjunction with the audited consolidated financial
statements of the Company and the notes thereto appearing elsewhere in this
Prospectus. These operating results are not necessarily indicative of results
that may be expected for any subsequent periods. See "Risk
Factors -- Fluctuations in Quarterly Operating Results."
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1995 1995 1995 1995 1996
--------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales.................................. $ 7,906 $ 7,293 $ 7,554 $ 8,694 $ 9,505 $ 8,640 $ 10,533
Cost of sales.......................... 4,225 3,892 4,244 4,466 4,608 4,356 5,106
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 3,681 3,401 3,310 4,228 4,897 4,284 5,427
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............. 1,760 1,510 1,500 1,714 1,608 1,682 1,769
Selling, general and
administrative.................... 1,876 1,836 1,765 2,312 2,539 2,309 2,947
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 3,636 3,346 3,265 4,026 4,147 3,991 4,716
------- ------- ------- ------- ------- ------- -------
Income from operations................. 45 55 45 202 750 293 711
Interest and other income, net......... 35 19 27 60 22 33 10
------- ------- ------- ------- ------- ------- -------
Income before income taxes............. 80 74 72 262 772 326 721
Provision (benefit) for income taxes... 7 6 6 21 309 130 (384)
------- ------- ------- ------- ------- ------- -------
Net income............................. $ 73 $ 68 $ 66 $ 241 $ 463 $ 196 $ 1,105
======= ======= ======= ======= ======= ======= =======
Net income per share................... $ 0.01 $ 0.01 $ 0.01 $ 0.02 $ 0.04 $ 0.02 $ 0.10
======= ======= ======= ======= ======= ======= =======
Shares used to compute net income per
share................................ 10,232 10,831 10,832 10,807 10,837 11,011 11,496
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 53.4 53.4 56.2 51.4 48.5 50.4 48.5
--------- -------- -------- -------- --------- -------- --------
Gross margin......................... 46.6 46.6 43.8 48.6 51.5 49.6 51.5
--------- -------- -------- -------- --------- -------- --------
Operating expenses:
Research and development............. 22.3 20.7 19.8 19.7 16.9 19.5 16.8
Selling, general and
administrative.................... 23.7 25.2 23.4 26.6 26.7 26.7 28.0
--------- -------- -------- -------- --------- -------- --------
Total operating expenses........ 46.0 45.9 43.2 46.3 43.6 46.2 44.8
--------- -------- -------- -------- --------- -------- --------
Income from operations................. 0.6 0.7 0.6 2.3 7.9 3.4 6.7
Interest and other income, net......... 0.4 0.3 0.4 0.7 0.2 0.4 0.1
--------- -------- -------- -------- --------- -------- --------
Income before income taxes............. 1.0 1.0 1.0 3.0 8.1 3.8 6.8
Provision (benefit) for income taxes... 0.1 0.1 0.1 0.2 3.2 1.5 (3.7)
--------- -------- -------- -------- --------- -------- --------
Net income............................. 0.9% 0.9% 0.9% 2.8% 4.9% 2.3% 10.5%
======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company has experienced large fluctuations in sales from quarter to
quarter due to a wide variety of factors. The Company has experienced both
acceleration and slowdown in orders related to such projects, causing changes in
the sales level of a given quarter relative to both the preceding and subsequent
quarters. The Company's sales for a given quarter may depend to a significant
degree upon planned product shipments to a single customer, often related to
specific equipment deployment
21
<PAGE> 22
projects. Sales to MCI and CompuServe, the Company's two largest current
customers, have varied by as much as $1 million and $700,000, respectively,
between consecutive quarters, and sales to other current customers have also
varied by as much as $800,000 from quarter to quarter. Most of the Company's
sales are in the form of large orders with short delivery times. The Company's
ability to affect and judge the timing of individual customer orders is limited.
Delays or lost sales can be caused by other factors beyond the Company's
control, including late deliveries by other vendors of components in a
customer's system, changes in implementation priorities, slower than anticipated
growth in demand for the services that the Company's products support and delays
in obtaining regulatory approvals for new services. Delays and lost sales have
occurred in the past and may occur in the future. Operating results in recent
periods have been adversely affected by delays in receipt of significant
purchase orders from major customers and the termination of sales to Stratacom.
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. These
and similar delays or lost sales could materially adversely affect the Company's
business, financial condition and results of operations. Although sales
fluctuations have primarily related to major customers, overall sales levels
have also been impacted from time to time by a general reduction in sales to all
customers, as a group, as occurred during the quarter ended December 31, 1994.
Sales to Stratacom for provision of network management capabilities in a system
sold to a business unit of AT&T accounted for 9% of the Company's sales during
fiscal 1995. Sales to Stratacom ceased during the quarter ended March 31, 1995
due to the decision by such AT&T business unit to internally provide such
management functionality in its system. The decrease in sales during the quarter
ended December 31, 1995 was primarily due to a delay in receiving an anticipated
order from MCI. Since the Company continues to have significant sales to major
customers, there can be no assurance that similar fluctuations in quarterly
sales will not occur in the future.
The Company's customers have in the past built, 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 customers to
reduce their inventory levels could lead to reductions in purchases from the
Company. These reductions, in turn, could cause fluctuations in the Company's
operating results and could have an adverse effect on the Company's business,
financial condition and results of operations in the periods in which the
inventory is reduced.
Operating results may also fluctuate due to factors such as the timing of
new product announcements and introductions by the Company, its major customers
or its competitors, delays in new product introductions by the Company, market
acceptance of new or enhanced versions of the Company's products, changes in the
product or customer mix of sales, changes in the level of operating expenses,
competitive pricing pressures, the gain or loss of significant customers,
increased research and development and sales and marketing expenses associated
with new product introductions, and general economic conditions. 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, financial
condition and results of operations for one quarter or a series of quarters. The
Company's expense levels are based in part on its expectations regarding future
sales and are fixed in the short term to a large extent. Therefore, the Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in sales. Any significant decline in demand relative to the
Company's expectations or any material delay of customer orders could have a
material adverse effect on the Company's business, financial condition and
results of operations. Fluctuations in operating results may cause volatility in
the price of the Company's Common Stock. See "Risk Factors -- Customer
Concentration," "Risk Factors -- Fluctuations in Quarterly Operating Results,"
and "Risk Factors -- No Prior Market; Stock Price Volatility."
LIQUIDITY AND CAPITAL RESOURCES
The primary source of financing for the Company has been cash flow from
operations. In addition, the Company has used proceeds from the private sale of
equity securities and bank borrowings to support its operations, acquire capital
equipment and finance inventory and accounts receivable growth.
22
<PAGE> 23
Net cash provided by operating activities during fiscal 1993 and fiscal
1994 totaled $1.6 million and $6.2 million, respectively. During fiscal 1995,
net cash used in operating activities was $2.0 million, primarily due to the
payment of accrued compensation expense. During the nine months ended March 31,
1996, net cash provided by operating activities was $1.2 million, primary due to
increased profitability.
The Company made capital expenditures of approximately $491,000, $861,000,
$782,000 and $546,000 in fiscal 1993, 1994 and 1995 and the nine months ended
March 31, 1996, respectively, primarily for the purchase of computers and test
equipment. Although the Company had no material commitments for capital
expenditures as of the date of this Prospectus, the Company expects that its
capital expenditures in fiscal 1997 will increase above recent historical
levels.
As of March 31, 1996, the Company's principal source of liquidity was cash
and cash equivalents of approximately $3.7 million. In addition, during April
1996, the Company obtained a bank line of credit of $2.0 million. See Note 3 of
Notes to Consolidated Financial Statements. The Company believes that cash
generated from proceeds from this offering, available funds, anticipated cash
flows from operations and its line of credit will satisfy the Company's working
capital and capital expenditure requirements through at least the next twelve
months. However, there can be no assurance that future events will not require
the Company to seek additional capital sooner or, if so required, that adequate
capital will be available on terms acceptable to the Company, or at all.
23
<PAGE> 24
BUSINESS
Verilink Corporation develops, manufactures and markets integrated access
products for telecommunications network service providers and corporate end
users. Verilink designed the Access System 2000 with modular hardware and the
Company's software-based Advanced Programmable Architecture(TM) to enable its
customers to access increased network capacity and to adopt new communications
services in a cost-effective manner. The Access System 2000 provides integrated
access to low speed services, fractional T1/E1 services, and T1, E1, T3, frame
relay and SMDS services, with ATM and ISDN products under development.
Verilink sells its products through a direct sales force and non-exclusive
resellers. Verilink's integrated network access products are used by network
service providers such as interexchange and local exchange carriers, and
providers of Internet, personal communications and cellular services. The
Company also sells single purpose network access devices for selected
applications. The Company's largest customers include MCI, CompuServe, Northern
Telecom and QUALCOMM.
INDUSTRY BACKGROUND
Corporate and consumer demand for data, voice and video transmission
services is expanding worldwide, creating a need for both increased bandwidth
and new communications services. At the same time, the competitive landscape
faced by providers of high bandwidth transmission capacity is evolving rapidly
due to developments including the migration of corporations from private
networks to public networks, the proliferation of the Internet, the continuing
deregulation of the telecommunications industry and the introduction of new
wireless services. In response to these developments, network service providers
("NSPs"), including interexchange and local exchange carriers, and providers of
Internet, personal communications and cellular services, are offering a variety
of new communications services, each of which traditionally required a separate
single purpose network access device. The limitations of single purpose network
access devices have created the need for flexible integrated network access
equipment that will allow NSPs to provide corporate users access to a variety of
communications services in a cost-effective manner.
Demand for Increased Bandwidth
Businesses increasingly depend on the flow of data, voice and video traffic
through their communication networks, driving demand for additional bandwidth.
Corporate employees increasingly travel, telecommute and work in geographically
dispersed teams, creating a need for remote connections to corporate local area
networks ("LANs"). Corporations are also deploying wide area networks ("WANs")
to connect LANs located in local and remote locations. In addition, the type of
information transmitted over networks increasingly requires high transmission
rates. For example, video conferencing and multimedia applications require
substantially more bandwidth than needed for traditional data file transfers.
This continued growth in demand for bandwidth has caused corporations to seek
network access solutions from NSPs and equipment suppliers that accommodate both
current and future bandwidth requirements.
Migration from Private to Public Networks
Since the mid-1980s, corporations have relied on private data networks
using dedicated digital circuits leased from communications carriers.
Corporations now increasingly use public network services offered by NSPs as an
alternative to the high cost of corporate private networks. These public network
services allow users to access end-to-end digital circuits on an as-needed
basis. This migration resulted from cost-effective and reliable new
communication services offered by NSPs, the trend to outsource non-core
corporate functions, and the growth in the cost and complexity of maintaining
private networks. In order to provide competitive service to these corporations,
NSPs need flexible network access equipment that facilitates cost-effective
provision of a variety of communications services.
24
<PAGE> 25
Growth of Corporate Use of the Internet
The Internet was originally used by academic and governmental organizations
for applications such as e-mail and file transfer. Increasingly, corporations
and individuals are using the Internet for more bandwidth-intensive applications
that use sound, images and video, and to provide interconnectivity within the
enterprise. Internet users now face transmission delays as backbone capacity
lags the growth in the number of users and as use of high-bandwidth applications
increases. In response to this transmission bottleneck, NSPs are upgrading the
Internet's communications backbone, which may encourage corporations to continue
increasing activity on the Internet.
Deregulation and Increased Competition
The market for providing communication services to larger organizations has
become increasingly competitive since the 1984 divestiture of AT&T. This
environment has led to the development and introduction of new services by a
broader range of NSPs, including long distance companies (such as AT&T, MCI and
Sprint), local exchange carriers (such as regional Bell operating companies
("RBOCs") and GTE) and competitive access providers (such as MFS Communications
Company, Inc. and Teleport Communications Group, Inc.). The deregulation
effected by the Telecommunications Act of 1996 is expected to further increase
competition among NSPs, as long distance and local exchange carriers enter each
others' business and new entrants emerge, including cable TV operators, wireless
carriers and Internet/on-line service providers. To compete successfully, this
growing group of NSPs must offer customers access to new services at a low cost
and with high reliability.
Wide Range of New Communications Services and Technologies
Over the past several years, NSPs have introduced a variety of new,
high-bandwidth switched services as alternatives to historical dedicated leased
line services. For example, ISDN service allows users to exchange data, voice
and video on a "dial-up" basis. In the United States, ISDN service is currently
offered by NSPs at transmission rates from 64 Kbps to 1.544 Mbps. Further, NSPs
have introduced packet and cell-based switching services such as frame relay,
SMDS and ATM. Frame relay is a data service which provides corporate users with
dedicated access to the NSP's frame relay network at transmission speeds of 56
Kbps to 1.544 Mbps ("T1"). ATM provides high speed transmission and low latency
which allows effective transmission of data, voice and video traffic.
Wireless telecommunications services are becoming more widespread due to
advances in technology, regulatory encouragement and increased demand. The
Company expects that personal communication services ("PCS"), digital cellular
and other emerging services will make wireless service cheaper, easier to use
and more compatible with existing information delivery systems. For example, the
cellular digital packet data ("CDPD") standard has been developed to allow data
transmissions in digitized packets during idle times on cellular phone channels.
LIMITATIONS OF SINGLE PURPOSE NETWORK ACCESS SOLUTIONS
Traditionally, a dedicated single purpose access device has been deployed
for each type of network communications service. For example, one device is used
for SMDS service and another entirely separate device is used to provide T1
service. The use of single purpose devices to access the expanding variety of
communications services has become increasingly costly and inefficient for
several reasons:
- Limited Ability to Accommodate Emerging Technologies and Services. As new
technologies and services such as ATM are deployed, the need to have a
flexible and cost-effective migration path to such technologies is
critical, as few companies can afford to replace large portions of their
network access equipment. Single purpose network access devices typically
cannot provide such a migration path.
25
<PAGE> 26
- Limited Ability to Accommodate Multiple Services. The migration of
network users from dedicated private to switched public networks has
placed NSPs in the position of having to be "everything to everyone"
because NSPs must offer network access compatible with the various
communications services chosen by their customers. Expenditures for
numerous single purpose access devices that each support a single service
offering can be an inefficient use of NSP's financial resources.
- Limited Scaleability. The rapid expansion of networks has increased
demand for upgraded network access which is difficult to meet efficiently
by simply purchasing more non-scaleable single purpose network access
devices. Furthermore, growing bandwidth requirements often necessitate
the adoption of new and faster technologies, thereby requiring additional
outlays for new access equipment.
- Difficulty of Maintenance and Support. Use of numerous single purpose
network access devices built to different standards and requiring
separate management systems can complicate operating procedures and
result in multiple potential failure points. The increasing importance of
network applications to end users has resulted in new focus on the
importance of investing in network access equipment that is reliable and
easy to manage, repair and upgrade.
The diagram below illustrates the numerous, single purpose devices needed
to access multiple communications services:
LOGO
THE VERILINK SOLUTION
Verilink's Access System 2000 is a flexible network access and management
solution that provides cost-effective integrated access to a broad range of
network services. The Access System 2000 uses a modular hardware architecture
and the Company's software-based Advanced Programmable Architecture ("APA") to
provide a scaleable, adaptable platform for a flexible network migration path to
new communications services. In addition, the Access System 2000 was designed to
simplify network management and to provide reliable service. The benefits of the
Access System 2000 include:
- Flexible Access to Multiple Services. The integrated Access System 2000
is designed to allow NSPs to rely on a single, flexible equipment
platform that they can adapt to meet the current and emerging service
needs of multiple customers. The Access System 2000 currently enables
NSPs to support historical dedicated leased line services, such as
subrate data, fractional T1, T1 and T3, as well as new high-bandwidth
switched services such as frame relay and SMDS in an
26
<PAGE> 27
integrated platform. Verilink expects to offer ISDN and ATM functionality
on the Access System 2000 platform during fiscal 1997. As these service
needs change, the Access System 2000's modular hardware architecture and
APA allows NSPs to use the same platform to provide access to multiple
services.
- Migration Path to New Technologies and Services. The Access System 2000's
architecture was designed to allow NSPs and corporate customers to add
new technologies and services incrementally. The Access System 2000
allows the customer access to increased network capacity or provide
access to additional service offerings by adding circuit cards. The
end-user can also vary certain system features simply by downloading new
software provided by the Company.
- Scaleable Growth. The Access System 2000's scaleable design enables it to
be expanded to meet customer demands for access to increased network
capacity by adding additional circuit cards often at lower incremental
cost, compared to the cost of buying, installing and maintaining multiple
new dedicated single-purpose access devices.
- Ease of Network Management. The Access System 2000 can also be monitored
remotely using the Company's proprietary management system, the Access
Manager 2000, or using industry standard simple network management
protocol ("SNMP") tools. The Company's APA technology allows the product
to be configured, upgraded and serviced remotely.
- Reliable Performance. Verilink's Access System 2000 is designed to be
highly reliable, and its ability to provide access to multiple services
from one integrated device lowers the number of potential failure points.
In addition, the Company believes its product reliability is enhanced by
its commitment to high quality standards and its formal program of total
quality management. See "-- Manufacturing and Quality."
The diagram below illustrates the variety of communications services that
can be supported in an integrated manner by the Access System 2000:
LOGO
27
<PAGE> 28
VERILINK STRATEGY
The Company's objective is to become the leading provider of integrated
network access equipment for use by NSPs and large corporate customers. Key
elements of the Company's strategy include:
- Expand Relationships with Key Customers. The Company has developed close
relationships with MCI, CompuServe, Northern Telecom and QUALCOMM,
leaders in traditional or emerging telecommunications markets. The
Company believes that these relationships have allowed it to gain an
in-depth knowledge of several networking technologies, which today are
deployed in different markets. As its key customers adopt new
technologies to expand the range of services they offer and enter new
markets, the Company intends to leverage its expertise in each of these
technologies by selling additional types of products to these customers.
- Expand Customer Base. The Company believes that a direct sales
organization that understands and can solve complex network access
problems is necessary to sell its products to NSPs and large
corporations. To date, the Company has sold its products through a
relatively small direct sales and support organization. The Company
intends to invest significantly to enlarge this sales and support
organization in order to expand its customer base.
- Offer Broad Array of Integrated Network Access Solutions. The Company's
product strategy is to offer multiple network access technologies on a
single integrated platform. Verilink designed the modular and scalable
architecture of the Access System 2000 to provide a migration path to new
network services, enabling customers to provide additional services
without entirely replacing network access equipment. The Company is
currently developing ISDN and ATM applications for the Access System 2000
product line.
- Focus on Emerging International Markets. The Company believes that the
markets for network access solutions in developing countries present
significant opportunities. The Company intends to address these
opportunities by partnering with NSPs and telecommunications equipment
providers active in these markets and by forming an international sales
force. The Company has recently introduced an Access System 2000 product
for E1 access that is designed to meet international telecommunications
standards.
- Provide Highly Reliable Products. The Company's customers operate in an
environment in which transmission reliability and availability are
increasingly mission critical factors. The Company has adopted a formal
total quality management process that integrates new product
specifications, development, manufacturing, repair and service, which is
intended to achieve high reliability of its products and services. The
Company has been ISO 9001 certified since 1993.
28
<PAGE> 29
PRODUCTS
Access System 2000
Verilink's Access System 2000 is a flexible network access and management
solution that provides cost-effective integrated access to a broad range of
network services. Access System 2000 products are designed for installation at
the origination and termination points at which NSPs provide communications
services to their corporate customers. A key element of the flexibility and
adaptability of the Access System 2000 is its modular architecture which allows
customers to access new services or expanded network capacity by installing new
circuit cards. In addition, its Advanced Programmable Architecture allows
certain functions of the Access System 2000's hardware to be configured through
software downloads. The table below summarizes the Access System 2000 product
line:
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------------------------------------------
VERILINK ACCESS SYSTEM 2000 PRODUCT LINE
- ---------------------------------------------------------------------------------------------
APPLICATION DESCRIPTION AND GENERAL FEATURES LIST PRICE RANGE
- ---------------------------------------------------------------------------------------------
Accesses T1 lines for PBX, multiplexer and D4 channel banks
CSU Provides ESF performance monitoring capabilities $2,800-5,000
Supports TDM applications
- ---------------------------------------------------------------------------------------------
Integrated DSU/CSU for frame relay and Internet applications
Accesses carrier-dedicated T1 and fractional T1 facilities
DSU/CSU Supports data applications at low speeds and at multiple $2,900-5,700
56 Kbps/64 Kbps rates
- ---------------------------------------------------------------------------------------------
Aggregates multiple lower speed data ports onto a single
T1/E1
T1/E1 line
Multiplexing Supports V.35, RS449, E1A530 and other interfaces and $4,500-7,500
provides
drop-and-insert capability
- ---------------------------------------------------------------------------------------------
Aggregate up to five RS-232 subrate data channels
Subrate Supports DS0A/DS0B formats
and Supports synchronous/asynchronous modes from 300 bps to $4,500-7,500
Multiplexing 19.2 Kbps
- ---------------------------------------------------------------------------------------------
Provides access to Switched Multimegabit Data Service
SMDS Supports T1/T3 rates $4,900-17,500
Intercarrier Interface for T3
- ---------------------------------------------------------------------------------------------
Provides bit-based inverse multiplexing for high-speed data
Inverse Supports up to eight T1/E1s $9,500-17,500
Multiplexing Automatic line configuration
- ---------------------------------------------------------------------------------------------
Provides DS3 access for high-speed data applications
DS3 DSU Supports a single High-Speed Serial Interface $6,400-9,100
In-band management capability
- ---------------------------------------------------------------------------------------------
Automatic Provides T1 transmission facility protection switching
Protection User-defined protection groups $2,500-4,500
Switching Automatic or manual switching
- ---------------------------------------------------------------------------------------------
Provides ATM WAN access for data applications
ATM* Supports T1/E1 and T3/E3 and nxT1/E1 $12,000-19,300
Interworking functions for frame relay or SMDS to ATM
- ---------------------------------------------------------------------------------------------
ISDN* Provides ISDN-PRI access $5,500-9,500
- ---------------------------------------------------------------------------------------------
</TABLE>
* Currently under development. See "Risk Factors -- Dependence on Recently
Introduced Products and Products Under Development."
The Access System 2000 is accessed and controlled by the Access Manager
2000, a full-network monitoring system. The Access Manager 2000 facilitates
remote configuration of node equipment and provides integral performance
monitoring, diagnostics, test and maintenance capabilities for the entire
29
<PAGE> 30
network. Software downloads for product upgrades and modifications can be
implemented remotely using the Access Manager 2000 or SNMP tools.
Access System 2000 Applications
NSPs use the Access System 2000 in a number of applications. The following
are brief descriptions of some of the uses of the Access System 2000:
Interexchange Carrier Frame Relay Network. In an interexchange carrier
("IXC") frame relay network, the Access System 2000 is located at the IXC's
point of presence and is used to terminate T1 or fractional T1 circuits from
frame relay subscribers. In this application, the Access System 2000 is used to
concentrate frame relay traffic from multiple users, providing more efficient
use of network ports on the carrier's frame relay switches or nodal processors.
As a result, the carrier can achieve increased circuit utilization and decreased
transmission costs.
Internet Service Provider Network. In an Internet service provider ("ISP")
network, the Access System 2000 is located at the ISP's network access point and
provides access to high-speed transmission between the ISP's regional centers
and its network operation center. The Access System 2000 provides high-bandwidth
solutions through T3 and multiple T1 access that can improve network performance
in a cost-effective manner.
Personal Communications Service Network. In a new personal communication
service ("PCS") network based on Code Division Multiple Access (CDMA), the
Access System 2000 is being used to provide wireline access and termination. The
Access System 2000, with its integrated access technology, is designed to be
used by the service provider to connect to carrier-provided services, while
providing channel grooming, performance monitoring and drop-and-insert functions
at their mobile switching sites.
Cellular Service Provider Network. In a cellular network, NSPs use T1
circuits for inter-site communications. The Access System 2000 is located at
both the cell site and mobile switching center to provide cost-effective
automatic T1 protection switching for critical inter-site traffic. In addition,
the Access System 2000 offers management capabilities, and its small size makes
it suitable for space-limited cell sites.
Other Products and Services
ConnecT DSU/CSU Products. The Company's ConnecT DSU/CSU line of products
integrates the capabilities of T1 data service units ("DSUs") and channel
service units ("CSUs"). They are designed to provide economical solutions for
connecting LANs and geographically separated digital devices, including video
teleconferencing equipment, mainframe computers, computer aided design and
manufacturing (CAD/CAM) workstations and imaging systems. Verilink's ConnecT
DSU/CSU products include the ConnecT1, a dual-port device with integrated
DSU/CSU functions that allow users to interconnect digital applications
operating at data rates from 56Kbps to T1, via the carrier network, and the
ConnecT FT1, a cost-effective, single-port device that provides access to T1 and
fractional T1 services.
Extended Superframe ("ESF") Products. The Company's ESF CSU products
interface data terminal equipment to a network facility and offer the full
benefit of ESF performance measurement. The ESF CSU products can be controlled
and monitored locally or remotely and are offered in a variety of
configurations, ranging from a single T1 circuit to a multiline shelf
accommodating up to 10 ESF CSUs.
Line Interface Units. The Company's Line Interface Unit provides the
interface needed to connect two T1 lines to a channel bank or voice multiplexer.
The product is designed to enhance the management capabilities of network access
equipment by providing T1 performance statistics. This product is purchased by
RBOCs to upgrade the performance of their installed base of channel banks.
Services. The Company offers its customers the option of purchasing
extended services in addition to those provided under its standard product
warranty. These extended services include product upgrades, software and on-site
hardware maintenance and installation services, extended telephone support,
on-site training and advanced equipment exchange.
30
<PAGE> 31
CUSTOMERS
The primary market for the Company's products is comprised of NSPs. The
secondary market for the Company's products is comprised of large corporations
with private networks. The following table sets forth a representative list of
Verilink's NSP and corporate end user customers, and its resellers, in these
markets.
<TABLE>
<S> <C>
AT&T Wireless Graybar
Alamo Rent A Car MCI
Alltel Supply Northern Telecom
Ameritech Nynex
Anixter QUALCOMM
Bell South Pacific Bell
CompuServe Rockwell International
EDS Southwestern Bell
First Data Corp. The Travelers Group
</TABLE>
The Company's products are sold to a limited number of customers. See "Risk
Factors -- Customer Concentration."
SALES AND MARKETING
The Company sells its products primarily to NSPs and their large corporate
end user customers through a direct sales force and through a number of
non-exclusive resellers, including OEMs, VARs and distributors. The Company has
focused its marketing strategy on leveraging existing, and developing new, key
customer relationships in specific telecommunications market segments, including
the WAN and remote LAN access, Internet access, and wireless access segments.
An important element of the Company's marketing strategy of targeting key
customer relationships is its direct sales efforts to such customers.
Approximately 78% of the Company's sales during the nine months ended March 31,
1996 were derived through direct sales to such customers. A direct sales effort,
supported by sales engineers who provide customers with pre- and post-sale
technical and strategic assistance, allows the Company to gain a more in-depth
knowledge of customers' network access requirements. The Company believes this
knowledge helps it to build long-term relationships and alliances with key
customers. The Company intends to increase the size of its direct sales and
support organization. In order to service its targeted markets, the Company has
11 sales people located in ten offices in major U.S. metropolitan areas, with an
average of ten years of direct sales experience in the telecommunications field.
The Company also has sales engineers located in most of its sales offices to
assist customers in developing technology strategies and specific product plans,
as well as provide technical assistance and support.
Verilink's service and support program includes: a five-year product
warranty; formal customer training programs; on-site installation and
maintenance; free telephone support; complete repair, refurbishment and upgrade
services with a committed ten-day turnaround; and local applications engineering
support.
In addition to its direct sales, the Company sells its products through
VARs and distributors such as Anixter, Graybar and Alltel Supply. Approximately
22% of the Company's sales during the nine months ended March 31, 1996 were made
to VARs and distributors. The Company's VARs and distributors have primarily
sold the Company's single purpose network access products.
To date, the Company has had minimal direct sales to international
customers. The Company believes that the international market for network access
solutions will experience increasing growth in the future. The Company's
strategy is to increase and diversify its international sales through corporate
relationships. The Company's Access System 2000 product has been designed to
meet international telecommunications standards. See "Risk Factors -- Risks
Associated With Entry into International Markets."
31
<PAGE> 32
COMPETITION
The market for network access and telecommunications equipment is highly
competitive, and the Company expects competition to increase in the future. This
market is subject to rapid technological change, regulatory developments and
emerging industry standards. The Company faces different competitive
environments for its Access System 2000 products than for its single purpose
network access products.
The market for integrated access devices such as the Company's Access
System 2000 is newly emerging and is subject to rapid change. The Company
believes that the primary competitive factors in this market are the development
and rapid introduction of new product features, price/performance, support for
multiple types of communications services, network management, reliability and
safety, and quality of customer support. There can be no assurance that the
Company's new products and products under development will be able to compete
successfully with respect to these or other factors. The Company's principal
competition to date for its current Access System 2000 products has been from
Digital Link Corporation, Kentrox, a division of ADC Telecommunications (both in
Kentrox's own products and products supplied by Premisys), and Larscom. As the
Company develops new products for the Access System 2000 line, the Company
expects to increasingly compete with Premisys. The Company expects additional
competition from companies that are currently competitors in the markets for the
Company's single purpose network access products, as such companies develop new
products. In addition, the Company expects substantial competition from
companies in the computer networking market and other related markets such as
Newbridge Networks Corporation and Ascend Communications, Inc. To the extent
that current or potential competitors can expand their current offerings to
include products that have functionality similar to the Company's products and
planned products, the Company's business, financial condition and results of
operations could be materially adversely affected.
The Company believes that the market for its single purpose network access
products is mature. The Company believes that the principal competitive factors
in this market are price, installed base and quality of customer support. In
this market, the Company primarily competes with Adtran, Digital Link, Kentrox
and Larscom. There can be no assurance that such companies or other competitors
will not introduce new products that provide greater functionality and/or at a
lower price than the Company's single purpose network access products. In
addition, the Company anticipates that competitors and customers may develop
products that could be used for selected applications for which the Company's
products are currently provided. Successful, timely development of such products
could reduce the level of demand for the Company's products. The Company does
not expect to spend significant, if any, resources on research and development
of its single purpose network access products. There can be no assurance that
the Company's single purpose network access products will be competitive in the
future. AT&T Paradyne, a company that had been a major customer in fiscal 1993,
developed a product for use in applications addressed by one of the Company's
single purpose network access products and subsequently substantially reduced
orders for the Company's products.
Many of the Company's current and potential competitors have substantially
greater technical, financial, manufacturing and marketing resources than the
Company. In addition, many of the Company's competitors have long-established
relationships with network service providers. 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. See "Risk Factors -- Competition."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on developing
new products, core technologies and enhancements to existing products. For the
past several years, product development activities have emphasized expansion of
features and functionality for the Access System 2000 product
32
<PAGE> 33
family. The Company's product development strategy has focused on the
development of modular software and hardware products that can be integrated and
adapted to the changing standards and requirements of the communications and
internetworking industries.
The Company expects that it will continue to expend significant resources
for product development of specific applications such as ISDN and ATM as well as
to respond to market demand and new service offerings from network service
providers. These applications are targeted for release in fiscal 1997. The
Company is also developing an application for analog voice transmission.
During fiscal 1993, 1994 and 1995, total research and development
expenditures were $5.5 million, $6.0 million and $6.5 million, respectively. In
the nine months ended March 31, 1996, such expenditures totaled $5.1 million.
All research and development expenses are charged to expense as incurred. As of
March 31, 1996, 51 full-time employees were engaged in product development.
The network access and telecommunications equipment markets are
characterized by rapidly changing technologies and frequent new product
introductions. 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 and
customer requirements. This will require the timely selection, development and
marketing of new products and enhancements on a cost-effective basis. The
development of new, technologically advanced products is a complex and uncertain
process, requiring high levels of innovation. The development of new products
for the integrated access market requires competence in the general areas of
telephony, data networking, network management and wireless telephony as well as
specific technologies such as SMDS, ATM and ISDN. Further, the communications
industry is characterized by the need to design products which meet industry
standards for safety, emissions and network interconnection. With new and
emerging technologies and service offerings from network service providers, such
standards are often changing or unavailable. As a result, there is a potential
for product development delay due to the need for compliance with new or
modified standards. 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. 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. The Company's business, financial condition and results
of operations would be materially adversely affected if the Company were to be
unsuccessful, or to incur significant delays, in developing and introducing such
new products or enhancements.
MANUFACTURING AND QUALITY
The Company's manufacturing operations consist primarily of material
requirements planning, materials procurement and final assembly, test and
quality control of subassemblies and systems. The Company performs virtually all
aspects of its manufacturing process at its San Jose facility, with the
exception of printed circuit board assembly. A local contract manufacturer
performs printed circuit board assembly with parts sourced by Verilink. This
control of the manufacturing process enables the Company to implement quality
control and continuous process improvement techniques and methods, including
failure mode analysis, statistical process control and the use of quality
improvement teams. In addition, the Company has extended these quality control
techniques to certain suppliers by teaching and assisting them to implement such
techniques as statistical process control and just-in-time parts delivery. The
Company has been ISO 9001 certified since 1993. ISO 9000 is an international
quality certification process, developed in the European Common Market and
adopted by the United States as the method by which companies can demonstrate
the functionality of their quality system. Verilink obtained such certification
through an independent third party, with ongoing audits on a semi-annual basis.
33
<PAGE> 34
On-time delivery of the Company's products is dependent upon the
availability of quality components and subsystems used in its products. The
Company depends upon a subcontractor to assemble printed circuit boards used in
its products in a timely and satisfactory manner. The Company obtains several
components, and licenses certain embedded software, from single sources.
Although the Company believes that, in each case, either an alternative supplier
is available or the product can be redesigned to incorporate a different
component, significant interruption in the delivery of any such item could have
a material adverse effect on the Company's business, financial condition and
results of operations. In particular, the Company's orders frequently require
delivery quickly after placement of the order. Because the Company does not
maintain significant component inventories, delay in shipment by a supplier
could lead to lost sales. See "Risk Factors -- Fluctuations in Quarterly
Operating Results" and "-- Dependence on Component Availability and Key
Suppliers."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
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 and technologies. The Company has been issued
certain U.S. and Canadian patents with respect to limited aspects of its single
purpose network access technology. The Company has not obtained significant
patent protection for its Access System 2000 technology. The Company is not
currently aware of any material past infringement on its technology by third
parties. There can be no assurance that third parties have not or will not
develop equivalent technologies or products without infringing the Company's
patents or that the Company's patents would be held valid and enforceable by a
court having jurisdiction over a dispute involving such patents. 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 deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company's
business, financial condition and results of operations could be materially
adversely affected. 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 misappropriation of
the Company's technology and products more likely.
The network access and telecommunications equipment industries are
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. The Company
has not conducted a formal patent search relating to the technology used in its
products, due in part to the high cost and limited benefits of a formal search.
In addition, since patent applications in the United States are not publicly
disclosed until the patent issues and foreign patent applications generally are
not publicly disclosed for at least a portion of the time that they are pending,
applications may have been filed which, if issued as patents, would relate to
the Company's products. Software comprises a substantial portion of the
technology in the Company's products. The scope of protection accorded to
patents covering software-related inventions is evolving and is subject to a
degree of uncertainty which may increase the risk and cost to the Company if the
Company discovers third party patents related to its software products or if
such patents are asserted against the Company in the future. Patents have been
granted recently on fundamental technologies in software, and patents may issue
which relate to fundamental technologies incorporated into the Company's
products. The Company may 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
typically agrees to indemnify its customers for all 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
34
<PAGE> 35
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 acceptable 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, financial condition and results
of operations would be materially adversely affected.
EMPLOYEES
At March 31, 1996, Verilink had 157 full-time employees of whom 51 were
primarily engaged in research and development, 44 in manufacturing and quality
control, 35 in sales and marketing, 11 in field service and 16 in administration
and finance. None of the Company's employees is represented by a collective
bargaining agreement nor has the Company experienced any work stoppage. The
Company considers its relations with its employees to be good. During the third
quarter of fiscal 1996 the Company employed approximately 13 temporary and
contract employees. See "Risk Factors -- Dependence on Key Personnel" and
"Management -- Employment Agreements."
FACILITIES
The Company's headquarters and principal administrative, engineering and
manufacturing facility is located in a facility containing approximately 55,000
square feet located in San Jose, California. The Company leases this building
through April 2001 from a partnership which is comprised of Leigh S. Belden and
Steven C. Taylor. The Company believes this lease was made on terms that are no
less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company believes its current facility is suitable for and
adequate to support its present level of operations and believes that future
growth can be accommodated by leasing additional space near this facility. See
"Certain Transactions."
BACKLOG
Backlog includes all unshipped orders for which the Company has received a
firm purchase order. Orders for the Company's products are usually placed by
customers on an as-needed basis and the Company has typically been able to ship
these products within 30 days after the customer submits a firm purchase order.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of sales in any future period. The Company's backlog as of March
31, 1995 and March 31, 1996 was approximately $2.0 million and $2.7 million,
respectively. See "Risk Factors -- Fluctuations in Quarterly Operating Results."
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal actions. From
time to time, however, the Company may be subject to claims and lawsuits arising
in the normal course of business.
35
<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of April 20, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- --------------------------- ---- -------------------------------------------------
<S> <C> <C>
Leigh S. Belden............ 46 President, Chief Executive Officer and Director
Steven C. Taylor........... 50 Chief Technical Officer, Vice Chairman of the
Board
Timothy G. Conley.......... 47 Vice President, Finance and Chief Financial
Officer
Thomas E. Clark............ 53 Vice President, Engineering
James G. Regel............. 53 Vice President, Marketing
Robert F. Griffith......... 51 Vice President, Sales
Grace T. Griffin........... 51 Vice President, Human Resources
Edward C.Y. Ip............. 49 Vice President, Advanced Development
Henry L. Tinker............ 64 Vice President, Operations
Howard Oringer(1)(2)....... 54 Chairman of the Board
David L. Lyon(1)(2)........ 47 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Belden co-founded the Company and has served as its President, Chief
Executive Officer and Director since its inception in December 1982. From 1980
to 1982, Mr. Belden was Vice President of Marketing for Cushman Electronics, a
manufacturer of telephone central office and two-way radio test equipment.
Previously, he held various international and domestic sales and marketing
management positions for California Microwave. Mr. Belden received a B.S. in
Electrical Engineering from the University of California at Berkeley and an
M.B.A. from Santa Clara University.
Mr. Taylor co-founded the Company and has served as its Chief Technical
Officer since its inception in December 1982. In addition, Mr. Taylor served as
Chairman of the Board of Directors from the Company's inception until January
1996, at which time he became the Vice Chairman of the Board of Directors.
Previously, Mr. Taylor served as Chief Engineer of Digital Products for
Culbertson Industries and California Microwave. In 1980, Mr. Taylor formed
Telecommunications Consultants, Inc., a consulting firm engaged in the design
and support of digital and analog communications equipment.
Mr. Conley joined the Company in November 1989 as Vice President, Finance
and Chief Financial Officer. From February 1989 to November 1989 he served as
Controller of the Graphics Products Division of Sun Microsystems, and from
October 1983 to February 1989 he was Vice President, Finance and Secretary and
Treasurer of Qubix Graphics Systems, a supplier of automated technical
documentation systems. Mr. Conley received a B.S. in Accounting from Wisconsin
State University and is a certified public accountant.
Mr. Clark joined the Company in January 1996 as Vice President,
Engineering. From September 1994 to December 1995 Mr. Clark served as Vice
President of Engineering of Luxcom, Inc., a manufacturer of fiber optic
multiplex equipment, and from November 1991 to September 1994 he was Vice
President of Engineering of Larscom, Inc., a manufacturer of access products for
digital networks. In addition, Mr. Clark was a senior product manager of Tandem
Computers from September 1988 to November 1991. Mr. Clark received a B.S. in
Electrical Engineering from the University of California at Berkeley and an M.S.
in Electrical Engineering from Stanford University.
Mr. Regel joined the Company in November 1992 as Vice President, Sales and
Marketing. Mr. Regel's title was changed to Vice President, Marketing in June
1996. From June 1989 to October 1992, Mr. Regel served as Vice President of
National Sales for Network Equipment Technolo-
36
<PAGE> 37
gies, a telecommunications equipment manufacturer, from January 1989 to June
1989 he was the President and Chief Executive Officer of Instor Corporation, a
software company, and from January 1987 to January 1989 he was Director of
Operations for IBM/Rolm Corporation. Mr. Regel received a B.A. in Economics from
the University of California at Berkeley and an M.B.A. from Santa Clara
University.
Mr. Griffith joined the Company in June 1996 as Vice President of Sales.
From February 1994 to June 1996, Mr. Griffith served as Vice President of Sales
of Network Equipment Technologies, a telecommunications equipment manufacturer.
From November 1989 to February 1994, he was the Director of Sales for Northern
Telecom, Inc. and from September 1986 to November 1989, he was Director of Sales
for Siemens Communications Systems. Mr. Griffith received a B.A. in Business
Administration and an M.B.A. from Pepperdine University.
Ms. Griffin joined the Company in December 1986 as the Company's Personnel
Manager. From November 1989 to December 1990 she was the Director of Human
Resources, and since December 1990 she has served as Vice President, Human
Resources. Ms. Griffin received a B.S. in History from Westmont College and an
M.B.A. from the University of Phoenix.
Mr. Ip joined the Company in November 1993 as Vice President, Engineering
and has served as Vice President, Advanced Development since January 1996. From
January 1990 to October 1993, Mr. Ip co-founded and served as Vice President of
Engineering of T3 Plus Networking, a manufacturer of high bandwidth
multiplexers, and from April 1987 to December 1989 he was the Engineering
Manager of Catel Telecommunications, a manufacturer of fiber optic cable
transmission equipment. From April 1985 to April 1987 he was an Engineering
Manager at Granger Telettra, a manufacturer of telecommunications equipment. Mr.
Ip received a B.S. in Electrical Engineering from the University of Manitoba and
an M.S. in Electrical Engineering from the University of Waterloo.
Mr. Tinker joined the Company in May 1991 as Vice President, Operations.
From May 1990 to May 1991 he served as an Operations Consultant to the Company.
From May 1987 to May 1990, Mr. Tinker was Vice President of a business group of
Cipher Data Products, a tape drive manufacturer. Mr. Tinker received a B.S. in
Business Administration from the University of California at Los Angeles.
Mr. Oringer has been a Director of the Company since August 1987 and
Chairman of the Board of Directors since January 1996. In addition, he has been
the Managing Director of Communications Capital Group, a management consulting
firm, since November 1993. From February 1986 to November 1993 Mr. Oringer was
the President, Chief Executive Officer and Chairman of the Board of Directors of
Telesciences, a manufacturer of telecommunications equipment. Mr. Oringer
received a B.E. in Engineering from the Stevens Institute of Technology, an M.S.
in Electrical Engineering from the California Institute of Technology and an
M.B.A. from Santa Clara University.
Dr. Lyon became a Director of the Company in April 1996. In 1987, Dr. Lyon
co-founded Pacific Communications Services, Inc. (PCSI), which is now a wholly
owned subsidiary of Cirrus Logic, Inc. He presently serves as President of PCSI,
a manufacturer of wireless communications equipment for digital cellular, CDPD,
PCS and advanced paging services. Dr. Lyon received a Ph.D. in Electrical
Engineering from the Massachusetts Institute of Technology. Dr. Lyon currently
serves as a member of the Board of Directors of Cirrus Logic, Inc.
Currently all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Prior to the effectiveness of this offering, the Company's Amended and Restated
Certificate of Incorporation will be amended to divide the Board of Directors
into three classes, the members of which shall be nominated in connection with
and elected at the Company's next annual meeting. Initially, each class of
directors will consist of one or two directors, who will serve for a one, two or
three year period or until their successors are elected and qualified.
Thereafter, directors will serve staggered three year terms. See "Description of
Capital Stock -- Certain Charter Provisions."
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<PAGE> 38
Officers are elected by and serve at the discretion of the Board of
Directors. Other than Henry L. Tinker, who is the father-in-law of Leigh S.
Belden, there are no family relationships among the directors or officers of the
Company.
BOARD COMMITTEES
Audit Committee. The Audit Committee of the Board of Directors reviews the
results and scope of the annual audit and other services provided by the
Company's independent accountant, reviews and evaluates the Company's internal
audit and control functions, and monitors transactions between the Company and
its employees, officers and directors. Mr. Oringer and Dr. Lyon are the members
of the Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors administers the Amended and Restated 1993 Stock Option Plan and the
Employee Stock Purchase Plan and reviews and approves the compensation and
benefits for the Company's executive officers. Mr. Oringer and Dr. Lyon are the
members of the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee reviews and approves the compensation
and benefits for the Company's executive officers, administer the Company's
stock option plans and Employee Stock Purchase Plan and make recommendations to
the Board of Directors regarding such matters. The committee is currently
composed of Mr. Oringer and Dr. Lyon, neither of whom is an officer of the
Company. No interlocking relationship exists between any member of the Company's
Board of Directors or Compensation Committee and any member of the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
DIRECTOR COMPENSATION
The Company's independent directors receive a quarterly fee of $2,650, and
all its directors receive a fee of $1,600 per meeting for their services as
Board members and are also reimbursed for expenses incurred in connection with
attending Board and committee meetings.
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<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company whose aggregate cash compensation
exceeded $100,000 during the fiscal year ended June 30, 1995 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ -------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION
- ---------------------------------- -------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Leigh S. Belden................... $245,000 $ -- $80,000(2) -- $ 123,000(3)
President, Chief Executive
Officer and Director
Steven C. Taylor.................. 245,000 -- 39,000(2) -- 78,000(3)
Chief Technical Officer, Vice
Chairman of the Board of
Directors
James G. Regel.................... 150,000 50,000 -- -- 38,300(4)
Vice President, Sales and
Marketing
Henry L. Tinker................... 179,000 10,000 -- -- 27,300(4)
Vice President, Operations
Timothy G. Conley................. 130,000 20,000 -- -- 25,750(4)
Vice President, Finance
</TABLE>
- ---------------
(1) Includes bonuses earned in fiscal 1995 and paid in fiscal 1996; excludes
bonuses earned in fiscal 1994 which were paid in fiscal 1995.
(2) This represents an amount paid by the Company as reimbursement for the
payment of income taxes.
(3) This amount primarily represents board of directors' fees, life insurance
premiums, retirement benefits, reimbursement of medical expenses, and auto
lease and operating expenses, paid by the Company.
(4) This amount primarily represents auto lease and operating expenses and
reimbursement of medical expenses paid by the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements"), dated April 16, 1986, with each of Leigh S. Belden, President,
Chief Executive Officer and Director, and Steven C. Taylor, Chief Technical
Officer and Vice Chairman of the Board of Directors. Each Employment Agreement
provides that Mr. Belden and Mr. Taylor, as applicable, receives a yearly salary
and bonus in amounts to be determined by the Board of Directors, in its
discretion, and reimbursement for automobile operation expenses. Mr. Belden and
Mr. Taylor are also entitled to participate on the same basis as other officers
of the Company in any pension, profit sharing, retirement, insurance, medical
reimbursement or other employee benefit plan adopted by the Company; provided,
however, that there is no limit on the amount of any medical reimbursement to
Mr. Belden or Mr. Taylor.
Each Employment Agreement continues on a year to year basis unless
employment of either Mr. Belden or Mr. Taylor is terminated (i) by the Board of
Directors for cause at any time, or without cause upon 180 days' written notice;
(ii) due to legal disqualification from performing services for the Company;
(iii) upon mandatory retirement at the end of the fiscal year in which such
individual
39
<PAGE> 40
reaches the age of seventy; or (iv)due to disability. Upon termination of
employment without cause, the Company will hire the terminated individual as a
consultant for a period of one year following termination. During the
consultancy period, the terminated individual is required to be available at
least two full working days per month and agrees not to compete with or engage
in any activity that conflicts with the business of the Company in return for
which the terminated individual will be entitled to receive a monthly salary,
bonus and benefits equal to the amount that he received during the fiscal year
of the Company immediately preceding his termination of employment. If either
Mr. Belden or Mr. Taylor is terminated for any other reason, the Company has the
option, but not the obligation, to hire such individual as a consultant upon the
same terms and conditions described above.
STOCK PLANS
Amended and Restated 1993 Stock Option Plan
The Company's Amended and Restated 1993 Stock Option Plan (the "1993 Plan")
was initially approved by the Board of Directors in March 1993 and by the
stockholders in November 1993. The purpose of the 1993 Plan is to create
additional incentives for the Company's employees (including employees of any
subsidiaries of the Company) and others who perform substantial services to the
Company to promote the financial success and progress of the Company by
providing an opportunity to purchase shares of the Company's Common Stock
pursuant to the exercise of options granted under the 1993 Plan. The Company may
grant options that qualify as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options. Incentive stock options may be granted to employees (including officers
and directors who are employees) of the Company, and employees who hold certain
outstanding options issued under the Company's 1983 Stock Option Plan and 1989
Directors Stock Option Plan (the "Prior Plans"), both of which Prior Plans have
been terminated. Nonqualified stock options may be granted to employees,
officers, directors, independent contractors and consultants of the Company and
holders of certain outstanding options issued under the Prior Plans. In April
1996, an additional 500,000 shares of Common Stock were reserved for issuance
under the 1993 Plan making the total number of shares authorized in the 1993
Plan 3,300,000, of which, at April 30, 1996, 881,458 were available for future
grant.
In April 1996, the 1993 Plan was amended to provide for automatic
nonqualified option grants of 30,000 shares ("Automatic Grants") to Directors
who are not officers of the Company ("Non-Employee Directors") upon each
Non-Employee Director's election and re-election to the Board of Directors
following the closing of the offering. Automatic grants will vest in equal
annual amounts over a three-year period following the date of grant.
Non-Employee Directors who are elected between annual meetings will receive a
ratable Automatic Grant. The exercise price of options granted to Non-Employee
Directors will be the fair market value on the date of grant. Non-Employee
Directors may not receive grants under the 1993 Plan other than Automatic
Grants.
The Board of Directors or a committee designated by the Board of Directors
is authorized to administer the 1993 Plan in a manner that complies with Rule
16b-3 under the Securities and Exchange Act of 1934, as amended (the "Exchange
Act"). Currently, the 1993 Plan is being administered by the Board of Directors,
which determines which eligible individuals are granted options and the terms of
such options, including the exercise price, number of shares subject to the
option and the vesting and exercisability thereof; provided, the maximum term of
an incentive stock option granted under the 1993 Plan may not exceed 10 years.
The exercise price of an incentive stock option granted under the 1993 Plan
must equal at least 100% of the fair market value of the subject stock on the
grant date and the exercise price of all nonqualified stock options must equal
at least 85% of the fair market value of the subject stock on the grant date.
With respect to any participant who owns more than 10% of the combined voting
power of all classes of stock of the Company, the exercise price of any option
granted must equal at least 110% of the fair market value on the grant date and,
if the option granted is an incentive stock option, the
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<PAGE> 41
maximum term of such incentive stock option may not exceed 5 years. The
aggregate fair market value on the date of grant of the stock for which
incentive stock options are exercisable for the first time by an employee of the
Company or an affiliate during any calendar year may not exceed $100,000.
Nonqualified stock options and incentive stock options granted under the
1993 Plan are immediately exercisable; however, the shares of Common Stock
issued upon exercise of such options typically vest in the optionee at the rate
of 25% on the date one year after the grant date, and 1/48th each month
thereafter, provided the optionee remains continuously employed by the Company.
Upon cessation of employment for any reason, the Company has the option to
repurchase all, but not some, of any unvested shares of Common Stock issued upon
exercise of an option under the 1993 Plan, within 60 days following the date of
cessation of employment at a repurchase price equal to the exercise price of
such shares.
Nonqualified and incentive stock options granted under the 1993 Plan are
not transferable other than by will or the laws of descent or distribution, and
each option that has not yet expired is exercisable only by the recipient during
such person's lifetime, or for 12 months thereafter by the person or persons to
whom the option passes by will or the laws of descent or distribution. The 1993
Plan may be amended at any time by the Board of Directors, although certain
amendments require shareholder approval. The 1993 Plan will terminate on March
1, 2003 unless earlier terminated by the Board of Directors.
Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and stockholders in April 1996, to be
effective upon the date of this Prospectus. Prior to the closing of this
Offering a total of 300,000 shares of Common Stock will be reserved for issuance
under the Purchase Plan. The Purchase Plan is designed to offer employees the
opportunity to purchase Common Stock through payroll deductions at a discounted
price and with favorable income tax consequences under section 423 of the Code.
The Purchase Plan provides for two overlapping purchase periods of up to 24
months with the first purchase period beginning on the date of this Prospectus
and ending on June 28, 1998, and an additional purchase period beginning each
subsequent January 1 and July 1, following the date of this Prospectus.
The Purchase Plan will be administered by the Compensation Committee of the
Board of Directors, which has the authority to change the commencement date of
future purchase periods. All individuals employed by the Company (including
employees of any subsidiary of the Company) on the commencement date of a
purchase period are eligible to participate in the Purchase Plan if they are
employed by the Company for at least 20 hours per week and more than five months
per calendar year, provided that any individual who holds five percent or more
of the Company's Common Stock (directly or upon the exercise of options) is not
eligible to participate. The Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions, which may not exceed 10% of an
employee's total compensation, including sales commissions (or, if lower,
$25,000 in any calendar year), at a price equal to 85% of the lower of the
closing sale price for the Common Stock reported on the Nasdaq National Market
at the beginning of the purchase period and the end of each respective purchase
period; participation ends automatically upon termination of employment with the
Company. Unless terminated sooner, the Purchase Plan will terminate ten years
from the date of this Prospectus.
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<PAGE> 42
AGGREGATE OPTION EXERCISES IN FISCAL 1995 AND YEAR-END OPTION VALUES.
The following table sets forth certain information with respect to stock
options held by the Named Executive Officers during the fiscal year ended June
30, 1995. No options were exercised by the Named Executive Officers during the
fiscal year ended June 30, 1995.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCIZED OPTIONS IN-THE-MONEY
SHARES ACQUIRED VALUE AT JUNE 30, 1995(#) OPTIONS AT JUNE 30, 1995(1)
NAME ON EXERCISE(#) RECEIVED ----------------------------- -----------------------------
- ---------------------- ---------------- --------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Leigh S. Belden....... -- -- -- -- -- --
Steven C. Taylor...... -- -- -- -- -- --
James G. Regel........ -- -- 160,000 -- $ 48,000 --
Henry L. Tinker....... -- -- 160,000 -- 48,000 --
Timothy G. Conley..... -- -- 180,000 -- 54,000 --
</TABLE>
- ---------------
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options and the fair market value for
the Company's Common Stock of $.80 per share as of June 30, 1995, as
determined by the Company's Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification agreements with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. The Company has entered into
indemnification agreements with each of its directors and executive officers and
intends to obtain a policy of directors' and officers' liability insurance that
insures such persons against the cost of defense, settlement or payment of a
judgment under certain circumstances.
In addition, the Company's Amended and Restated Certificate of
Incorporation provides that the liability of the Company's directors for
monetary damages shall be eliminated to the fullest extent permissible under
Delaware law. This provision in the Amended and Restated Certificate of
Incorporation does not eliminate a director's duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available. Each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Company, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Company or its
stockholders, for any transaction from which the director derived an improper
personal benefit, for improper transactions between the director and the Company
and for improper distributions to stockholders and loans to directors and
officers. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
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<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
31, 1996 as adjusted to reflect the sale of shares offered hereby, by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each Named
Executive Officer (see "Management -- Executive Compensation"), (iv) each
Selling Stockholder and (v) all current executive officers and directors as a
group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO OWNED
OFFERING(1) AFTER OFFERING(1)
5% BENEFICIAL OWNERS, DIRECTORS ------------------ NUMBER OF -------------------
& NAMED EXECUTIVE OFFICERS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
- ---------------------------------------------------- -------- ------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
Leigh S. Belden(2).................................. 3,643,462 34.5% 375,392 3,268,070 26.0%
Steven C. Taylor(3)................................. 3,604,106 34.1% 375,392 3,228,714 25.7%
TA Associates, Inc.(4).............................. 1,009,356 9.6% 302,806 706,550 5.6%
Beltech, Inc.(5).................................... 1,000,000 9.5% -- 1,000,000 8.0%
Oliver Corporation(6)............................... 800,000 7.6% -- 800,000 6.4%
Howard Oringer...................................... 206,000 1.9% -- 206,000 1.6%
Timothy G. Conley................................... 180,000 1.7% -- 180,000 1.4%
Pantheon U.S.A. Fund Ltd. .......................... 167,228 1.6% 167,228 -- --
James G. Regel...................................... 160,000 1.5% -- 160,000 1.3%
Henry L. Tinker..................................... 160,000 1.5% -- 160,000 1.3%
CHAP L.P. .......................................... 151,234 1.4% 151,234 -- --
George Stamatis(7).................................. 114,520 1.1% 30,000 84,520 *
Sofilec S.A. ....................................... 106,400 1.0% 106,400 -- --
VCFA Investment II Limited.......................... 83,610 * 83,610 -- --
DESIFTA............................................. 73,486 * 22,046 51,440 *
VCFA Investment III Limited......................... 53,108 * 53,108 -- --
VCFA Venture Partners L.P. ......................... 30,502 * 30,502 -- --
Meridian Management Limited......................... 7,608 * 2,282 5,326 *
David L. Lyon....................................... -- -- -- -- --
All executive officers and directors as a group (9
persons)(8)....................................... 8,293,568 77.0% 750,784 7,542,784 59.1%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of March 31, 1996 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person. To the
Company's knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set
forth opposite such person's name. Except as otherwise indicated, the
address of each of the persons in this table is as follows: c/o Verilink
Corporation, 145 Baytech Drive, San Jose, California 95134.
(2) Includes (a) 1,719,080 shares owned by Leigh S. Belden & Deborah Tinker
Belden, or their successors, Trustees U/A Dated 12/09/88; (b) 2,050 shares
owned by Baytech Associates, a California general partnership in which Mr.
Belden has a 50% general partner interest; (c) 720,000 shares owed by trusts
for minor children of Mr. Belden; (d) 52,332 shares owned by members of Mr.
Belden's family for which Mr. Belden has a verbal agreement granting him the
right to vote the shares; and (e) 1,000,000 shares owned by Beltech
Corporation, a Nevada corporation of which Mr. Belden is a Director and
President and the Leigh S. Belden and Deborah Tinker Belden Trust U/A Dated
12/09/88 is the sole shareholder.
(3) Includes (a) 2,118,600 shares owned by Steven C. Taylor and Suzanne E.
Taylor, Trustees of Steven and Suzanne Taylor Living Trust Agreement Dated
June 2, 1988; (b) 2,050 shares owned by Baytech Associates, a California
general partnership interest in which Mr. Taylor has a 50% general partner
interest; (c) 800,000 shares owned by the Oliver Corporation, a Nevada
corporation of which Mr. Taylor is a Director and President and the Steven
and Suzanne Taylor Living Trust Agreement Dated June 2, 1988 is the sole
shareholder; (d) 683,456 shares owned by Mr. Taylor's family for which Mr.
Taylor has a verbal agreement granting him the right to vote the shares.
(4) TA Associates, Inc., High Street Tower, Suite 2500, 125 High Street, Boston,
Massachusetts 02210. Includes (a) 16,848 shares owned by TA Investors; (b)
812,768 shares owned by Advent V Ltd. Partnership; (c) 138,628 shares owned
by Advent Industrial Ltd. Partnership; (d) 11,640 shares owned by TA
Associates Atlantic Ltd. Partnership; and (e) 29,472 shares owned by TA
Associates V Ltd. Partnership.
(5) Beltech, Inc., 889 Alder Avenue, Suite 200, Incline Village, NV 89451.
(6) Oliver Corporation, 889 Alder Avenue, Suite 200, Incline Village, NV 89451.
(7) George Stamatis, 166 Tascack Road, Pearl River, NY 10965.
(8) Includes options to purchase 200,000 shares exercisable within 60 days of
March 31, 1996.
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<PAGE> 44
CERTAIN TRANSACTIONS
In September 1993, the Company and Leigh S. Belden, President, Chief
Executive Officer and Director of the Company, entered into a Common Stock
Purchase Agreement providing for the purchase by Mr. Belden of 1,600,000 shares
of the Company's Common Stock in exchange for a promissory note in the amount of
$800,000 issued by Mr. Belden in favor of the Company. Mr. Belden's promissory
note bears interest at the annual rate of 5%, with principal and accrued
interest payable in full on or before September 16, 1998, and was originally
secured by 2,900,000 shares, of Common Stock of the Company held by Leigh S.
Belden and Deborah Tinker Belden, Trustees U/A Dated December 9, 1988. Recourse
under Mr. Belden's promissory note was originally limited to the 2,900,000
pledged shares, and Mr. Belden is not personally liable under the promissory
note. In December 1995, the Company approved the transfer, free of any security
interest, of 1,000,000 shares of Common Stock held by Leigh S. Belden and
Deborah Tinker Belden, Trustees U/A Dated December 9, 1988, to Beltech, Inc., a
Nevada corporation of which the Leigh S. Belden and Deborah Tinker Belden Trust
U/A Dated 12/09/88 is the sole shareholder; the 1,000,000 shares transferred to
Beltech, Inc. free of any security interest had been subject to the Company's
security interest under Mr. Belden's promissory note. In addition, as of March
31, 1996, Mr. Belden and Steven C. Taylor, Chief Technical Officer and Director
of the Company, individually owe the Company $577,000 and $152,000,
respectively, for personal advances beginning in November 1994, which amounts
are intended to be repaid in connection with their sales of shares in this
offering. These advances do not bear interest and are due on demand.
In November 1995 and January 1996, Henry L. Tinker and James G. Regel each
issued a promissory note in the amount of $80,000 in favor of the Company to
finance their respective exercises of options to purchase 160,000 shares of
Common Stock of the Company, at an exercise price of $.50 per share, under the
1993 Stock Option Plan. Mr. Tinker's promissory note bears interest at the
annual rate of 5%, with principal and accrued interest payable in full on or
before November 16, 2000, and is secured by shares of Common Stock of the
Company and real property owned by Mr. Tinker. Mr. Regel's promissory note also
bears interest at an annual rate of 5%, with principal and accrued interest
payable in full on or before January 1, 2001, and is secured by shares of Common
Stock of the Company and an investment account owned by Mr. Regel. Additionally,
in November 1995 and January 1996, Timothy G. Conley issued promissory notes in
the amounts of $10,000 and $80,000, respectively, to finance his exercises of
options to purchase 20,000 and 160,000 shares of Common Stock of the Company, at
an exercise price of $.50 per share, pursuant to the 1993 Stock Option Plan. Mr.
Conley's promissory notes bear interest at an annual rate of 5% and are payable
in full on or before November 16, 2000 and January 2, 2001, respectively, and
are secured by shares of Common Stock of the Company and the residence of Mr.
Conley.
In July 1995, Mr. Conley and Mr. Regel each entered into identical
Executive Incentive Compensation Agreements with the Company, providing for
performance incentive payment of approximately $200,000, to each of Mr. Conley
and Mr. Regel based upon the attainment by the Company of an operating profit of
at least $500,000 in fiscal 1996. Such payment is due on the earlier of the
completion of this offering or August 1996. This agreement terminates upon the
completion of this offering, all amounts have been accrued as of March 31, 1996,
and all accrued amounts are payable no later than August 1996.
In January 1996, Howard Oringer, Chairman of the Company's Board of
Directors, issued the Company a promissory note in the amount of $100,000 to
finance his exercise of options to purchase 200,000 shares of Common Stock of
the Company at an exercise price of $0.50 per share pursuant to the 1993 Plan.
Such promissory note bears interest at an annual rate of 5% and is secured by
the shares acquired and, up to $50,000, by certain real property owned by Mr.
Oringer. In fiscal 1994, 1995 and for the nine months ended March 31, 1996, Mr.
Oringer received $60,000, $120,000, and $90,000, respectively, in his capacity
as consultant to the Company. In addition, Mr. Oringer received reimbursement of
Company-related expenses in the amounts of $19,300 and $12,300 for fiscal 1995
and the nine months ended March 31, 1996. The Company currently pays a fee of
$10,000 per month to
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<PAGE> 45
Mr. Oringer pursuant to an oral consulting agreement, under which Mr. Oringer
provides part-time consulting services to the Company in the areas of general
business advice, strategic planning, sales and marketing strategy, and financial
advisory services.
The Company leases its facility located at 145 Baytech Drive in San Jose,
California from Baytech Associates, a California general partnership in which
Leigh S. Belden and Steven C. Taylor are the two partners, each with a fifty
percent partnership interest. The Lease Agreement between the Company and
Baytech Associates was entered into in February 1986 and expires in April 2001.
The Company believes this lease was made on terms that are no less favorable to
the Company than would have been obtained from unaffiliated third parties. The
Company paid Baytech Associates a total of $768,000, $792,000 and $816,000 in
lease payments in fiscal 1993, 1994 and 1995, respectively, and paid $620,000
during the nine months ended March 31, 1996.
DESCRIPTION OF CAPITAL STOCK
Prior to the closing of this offering, the Company will be authorized to
issue up to 40,000,000 shares of Common Stock, $.01 par value per share, and
1,000,000 shares of Preferred Stock, $.01 par value per share.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Amended and Restated
Certificate of Incorporation which is included as an exhibit to the Registration
Statement of which this Prospectus is a part and by the provisions of applicable
law.
COMMON STOCK
As of March 31, 1996, there were 10,566,104 shares of Common Stock
outstanding that were held of record by approximately 111 stockholders. There
will be 12,566,104 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and no exercise of outstanding option)
after giving effect to the sale of Common Stock offered to the public by the
Company hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and are entitled
to cumulate their votes for elections of Directors. Subject to preferences that
may be granted to any then outstanding Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor as well as any
distributions to the stockholders. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets of the Company remaining after
payment of liabilities and the liquidation preference of any then outstanding
Preferred Stock. Holders of Common Stock have no preemptive or other
subscription or conversion rights. There are no redemption or sinking fund
provisions applicable to the Common Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue 2,000 shares of Preferred Stock, $.01 par value per share, in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof. The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares then outstanding) by
the affirmative vote of the holders of a majority of the Common Stock.
Currently, there are no outstanding shares of Preferred Stock.
Effective upon the closing of this offering and pursuant to the Company's
Amended and Restated Certificate of Incorporation, the Board of Directors will
have the authority, without further action by the stockholders, to issue up to
1,000,000 shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights,
45
<PAGE> 46
voting rights, terms of redemption, liquidation preferences, sinking fund terms
and the number of shares constituting any series or the designation of such
series, any or all of which may be greater than the rights of Common Stock,
without any further vote or action by stockholders. The issuance of Preferred
Stock could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
Pursuant to the Common Stock and Option Purchase Agreement, dated as of
June 27, 1985 (the "Purchase Agreement"), between the Company and the holders
("Holders") of approximately 763,316 shares of Common Stock after the completion
of this offering (the "Registrable Securities"), the Holders are entitled to
certain rights with respect to the registration of such shares under the
Securities Act of 1933, as amended (the "Securities Act"). The Holders include,
but are not limited to, certain funds affiliated with TA Associates (the
"Purchasers"). If the Company proposes to register any of its securities under
the Securities Act, either for its own account or the account of other security
holders, the Company is required to notify the Holders and to use its best
efforts to effect the registration, and the Holders are entitled to include at
the Company's expense their Registrable Securities in such registration, subject
to certain conditions and limitations. In addition, at any time or from time to
time, Holders of at least 30% of the Registrable Securities may require the
Company to file a registration statement under the Securities Act at the
Company's expense, covering an offering having an aggregate offering price of
not less than $5,000,000 and an offering price per share of not less than
$10.00, and the Company is required to use its best efforts to effect the
registration, subject to certain conditions and limitations. All shares of
Common Stock to be disposed of by the Holders incidental to a registration
proposed by the Company or pursuant to a demand for registration by a Holder or
Holders shall be on a pro rata basis in accordance with the Holders' respective
holdings. Further, the Holders of such Registrable Securities may require the
Company to file additional registration statements on Form S-3 when use of such
form becomes available to the Company, subject to certain conditions and
limitations. All expenses incurred in connection with the Form S-3 Registration
or incidental to a registration proposed by the Company will be borne by the
Company except for underwriting discounts and selling commissions relating to
the securities, if any, registered by the Holders, which expenses shall be borne
by such Holders.
CERTAIN CHARTER PROVISIONS
Effective upon the closing of this offering and subject to approval of the
stockholders, the Company's Certificate of Incorporation will be amended to
provide that the Board of Directors will be divided into three classes of
directors with each class serving a staggered three-year term. This system of
electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of the Company and may maintain
the incumbency of the Board of Directors, as it generally makes it more
difficult for stockholders to replace a majority of the directors. The Company's
Bylaws will be amended to eliminate cumulative voting and shall provide that all
stockholder action must be effected at a duly called meeting of stockholders and
not by a consent in writing; the Bylaws, as amended, will provide that only the
Company's Chief Executive officer or a majority of the members of the Company's
Board of Directors may call a special meeting of stockholders. These and other
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. The Amended and Restated
Certificate of Incorporation and Bylaws, as amended, will require approval by
holders of 66 2/3% or more of the outstanding Common Stock to further amend any
of these provisions. See "Risk Factors -- Control of Company; Antitakeover
Effects of Certain Charter Provisions."
46
<PAGE> 47
LISTING
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol VRLK.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock of the Company is
Boston Equiserve. Its address is 150 Royall Street, Canton, Massachusetts,
02021, and its telephone number is (617) 575-2000.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,566,104 shares
of Common Stock outstanding based on shares outstanding as of March 31, 1996. Of
these shares, the 3,700,000 shares sold in this offering will be freely
transferable without restriction under the Securities Act, unless they are held
by "affiliates" of the Company as that term is used under the Securities Act and
the Regulations promulgated thereunder.
The remaining 8,866,104 shares held by officers, directors, employees,
consultants and other stockholders of the Company were sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act
and are restricted securities within the meaning of Rule 144 under the
Securities Act. Approximately 50,672 of these shares of Common Stock will be
eligible for sale in the public market immediately upon the effective date of
the Registration Statement of which this Prospectus is a part (the "Effective
Date") in reliance on Rule 144(k) under the Securities Act. Beginning 90 days
after the Effective Date, virtually none of these shares will become eligible
for sale subject to the provisions of Rule 144 and Rule 701. Beginning 180 days
after the Effective Date, approximately 2,671,758 additional shares will become
eligible for sale subject to the provisions of Rule 144 or Rule 701 upon the
expiration of agreements not to sell such shares entered into between the
Underwriters and such stockholders. Beginning 270 days after the Effective Date,
approximately 4,812,838 additional shares will become eligible for sale subject
to the provisions of Rule 144 or Rule 701 upon the expiration of agreement not
to sell such shares entered into between the Underwriters and such stockholders.
Any shares subject to such agreement may be released at any time without notice
by Hambrecht & Quist LLC. In addition, outstanding options to purchase
approximately 4,310 shares will be vested and exercisable, and the shares
issuable upon exercise thereof eligible for sale, 90 days following the
Effective Date, and options to purchase an additional approximately 318,014
shares will be vested and exercisable, and the shares issuable upon exercise
thereof eligible for sale 180 days following the Effective Date, upon expiration
of certain lock-up agreements. In addition, the Commission has proposed
revisions to Rule 144 and Rule 144(k), the effect of which would be to shorten
the holding period under Rule 144 from two years to one year and to shorten the
holding period under Rule 144(k) from three years to two years. If enacted,
these proposed revisions would increase, potentially substantially, the number
of shares that would be available for sale in the public market 180 and 270 days
after the Effective Date. Any shares subject to lock-up agreements may be
released at any time without notice by Hambrecht & Quist LLC. See "Risk
Factors -- Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least two years is entitled to sell, within any
three-month period commencing 90 days after the Effective Date, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock (approximately 125,661 shares immediately after this offering)
or (ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale, subject to the filing of a Form 144 with
respect to such sale and certain other limitations and restrictions. In
addition, a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least three years,
47
<PAGE> 48
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares prior to the Effective Date or who holds vested
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144s holding-period restrictions, in each case commencing 90
days after the Effective Date. However, the Company and certain officers,
directors and other stockholders of the Company have agreed not to sell or
otherwise dispose of any shares of Common Stock of the Company for the 180-day
period after the Effective Date without the prior written consent of Hambrecht &
Quist LLC. See "Underwriting."
As soon as practicable after the Effective Date and on the Effective Date,
the Company intends to file registration statements on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
the 1993 Plan and the Stock Purchase Plan, respectively, thus permitting the
resale of such shares by non-affiliates in the public market without restriction
under the Securities Act. Such registration statements will become effective
immediately upon filing.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts in the open market may
adversely affect the market price of the Common Stock offered hereby.
48
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives Hambrecht & Quist LLC
and Oppenheimer & Co., Inc., have severally agreed to purchase from the Company
and the Selling Stockholders the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Hambrecht & Quist LLC............................................. 970,000
Oppenheimer & Co., Inc. .......................................... 970,000
Bear, Stearns & Co., Inc. ........................................ 110,000
Alex. Brown & Sons Incorporated................................... 110,000
Cowen & Company................................................... 110,000
Lazard Freres & Co. LLC........................................... 110,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 110,000
Montgomery Securities............................................. 110,000
J.P. Morgan Securities Inc. ...................................... 110,000
Morgan Stanley & Co. Incorporated................................. 110,000
Robertson, Stephens & Company LLC................................. 110,000
Smith Barney Inc. ................................................ 110,000
UBS Securities LLC................................................ 110,000
Adams, Harkness & Hill, Inc. ..................................... 50,000
Allen & Company Incorporated...................................... 50,000
Furman Selz LLC................................................... 50,000
Needham & Company, Inc. .......................................... 50,000
Punk, Ziegel & Knoell............................................. 50,000
Raymond James & Associates, Inc. ................................. 50,000
Soundview Financial Group, Inc. .................................. 50,000
Sutro & Co. Incorporated.......................................... 50,000
Van Kasper & Company.............................................. 50,000
Wessels, Arnold & Henderson, L.L.C. .............................. 50,000
Wheat First Butcher Singer........................................ 50,000
--------
Total............................................................. 3,700,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent accountants. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.62 per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $0.10 per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 555,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm
49
<PAGE> 50
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the above table
bears to the total number of shares of Common Stock offered hereby. The Company
will be obligated, pursuant to the option, to sell shares to the Underwriters to
the extent the option is exercised. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of shares of
Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Certain Selling Stockholders, and certain other stockholders of the
Company, including certain executive officers and directors, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock owned by them during a period of 180
days from the effective date of the registration statement relating to this
Prospectus. Upon the expiration of such 180-day period, approximately 2,722,430
shares will be eligible for resale in accordance with Rule 144 or Rule 701.
Certain other Selling Stockholders, including the remaining executive officers
and directors have agreed that they will not, without the prior written consent
of Hambrecht & Quist LLC, offer, sell, or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them during a period of 270 days from the effective date of the registration
statement relating to this Prospectus. Upon the expiration of such 270-day
period, an additional 4,812,838 shares will become eligible for resale in
accordance with Rule 144 or Rule 701. The Company has agreed that it will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or Securities exchangeable for or convertible into shares
of Common Stock during the 180 day period except that the Company may grant
additional options under its stock option plans, provided that, without the
prior written consent of Hambrecht & Quist LLC, such additional options shall
not be exercisable during such period.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors considered in determining the initial public
offering price are prevailing market and economic conditions, revenues and
earnings of the Company, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morrison & Foerster LLP, Palo Alto, California. Stephen M. Tennis, a
partner of Morrison & Foerster LLP, owns 100,000 shares of Common Stock in the
Company. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
50
<PAGE> 51
EXPERTS
The consolidated financial statements of the Company as of June 30, 1994
and 1995 and March 31, 1996 and for each of the three years in the period ended
June 30, 1995 and for the nine months ended March 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the North Western Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, NY 10048, and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission.
51
<PAGE> 52
GLOSSARY OF TERMS
<TABLE>
<S> <C>
Asynchronous Transfer Mode (ATM) A fixed length 53-byte packet-based transmission
technology that may be used to transmit data, voice and
video traffic; ATM utilizes cell switching.
Automatic Protection Switching Automatic Protection Switching provides intelligent
backup for end-user data and voice traffic by
automatically switching to backup circuits when primary
circuits fail.
Cell switching The receipt of fixed length data packets, called cells,
from one or more inputs and subsequent transmission onto
an outgoing circuit based upon address information
contained in the cell. ATM is an example of cell
switching.
Cellular Digital Packet Data (CDPD) A method of transmitting data over analog cellular
telephone networks.
Channel Bank A multiplexer that puts many slow speed voice or data
conversations onto one high speed link and controls the
flow of the conversations.
Channel Service Unit (CSU) A device that terminates a digital circuit, such as a T1
line. A CSU performs certain line conditioning functions
and ensures network compliance in accordance with rules
of the Federal Communications Commission.
Code Division Multiple Access An advanced form of digital cellular phone access
(CDMA) service which provides greater call handling capacity
than more conventional technology.
D4 Channel Banks An interface between a T1 carrier service and a local
analog device, such as a telephone or data set.
Dataphone Digital Service (DDS) A private line digital service with transmission speeds
of up to 56 Kbps.
Digital Access Cross Connect A digital switching device that connects one or more
channels from an incoming digital line and to one or
more channels on outgoing digital lines.
DS3 Telecommunications lines which operate in North America
at 44.736 Mbps.
Digital Signal Level Zero A/Digital Two techniques used to carry low-speed digital traffic
Signal Level Zero B (DS0A/DS0B) in one 64 Kbph data channel.
E1 European telecommunications lines that operate at speeds
of 2.048 Mbps, comparable to T1 lines in the United
States.
E1A530 A standard for physical interface connectors using a
25-pin connector.
E3 European telecommunications lines that operate at speeds
of 34.368 Mbps.
</TABLE>
52
<PAGE> 53
<TABLE>
<S> <C>
Extended Superframe Format (ESF) A T1 frame format technology used in WANs that groups
together 24 frames, or data transmission units and
provides performance monitoring capabilities.
Fractional T1 Telecommunications lines which operate in North America
at speeds between 56 Kbps to 1.544 Mbps.
Fractional T3 Telecommunications lines which operate in North America
at speeds of 1.544 Mbps to under 44.736 Mbps.
Frame Relay A variable length packet-based transmission technology
that may be used to transmit data at speeds up to 2
Mbps.
High speed serial interface A standard for a serial link, up to 52 Mbps over WAN
lines.
In-band Management Capability The ability of access equipment to be managed from a
remote site by using or reserving a portion of the
circuit bandwidth used to carry normal data and voice
traffic.
Integrated Services Digital Network An internationally accepted standard for voice, data and
(ISDN) signaling that makes all transmission circuits
end-to-end digital and defines a standard out-of-band
signaling system.
Integrated Services Digital Network A T1 or E1 circuit used to carry 23 or 30 ISDN calls,
Primary Rate Interface (ISDN-PRI) respectively. In ISDN-PRI, a single channel is used for
the call setup and tear-down signaling for calls placed
on all of the other channels in the T1 or E1 circuit.
Inverse Multiplexer A device that breaks down high speed data from a single
source for transmission over multiple lower speed WAN
lines.
Kbps Thousand bits per second.
Local Area Networks (LANs) A type of high-speed data communications arrangement in
which multiple computer and related products in an
office or campus environment are connected by means of a
standard transmission medium (typically coaxial cable,
twisted-pair wire or optical fiber).
Mbps Million bits per second.
Mission-critical applications Applications essential to success of an organization.
Multiplexing The combining of multiple data channels onto a single
transmission medium.
Packet Switching A data transmission technique whereby user information
is segmented and routed in discrete data envelopes
called packets, each with its own appended control
information for routing, sequencing and error checking.
Packet switching allows a communications channel to be
shared by many users, each using the circuit only for
the time required to transmit a single packet.
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C>
Personal Communications Service A telecommunications service similar to ordinary
(PCS) cellular service that uses lower-powered and
higher-frequency digital transmission technology
Private Branch Exchange (PBX) A telephone switch located on a customer's premises that
primarily establishes circuits over telephone lines
between individual users and the switched telephone
network. A PBX typically also provides switching within
a customer's premises and usually offers numerous other
enhanced features such as least-cost routing and
call-detail recording.
RBOC Regional Bell Operating Company
RS-449 A standard for physical interface connectors used for
transmission rates of up to 2 Mbps.
Simple Network Management Protocol A standard protocol that gathers management information
(SNMP) from network devices and provides a means to set and
monitor configuration parameters.
Subrate Low-speed digital traffic that runs at a rate of less
than 64 Kbps.
Switched Multimegabit Data Service A fixed length 53-byte packet-based transmission
(SMDS) technology that may be used to transmit data at speeds
up to 45 Mbps.
T1 Telecommunications lines that operate in North America
at speeds of 1.544 Mbps.
T3 Telecommunications lines which operate in North America
at speeds of 44.736 Mbps.
User-Defined Protection Groups The ability of end-users of an Automatic Protection
Switch to define how protected circuits are grouped,
e.g., 1X1 or 1X5 (one for one or one for five). A 1X1
protection group means that one circuit will protect or
backup one other circuit, while a 1X5 protection group
means that one circuit will protect or backup five other
circuits.
V.35 A standard for interface between a network access device
and a packet network for transmission rates above 19.2
Kbps.
Wide Area Network (WAN) A network that extends beyond the distance that can be
accommodated by local cabling methods. A WAN typically
utilizes public carrier services to connect sites, which
may span a city, state, country or world.
</TABLE>
54
<PAGE> 55
VERILINK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of June 30, 1994 and 1995 and March 31, 1996........... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1993, 1994 and 1995
and for the Nine Months Ended March 31, 1995 (unaudited) and 1996................... F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and 1995
and for the Nine Months Ended March 31, 1995 (unaudited) and 1996................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1993,
1994
and 1995 and for the Nine Months Ended March 31, 1996............................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Verilink Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Verilink Corporation and its subsidiary at June 30, 1994 and 1995
and March 31, 1996, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1995 and the nine months
ended March 31, 1996, 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.
PRICE WATERHOUSE LLP
San Jose, California
April 23, 1996
F-2
<PAGE> 57
VERILINK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 6,161 $ 3,243 $ 3,652
Accounts receivable, net of allowance of $76 at each date... 2,532 3,913 4,253
Inventories................................................. 3,129 2,720 3,474
Deferred tax assets......................................... 545 411 1,112
Other current assets........................................ 860 592 909
------- ------- -------
Total current assets................................ 13,227 10,879 13,400
Property and equipment, net................................... 1,613 1,418 1,385
Deferred tax assets........................................... 114 248 611
Other assets.................................................. 75 72 75
------- ------- -------
$15,029 $12,617 $15,471
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,539 $ 1,303 $ 1,178
Accrued expenses............................................ 6,085 3,440 3,802
Income taxes payable........................................ 87 269 1,029
Current portion of long-term debt........................... 158 172 44
------- ------- -------
Total current liabilities........................... 7,869 5,184 6,053
------- ------- -------
Long-term debt, net of current portion........................ 172 -- --
------- ------- -------
Commitments (Note 9)
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding............. -- -- --
Common Stock, $0.01 par value; 40,000,000 shares authorized;
9,518,952, 9,519,512 and 10,566,104 shares issued and
outstanding.............................................. 95 95 106
Additional paid-in capital.................................. 3,894 3,894 5,632
Notes receivable from stockholders.......................... (850) (850) (1,427)
Treasury stock; 3,352,710 shares of Common Stock at cost at
each date................................................ (7,320) (7,320) (7,320)
Deferred compensation related to stock options.............. -- -- (873)
Retained earnings........................................... 11,169 11,614 13,300
------- ------- -------
Total stockholders' equity.......................... 6,988 7,433 9,418
------- ------- -------
$15,029 $12,617 $15,471
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 58
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------- ---------------------
1993 1994 1995 1996
------- ------- ------- 1995 -------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales........................................ $28,007 $36,533 $31,447 $22,753 $28,678
Cost of sales................................ 16,120 18,886 16,827 12,361 14,070
------- ------- ------- ------- -------
Gross profit....................... 11,887 17,647 14,620 10,392 14,608
------- ------- ------- ------- -------
Operating expenses:
Research and development................... 5,481 5,975 6,484 4,770 5,059
Selling, general and administrative........ 7,361 8,803 7,789 5,477 7,795
------- ------- ------- ------- -------
Total operating expenses........... 12,842 14,778 14,273 10,247 12,854
------- ------- ------- ------- -------
Income (loss) from operations................ (955) 2,869 347 145 1,754
Interest and other income, net............... 157 24 141 81 65
------- ------- ------- ------- -------
Income (loss) before income taxes............ (798) 2,893 488 226 1,819
Provision for income taxes................... 592 630 40 19 55
------- ------- ------- ------- -------
Net income (loss)............................ $(1,390) $ 2,263 $ 448 $ 207 $ 1,764
======= ======= ======= ======= =======
Net income (loss) per share.................. $ (0.16) $ 0.23 $ 0.04 $ 0.02 $ 0.16
======= ======= ======= ======= =======
Shares used to compute net income (loss) per
share...................................... 8,579 9,900 10,676 10,632 11,115
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 59
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------------- -------------------
1993 1994 1995 1996
------- ------ ------- 1995 -------
-------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $(1,390) $2,263 $ 448 $ 207 $ 1,764
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........ 1,298 1,121 977 759 579
Deferred income taxes................ 640 (659) -- -- (1,064)
Deferred compensation related to
stock options..................... -- -- -- -- 300
Changes in assets and liabilities:
Accounts receivable............... (335) 970 (1,381) (1,315) (340)
Inventories....................... (635) 832 409 737 (754)
Other assets...................... 194 (311) 271 439 (320)
Accounts payable.................. 1,173 (575) (236) (433) (125)
Accrued expenses.................. 696 2,519 (2,645) (3,210) 362
Income taxes payable.............. -- 87 182 219 760
------- ------ ------- ------- -------
Net cash provided by (used in)
operating activities......... 1,641 6,247 (1,975) (2,597) 1,162
------- ------ ------- ------- -------
Cash flows from investing activities for
purchases of property and equipment....... (491) (861) (782) (671) (546)
------- ------ ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock.... -- 1 5 -- 104
Repurchase of Common Stock................ (68) (13) (8) -- (183)
Repayment of long-term debt............... (509) (144) (158) (117) (128)
------- ------ ------- ------- -------
Net cash used in financing
activities........................ (577) (156) (161) (117) (207)
------- ------ ------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 573 5,230 (2,918) (3,385) 409
Cash and cash equivalents at beginning of
period.................................... 358 931 6,161 6,161 3,243
------- ------ ------- ------- -------
Cash and cash equivalents at
end of period............................. $ 931 $6,161 $ 3,243 $ 2,776 $ 3,652
======= ====== ======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.................... $ 109 $ 52 $ 29 $ 24 $ 7
Cash paid (refunds) for income taxes...... $ (201) $1,141 $ (142) $ (199) $ 359
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Common stock issued for notes
receivable............................. $ -- $ 850 $ -- $ -- $ 577
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 60
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED
NOTES COMPENSATION
COMMON STOCK ADDITIONAL RECEIVABLE RELATED
------------------- PAID-IN FROM TREASURY TO STOCK RETAINED
SHARES AMOUNT CAPITAL STOCKHOLDERS STOCK OPTIONS EARNINGS TOTAL
---------- ------ ---------- ------------ -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992...... 7,880,140 $ 78 $3,068 $ -- $(7,249 ) $ -- $10,298 $ 6,195
Repurchase of 30,000 shares of
Common Stock for treasury... (30,000) -- -- -- (65 ) -- -- (65)
Repurchase and retirement of
shares of Common Stock...... (6,000) -- (2) -- -- -- (1 ) (3)
Net loss...................... -- -- -- -- -- -- (1,390 ) (1,390)
---------- ---- ------ ------- ------- ------- ------- -------
Balance at June 30, 1993...... 7,844,140 78 3,066 -- (7,314 ) -- 8,907 4,737
Issuance of Common Stock...... 1,700,000 17 833 (850) -- -- -- --
Issuance of Common Stock under
stock option plans.......... 1,500 -- 1 -- -- -- -- 1
Repurchase of 12,612 shares of
Common Stock for treasury... (12,612) -- -- -- (6 ) -- -- (6)
Repurchase and retirement of
shares of Common Stock...... (14,076) -- (6) -- -- -- (1 ) (7)
Net income.................... -- -- -- -- -- -- 2,263 2,263
---------- ---- ------ ------- ------- ------- ------- -------
Balance at June 30, 1994...... 9,518,952 95 3,894 (850) (7,320 ) -- 11,169 6,988
Issuance of Common Stock under
stock option plans.......... 10,162 -- 5 -- -- -- -- 5
Repurchase and retirement of
shares of Common Stock...... (9,602) -- (5) -- -- -- (3 ) (8)
Net income.................... -- -- -- -- -- -- 448 448
---------- ---- ------ ------- ------- ------- ------- -------
Balance at June 30, 1995...... 9,519,512 95 3,894 (850) (7,320 ) -- 11,614 7,433
Issuance of Common Stock under
stock option plans.......... 1,256,982 13 668 (577) -- -- -- 104
Repurchase and retirement of
shares of Common Stock...... (210,390) (2) (103) -- -- -- (78 ) (183)
Deferred compensation related
to stock options............ -- -- 1,173 -- -- (1,173) -- --
Amortization of deferred
compensation................ -- -- -- -- -- 300 -- 300
Net income.................... -- -- -- -- -- -- 1,764 1,764
---------- ---- ------ ------- ------- ------- ------- -------
Balance at March 31, 1996..... 10,566,104 $106 $5,632 $ (1,427) $(7,320 ) $ (873) $13,300 $ 9,418
========== ==== ====== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 61
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Verilink Corporation (the "Company"), a Delaware Corporation, was
incorporated in 1982 to manufacture and market equipment for use by
telecommunication network service providers and their corporate customers.
Certain equity transactions
In April 1996, the Company's Board of Directors and stockholders approved
an increase in the number of common and preferred shares authorized to
40,000,000 and 1,000,000, respectively, and increased the number of shares
reserved for issuance under the 1993 Stock Option Plan by 500,000. The Board
also approved a two-for-one stock split of the Company's Common Stock. All
applicable share and per share amounts of Common Stock have been retroactively
adjusted to reflect the stock split and increase in authorized shares.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary in the United Kingdom. All significant
intercompany accounts and transactions have been eliminated.
The Company's interim quarters end on the Sunday nearest the calendar
quarter end. The Company's fiscal year ends on the Sunday nearest June 30. For
purposes of financial statement presentation, each interim period is considered
to have ended on the last day of the respective calendar quarter and each fiscal
year is considered to have ended on June 30. The nine month periods ended March
31, 1995 and 1996 comprised 39 weeks. Fiscal 1993 and 1995 comprised 52 weeks
and fiscal 1994 comprised 53 weeks.
Foreign currency
The functional currency of the Company's foreign subsidiary is the local
currency. The balance sheet accounts are translated into United States dollars
at the exchange rate prevailing at the balance sheet date. Sales, costs and
expenses are translated into United States dollars at average rates for the
period. Gains and losses resulting from translation are accumulated as a
component of stockholders' equity and to date have not been material. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during any of the
periods presented.
Cash equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents.
F-7
<PAGE> 62
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally two to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the assets
or the remaining lease term.
Revenue recognition
Revenues from the sale of products are recognized upon shipment to
customers.
The following table summarizes the percentage of total sales for customers
accounting for more than 10% of the Company's sales:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
-------------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
A......................................... -- -- 14% 14% 18%
B......................................... 13% 20% 14% 11% 25%
C......................................... 24% 11% -- -- --
D......................................... -- -- -- 13% --
</TABLE>
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
and accounts receivable. The Company places its cash and cash equivalents
primarily in market rate accounts and commercial paper. The Company's trade
accounts receivable are derived from sales to customers primarily in the United
States. The Company performs credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains reserves for potential credit losses and historically such losses have
been immaterial.
Research and development costs
Research and development costs are expensed as incurred.
Software development costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86
requires the capitalization of certain software development costs incurred
subsequent to the date technological feasibility is established, which the
Company defines as the completion of a working model and prior to the date the
product is generally available for sale. The capitalized cost is then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current sales to total projected product sales, whichever is greater. To date,
the period between achieving technological feasibility and the general
availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
F-8
<PAGE> 63
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warranty
The estimated costs of fulfilling product warranties are accrued at the
time the related sale is recorded and have not been significant for all periods
presented.
Income taxes
A deferred income tax liability or asset, net of valuation allowance, is
established for the expected future tax consequences resulting from the
differences between the financial reporting and income tax bases of the
Company's assets and liabilities and from tax credit carryforwards.
Net income (loss) per share
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options (using the treasury stock method).
Common stock subject to repurchase by the Company as a result of stock option
exercises prior to vesting are included in the weighted average number of common
shares outstanding during the period. Common equivalent shares are excluded from
the computation if their effect is antidilutive, except that, pursuant to the
requirements of the Securities and Exchange Commission, common equivalent shares
(using the treasury stock method and the initial public offering price) issued
subsequent to March 31, 1995 have been included in the computation as if they
were outstanding for all periods presented.
Recently issued accounting pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." The Company's adoption of SFAS 123 in fiscal 1997
will not have any effect on the Company's financial position or results of
operations, as the Company intends to continue to measure compensation cost of
stock option plans using the intrinsic value based method.
Interim results (unaudited)
The accompanying consolidated statements of operations and of cash flows
for the nine months ended March 31, 1995 are unaudited. In the opinion of
management, the statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair statement of the results
of the interim period. The data disclosed in these notes to consolidated
financial statements for this period are also unaudited.
NOTE 2 -- DETAILS OF BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
JUNE 30,
------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Inventories:
Raw materials....................................... $ 1,593 $ 2,015 $ 2,286
Work-in-process..................................... 817 385 665
Finished goods...................................... 1,533 1,139 1,272
------- ------- -------
3,943 3,539 4,223
Less inventory reserves............................. (814) (819) (749)
------- ------- -------
$ 3,129 $ 2,720 $ 3,474
======= ======= =======
</TABLE>
F-9
<PAGE> 64
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Property and equipment:
Furniture, fixtures and office equipment............ $ 4,372 $ 4,813 $ 5,106
Machinery and equipment............................. 1,745 2,036 2,289
Leasehold improvements.............................. 517 517 517
------- ------- -------
6,634 7,366 7,912
Less accumulated depreciation and amortization...... (5,021) (5,948) (6,527)
------- ------- -------
$ 1,613 $ 1,418 $ 1,385
======= ======= =======
Accrued expenses:
Compensation and related benefits................... $ 3,745 $ 1,225 $ 1,631
Warranty............................................ 861 598 481
Other............................................... 1,479 1,617 1,690
------- ------- -------
$ 6,085 $ 3,440 $ 3,802
======= ======= =======
</TABLE>
NOTE 3 -- LINE OF CREDIT
The Company had a $2,000,000 line of credit with a bank which provided for
borrowings at the bank's prime rate plus 1% and was secured by certain of the
Company's assets. The line of credit required the Company to maintain certain
levels of profitability and liquidity and also required compliance with various
financial ratios and covenants. The line of credit expired on March 15, 1996.
In April 1996, the Company entered into a line-of-credit agreement with a
bank which provides for borrowings of up to $2,000,000. Borrowings under the
agreement are limited to a specified percentage of eligible accounts receivable.
Interest on borrowings is set at the bank's prime rate. Borrowings under the
line of credit are secured by substantially all of the Company's assets. Among
other provisions, the Company is required to maintain certain financial
covenants and annual profitability. In addition, payment of cash dividends is
prohibited without the bank's consent. The line-of-credit agreement expires in
April 1997.
NOTE 4 -- LONG-TERM DEBT
In connection with the June 30, 1991 repurchase of Common Stock from a
stockholder, the Company issued a five-year subordinated note payable for
$730,000, bearing interest at 8.5%, with principal and interest due in sixty
equal monthly instalments beginning in July 1991 through June 1996. The balance
outstanding at March 31, 1996 was $44,000.
NOTE 5 -- COMMON STOCK
During fiscal 1993, 1994 and 1995, and the nine months ended March 31,
1996, the Company repurchased 36,000, 26,688, 9,602 and 210,390 shares of Common
Stock, respectively, at prices ranging from $0.50 to $2.17 per share. Of the
shares repurchased, 42,612 shares are held in treasury at cost and the remaining
shares were retired.
In September 1993, the Company issued 1,600,000 shares of Common Stock to
one of the Company's principal stockholders and 100,000 shares to one of its
officers in exchange for notes totaling $850,000. These notes bear interest at
5% per annum and are due in September 1998 and $800,000 of these notes are
secured by 1,900,000 shares of the Company's Common Stock and $50,000 are
secured by a deed of trust.
F-10
<PAGE> 65
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the period of November 1995 through February 1996, the Company made
loans totaling $577,000 to certain executives, employees and directors pursuant
to the Company's 1993 Stock Option Plan. The loans are secured by 1,046,500
shares of the Company's Common Stock and certain other assets. The loans bear
interest at 5% per annum and are repayable in equal annual instalments through
February 2001.
In connection with a stock purchase agreement in June 1985, as amended by a
settlement agreement in 1990, certain rights were ascribed to an investor. These
rights include, among other things, the right to acquire a proportionate share
of any future issuances of Common Stock or its equivalent. This right will
expire on the effective date of an initial public offering of the Company's
Common Stock at a price per share of at least $6.67 (subject to adjustment for
anti-dilution) and aggregate proceeds exceeding $5,000,000.
NOTE 6 -- INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------ MARCH 31,
1993 1994 1995 1996
---- ------ ---- -----------
<S> <C> <C> <C> <C>
Current:
Federal....................................... $(54) $1,172 $-- $ 1,045
State......................................... 6 117 40 74
---- ------ --- -------
(48) 1,289 40 1,119
---- ------ --- -------
Deferred:
Federal....................................... 492 (659) -- (493)
State......................................... 148 -- -- (571)
---- ------ --- -------
640 (659) -- (1,064)
---- ------ --- -------
$592 $ 630 $40 $ 55
==== ====== === =======
</TABLE>
The tax provision reconciles to the amount computed by multiplying income
before tax by the U.S. federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------- MARCH 31,
1993 1994 1995 1996
----- ----- ----- -----------
<S> <C> <C> <C> <C>
Provision at statutory rate.................... (34.0)% 34.0% 34.0% 34.0%
State taxes, net of federal benefit............ 5.8 6.1 5.3 7.2
Change in valuation allowance.................. 117.4 (25.4) (22.5) (57.3)
Disallowance (utilization) of research and
development credits.......................... (13.3) -- -- 8.7
Permanent differences.......................... 5.3 0.3 4.5 8.0
Other.......................................... (7.0) 6.8 (13.1) 2.4
------ ------ ------
- - -
------ -
74.2% 21.8% 8.2% 3.0%
======= ======= ======= =======
</TABLE>
F-11
<PAGE> 66
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Research and development credit carryforwards......... $ -- $ 295 $ 151
Inventory reserves.................................... 340 350 320
Warranty.............................................. 371 255 207
Other reserves and accruals........................... 463 230 453
Depreciation.......................................... 161 398 446
Other................................................. 476 173 146
------- ------- ------
Total deferred tax assets............................. 1,811 1,701 1,723
Valuation allowance................................... (1,152) (1,042) --
------- ------- ------
Net deferred tax assets............................... $ 659 $ 659 $ 1,723
======= ======= ======
</TABLE>
At March 31, 1996, the Company had credit carryforwards of $151,000
available to offset future income; such carryforwards expire from 2003 to 2011.
Net deferred tax assets as of March 31, 1996 were based on the Company's
carryback capacity and, to a lesser extent, expected future income in the next
twelve months.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
The 1993 Stock Option Plan (the "1993 Plan") was approved by the Board of
Directors in March 1993. The 1993 Plan replaced the 1983 Stock Option Plan (the
"1983 Plan"). All options outstanding under the 1983 Plan were canceled and
replaced with new options for a like number of shares under the 1993 Plan.
During the nine months ended March 31, 1996, the 1989 Directors Stock Option
Plan (the "1989 Plan") was terminated and all options outstanding and available
for grant under the 1989 Plan were incorporated into the 1993 Plan. As of March
31, 1996, a total of 2,800,000 shares of Common Stock had been reserved for
issuance under the 1993 Plan to eligible employees, officers, directors,
independent contractors and consultants upon the exercise of incentive stock
options ("ISOs") and nonqualified stock options ("NSOs"). In April 1996, the
Board of Directors approved a 500,000 share increase in the number of shares
reserved for issuance. Options granted under the 1993 Plan are for periods not
to exceed ten years and must be issued at prices not less than 100% and 85% for
ISOs and NSOs, respectively, of the fair market value of the stock on the date
of grant as determined by the Board of Directors. Options granted under the 1993
Plan are exercisable immediately and generally vest 25% after one year and
1/48th of the total grant monthly thereafter, provided that the optionee remains
continuously employed by the Company. Upon cessation of employment for any
reason, the Company has the option to repurchase all unvested shares of Common
Stock issued upon exercise of an option at a repurchase price equal to the
exercise price of such shares. Options granted to stockholders who own greater
than 10% of the outstanding stock are for periods not to exceed five years and
must be issued at prices not less than 110% of the fair market value of the
stock on the date of grant as determined by the Board.
F-12
<PAGE> 67
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity under the 1993 Plan is as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE OPTIONS
FOR GRANT OUTSTANDING PRICE PER SHARE
---------- ----------- ---------------
<S> <C> <C> <C>
Balance at June 30, 1992.................... 1,378,534 1,421,466 $1.00-$2.18
Granted..................................... (182,000) 182,000 $2.17
Exercised................................... -- -- --
Canceled.................................... 417,510 (417,510) $2.17
---------- ----------
Balance at June 30, 1993.................... 1,614,044 1,185,956 $1.00-$2.18
Granted..................................... (2,576,000) 2,576,000 $0.50
Exercised................................... -- (1,500) $0.50
Canceled.................................... 2,214,456 (2,214,456) $0.50-$2.18
---------- ----------
Balance at June 30, 1994.................... 1,252,500 1,546,000 $0.50
Granted..................................... (279,000) 279,000 $0.50-$0.80
Exercised................................... -- (10,162) $0.50
Canceled.................................... 137,854 (137,854) $0.50-$0.80
---------- ----------
Balance at June 30, 1995.................... 1,111,354 1,676,984 $0.50-$0.80
Granted..................................... (733,800) 733,800 $0.80-$0.88
Exercised................................... -- (1,256,982) $0.50-$0.88
Canceled.................................... 129,304 (129,304) $0.50-$0.88
---------- ----------
Balance at March 31, 1996................... 506,858 1,024,498 $0.50-$0.88
========== ==========
Vested at March 31, 1996.................... 177,222 $0.50-$0.88
==========
</TABLE>
The Company has recorded compensation expense for the difference between
the grant price and deemed fair market value of the Company's Common Stock for
options granted in January and February 1996. Such compensation expense was
approximately $300,000 for the nine months ended March 31, 1996 and will
aggregate approximately $1,173,000 over the vesting period of four years.
In April 1996, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") under which 300,000 shares of Common Stock have been reserved
for issuance. The Purchase Plan permits eligible employees to purchase Common
Stock through periodic payroll deductions of up to 10% of their annual
compensation. The Purchase Plan provides for two six month offering periods
during each calender year with the first offering period beginning on January 1
and ending on June 30, and the second offering period beginning on July 1 and
ending on December 31. The initial offering period will begin upon the
effectiveness of the Company's initial public offering. The price at which
Common Stock is purchased under the Purchase Plan will be equal to 85% of the
lower of the fair value of the Common Stock at the beginning or end of each
offering period.
Awards under the Company's Profit Sharing Plan are at the discretion of the
Board of Directors and are based on achieving targeted levels of profitability.
No expense under the plan was incurred in fiscal 1993 and 1995. The Board of
Directors approved an award in the amount of $2,800,000 for fiscal 1994. A total
of $305,000 has been accrued for the nine months ended March 31, 1996.
NOTE 8 -- RELATED PARTY TRANSACTIONS
The Company has a lease agreement with Baytech Associates ("Baytech") for
occupancy of the Company's principal facility which expires in June 1996.
Baytech is owned by two stockholders who beneficially own an aggregate of 70% of
the Company's Common Stock and who are also officers and
F-13
<PAGE> 68
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directors of the Company. During fiscal 1993, 1994 and 1995, and the nine months
ended March 31, 1995 and 1996, rent expense totaled $768,000, $792,000,
$816,000, $620,000 and $620,000, respectively. In addition, the Company has
expended approximately $517,000 through March 31, 1996 in connection with
leasehold improvements.
Included in other current assets as of June 30, 1994 and 1995 and March 31,
1996, are advances of $730,000, $462,000 and $828,000, respectively, due from
four officers of the Company, including its principal stockholders. These
advances are non-interest bearing and are due on demand.
The Company paid approximately $41,000, $105,000, $149,000, $110,000 and
$113,000 for consulting services to two of its outside directors during fiscal
1993, 1994 and 1995, and the nine months ended March 31, 1995 and 1996,
respectively.
NOTE 9 -- COMMITMENTS
The Company leases its facilities under noncancelable operating lease
agreements which expire in 1996. The Company's principal facility lease (see
Note 8) contains escalation clauses providing for increases linked to the
Consumer Price Index and stated minimum increases. Rent expense is recognized on
a straight-line basis with rent expense in excess of payments being recorded as
accrued facility lease.
As of March 31, 1996, future minimum obligations under all noncancelable
operating leases were $207,000 and are payable through June 1996.
Rent expense under all noncancelable operating leases totaled $860,000,
$867,000, $897,000, $674,000 and $679,000 for the years ended June 30, 1993,
1994 and 1995, and the nine months ended March 31, 1995 and 1996, respectively.
F-14
<PAGE> 69
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 24
Management............................ 36
Principal and Selling Stockholders.... 43
Certain Transactions.................. 44
Description of Capital Stock.......... 45
Shares Eligible for Future Sale....... 47
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 50
Additional Information................ 50
Glossary of Terms..................... 51
Index to Consolidated Financial
Statements.......................... F-1
UNTIL JULY 5, 1996 (25 DAYS AFTER THE DATE
OF THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK OFFERED
HEREBY, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
3,700,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
OPPENHEIMER & CO., INC.
JUNE 10, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 70
APPENDIX --DESCRIPTION OF GRAPHIC IMAGES
INSIDE FRONT COVER
Set forth here is a full page graphic representation of the integrated
access capabilities of the Verilink Access System 2000 entitled "Integrated
Access for Network Service Providers." The Verilink logo appears to the left of
the title. Underneath the title appear five boxes, each representing the
Company's Access System 2000. One box captioned "Local Exchange Carriers"
illustrates, through the use of labeled images of a video camera, a PBX exchange
and a router connected by lines drawn to the box, the integrated services access
the Access System 2000 enables such carriers to provide. Another box is
captioned "Interexchange Carriers" and illustrates, through the use of a small
map of the earth labeled "Public Switched Network" connected by a line drawn to
the box, the integrated services access the Access System 2000 enables such
carriers to provide. Another box captioned "PCS Providers" illustrates, through
the use of a labeled image of a PCS base station transmitting to a wireless
phone connected by a line drawn to the box, the wireless access the Access
System 2000 facilitates. Another box captioned "Cellular Service Providers"
illustrates, through the use of an image of a switch linked to a transmitting
tower, the wireline access the Access System 2000 facilitates. Another box
captioned "Internet Service Providers" illustrates, through the use of an image
of a server linked to a laptop computer, the backbone access the Access System
2000 facilitates. Each of the five boxes sit at the edge of a large
representation of a cloud, the center of which contains labels referring to the
following services that Access System 2000 currently supports or, as indicated
herein and in the graphic by asterisks, is currently under development by
Verilink to support: T1, ATM*, T3, Analog*, DDS, SMDS, E1, ISDN* and frame
relay.
PAGE 26
Set forth here are two columns titled "Services Used" and "Dedicated Access
Devices." The first column is a plain text listing of the 11 services set forth
below. The listed services are connected by separate lines to 11 small stacked
rectangular boxes containing the text listed opposite such services as set forth
below:
<TABLE>
<CAPTION>
SERVICES USED DEDICATED ACCESS DEVICES
- ----------------------------------- ------------------------------------------------
<S> <C>
ATM ATM Switch
SMDS SMDS Switch
T3 Digital Access Cross Connect
Frame Relay Frame Relay Switch
Inverse Multiplexing Digital Access Cross Connect
T1 Channel Service Unit
E1 Channel Service Unit
ISDN Channel Service Unit
Wireless Channel Service Unit
DDS T1 Multiplexer
Analog Data/Voice Channel Bank
</TABLE>
Each of the 11 boxes is connected by a separate line to a graphic
representation of a cloud appearing to the right of the columns and labeled
"Network Services."
<PAGE> 71
PAGE 27
Set forth here is the following column of text:
<TABLE>
<CAPTION>
SERVICES USED
-------------------------------------
<S> <C>
ATM*
SMDS
T3
Frame Relay
Inverse Multiplexing
T1
E1
ISDN*
Wireless
DDS
Analog Data/Voice*
</TABLE>
Each of listed services in the column are connected by separate lines to a
drawing appearing to their right labeled "Access System 2000." This drawing is
connected by a single line to a graphic representation of a cloud appearing to
the right of the drawing and labeled "Network Services." The asterisks following
the listed services indicate that support for such services is currently under
development by Verilink.
