<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-28562
VERILINK CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2857548
- ---------------------------------- ------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
145 BAYTECH DRIVE, SAN JOSE, CALIFORNIA 95134
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 945-1199
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ . No / / .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. / X /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Common Stock on September 11,
1996, as reported by the Nasdaq National Market was $121,200,763. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
<PAGE> 2
This Amendment to Verilink Corporation's Report on Form 10-K
for its fiscal year ended June 30, 1996 is being filed solely for the purpose of
re-submitting via EDGAR Exhibit 13.1 (Annual Report to Stockholders), the last
11 pages of which were inadvertently omitted by Verilink Corporation's filing
agent from the initial filing of the Report on Form 10-K.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Verilink Corporation
April 15, 1997 By: /s/ Leigh S. Belden
---------------
Leigh S. Belden
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Leigh S. Belden President, Chief Executive Officer and Director (Principal April 15, 1997
--------------- Executive Officer)
Leigh S. Belden
/s/ Timothy G. Conley Vice President, Finance and Chief Financial Officer April 15, 1997
--------------- (Principal Financial and Accounting Officer)
Timothy G. Conley
/s/ Howard Oringer Chairman of the Board of Directors April 15, 1997
--------------
Howard Oringer
/s/ Steven C. Taylor Chief Technical Officer, April 15, 1997
----------------- Vice Chairman of the Board of Directors
Steven C. Taylor
/s/ David L. Lyon Director April 15, 1997
---------------
David L. Lyon
</TABLE>
2
<PAGE> 4
INDEX TO EXHIBITS
3.1 Registrant's Amended and Restated Certificate of
Incorporation. (1)
3.2 Registrant's Amended and Restated Bylaws. (1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
10.1 Common Stock and Option Purchase Agreement, dated as of
June 27, 1985 between the Registrant and the stockholders
set forth herein, and Standstill Agreement dated as of
November 15, 1989 between the Registrant, TA Associates,
and the stockholders set forth therein. (1)
10.2 Form of Indemnification Agreement between the Registrant
and each of its executive officers and directors. (1)
10.3* Employment Agreement between the Registrant and Leigh S.
Belden dated as of April 16, 1986. (1)
10.4* Employment Agreement between the Registrant and Steven C.
Taylor dated as of April 16, 1986. (1)
10.5* Executive Incentive Compensation Agreement between the
Registrant and Timothy G. Conley dated as of July 1, 1995.
(1)
10.6* Executive Incentive Compensation Agreement between the
Registrant and James G. Regel dated as of July 1, 1995.
(1)
10.7 Common Stock Purchase Agreement and Promissory Note
between the Registrant and Leigh S. Belden each dated as
of September 16, 1993. (1)
10.8 Promissory Notes of Timothy G. Conley in favor of the
Registrant dated as of November 16, 1995 and January 2,
1996. (1)
10.9 Promissory Note of James G. Regel in favor of the
Registrant dated as of January 1, 1996. (1)
10.10 Promissory Note of Henry L. Tinker in favor of the
Registrant dated as of November 16, 1995. (1)
10.11 Promissory Note of Howard Oringer in favor of the
Registrant dated as of January 2, 1996. (1)
10.12 Lease Agreement between the Registrant and Baytech
Associates, a California general partnership, dated
February 27, 1986, and Memorandum of Lease Modification
dated January 22, 1987. (1)
10.13+ Software License Agreement between the Registrant and
Integrated Systems, Inc. dated January 27, 1993, as
amended. (1)
10.14* Registrant's Amended and Restated 1993 Stock Option Plan,
including forms of agreements thereunder. (1)
10.15* Form of Registrant's 1996 Employee Stock Purchase Plan,
including forms of agreements thereunder. (1)
11.1** Statement regarding calculation of net income per share.
13.1 Annual Report to Stockholders.
3
<PAGE> 5
23.1** Consent of Price Waterhouse LLP.
27.1** Financial Data Schedule.
(b) Reports on Form 8-K.
N/A
-----------------
(1) Incorporated by reference to identically numbered Exhibit to the
Company's Registration Statement on Form S-1 (Commission File No.
333-4010), which became effective on June 10, 1996.
* Management contracts or compensatory plans or arrangements.
+ Confidential treatment granted as to portions of this exhibit.
** Filed previously.
4
<PAGE> 1
EXHIBIT 13.1
[LOGO-verilink corporation]
Annual Report
1996
<PAGE> 2
CORPORATE PROFILE
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 platform with modular hardware and software to enable its customers
to access increased network capacity and adopt new communications services in a
cost-effective manner. The Company's strategy is to continue to expand the
functionality of its integrated access product line as its customers access new
network services and migrate to emerging telecommunications technologies.
Verilink completed an initial public offering on June 11, 1996. Its common stock
is traded on the NASDAQ National Market under the symbol VRLK.
CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Letter to Our Stockholders 2
Financial Information
Management's Discusssion and Analysis
of Financial Condition and Results
of Operations 8
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 18
Report of Independent Accountants 27
Selected Consolidated Financial Data 28
Quarterly Financial Data 28
Common Stock Profile 28
Corporate Information 29
</TABLE>
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
---------------------------
1996 1995 % CHANGE
- ----------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Sales $41,608 $31,447 32%
Gross profit 21,174 14,620 45%
Income from operations 3,232 347 831%
Net income 2,716 448 506%
Net income per share $ 0.24 $ 0.04 500%
Shares used to compute net income per share 11,367 10,676 6%
Cash and cash equivalents $40,542 $ 3,243 1150%
Working capital 45,015 5,695 690%
Total assets 55,218 12,617 338%
Total stockholders' equity 47,234 7,433 535%
</TABLE>
[GRAPHIC ]
<PAGE> 4
LETTER TO OUR STOCKHOLDERS
To Our Fellow Stockholders:
Fiscal 1996 was a particularly eventful one for Verilink, reflecting
the continued expansion of the market for communications services and our
ability to meet the growing demand for access to those services. We would like
to tell you about some of the year's highlights that preceded our successful
initial public offering in June and contributed to record sales for the year.
We are particularly pleased to report that sales for the fiscal year
ended June 30, 1996 were $41,608,000, an increase of 32 percent over the prior
year's sales of $31,447,000. Net income for the year was $2,716,000, a 506
percent increase over net income of $448,000 for the previous fiscal year.
Earnings per share were $.24, compared with $.04 in fiscal 1995.
Since this is our first annual report to our stockholders as a publicly
owned company, let us tell you about Verilink's business. Verilink products
provide access to existing and emerging communications services. For example,
when a corporate employee sends an e-mail, logs on to the Internet, or conducts
a videoconference with a remote location, Verilink equipment can be involved
either on the company's
Verilink provides integrated
access solutions that enable
customers to adopt emerging
communications technologies
and services as their business
needs evolve and change.
2
<PAGE> 5
premises, or at the carrier that handles the communication. Our products are
purchased both by network service providers and by large corporations for their
own private networks.
GROWING NEED FOR ACCESS The market for communications services is exploding.
Business users are demanding virtually instant access to more information, in
more forms, wherever they are, which is intensifying the need for fast, easy
access to greater and greater network bandwidth. In addition to the increased
amount of information flowing over public and private networks, many emerging
communications capabilities, like videoconferencing and multimedia applications,
demand significantly higher bandwidth to transmit huge amounts of data. This
demand for increased bandwidth and the growing use of new and existing services
such as frame relay, Integrated Services Digital Network (ISDN), Switched
Multimegabit Data Service (SMDS) and Asynchronous Transfer Mode (ATM) has driven
the expansion of communications networks.
Both corporations and network service providers are finding that they
must manage an increasingly complex web of communications services to meet the
information needs of today's businesses. Whether at the customer premises or the
service provider site, this provides a costly challenge in an environment that
traditionally has required individual, single-purpose
[GRAPHIC "The market for communications services is exploding." ]
3
<PAGE> 6
[GRAPHIC "Demand for increased bandwidth... has driven the expansion of
communications networks." ]
access devices for each type of communications service. For example, one piece
of equipment provided access to dedicated T1 service, a second to frame relay,
and so forth. Each new service needed a new dedicated access device with its own
requirements for physical space, management and maintenance. It is easy to
imagine the increasing complexity and cost of managing such a growing
communications infrastructure.
INTEGRATED ACCESS-OUR SOLUTION Verilink's flagship product, the Access System
2000, is aimed squarely at this emerging market opportunity. The Access System
2000 provides integrated access to multiple communications services from a
single, flexible platform. In place of several dedicated devices, the Access
System 2000 is a single piece of equipment, a system, with individual cards for
different communications services. Most important, the system is scalable; as
access to a new communications service is required, the addition of a single
card is generally all that is necessary.
The convergence of voice, video,
multimedia and data-intensive
applications creates the need for
access to increased network
bandwidth. To meet this
growing demand, Verilink
redefines intelligent network
access by offering an
expandable, modular solution.
4
<PAGE> 7
WAN, INTERNET AND WIRELESS ACCESS The market for access devices is large and
growing rapidly. Within the total access market, however, there are three
specific areas-Wide Area Network (WAN) access, Internet access and wireless
access-where we believe our products offer particularly attractive solutions.
Industry analysts have projected that these three areas will comprise a
worldwide market of nearly $10 billion by the end of the decade.
Businesses that link Local Area Networks at different locations can
rely on the Access System 2000 for WAN access. Internet Service Providers use
the Access System 2000 to provide access to high-speed transmission facilities
between their regional switching centers and within their backbone network
infrastructures. And, the growth of wireless communications services offers yet
a third opportunity for us. Specifically, the emergence of Personal
Communications Services and the ability to send data over wireless networks are
increasing the need for access to wireless networks. Verilink provides this
access.
1996 IN REVIEW In fiscal 1996, Verilink made significant strides toward
addressing the opportunities in WAN, Internet and wireless access. To provide
access to new higher-speed broadband services, we added important functionality
to our Access System 2000 platform. We introduced inverse multiplexing
capability for T1 and E1 (international) lines, and an even higher-speed DS3
access card. This brings the number of communications services supported by the
Access System 2000 to ten.
5
<PAGE> 8
We expanded our relationships with key customers, including MCI,
CompuServe and QUALCOMM, and added significant new customers, such as Northern
Telecom (Nortel) and SunGard Recovery Services Inc.
Augmenting our executive staff, Tom Clark joined Verilink as Vice
President of Engineering. Previously, Tom had been Vice President of Engineering
for Larscom Incorporated. Bob Griffith, formerly Vice President of Carrier Sales
at Network Equipment Technologies, Inc., joined the Company as Vice President of
Sales. David Lyon, Co-founder and President of Pacific Communications Services,
Inc., joined Verilink's Board of Directors, and long-time board member Howard
Oringer became Chairman of the Board.
NEW PRODUCTS, NEW MARKETS While we are pleased with the milestones we reached
during fiscal 1996, we are particularly excited about our plans for the future.
In fiscal 1997 , we expect to introduce ISDN and ATM capabilities for the Access
System 2000 and will continue our major investment in the development of new
communications access solutions.
Verilink protects customer
investments in communications
networks by providing
multiple product applications,
all from a highly reliable and
flexible platform.
6
<PAGE> 9
To date, nearly all of our business has been from within the United
States. In the future, we expect significant opportunities to emerge in
international markets, and we are developing the products and building the
infrastructure to address those markets. Additionally, we are expanding our
sales force and distribution network to further increase and support our growing
customer base.
We believe our business prospects are exciting. Verilink has built a
solid business foundation based on highly reliable products and has an
experienced and motivated team in place to achieve its growth plans. Verilink is
committed to continuing to offer leading-edge communications access solutions.
In closing, we would like to take this opportunity to thank our
stockholders, customers, suppliers and dedicated employees for their support and
contribution to the success of Verilink.
/s/ Steven C. Taylor /s/ Leigh S. Belden
- -------------------- -------------------
Steven C. Taylor Leigh S. Belden
Founder, Vice Chairman & Founder,
Chief Technical Officer President & CEO
[PICTURE FLUSH RIGHT OF SIGNATURES - Steven C. Taylor & Leigh S. Belden]
7
<PAGE> 10
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 and 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.These 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. Sales
related to the Company's Access System 2000 product line represented
70%, 53% and 43% of total sales in fiscal 1996, 1995 and 1994,
respectively. Sales of Access System 2000 products, including recently
developed applications, are expected to represent an increasing
percentage of future sales.
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 64%, 47% and 46% of sales in fiscal 1996, 1995
and 1994, 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.
Since the Company continues to have significant sales to a small number
of customers, similar sales fluctuations may occur in the future.
The Company sells its products primarily in the United States to
NSPs through a direct sales force and through a variety of resellers,
including original equipment manufacturers (OEMs), value added
resellers (VARs) and distributors. To date, international sales have
not been significant. The Company intends to expand the marketing of
its products generally and to commence sales outside the United States.
8
<PAGE> 11
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>
YEAR ENDED JUNE 30,
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 49.1 53.5 51.7
-------------------------------
Gross margin 50.9 46.5 48.3
-------------------------------
Operating expenses:
Research and development 16.8 20.6 16.4
Selling, general and administrative 26.3 24.8 24.1
Total operating expenses 43.1 45.4 40.5
-------------------------------
Income from operations 7.8 1.1 7.8
Interest and other income, net 0.3 0.4 0.1
-------------------------------
Income before income taxes 8.1 1.5 7.9
Provision for income taxes 1.6 0.1 1.7
-------------------------------
Net income 6.5% 1.4% 6.2%
===============================
</TABLE>
The following table summarizes sales by product line for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Sales:
Access System 2000 $29,261 $16,519 $15,881
Other products and services 12,347 14,928 20,652
-------------------------------------
Total $41,608 $31,447 $36,533
=====================================
Access System 2000, as a percent of total 70% 53% 43%
=====================================
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1996 AND 1995
Sales Sales in fiscal 1996 increased by 32% to $41.6 million as
compared with sales of $31.4 million in fiscal 1995. This was due to an
increase of 77% in sales of Access System 2000 products resulting
primarily from increased sales to MCI and CompuServe associated with
expansion of their networks, as well as the initial shipment of a new
product for Personal Communications Service applications. The increase
in sales between fiscal 1996 and 1995 was offset in part by a decline
in sales of non-Access System 2000 products of 17%, or $2.6 million,
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
further decline as a percentage of sales.
During fiscal 1996, sales to MCI, CompuServe and the Company's top
five customers in total accounted for 29%, 18% and 64% of sales,
respectively. Sales to MCI, CompuServe and the Company's top five
customers in total accounted for 14%, 14% and 47%, respectively, of
sales during fiscal 1995.
Gross Profit Gross profit in fiscal 1996 increased by 45% to $21.2
million, as compared with gross profit of $14.6 million in fiscal 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 47% 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 8%, to $7.0 million in fiscal
1996, as compared to $6.5 million in fiscal 1995, primarily due to the
addition of personnel and related expenses, but decreased as a
percentage of sales to 17% from 21% 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 operation 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 40%, to $10.9 million in fiscal 1996, as compared to $7.8
million in fiscal 1995, primarily due to incentive compensation,
including commissions and the amortization of deferred compensation
expense related to the Company's stock option plan.
10
<PAGE> 13
As a percentage of sales, selling, general and administrative expenses
increased to 26% in fiscal 1996 from 25% in fiscal 1995. The Company
expects selling, general and administrative expenses to increase in
amount 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 $663,000
in fiscal 1996 represented an effective tax rate of 20%. The effective
tax rate was less than the combined federal and state statutory rates
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. The provision
for income taxes of $40,000 in fiscal 1995 represented minimum state
income and franchise taxes.
FISCAL YEARS ENDED JUNE 30, 1995 AND 1994
Sales Sales decreased 14% to $31.4 million in fiscal 1995 from $36.5
million in fiscal 1994, 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 the Company's single purpose network
access products to AT&T Paradyne declined to 2% of sales in fiscal 1995
from 11% of sales in fiscal 1994, due to the decision by AT&T Paradyne
to focus its sales efforts on competing products developed within the
AT&T organization. Sales of Access System 2000 products increased by
the net amount of $638,000, which included a decrease in sales to MCI
of $3.0 million. During fiscal 1995 and 1994, sales to MCI accounted
for 14% and 20%, respectively, of the Company's sales. In addition,
CompuServe accounted for 14% of the Company's sales during fiscal 1995.
Gross Profit Gross profit decreased 17% to $14.6 million in fiscal 1995
from $17.6 million in fiscal 1994, primarily due to the decrease in
sales volume. Gross margin declined to 47% in fiscal 1995 from 48% in
fiscal 1994 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 by
9% to $6.5 million in fiscal 1995 from $6.0 million in fiscal 1994,
primarily due to material costs for development of product prototypes.
Selling, General and Administrative Selling, general and administrative
expenses declined by 12% to $7.8 million in fiscal 1995 from $8.8
million in fiscal 1994, primarily due to a reduction in profit-sharing
expenses, which was partially offset by increased personnel-related
expenses as a result of staff additions, primarily in sales and
marketing.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes During fiscal 1995, the Company recorded a
tax provision of $40,000, representing minimum state income and
franchise taxes. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company raised $36.8 million through its initial public offering of
common stock in June 1996. Prior to the offering, the primary source of
financing for the Company had been cash flow from operations. In
addition, the Company had 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.
During fiscal 1996, net cash provided by operating activities was
$1.7 million, primarily due to increased profitability. During fiscal
1995, net cash used in operating activities was $2.0 million, primarily
due to the payment of accrued compensation expense. Net cash provided
by operating activities during fiscal 1994 totaled $6.2 million.
The Company made capital expenditures of approximately $958,000,
$782,000 and $861,000 in fiscal 1996, 1995 and 1994, respectively,
primarily for the purchase of computers and test equipment. The Company
expects to incur capital expenditures of approximately $3.0 to $4.0
million in fiscal 1997, primarily for leasehold improvements and
computer and test equipment.
The Company believes that cash generated from the proceeds of its
initial public offering, other available funds and anticipated cash
flows from operations 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.
12
<PAGE> 15
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this annual report which are not purely historical
are forward looking statements, including statements regarding the Company's
expectations, hopes or intentions regarding the future. Forward looking
statements include statements regarding the future of the network access and
telecommunications equipment industries and Verilink's strategy under the
heading "Letter to Our Stockholders"; statements regarding Verilink's liquidity,
anticipated cash needs and availability, anticipated expense levels, expected
sales of Access System 2000 products as a percentage of future sales, and
Verilink's intention to expand marketing efforts and commence sales outside the
United States under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All forward looking statements
included in this document are made as of the date hereof, based on information
available to the Company as of the date hereof, and Verilink assumes no
obligation to update any forward looking statement. It is important to note that
the Company's actual results could differ materially from those in such forward
looking statements.
Among the factors that could cause the Company's actual quarterly and
year-to-year operating results to differ materially are the following:
competition; the mix of products sold; the Company's success in developing,
introducing and shipping new products; the Company's dependence on single or
limited source suppliers for certain components used in its products; price
reductions for the Company's products; the timing of orders from and shipments
to customers; and general economic conditions. As previously noted, a small
number of customers have accounted for a majority of the Company's sales. Loss
of, or a material reduction in orders by, one or more of these customers would
materially adversely affect the Company's business, financial condition and
results of operations. The Company believes competition in the integrated access
portion of the telecommunications industry will increase significantly in the
future and could adversely affect the Company's business, results of operations
and financial condition. The Company expects that its gross margins could be
adversely affected in future periods by price adjustments as a result of
increased competition. The Company typically operates with a relatively small
backlog. As a result, quarterly sales and operating results generally depend on
the volume of, timing of and ability to fulfill orders received within the
quarter, which are difficult to forecast. A significant portion of the Company's
expense levels is relatively fixed and difficult to reduce in the short term. If
sales are below expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall. The Company may
also increase spending in response to competition or to pursue new market
opportunities. Accordingly, there can be no assurance that the Company will be
able to sustain profitability. You should consult the risk factors which shall
be listed from time to time in the Company's reports on SEC forms 10-K, 10-Q and
8-K.
13
<PAGE> 16
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1995
- ------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,542 $ 3,243
Accounts receivable, net of allowance of $76 for each date 6,182 3,913
Inventories 4,952 2,720
Deferred tax assets 815 411
Other current assets 508 592
------------------------
Total current assets 52,999 10,879
Property and equipment, net 1,530 1,418
Deferred tax assets 613 248
Other assets 76 72
------------------------
$ 55,218 $ 12,617
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,199 $ 1,303
Accrued expenses 4,945 3,440
Income taxes payable 840 269
Current portion of long-term debt -- 172
------------------------
Total current liabilities 7,984 5,184
------------------------
Commitments (Note 10)
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;
13,122,833 and 9,519,512 shares issued and outstanding 131 95
Additional paid-in capital 42,432 3,894
Notes receivable from stockholders (1,445) (850)
Treasury stock; 3,352,710 shares of Common Stock at cost
for each date (7,320) (7,320)
Deferred compensation related to stock options (816) --
Retained earnings 14,252 11,614
------------------------
Total stockholders' equity 47,234 7,433
------------------------
$ 55,218 $ 12,617
========================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
14
<PAGE> 17
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Sales $41,608 $31,447 $36,533
Cost of sales 20,434 16,827 18,886
-----------------------------------
Gross profit 21,174 14,620 17,647
-----------------------------------
Operating expenses:
Research and development 7,004 6,484 5,975
Selling, general and administrative 10,938 7,789 8,803
-----------------------------------
Total operating expenses 17,942 14,273 14,778
-----------------------------------
Income from operations 3,232 347 2,869
Interest and other income, net 147 141 24
-----------------------------------
Income before income taxes 3,379 488 2,893
Provision for income taxes 663 40 630
-----------------------------------
Net income $ 2,716 $ 448 $ 2,263
===================================
Net income per share $ 0.24 $ 0.04 $ 0.23
===================================
Shares used to compute net income per share 11,367 10,676 9,900
===================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
15
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,716 $ 448 $ 2,263
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 846 977 1,121
Deferred income taxes (769) -- (659)
Deferred compensation related to stock options 357 -- --
Accrued interest on notes receivable
from stockholders (18) -- --
Changes in assets and liabilities:
Accounts receivable (2,269) (1,381) 970
Inventories (2,232) 409 832
Other assets 80 271 (311)
Accounts payable 896 (236) (575)
Accrued expenses 1,505 (2,645) 2,519
Income taxes payable 628 182 87
----------------------------------------
Net cash provided by (used in)
operating activities 1,740 (1,975) 6,247
----------------------------------------
Cash flows from investing activities for purchases of
property and equipment (958) (782) (861)
----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 36,872 5 1
Repurchase of Common Stock (183) (8) (13)
Repayment of long-term debt (172) (158) (144)
----------------------------------------
Net cash provided by (used in) financing activities 36,517 (161) (156)
----------------------------------------
Net increase (decrease) in cash and cash equivalents 37,299 (2,918) 5,230
Cash and cash equivalents at beginning of year 3,243 6,161 931
----------------------------------------
Cash and cash equivalents at end of year $ 40,542 $ 3,243 $ 6,161
========================================
Supplemental disclosures:
Cash paid for interest $ 8 $ 29 $ 52
Cash paid (refund) for income taxes $ 805 $ (142) $ 1,141
Supplemental disclosure of noncash financing activities:
Common stock issued for notes receivable $ 577 $ -- $ 850
Tax benefit of stock options $ 57 $ -- $ --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
------------------- PAID-IN FROM TREASURY
SHARES AMOUNT CAPITAL STOCKHOLDERS STOCK
- ------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 7,844,140 $ 78 $ 3,066 $ -- $(7,314)
Issuance of Common Stock 1,700,000 17 833 (850) --
Issuance of Common Stock under
stock option plans 1,500 -- 1 -- --
Repurchase of 12,612 shares of
Common Stock for treasury (12,612) -- -- -- (6)
Repurchase and retirement of shares
of Common Stock (14,076) -- (6) -- --
Net income -- -- -- -- --
------------------------------------------------------------------
Balance at June 30, 1994 9,518,952 95 3,894 (850) (7,320)
Issuance of Common Stock under
stock option plans 10,162 -- 5 -- --
Repurchase and retirement of shares
of Common Stock (9,602) -- (5) -- --
Net income -- -- -- -- --
------------------------------------------------------------------
Balance at June 30, 1995 9,519,512 95 3,894 (850) (7,320)
Issuance of Common Stock in initial
public offering, net 2,555,000 25 36,742 -- --
Issuance of Common Stock under
stock option plans 1,258,711 13 669 (577) --
Repurchase and retirement of shares
of Common Stock (210,390) (2) (103) -- --
Deferred compensation related to
stock options -- -- 1,173 -- --
Amortization of deferred compensation -- -- -- -- --
Accrued interest on notes receivable
from stockholders -- -- -- (18) --
Tax benefit of stock options -- -- 57 -- --
Net income -- -- -- -- --
------------------------------------------------------------------
Balance at June 30, 1996 13,122,833 $ 131 $ 42,432 $ (1,445) $(7,320)
==================================================================
<CAPTION>
DEFERRED
COMPENSATION
RELATED
TO STOCK RETAINED
OPTIONS EARNINGS TOTAL
- --------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C> <C>
Balance at June 30, 1993 $ -- $ 8,907 $ 4,737
Issuance of Common Stock -- -- --
Issuance of Common Stock under
stock option plans -- -- 1
Repurchase of 12,612 shares of
Common Stock for treasury -- -- (6)
Repurchase and retirement of shares
of Common Stock -- (1) (7)
Net income -- 2,263 2,263
-------------------------------------
Balance at June 30, 1994 -- 11,169 6,988
Issuance of Common Stock under
stock option plans -- -- 5
Repurchase and retirement of shares
of Common Stock -- (3) (8)
Net income -- 448 448
-------------------------------------
Balance at June 30, 1995 -- 11,614 7,433
Issuance of Common Stock in initial
public offering, net -- -- 36,767
Issuance of Common Stock under
stock option plans -- -- 105
Repurchase and retirement of shares
of Common Stock -- (78) (183)
Deferred compensation related to
stock options (1,173) -- --
Amortization of deferred compensation 357 -- 357
Accrued interest on notes receivable
from stockholders -- -- (18)
Tax benefit of stock options -- -- 57
Net income -- 2,716 2,716
-------------------------------------
Balance at June 30, 1996 $ (816) $ 14,252 $ 47,234
=====================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
17
<PAGE> 20
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 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.
Management estimates and assumptions The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and 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 fiscal year ends on the Sunday nearest
June 30. For purposes of financial statement presentation, each fiscal
year is considered to have ended on June 30. Fiscal 1996 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. Revenues, 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 and cash equivalents The Company considers all highly liquid debt
instruments with a maturity of three months or less when purchased to
be cash equivalents.
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.
18
<PAGE> 21
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>
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
MCI Communications Corporation 29% 14% 20%
CompuServe Corporation 18% 14% --
AT&T Paradyne Corporation -- -- 11%
</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, treasury bills 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.
Warranty The estimated costs of fulfilling product warranties are accrued at
the time the related sale is recorded.
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.
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income per share Net income 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 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 through June 10, 1996 have been included
in the computation as if they were outstanding for all periods through
the effective date of the Company's initial public offering.
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.
NOTE 2 INITIAL PUBLIC OFFERING
In June 1996, the Company completed an initial public offering and
issued 2,555,000 shares of its Common Stock to the public at a price of
$16.00 per share. The Company realized proceeds of approximately $36.8
million, net of underwriting discounts, commissions and other offering
costs.
NOTE 3 DETAILS OF BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1995
------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Inventories:
Raw materials $ 2,999 $ 2,015
Work-in-process 831 385
Finished goods 1,780 1,139
-------------------
5,610 3,539
Less inventory reserves (658) (819)
-------------------
$ 4,952 $ 2,720
===================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1995
---------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Property and equipment:
Furniture, fixtures and office equipment $ 5,179 $ 4,813
Machinery and equipment 2,513 2,036
Leasehold improvements 533 517
-------------------
8,225 7,366
Less accumulated depreciation and amortization (6,695) (5,948)
-------------------
$ 1,530 $ 1,418
===================
Accrued expenses:
Compensation and related benefits $ 1,673 $ 1,225
Warranty 743 598
Commissions 435 148
Other 2,094 1,469
-------------------
$ 4,945 $ 3,440
===================
</TABLE>
NOTE 4 LINE OF CREDIT
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 (8.25% at June 30, 1996). 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. At June 30, 1996, no borrowings were
outstanding under the line-of-credit agreement.
NOTE 5 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 installments beginning in July 1991 through June
1996. The note was repaid as of June 30, 1996.
NOTE 6 COMMON STOCK
During fiscal 1996, 1995 and 1994, the Company repurchased 210,390,
9,602 and 26,688 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.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is secured by 80,000 shares of the Company's
Common Stock and $50,000 is secured by a deed of trust.
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,
have a five-year term and bear interest at 5% per annum. Principal plus
accrued interest is repayable at maturity.
In connection with a stock purchase agreement in June 1985, as
amended in 1990, certain rights were ascribed to an investor. These
rights included, among other things, the right to acquire a
proportionate share of any future issuances of Common Stock or its
equivalent. This right expired on the effective date of the initial
public offering of the Company's Common Stock.
The provision for income taxes consists of the following (in
thousands):
NOTE 7 INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,350 $ -- $ 1,172
State 82 40 117
-----------------------------------
1,432 40 1,289
-----------------------------------
Deferred:
Federal (240) -- (659)
State (529) -- --
-----------------------------------
(769) -- (659)
-----------------------------------
$ 663 $ 40 $ 630
===================================
</TABLE>
22
<PAGE> 25
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>
YEAR ENDED JUNE 30,
-----------------------------
1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 5.8 5.3 6.1
Change in valuation allowance (30.8) (22.5) (25.4)
Disallowance of research and development credits 5.4 -- --
Permanent differences 4.6 4.5 0.3
Other 0.6 (13.1) 6.8
-----------------------------
19.6% 8.2% 21.8%
=============================
</TABLE>
Deferred tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1996 1995
<S> <C> <C>
Research and development credit carryforwards $ 179 $ 295
Inventory reserves 282 350
Warranty 190 255
Other reserves and accruals 210 230
Depreciation 424 398
Other 143 173
------------------
Total deferred tax assets 1,428 1,701
Valuation allowance -- (1,042)
------------------
Net deferred tax assets $ 1,428 $ 659
==================
</TABLE>
At June 30, 1996, the Company had credit carryforwards of $179,000
available to offset future income; such carryforwards expire from 2003
to 2011. Net deferred tax assets as of June 30, 1996 were based on the
Company's carryback capacity and, to a lesser extent, expected future
income in the next twelve months.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 EMPLOYEE BENEFIT PLANS
The 1993 Stock Option Plan (the "1993 Plan") was approved by the Board
of Directors in March 1993. During fiscal 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 June 30, 1996, a total of
3,300,000 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). 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. 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. Options to purchase 214,421 shares were vested as of June
30, 1996.
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, 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
Approved 500,000 -- --
Granted (1,057,600) 1,057,600 $0.80-$7.50
Exercised -- (1,258,711) $0.50-$0.88
Canceled 147,997 (147,997) $0.50-$5.00
--------------------------
Balance at June 30, 1996 701,751 1,327,876 $0.50-$7.50
==========================
</TABLE>
24
<PAGE> 27
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 $357,000 for fiscal 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,
1996 and the second offering period beginning on July 1 and ending on
December 31. The initial offering period commenced upon the
effectiveness of the Company's initial public offering. The price at
which Common Stock is purchased under the Purchase Plan is 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. The Company provided for awards of
$517,000 and $2,800,000 for fiscal 1996 and 1994, respectively. No
expense under the plan was incurred in fiscal 1995.
NOTE 9 RELATED PARTY TRANSACTIONS
The Company leases its principal facility from Baytech Associates
(Baytech) under an operating lease which expires in April 2001. Baytech
is owned by two stockholders who hold an aggregate of 42% of the
Company's Common Stock and who are also officers and directors of the
Company. During fiscal 1996, 1995 and 1994, rent expense totaled
$826,000, $816,000, and $792,000, respectively.
Included in other current assets as of June 30, 1996 and 1995, are
advances of $325,000 and $462,000, respectively, due from certain
officers of the Company. These advances are non-interest bearing and
are due on demand.
The Company paid approximately $120,000 for consulting services to
an outside director during fiscal 1996 and $149,000 and $105,000 for
such services to two of its outside directors during fiscal 1995 and
1994, respectively.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 COMMITMENTS
The Company leases its facilities under noncancelable operating lease
agreements which expire through April 2001. The Company's principal
facility lease (see Note 9) provides for lease payments based on the
fair market value of comparable facilities, commencing in May 1999
through expiration of the lease in April 2001. The future minimum lease
payments set forth below assume that the monthly lease payment for the
Company's principal facility from May 1999 through April 2001 will not
vary significantly from the present monthly lease payment.
Future minimum lease payments under all noncancelable operating
leases with terms in excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
Year ending June 30,
1997 $ 428
1998 428
1999 428
2000 428
2001 357
-------
Total minimum lease payments $ 2,069
=======
</TABLE>
Rent expense under all noncancelable operating leases totaled
$906,000, $897,000 and $867,000 for fiscal 1996, 1995 and 1994,
respectively.
26
<PAGE> 29
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, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 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
July 19, 1996
27
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 41,608 $ 31,447 $ 36,533 $ 28,007 $ 30,696
Gross profit 21,174 14,620 17,647 11,887 13,049
Income (loss) from
operations 3,232 347 2,869 (955) 137
Net income (loss) 2,716 448 2,263 (1,390) 33
Net income (loss) per share $ 0.24 $ 0.04 $ 0.23 $ (0.16) $ 0.00
Shares used to compute
net income (loss)
per share 11,367 10,676 9,900 8,579 8,649
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $40,542 $ 3,243 $ 6,161 $ 931 $ 358
Working capital 45,015 5,695 5,358 3,082 3,711
Total assets 55,218 12,617 15,029 10,891 10,989
Long-term debt,
net of current portion -- -- 172 329 488
Total stockholders' equity 47,234 7,433 6,988 4,737 6,195
</TABLE>
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
1996 1996 1995 1995 1995 1995 1994 1994
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $12,931 $10,533 $ 8,640 $ 9,505 $ 8,694 $ 7,554 $ 7,293 $ 7,906
Gross profit 6,567 5,427 4,284 4,897 4,228 3,310 3,401 3,681
Income from operations 1,479 711 293 750 202 45 55 45
Net income 952 1,105 196 463 241 66 68 73
Net income per share $ 0.08 $ 0.10 $ 0.02 $ 0.04 $ 0.02 $ 0.01 $ 0.01 $ 0.01
Shares used to compute
net income per share 12,122 11,496 11,011 10,837 10,807 10,832 10,831 10,232
</TABLE>
COMMON STOCK PROFILE
The Company's common stock is traded on the NASDAQ National Market under the
symbol VRLK. The high and low prices during the fourth quarter of fiscal 1996,
beginning June 11, 1996 (the effective date of the Company's initial public
offering) were $27.50 and $18.00, respectively.
28
<PAGE> 31
CORPORATE INFORMATION
<TABLE>
<CAPTION>
OFFICERS DIRECTORS TRANSFER AGENT
<S> <C> <C>
Leigh S. Belden Howard Oringer(1) The First National Bank of Boston
President and Chief Executive Officer Chairman of the Board of Directors c/o Boston EquiServe, L.P.
Managing Director, Shareholder Services
Steven C. Taylor Communications Capital Group Mail Stop: 45-02-64
Chief Technical Officer P.O. Box 644
Leigh S. Belden Canton, MA 02102-0644
Thomas E. Clark President and Chief Executive Officer, Tel: (617) 575-3120
Vice President, Engineering Verilink Corporation Web site address:
http://www.EquiServe.com
Timothy G. Conley David L. Lyon(1)
Vice President, Finance President,
Chief Financial Officer Pacific Communications Services, Inc., STOCKHOLDERS' MEETING
a subsidiary of Cirrus Logic, Inc.
Grace T. Griffin The annual meeting will be
Vice President, Human Resources Steven C. Taylor held at 10:00 AM on Thursday,
Chief Technical Officer, November 7, 1996 at Verilink
Robert F. Griffith Verilink Corporation headquarters, 145 Baytech Drive,
Vice President, Sales San Jose, CA.
(1) Member of Compensation and Audit
Edward C. Y. Ip Committees
Vice President, Advanced Development INVESTOR RELATIONS
James G. Regel LEGAL COUNSEL For a copy of the Company's Form 10-K,
Vice President, Marketing additional copies of this report or other
Morrison and Foerster LLP financial information, contact:
Henry L. Tinker Palo Alto, CA
Vice President, Operations Verilink Corporation
Investor Relations
INDEPENDENT ACCOUNTANTS 145 Baytech Drive
San Jose, CA 95134
Price Waterhouse LLP Tel: (408) 945-1199
San Jose, CA
Other corporate information is available on
Verilink's Internet web site at
HEADQUARTERS http://www.verilink.com
Verilink Corporation
145 Baytech Drive
San Jose, CA 95134
Tel: (408) 945-1199
Fax: (408) 945-3823
</TABLE>
<PAGE> 32
[VERILINK LOGO]
145 Baytech Drive San Jose California 95134
