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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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 27, 1999
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)
<TABLE>
<S> <C>
DELAWARE 94-2857548
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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145 BAYTECH DRIVE, SAN JOSE, CALIFORNIA
SAN JOSE, CALIFORNIA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 945-1199
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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. [ ]
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
15, 1999, as reported by the Nasdaq National Market was $16,225,414. 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.
As of September 15, 1999, the registrant had outstanding 13,998,031 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in this
Annual Report on Form 10-K: the Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held November 16, 1999 (the "Proxy Statement"),
(Part III).
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PART I
ITEM 1. BUSINESS
OVERVIEW
Verilink Corporation (the "Company") develops, manufactures and markets
integrated access products and customer premise equipment products (CPE) for use
by telecommunications network service providers ("NSPs") and corporate end users
on wide area networks. Wide area networks ("WANs") are comprised of information
switching systems interconnected by long-distance digital transmission links,
which enable individuals, groups and businesses to exchange information
electronically. Verilink products provide seamless connectivity and interconnect
for multiple traffic types and implement efficient transmission links between
various network elements such as routers, and frame relay, ATM, and voice
switches. Verilink access systems bring value to digital transmission links by
providing efficient use of bandwidth, support for diverse applications, and
management of networks in a space saving, high-density platform. Corporations,
NSPs such as interexchange and local exchange carriers, internet service
providers ("ISPs"), and personal communications and cellular service providers
use Verilink integrated access products and customer premise equipment products
to serve their networking requirements. The CPE product line was significantly
expanded as a result of the TxPort, Inc. acquisition in November 1998.
CONSOLIDATION PLANS
On July 21, 1999 the Company announced its plans to substantially
consolidate its operations into its existing operations located in Huntsville,
Alabama. The goal of this plan is to reduce expenses and enable the Company to
achieve profitability at lower revenue levels. In connection with those plans
since the year end, the Company has entered into an agreement to outsource its
San Jose based manufacturing operations to a third party subcontract
manufacturer.
INDUSTRY BACKGROUND
Three fundamental forces are driving growth in the market for
telecommunications equipment. First, corporate and end-user demand for data,
voice, and video communication services continues to grow rapidly worldwide.
Second, the opening of overseas telecommunications markets due to deregulation
and the privatization of government-owned monopoly carriers, is permitting the
emergence of new carriers and is creating new market opportunities. Lastly, the
commercialization of new telecommunication technologies such as frame relay,
ATM, IP, xDSL, and various digital mobile communication technologies is enabling
the introduction of new kinds of telecommunication services at lower costs.
These three forces have contributed to the growing popularity of the Internet,
the need for higher bandwidth, and the widespread adoption of wireless
communication services.
The Internet
The Internet was originally conceived by academic and governmental
organizations for use in such applications as E-mail and file transfer. With the
invention of the easy to use web browser and the availability of low cost web
servers the Internet has become a global and commercial phenomenon. Today the
Internet is the universal public data network -- it does for data communication
what the public telephone network does for voice communication. Corporations use
the Internet to provide access to information resources and to connect on-line
with prospects, customers, business partners, and traveling employees. Consumers
increasingly are using the Internet to access information, perform routine
banking and brokerage transactions, and to purchase goods and services. As the
application for the Internet expands to mainstream business and consumer uses,
the need for Quality-of-Service (QOS) controls, security mechanisms, and other
virtual private networking capabilities will become critical.
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Higher bandwidth
Bandwidth refers to the information carrying capacity of a channel, and is
a key factor for determining the amount, quality, and speed of a particular
service available to a user. As the number of users that make use of corporate
and public networks continues to increase, the requirement for additional
bandwidth will grow. In addition, as the use of more data intensive applications
such as multimedia and video conferencing gains popularity, the total bandwidth
requirements of networks will grow at a faster rate. In order to keep pace with
this rapid rate of expansion in the carrying capacity of the WAN, NSPs and
corporate enterprises are employing new telecommunications access equipment,
technology and transmission facilities. With ever-increasing demands for
bandwidth, both service providers and corporate end users need to manage their
communication services and budgets more efficiently and cost effectively.
Equipment vendors who differentiate themselves by providing the ability to
manage networks more efficiently and cost effectively will be beneficiaries of
this trend toward higher bandwidth.
Wireless communication
Demand by mobile workers and consumers for wireless communication services
has experienced significant growth over the past several years. This growth has
been enabled by the availability of new low cost digital services and fueled by
intense competition among service providers. In addition, service providers who
must deliver new communication services to developing nations are increasingly
looking to wireless technology as the most cost-effective solution. These two
growth drivers have given rise to a multi-billion dollar wireless communications
industry. The Company expects that future growth in this market will come from a
further increase in the number of subscribers, an increase in the total minutes
of use, the increased implementation of wireless local loop systems in
developing nations, and the emergence of broadband access in developed nations.
Wireless communication services provide un-tethered access between the user and
the service provider's Point-of-Presence (POP). From the POP voice and data
traffic is then routed over specialized wireline transmission networks. In order
to provide the necessary capacity and geographic coverage to support
uninterrupted wireless access, multiple POP locations must be deployed and
interconnected. Telecom equipment specifically tailored to the rigorous demands
for reliability, scalability and network management will become critical to the
success of these large-scale deployments.
PRODUCTS
Access System 2000
Verilink's Access System 2000 ("AS2000") 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 installed at the
origination and termination points at which NSPs provide communications services
to their corporate customers. AS2000 systems provide transmission link
management, multiplexing, and inverse multiplexing functions for T1 (1.5 Mbps),
E1, multi-T1, multi-E1, and T3 (45 Mbps) access links. A key feature of the
Access System 2000 is its flexibility and adaptability made possible by a
modular architecture which allows customers to access new services or expanded
network capacity simply by configuring or changing out circuit cards. In a
single platform, the AS2000 combines the functions of a T1 CSU/DSU, E1 NTU,
inverse multiplexer, cross-connect, T3 DSU, TDM, automatic protection switch,
and a Simple Network Management Protocol (SNMP) management agent.
Access System 3000
The AS3000 system, first introduced in fiscal 1999, is designed to build on
the architecture of the successful AS2000 platform. System enhancements to the
AS2000 include a four-fold increase in switching capacity, support for voice
signals, and broadband multiplexing up to T3 rates. The AS3000 is targeted
toward Competitive Local Exchange Carriers (CLECs) who wish to offer customers
integrated access to voice and high-speed data network services.
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Access System 4000
The AS4000 is an integrated access cross-connect system that provides full
non-blocking DACS capability, channel bank functionality, and standard
interfaces including T1, SDSL, HDSL, analog voice and T3. The AS4000 is targeted
at carriers and enterprise networks that have access requirements for voice and
data applications over a wide array of WAN circuit types.
PRISM 3030/3060 Integrated Access Multiplexer
The PRISM 3030/3060 family of intelligent channel banks enables customers
to combine voice and data requirements into a single, multi-functional access
device. This allows them to decrease initial equipment deployment and ongoing
operational costs, while optimizing network and bandwidth efficiency, and
increase equipment density to save space in network closets. The PRISM 3030 and
3060 products are modular voice and data multiplexers, which allow voice and
data to be combined over a single T1 facility. The 3030/3060 products are
deployed as managed voice channel banks, and support FXS, FXO, and E&M
functionality with advanced signaling feature support and integral diagnostic
capabilities.
WANscope Frame Relay Performance Monitoring Probes
The WANscope family of access products is designed for use in Customer
Premise Equipment (CPE) or Customer Located Equipment (CLE) applications.
WANscope products feature the capability for NSPs or corporate enterprises to
constantly monitor and measure network performance for frame relay service,
today's predominant technology for enterprise WAN backbones. Constant vigilance
over network performance parameters such as loss, delay, and throughput enables
service providers and service users to enforce Service Level Agreements (SLAs),
and to proactively manage network capacity and congestion to avoid downtime and
eliminate waste.
CSU/DSU Circuit Management Products
Physical layer transmission standards form the foundation upon which all
advanced data services are based, including the Internet, frame relay service,
cell relay service, leased lines, and Integrated Services Digital Networks
(ISDN). Verilink's physical layer transmission devices convert standard data
interchange signals into formats appropriate for sending over carrier
facilities. Additionally, these devices provide physical layer performance
monitoring and diagnostic functions. Verilink transmission systems are produced
to carrier-grade standards of quality and are typically found deployed in
mission-critical applications used at bank, and other corporate enterprises.
Verilink offers a broad portfolio of products appropriate for a wide range
of applications in either modular systems, such as the 1051 and 1024
chassis-based products, or as stand-alone devices. Stand-alone devices include
the compact Lite family of products, and the PRISM 2000, 3000, and 4000 families
of data service/channel service unit (CSU/DSU) devices. Introduced in fiscal
1999, the FrameStart family of products enables network administrators to
rapidly deploy and test frame relay LAN-to-LAN or wide area networks at a
fraction of the cost of using full network probes.
SALES, MARKETING, AND CUSTOMER SUPPORT
Sales and Marketing
The Company sells its products and services to network service providers
and wireless equipment manufacturers primarily through a direct sales force
located in major U.S. metropolitan areas. A direct sales effort, supported by
sales engineers who provide customers with pre- and post-sale technical
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 sells its products and services to North American enterprises
primarily through indirect channels, which include distributors, systems
integrators (SIs), and value-added resellers (VARs). These include Alltel
Supply, Inc., Anixter Bro's, Inc., Graybar Electronic Co. Inc., ICOM Inc.,
Inter-Tel, Kent
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Datacomm, RE/COM Group Inc., and Sprint North Supply. With the addition of the
CPE product line acquired from TxPort, Inc. in November 1998, the Company
believes that sales through indirect channels will become increasingly more
important.
The Company believes that entry into international markets for advanced
digital network products will be enabled through strategic relationships and
in-country distribution channels that reach both enterprise and NSP customers.
To date, the Company has had minimal direct sales to international customers. In
addition to the specific sales efforts directed at network service providers,
the Company's marketing activities include participating in industry trade shows
and conferences, distribution of sales and product literature, media relations,
advertising in trade journals, direct mail and ongoing communications with
customers and industry analysts.
Customer Service and Support
The Company maintains 24-hour, 7-day a week telephone support for all of
its customers. The Company provides for a fee direct installation and service of
its products utilizing its own resources or resources available under a
Worldwide Equipment Support agreement with Vital Network Services Inc. The
Company provides training to its customers dealing with the installation,
operation and maintenance of the Company's products.
The Company also offers various levels of maintenance agreements to its
customers for a fee, which provide for on-site service in response to customer
reported difficulties.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on developing
new products, core technologies and enhancements to existing products. During
the past year, product development activities have emphasized expansion of
features for the Access System 2000 product family, and on the introduction of
the Access System 3000 platform. Other developments included feature
enhancements to the PRISM family of intelligent channel banks, enhancements to
existing DSU/CSUs, and the introduction of new, lower-cost and feature rich
FrameStart and Lite families of DSU/CSUs. 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 and on the
development of low-cost CPE devices that leverage advancements in hardware and
software technology.
During fiscal 1999, 1998 and 1997, total research and development
expenditures were $13.4 million, $12.5 million, and $9.4 million, respectively.
All research and development expenses are charged to expense as incurred.
The Company expects that it will continue to expend significant resources
for product development of specific applications such as voice, IP, network
management, xDSL and other performance monitoring services as well as to respond
to market demand and new service offerings from network service providers. See
"Factors Affecting Future Results -- Dependence on Recently Introduced Products
and Products Under Development".
MANUFACTURING AND QUALITY
The Company entered into arrangements in September 1999 with a contract
manufacturer to outsource substantially all of its San Jose-based procurement,
assembly, and system integration operations. This transition is expected to be
completed by the end of calendar year 1999. Under the terms of the agreement the
Company will maintain a bonded warehouse on the contractors premises from which
it will ship product directly to its customers.
The Company's manufacturing operations based in Huntsville, Alabama
primarily support the manufacturing of the former TxPort, Inc. product line and
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 for the
former TxPort, Inc. products at its
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Huntsville facility, with the exception of surface mounted printed circuit board
assembly. The Company's current San Jose operations have been ISO 9001 certified
since 1993, while the Huntsville facilities completed their certification in
March 1999. 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. The Company obtained such certification through an independent third
party, with ongoing audits on a semi-annual basis.
COMPETITION
The market for telecommunications network access 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
new entrants. The market for integrated access devices such as the Access System
product line and for enterprise devices such as the PRISM, FrameStart, and Lite
product lines 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 and performance, support for multiple types of
communications services, network management, reliability, and quality of
customer support. There can be no assurance that the Company's current products
and future 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 and 3000 products has been from Digital Link
Corporation, Kentrox, a division of ADC Telecommunications and Larscom, Inc., a
subsidiary of Axel Johnson. In addition, the Company experiences substantial
competition with its enterprise access and network termination products from
companies in the computer networking market and other related markets. These
competitors include Premisys Communications, Inc., Newbridge Networks
Corporation, Telco Systems, Inc., a subsidiary of World Access Inc., Visual
Networks, Adtran, Inc., and Paradyne 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 basic network termination products
is mature, but that the market for feature-enhanced network termination and
network access products continues to grow and expand, as more "capability" and
"intelligence" moves outward from the central office to the enterprise. The
Company believes that the principal competitive factors in this market are
price, feature sets, installed base and quality of customer support. In this
market, the Company primarily competes with Adtran, Digital Link, Kentrox,
Paradyne, Visual Networks 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 like products.
In addition, advanced termination products are emerging which represent both new
market opportunities as well as a threat to the Company's current products.
Furthermore, basic line termination functions are increasingly being integrated
by competitors, such as Cisco and Nortel Networks, into other equipment such as
routers and switches. These include direct WAN interfaces in certain products,
which may erode the addressable market for separate network termination
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 "Factors Affecting Future Results -- Competition".
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 technology. There can be no assurance
that third parties have not or will not develop equivalent
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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
independent contractors, 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 "Item
7. Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and "Factors Affecting Future Results -- Limited Protection of
Intellectual Property".
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 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 "Factors Affecting
Future Results -- Risk of Third Party Claims Infringement".
EMPLOYEES
As of June 27, 1999, the Company had approximately 310 employees worldwide,
of whom 85 were employed in engineering, 56 in sales, marketing and customer
service, 132 in manufacturing and 37 in general and administration. Of the
total, approximately 131 positions located in San Jose are expected to be either
eliminated or displaced to the Huntsville, Alabama location, as a result of the
Company's plan to consolidate its operations in Huntsville, Alabama and
outsource its San Jose manufacturing operations
Management believes that the future success of Verilink will depend in part
on its ability to attract and retain qualified employees, including management,
technical, and design personnel. In particular, the Company believes that it is
highly likely that all of its officers, with the exception of Graham Pattison,
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President and CEO, and Steve Turner, Vice President of the Huntsville Business
Unit, will not continue employment with the Company after the transition,
although to date, none has provided notice of termination. In addition, the
Company currently has numerous open positions in its Huntsville Alabama
location, particularly, engineering positions. Any lengthy delay in filling
these positions will impact the ability of the Company to transition the
business and will lead to delays in the introduction of various products
currently being developed, as well as the research and development associated
with potential new products. See "Item 7. Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and "Factors Affecting Future
Results -- Dependence on Key Personnel".
BACKLOG
The Company manufactures its products based upon its forecast of customer
demand and typically builds finished products in advance of receiving firm
orders from its customers. Orders for the Company's products are generally
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.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative and engineering
facility have been located in a building containing approximately 55,000 square
feet located in San Jose, California. During 1997, the Company moved its
manufacturing operations into a new 24,000 square foot facility located nearby
its headquarters building in San Jose, California. In September 1998, the
Company began leasing an additional 16,000 square feet of office space under a
must-take provision of the related lease and had guaranteed Baytech Associates
obligation on an additional 30,000 square feet of office space. In August 1999,
the Company reached an agreement that established a new lease rate under a
market rate adjustment provision of the headquarters building lease, and entered
into a new agreement for the manufacturing facility lease covering the 42,000
square feet of space that it occupied. The result of these market rate
adjustments was to substantially increase the Company's remaining lease
obligation. The Company leases these buildings through April 2001 and November
2001, respectively, from Baytech Associates, a partnership which is comprised of
Leigh S. Belden and Steven C. Taylor, Directors of the Company.
As a result of the Company's plans to consolidate its operations in
Hunstville, Alabama, the use of both of the facilities located in San Jose will
be discontinued by the end of the 1999 calendar year. The Company is in the
process of trying to sublease this space and has entered into discussions with
its landlord to explore settlement options for its remaining lease obligation.
The Company will move its principal administrative, engineering, and
marketing functions to its facility located in Huntsville, Alabama, in which the
Company leases approximately 49,000 square feet. Approximately 9,000 square feet
of this space is currently being subleased to another tenant, but will become
available for occupancy by the Company after December of 1999. The Company
occupies these buildings under leases that expire on various dates ranging from
December 2000 through March 2002.
The Company also leases approximately 49,000 square feet at the same
Huntsville location to support its manufacturing operations. Approximately,
18,000 square feet of this space is currently being subleased to another tenant,
but will be become available for occupancy by the Company after December 1999.
The Company leases these buildings under leases that expire on various dates
ranging from December 2000 through June 2001.
In addition, the Company has eight sales offices located in the U.S. and
Canada. These properties are occupied under operating leases that expire on
various dates through the year 2003, with options to renew in most instances.
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ITEM 3. LEGAL PROCEEDINGS
The Company is subject to a legal claim arising from an acquisition by
TxPort, Inc. prior to the acquisition of TxPort, Inc. by the Company. The
Company believes that it is indemnified against the claim by the seller of
TxPort, Inc. Management believes that the claim will be resolved without
material effect on the Company's financial position and results of operations.
The Company is not involved in any other material legal actions. From time
to time, however, the Company may be subject to claims and lawsuits arising in
the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of the Company was held on June 22, 1999
(the "Special Meeting"). The voting of holders of record of 14,076,931 shares of
the Company's Common Stock outstanding as of the close of business on May 10,
1999 was solicited by proxy pursuant to Regulation 14A under the Securities
Exchange Act of 1934. The amendment to the Company's Stock Option Plan to
increase the number of shares for issuance from 5,050,000 to 6,050,000 shares
was ratified. The stockholder's vote was 6,055,865 shares voted FOR; 1,436,012
shares AGAINST; and 18,727 shares ABSTAINED from voting.
EXECUTIVE OFFICERS OF THE COMPANY
Information concerning executive officers of the Company is set forth
below:
Mr. Graham Pattison, age 49, joined the Company in April 1999 as President,
Chief Executive Officer and Director. From May 1998 until joining Verilink, Mr.
Pattison was Vice President and General Manager of new business ventures at
Motorola's new Internet and Networking Group (ING). From June 1996 to May 1998,
Mr. Pattison served as Vice President and General Manager of Motorola's Network
System Division (NSD). From November 1995 to June 1996, Mr. Pattison served as
Vice President of North American Distribution for Motorola. From November 1994
to November 1995, Mr. Pattison served as Vice President of International
Distribution for Motorola. From November 1991 to November 1994, Mr. Pattison
served as General Manager of Motorola's Europe Middle-East and Africa (EMEA)
Division. Mr. Pattison received a B.S. in Electrical Engineering and a M.S. in
Engineering Technology from Royal Melbourne Institute of Technology (RMIT),
Australia.
Mr. John C. Batty, age 44, joined the Company in May 1997 as Vice
President, Finance and Chief Financial Officer. From December 1992 until joining
Verilink, Mr. Batty was Vice President and Treasurer for VLSI Technology, Inc.,
a semiconductor manufacturer. From April 1991 to December 1992, Mr. Batty was
Director of Corporate Financial Planning for VLSI. Mr. Batty received a B.A. in
Economics from the University of New Hampshire, and a M.B.A. from the University
of Chicago.
Mr. Tom Flak, age 33, joined the Company in July 1997 as Director, Product
Marketing. In August 1998, Mr. Flak was promoted to the position of Vice
President of Marketing. From October 1992 until joining Verilink, Mr. Flak
worked in various marketing management, sales and engineering positions with
Network Equipment Technologies, a telecommunications equipment manufacturer.
From June 1989 to October 1992, Mr. Flak was a systems engineer with
Southwestern Bell Telephone Company. Mr. Flak received a B.S. in Electrical
Engineering from the University of Missouri at Rolla and a M.S. in Information
Networking from Carnegie-Mellon University.
Mr. Stephen G. Heinen, age 44, joined the Company in September 1998 as Vice
President, Engineering. From June 1987 until joining Verilink, Mr. Heinen held
various senior management positions within Northern Telecom (Nortel), including
Assistant Vice President of Technology for the Meridian 1 Business
Communications System, the leading Private Branch Exchange (PBX) worldwide.
Prior to 1987, Mr. Heinen was a member of the scientific staff at Bell Northern
Research, the research and development subsidiary of Northern Telecom. Mr.
Heinen received a B.S. in Computer Science from the University of California at
Santa Barbara.
9
<PAGE> 10
Mr. Henry L. Tinker, age 68, joined the Company in May 1991 as Vice
President, Operations. From May 1990 until joining Verilink, Mr. Tinker served
as an Operations Consultant to the Company. From May 1984 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. Steve Turner, age 41, joined the Company in November, 1998 as Vice
President of the Company's Huntsville Strategic Business Unit. From August 1997
until joining the Company, Mr. Turner served as Vice President of Engineering
and Technology for TxPort, Inc. From November 1995 to August 1997, Mr. Turner
was Vice President of extended range products for Adtran, Inc. Prior to joining
Adtran, Mr. Turner served in various technical and management capacities with
Motorola's Information Systems Group. Mr. Turner received his B.S. in Electrical
Engineering from Louisiana Tech University and a M.S. in Electrical Engineering
from the University of Missouri.
Other than Henry L. Tinker, who is the father-in-law of Leigh S. Belden, a
director of the Company, there are no family relationships among any of the
directors or executive officers of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
(Nasdaq) under the symbol "VRLK" since the Company's initial public offering of
Common Stock in June 1996. Prior to the initial public offering, there was no
established trading market for the Company's Common Stock. As of September 15,
1999, the Company had 139 shareholders of record and approximately 3,300
beneficial owners of shares held in street name. The following table shows the
high and low sale prices per share for the Common Stock as reported by Nasdaq
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1999 -- QUARTER ENDED JUNE 27 MARCH 28 DECEMBER 27 SEPTEMBER 27
---------------------------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Market Price: High............................. $ 3.25 $ 2.63 $3.88 $ 4.63
Low.............................. $ 3.06 $ 2.13 $3.63 $ 4.38
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 -- QUARTER ENDED JUNE 28 MARCH 29 DECEMBER 28 SEPTEMBER 28
---------------------------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Market Price: High............................. $11.00 $11.00 $9.44 $13.00
Low.............................. $ 6.38 $ 5.56 $5.56 $ 8.75
</TABLE>
The Company has never declared or paid dividends on its capital stock and
does not intend to pay dividends in the foreseeable future.
10
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data concerning the Company
for and as of the end of each of the years in the five year period ended June
27, 1999, are derived from the audited consolidated financial statements of the
Company. The selected financial data are qualified in their entirety by the more
detailed information and financial statements, including the notes thereto. The
financial statements of the Company as of June 27, 1999 and June 28, 1998, and
for each of the three years in the period ended June 27, 1999, and the report of
PricewaterhouseCoopers LLP thereon, are included elsewhere in this report.
FINANCIAL INFORMATION BY YEAR (UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF EMPLOYEES)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 59,553 $50,915 $57,170 $41,608 $31,447
Gross profit............................ $ 27,729 25,121 28,845 21,453 14,755
Income (loss) from operations........... $(14,901)(1) (3,745) 4,832 3,232 347
Net income (loss)....................... $(13,666) (1,071) 4,194 2,716 448
Net income (loss) per share -- basic.... $ (0.98) $ (0.08) $ 0.31 $ 0.27 $ 0.05
Net income (loss) per
share -- diluted...................... $ (0.98) $ (0.08) $ 0.29 $ 0.25 $ 0.04
Shares used to compute net income (loss)
per share -- basic.................... 13,929 13,742 13,324 10,224 9,519
Shares used to compute net income (loss)
per share -- diluted.................. 13,929 13,742 14,289 10,804 9,961
Research and development as a percentage
of sales.............................. 22.5% 24.5% 16.4% 17.5% 21.0%
Capital expenditures.................... $ 2,586 $ 2,752 $ 6,471 $ 958 $ 782
Cash and cash equivalents and short-term
investments........................... $ 18,476 $42,415 $39,050 $40,542 $ 3,243
Working capital......................... $ 25,960 $45,163 $46,217 $45,015 $ 5,695
Stockholders' equity.................... $ 40,139 $53,810 $53,767 $47,234 $ 7,433
Total assets............................ $ 54,281 $63,828 $60,687 $55,218 $12,617
Employees............................... 310 250 219 182 152
</TABLE>
(1) Includes in-process research and development charge of $3,330 and
restructuring charge of $3,200.
11
<PAGE> 12
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each
of the Company's last eight fiscal quarters. This information has been prepared
by the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
data.
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
3 MONTHS ENDED
--------------------------------------------------
FISCAL 1999 JUNE 27 MARCH 28 DECEMBER 27 SEPTEMBER 27
----------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales..................................... $13,366 $12,003 $17,107 $17,078
Gross profit.................................. $ 5,695 $ 4,611 $ 8,654 $ 8,770
Income (loss) from operations................. $(2,891) $(8,925) $(3,637) $ 552
Net income (loss)............................. $(2,509) $(8,650) $(3,228) $ 722
Net income (loss) per share -- basic.......... $ (0.18) $ (0.62) $ (0.23) $ 0.05
Net income (loss) per share -- diluted........ $ (0.18) $ (0.62) $ (0.23) $ 0.05
Shares used to compute net income (loss) per
share -- basic.............................. 13,858 14,020 13,929 13,908
Shares used to compute net income (loss) per
share -- diluted............................ 13,858 14,020 13,929 14,244
</TABLE>
<TABLE>
<CAPTION>
3 MONTHS ENDED
--------------------------------------------------
FISCAL 1998 JUNE 28 MARCH 29 DECEMBER 28 SEPTEMBER 28
----------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales..................................... $17,303 $14,081 $ 9,518 $10,013
Gross profit.................................. $ 8,758 $ 6,720 $ 4,639 $ 5,005
Income (loss) from operations................. $ 683 $ (953) $(1,903) $(1,572)
Net income (loss)............................. $ 903 $ (470) $ (875) $ (629)
Net income (loss) per share -- basic.......... $ 0.07 $ (0.03) $ (0.06) $ (0.05)
Net income (loss) per share -- diluted........ $ 0.06 $ (0.03) $ (0.06) $ (0.05)
Shares used to compute net income (loss) per
share -- basic.............................. 13,818 13,805 13,690 13,655
Shares used to compute net income (loss) per
share -- diluted............................ 14,284 13,805 13,690 13,655
</TABLE>
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the 1999
Consolidated Financial Statements and Notes thereto.
This MD&A 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. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth herein,
including those set forth in "Factors Affecting Future Results" below.
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal years
1999, 1998, and 1997 ended June 27, June 28, and June 29, respectively, and
consisted of 52 weeks. References to 1999, 1998, and 1997 shall be to the
respective fiscal year unless otherwise stated or the context otherwise
requires.
OVERVIEW
Verilink Corporation (the "Company") develops, manufactures and markets
integrated access products and customer premise equipment for telecommunications
network service providers ("NSPs") and corporate end users on wide area
networks. 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 to provide
seamless connectivity and interconnect for multiple traffic types on wide area
networks ("WANs").
During the second quarter of fiscal 1999, the Company acquired TxPort, a
manufacturer of high speed voice, and data communications products, based in
Huntsville, Alabama for $10,000,000 in cash, which was funded by the Company's
working capital. Accordingly, the results of operations of TxPort, commencing
November 16, 1998, the date of acquisition, have been included with the
Company's results for fiscal 1999.
In July, 1999 the Company announced its plans to substantially consolidate
its operations into its existing operations located in Huntsville, Alabama. The
goal of this plan is to reduce expenses and enable the Company to achieve
profitability at lower revenue levels. In connection with those plans the
Company will also outsource its San Jose-based manufacturing operations to a
third party subcontract manufacturer.
During 1999, Verilink's Access System 2000 product line continued to
generate the majority of sales. Verilink designed the Access System 2000 with
modular hardware and software 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, and frame relay services. The Access
System 3000 was introduced in 1999 as an extension of the successful AS2000
platform and includes an increase in switching capacity, support for voice
signals and broadband multiplexing up to T3 rates. The Company has other
features under development that are intended to expand the number of services
the Access System products support.
The Company also sells single purpose network access devices for selected
applications. The acquisition of the former TxPort product line significantly
adds to the breadth of the Company's product portfolio in this area, and
contributed a significant percentage of the Company's total sales in the second
half of fiscal 1999.
The Company believes that period-to-period comparisons of its financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, the Company's results of
operations may fluctuate from period-to-period in the future.
13
<PAGE> 14
RESULTS OF OPERATIONS
SALES
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Net sales............................................. $59,553 $50,915 $57,170
Percentage change from preceding year................. 17% (11)% 37%
</TABLE>
Net sales for 1999 increased 17% to $59.6 million from 1998 net sales of
$50.9 million. The increase was solely attributable to the sales contribution of
products acquired from the TxPort acquisition that was completed in November
1998. Sales from these products represented approximately 20% of total year
sales, and 38% of the second half of the year sales. Net sales for 1998 were
$50.9 million representing a decrease of 11% from 1997 sales of $57.2 million.
The decline in net sales during 1998 was attributable primarily to a decline in
shipments to the Company's reseller and carrier customers that was partially
off-set by improved shipments to system integrators. The Company believes 1998
net sales were adversely affected in part by pending merger and consolidation
discussions among the Company's key customers resulting in delayed purchases.
During 1999, shipments of the Access System 2000 product line accounted for
approximately 67% of net sales compared to 86% during 1998 and 80% in 1997. The
sales contribution of the recently introduced AS3000 was negligible as a result
of its late introduction and as selling and customer testing cycles extended
beyond what had been anticipated.
The Company's business is characterized by the concentration of sales to a
limited number of key customers. Sales to the Company's top five customers
accounted for 57%, 64% and 67% of sales in 1999, 1998, and 1997, respectively.
The Company's largest customers in fiscal 1999 were MCIWorldCom, Nortel, Bell
Atlantic/NYNEX, Timeplex and Ericsson (formerly Qualcomm). See Note 1 of "Notes
to Consolidated Financial Statements" and "Factors Affecting Future
Results -- Customer Concentration".
The Company sells its products primarily in the United States through a
direct sales force and through a variety of resellers, including original
equipment manufacturers (OEMs), system integrators, value-added resellers (VARs)
and distributors. Sales to VARs and distributors accounted for approximately 19%
of sales in 1999, as compared to approximately 10% in 1998 and 18% in 1997. With
the addition of the former TxPort product line the importance of the channel is
expected to increase, as those products lend themselves more to an indirect
distribution model. To date, sales outside of North America have not been
significant. However, the Company intends to expand the marketing of its
products to markets outside of North America.
GROSS PROFIT
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Gross Profit.......................................... $27,729 $25,121 $28,845
Percentage of Sales................................... 46.6% 49.3% 50.5%
</TABLE>
Gross profit, as a percentage of sales in 1999 was 46.6% as compared to
49.3% in 1998 and 50.5% in 1997. The decrease in gross profit margin in 1999 was
primarily due to significantly lower sales volume for the Company's San
Jose-based operations, particularly in the second half of the year, in
combination with the relatively fixed cost of maintaining manufacturing
operations in both California and Alabama. This lower sales volume was
accompanied by a reduction in unit volumes of normally high unit volume
products, and resulted in inefficiencies associated with producing a high mix of
products at lower volumes. The decrease in gross profit margin in 1998 was
primarily due to increased manufacturing overhead spending resulting from higher
labor and facility related costs at lower net sales levels. The increase in 1998
manufacturing overhead spending was offset in part by favorable direct material
costs. In future periods, the Company's gross profit will vary depending upon a
number of factors, including the cost of products manufactured at subcontract
facilities, the channels of distribution, the price of products sold,
discounting practices, the mix of products sold, price competition, increases in
material costs, and changes in other components of cost of sales. As the Company
14
<PAGE> 15
introduces new products, it is possible that such products may have lower gross
profit than other established products in high volume production. Accordingly,
gross profit as a percentage of sales may vary.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
(THOUSANDS)
<S> <C> <C> <C>
Research and development............................... $13,391 $12,484 $9,373
Percentage of Sales.................................... 22.5% 24.5% 16.4%
</TABLE>
Research and development expenses (R&D) increased to $13.4 million or 22.5%
of sales in 1999 compared to $12.5 million and $9.4 million or 24.5% and 16.4%
of sales for 1998 and 1997, respectively. The expense increase during 1999 is
due principally to the addition of expenses associated with the Huntsville
development organization beginning in November 1998, and to an increased rate of
development on the AS3000 product line during the first half of the fiscal year.
Although R & D expenses increased in absolute dollars, it decreased as a
percentage of sales due to higher sales volume in 1999 as compared to 1998. The
expense increase in 1998 was due principally to the use of outside consultants
and the addition of personnel associated with product development activities.
The increase in R&D expenses in 1998 as a percentage of sales was due to an
increase in spending at reduced sales levels. During 1998, the Company's new
product development efforts focused on advanced features for the Access System
2000 Platform, the Access System 3000 and development of the Node Manager
developed to provide node element management capabilities for all Access System
2000 and 3000 modules. The Company considers product development expenditures to
be critical to future sales and expects to continue to invest in this area,
while such expenditures as a percentage of sales may vary. There can be no
assurance that the Company's research and development efforts will result in
commercially successful new technology and products in the future, and those
efforts may be affected by other factors as noted below. See "Factors Affecting
Future Results -- Dependence on Recently Introduced Products and Products Under
Development".
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Selling, general and administrative................... $22,709 $16,382 $14,640
Percentage of sales................................... 38.1% 32.2% 25.6%
</TABLE>
The Company's selling, general and administrative (SG & A) expenses
increased to $22.7 million in 1999, compared to $16.4 million in 1998 and $14.6
million in 1997. SG & A expenses increased as a percentage of sales to 38.1% in
1999 from 32.2% in 1998 due to the decline in revenues in the San Jose
operations combined with the overlap in SG & A functions in the Company's
California and Alabama operations. The increase in expense in 1999 was primarily
the result of the addition of expenses from the TxPort acquisition. Selling
expenses increased as a result of increased selling efforts and equipment
demonstration costs. Marketing expenses increased principally as a result of
incremental costs associated with the integration of sales collateral of TxPort
into a single company, more extensive trade show participation, and increases in
other promotional activities such as direct mail campaigns. General and
Administrative expenses also increased as a result of increases in staff
associated with the acquisition of TxPort and outside contract costs associated
with the implementation of the Company's ERP system. The increase in dollars
spent in 1998 was due to the increase in selling and marketing activities and
personnel related costs necessary to support the Company's infrastructure. These
expenses increased as a percentage of sales to 32.2% in 1998 from 25.6% in 1997
due to increased dollar spending between periods at reduced net sales levels.
The Company expects that general and administrative expenses will decline as a
result of its plans to consolidate its operations in Huntsville, Alabama.
However, there can be no assurance that the Company will be successful in its
efforts to reduce expenses. See "Factors Affecting Future
Results -- Restructuring Actions May Not Achieve Intended Results".
15
<PAGE> 16
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Effective November 16, 1998, the Company completed its acquisition of
TxPort, Inc. ("TxPort") from Acme-Cleveland Corporation, by purchasing all the
outstanding shares of TxPort at a cost of $10,500,000. TxPort is a manufacturer
of high speed voice and data communications products.
The transaction was accounted for using the purchase method, and the
purchase price was allocated to the assets acquired, including core technology,
and liabilities assumed based on the estimated fair market values at the date of
acquisition.
At the time of the acquisition the Company was involved in research and
development projects in relation to three areas, enhancement and augmentation of
the CSU product line, enhancement and augmentation of the CSU/DSU product line
and development of packet and frame aware CSU/DSU products along with a virtual
private network product. The in-process research and development of $3.3
million, which was expensed at the acquisition date, represented the estimated
current fair market value of the research and development projects which had not
reached technological feasibility and had no alternative future uses at the date
of acquisition. The value of in-process research and development was determined
by estimating the expected cash flows from the projects once commercially
viable, discounting the net cash flows back to their present value and then
applying a percentage of completion. The net cash flows from the identified
projects were based on management estimates of revenues, cost of sales, research
and development costs, selling, general and administrative costs, and income
taxes from the project. The research and development costs included in the model
reflect costs to sustain the project, but exclude costs to bring the in-process
project to technological feasibility. The estimated revenues were based on
management projections for the projects. Projected gross margins reflect recent
historical performance of other Company products and are in line with industry
expectations. The estimated selling, general and administrative costs, and
research and development costs were estimated excluding synergies expected from
the acquisition.
The discount rate used in discounting the net cash flows from in-process
research and development is 35%. This discount rate reflects the uncertainties
surrounding the successful development of the in-process research and
development, market acceptance of the technology, the useful life of such
technology, the profitability levels of such technology and the uncertainty of
technological advances that could potentially impact the estimates described
above.
The percent of completion for the three project areas was determined by
comparing both effort expected and research and development costs incurred as of
November 1998, to the remaining effort to be expended and research and
development costs to be incurred, based on management's estimates, to bring the
projects to technological feasibility. Based on these comparison management
estimated the three project areas to be approximately 55%, 35%, and 60% complete
as of the date of acquisition. The projects were substantially completed by June
1999. The effort and costs required to complete the projects approximated the
estimates made by management at the date of acquisition.
Recent actions and comments from the Securities and Exchange Commission
have indicated that they are reviewing the current valuation methodology of
purchased in-process research and development relating to acquisitions. The
Commission is concerned that some companies are writing off more of the value of
an acquisition than is appropriate. The Company believes that it is in
compliance with all of the rules and related guidance as they currently exist.
However, there can be no assurance that the Commission will not seek to reduce
the amount of purchased in-process research and development previously expensed
by the Company. This would result in the restatement of previously filed
financial statements of the Company and could have a material negative impact on
the financial results for the period subsequent to the acquisition.
The results of the operations acquired have been included with those of the
Company from the date of acquisition. Intangible assets have been recorded and
are being amortized over estimated useful lives between three and ten years.
RESTRUCTURING CHARGE
In March 1999, the Company announced and implemented a restructuring of the
business to streamline operations and eliminate redundant functions by
consolidating manufacturing operations, combining sales and
16
<PAGE> 17
marketing functions, and restructuring research and development activities.
Included as a part of the restructuring activities was the retirement of the
Company's two founders. The Company incurred a pretax restructuring charge of
$3,200,000. See Note 3 of "Notes to Consolidated Financial Statements" for
further details of the restructuring charge. Approximately $2,930,000 of the
restructuring charge was cash in nature and paid out of the Company's working
capital.
In connection with the Company's plans to substantially consolidate its
operations into its existing operations located in Huntsville, Alabama, and
outsource its San Jose manufacturing operations, the Company expects that
approximately 131 positions located in San Jose will be either eliminated or
displaced to Huntsville, Alabama. In addition, the Company expects to incur a
charge in the first quarter of fiscal 2000 related to the early termination of
its lease obligations, the separation of employees, and the write down of
impaired assets.
INTEREST AND OTHER INCOME, NET
Interest and other income, net declined to $1.2 million from $2.1 million
in 1998 as a result of substantially lower invested cash balances. Interest and
other income, net remained relatively unchanged between 1998 and 1997 at
approximately $2.0.
PROVISION FOR/BENEFIT FROM INCOME TAXES
In fiscal 1999, the Company recorded no benefit from income taxes due to
continued operating losses and the uncertainty of realization of the Company's
net deferred tax assets. In fiscal 1998, the Company recorded a benefit from
income taxes of $608,000, representing an effective tax rate of 36%, compared to
an effective tax rate of 39% in fiscal 1997. This benefit was based on available
net operating loss carryback capacity. As of June 27, 1999, the Company had
fully utilized its available carryback capacity.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1999 the Company's principal sources of liquidity included
$18.5 million of cash, cash equivalents, and short-term investments.
During 1999, the Company used $7.2 million of net cash in operating
activities; a $12.4 million change from the $5.2 million of net cash provided by
operating activities in 1998. During 1997 the Company generated $3.7 million in
net cash from operating activities. Accounts receivable increased $3.2 million
to $9.2 million at June 27, 1999 from $6.0 million at June 28, 1998. This was
due to the acquisition of TxPort Inc., less linearity in shipments in the fourth
quarter of fiscal 1999 than in 1998 and a $1.3 million advance billing made to a
customer at its request. Accounts receivable at June 28, 1998 decreased by $2.5
million as compared to June 29, 1997 reflecting an improvement in the linearity
of shipments during the fourth quarter of 1998 over the prior year. Inventories
increased $2.0 million to $6.9 million at June 27, 1999 from $4.9 million at
June 28, 1998. This increase was due to the acquisition of TxPort Inc. and lower
sales volume in the fourth quarter of 1999 than expected. In 1999, total current
liabilities increased by $4.1 million due mainly to the liabilities assumed in
connection with the acquisition of TxPort, Inc. In 1998, accounts payable and
accrued expenses increased $2.9 million, reflecting increased procurement
activities and accruals for outside consultants and service providers.
Net cash used in investing activities was $2.1 million in 1999 compared to
a use of $26.4 million and $8.9 million in 1998, and 1997 respectively. The net
cash used in investing activities in 1999 resulted primarily from the maturity
of $14.5 in short-term investments offset by $10.5 million in cash used for the
acquisition of TxPort, Inc., $2.6 million of capital equipment and $3.6 million
of notes receivable from a director. The net cash used in investing activities
in 1998 and 1997 was primarily the result of greater purchases of short-term
investments, and purchases of property and equipment. The Company estimates that
total budgeted capital expenditures in fiscal 2000 will approximate $3.0 million
and will include expenditures for IT infrastructure, and design tools.
17
<PAGE> 18
Net cash used in financing activities was $100,000 in 1999 as compared to
net cash provided by financing activities of $933,000 in 1998 and $1.3 million
in 1997. The use of cash in 1999 was primarily attributable to the Company's
repurchase of $937,000 of its Common Stock offset by the proceeds from the
exercise of stock options and the Employee Stock Purchase Plan.
On February 18, 1999, the Board of Directors authorized the Company's
management to systematically repurchase up to 1,000,000 shares of the Company's
Common Stock. As of June 27, 1999, the Company had purchased 284,500 shares at a
cost of $937,000.
The Company believes that its cash and investment balances and anticipated
cash flows from operations will be adequate to finance current operations,
anticipated investments and capital expenditures for at least the next twelve
months. However, the Company continues to investigate the possibility of
generating financial resources through committed credit agreements, technology
or manufacturing partnerships, equipment financing, and offerings of debt and
equity securities.
YEAR 2000 READINESS
The year 2000 presents concerns, which are widespread and complex. If
computer, information or telecommunication systems do not correctly recognize
date information when the year changes to 2000, there could be an adverse impact
on the Company's operations. The Company has evaluated and continues to evaluate
its year 2000 risk as it exists in four areas: information technology
infrastructure, including reviewing what actions are necessary to bring all
software tools used internally to year 2000 compliance; information systems used
by the Company's suppliers; potential warranty and year 2000 claims from the
Company's customers; and the potential impact of reduced spending by customers
or potential customers on telecommunication network solutions as a result of
devoting a substantial portion of their information system spending to resolve
year 2000 compliance issues.
The Company evaluated its information technology infrastructure for year
2000 compliance, which included reviewing what actions were required to make all
software systems used internally year 2000 compliant. The Company purchased and
implemented an enterprise resource planning solution (ERP) which has been
determined to be year 2000 compliant. It is the Company's intent for all
software systems and tools that are identified as non-compliant to be either
upgraded or replaced. For the non-compliant systems identified to date, the cost
to bring the systems to year 2000 compliance is not expected to be material to
the Company's operating results. However, if implementation of replacement
systems and tools is delayed, or if significant new non-compliance issues are
identified, the Company's results of operations, business and financial
condition could be materially adversely affected.
The Company contacted its key suppliers to determine that the suppliers
operations and the products and services they provide are year 2000 compliant.
Responses have generally indicated substantial remediation, or documented plans
to remediate the year 2000 issue. Some have given written certification of
internal and product compliance. Substantially all key suppliers have indicated
compliance of their product or service. In the event that any of the Company's
key suppliers does not successfully and timely achieve year 2000 compliance, the
Company's business, financial condition and results of operations could be
adversely affected.
All of the Company's products were reviewed for compliance to year 2000
guidelines. This process included a complete and thorough testing of current
products as well as inclusion of year 2000 requirements in specifications for
future product releases. Based on this review, the Company believes its current
product shipments are year 2000 compliant and that neither performance nor
functionality are affected by dates prior to, during, and after the year 2000
and that the year 2000 is recognized as a leap year. However, as all customer
events cannot be anticipated, the Company may see an increase in product
warranty and other claims. In the event that any of the Company's products
ultimately are not year 2000 compliant, or there are customer claims made
against the Company, the Company's business, financial condition and results of
operations could be adversely affected.
Costs. The total cost to address the Year 2000 issue has not been and is
not expected to be material to the Company's financial condition. The Company is
using both internal and external resources to reprogram,
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or replace, and test its software for Year 2000 modifications. The Company does
not separately track internal costs incurred on the Year 2000 Project, which
principally includes payroll and related costs for Information Management
employees that are being expensed as incurred. These costs will be funded
through operating cash flows.
Risks. The Company believes, based on currently available information, that
it will be able to properly manage its total Year 2000 exposure. There can be no
assurance, however, that the Company will be successful in its efforts, or that
the computer systems of other companies on which the Company relies will be able
to be modified in a timely manner. Additionally, there can be no assurance that
a failure to modify such systems by another company, or modifications that are
incompatible with the Company's systems, would not have a material adverse
effect on the Company's business, financial condition, or results of operations.
Contingency Plans. The Company has formulated contingency plans in those
areas where year 2000 non-compliance could have a material adverse effect on the
Company's business, financial condition and results of operations. However, the
Company has not developed a contingency plan to address every potential year
2000 non-compliance situation that may be present when the year changes to 2000.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP No. 98-1 requires entities
to capitalize costs related to internal-use software once specified criteria
have been met. The Company will adopt SOP No. 98-1 for fiscal year 2000.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will adopt
SFAS No. 133 for fiscal year 2001. However, since the Company currently does not
hold any derivative instruments and does not engage in hedging activities, the
Company does not expect the adoption of SFAS No. 133 to have a material impact
on its results of operations, financial position or cash flows.
FACTORS AFFECTING FUTURE RESULTS
As described by the following factors, past financial performance should
not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.
This Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
using terminology such as "may," "will," "expects," "plans," "anticipates,"
"estimates," "potential," or "continue," or the negative thereof or other
comparable terminology regarding beliefs, plans, expectations or intentions
regarding the future. Forward-looking statements include statements in (i) Item
1 regarding the Company's plans to substantially consolidate its operations and
outsource its manufacturing operations (the "Restructuring"); the goals,
intended benefits and success of the Restructuring, particularly the goal of
reducing expenses; continued growth of the market for communications services;
the emergence of new communications carriers; the creation of new market
opportunities; the introduction of new telecommunications services; the growing
popularity and use of the Internet; the need for virtual private networking
capabilities becoming critical; the growth in the requirement for additional
bandwidth; the employment of new telecommunications equipment, technology and
facilities; the beneficiaries of the trend toward higher bandwidth; developing
nations increasingly looking to wireless technology; future growth in the
wireless communications industry, particularly in terms of number of
subscribers, minutes used, implementation of new systems and the emergence of
broadband access; the Company's expected expenditures on product development;
the timing of the completion of the Company's outsourcing plan; the growth of
the market for feature-enhanced network termination and access products; and the
members of the Companies senior management team who will or will not be
continuing with the Company or transitioning to the Company's Huntsville
operations and (ii) Item 7
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regarding the goals and success of the Restructuring plan; product features
under development; the expected decline selling, general and administrative
expenses; evaluation and resolution of the Year 2000 problems; expenses
associated with the Year 2000 problem; total budgeted capital expenditures; and
the adequacy of the Company's cash position for the next twelve months. These
forward-looking statements involve risks and uncertainties, and it is important
to note that Verilink's actual results could differ materially from those in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below as well as the other
factors set forth in Item 1 and Item 7 hereof. All forward-looking statements
and risk factors included in this document are made as of the date hereof, based
on information available to Verilink as of the date hereof, and Verilink assumes
no obligation to update any forward-looking statement or risk factor. You should
consult the risk factors listed from time to time in the Company's Reports on
Form 10-Q and the Company's Annual Report to Stockholders.
Restructuring Actions May Not Achieve Intended Results. The Company
announced in July 1999 its plans to substantially consolidate its operations in
Huntsville, Alabama in order to strengthen its business and improve its results
from operations. These actions are intended to streamline the Company's
operations, reduce operating costs, and enable the Company to achieve
profitability at lower revenue levels. Delay or difficulty in implementing these
actions, or market factors could reduce the anticipated benefit of these
actions. The Company's revenues, operating results, and financial condition,
could be adversely affected by the Company's ability to manage effectively the
transition to Huntsville, to continually improve new product development
processes, and to outsource a substantial portion of its manufacturing
activities. In particular, there is a risk that the company may be unable to
efficiently manage its operations due to the high likelihood of departures of
members of its senior management team and the inherent complexities included in
managing operations in both Alabama and California. Moreover, the Company's
plans to outsource a substantial portion of its manufacturing activities exposes
it to a number of risks including reduced control over manufacturing and
delivery schedules, quality control and costs. The failure by the Company to
overcome these risks and achieve the intended results from its restructuring
actions would have a significant adverse affect on the Company's business and
results of operations, particularly in light of the Company's recent
disappointing operating results.
Customer Concentration. A small number of customers continue to account for
a majority of the Company's sales. In September 1998, MCI and WorldCom completed
their merger and now operate under the same name MCIWorldCom. Percentages of
total revenue have been restated for fiscal 1999 and prior years as if the
merger had been in effect for all periods presented. Similarly, in May, 1999,
Ericsson completed its acquisition of Qualcomm's terrestrial Code Division
Multiple Access (CDMA) wireless infrastructure business. Percentages of total
revenue for Ericsson have been restated for fiscal 1999 and prior years as if
the acquisition had been in effect for all periods presented. In fiscal 1999,
sales to MCIWorldCom, Nortel, and Ericsson accounted for 27%, 17%, and 5% of the
Company's sales respectively and sales to the Company's top five customers
accounted for 57% of the Company's sales. In fiscal 1998, sales to MCIWorldCom,
Nortel, and Ericsson accounted for 31%, 20%, and 12% of the Company's sales,
respectively, and sales to the Company's top five customers accounted for 64% of
the Company's sales. In fiscal 1997, MCIWorldCom, Nortel and Ericsson accounted
for 33%, 22%, and 9% of the Company's sales, respectively, and the Company's top
five customers accounted for 67% of the Company's sales. Other than MCIWorldCom,
Nortel, and Ericsson, no customer accounted for more than 10% of the Company's
sales in fiscal years 1999, 1998, or 1997. 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. Certain
customers of the Company have been or may be acquired by other existing
customers. The impact of such acquisitions on sales to such customers is
uncertain, but there can be no assurance that such acquisitions will not result
in a reduction in sales to those customers. In addition, such acquisitions could
have in the past and could in the future, result in further concentration of the
Company's customers. The Company has in the past experienced significant
declines in sales it believes were in part related to orders being delayed or
cancelled as a result of pending acquisitions relating to its customers. There
can be no assurance future merger and acquisition activity among the customers
will not have a similar adverse affect on the Company's sales and results of
operations. The Company's customers are typically not
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contractually obligated to purchase any quantity of products in any particular
period. Product sales to major customers have varied widely from period to
period. In some cases, major customers have abruptly terminated purchases of the
Company's products. 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" and
"Fluctuations in Quarterly Operating Results".
Dependence on Contract Manufacturers. The Company entered into arrangements
with a single contract manufacturer to outsource substantially all of the
Company's San Jose-based manufacturing operations, including its procurement,
assembly, and system integration operations. During 1999, a majority of the
Company's revenues were generated by products manufactured by its operations
located in California. There can be no assurance that this contract manufacturer
will be able to meet the Company's future requirements for manufactured
products, or that such independent contractor will not experience quality
problems in manufacturing the Company's products. The inability of the Company's
contract manufacturer to provide the Company with adequate supplies of high
quality products could have a material adverse effect on the Company's business,
financial condition, and results of operations. The loss of any of the Company's
contract manufacturers could cause a delay in the Company's ability to fulfill
orders while the Company identifies a replacement manufacturer. Such an event
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
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. The Company is a party to agreements
with certain of its executive officers to help ensure the officer's continual
service to the Company in the event of a change-in-control. Each of the
Company's executive officers, and key management, sales and technical personnel
would be difficult to replace. As a result of the Company's plans to consolidate
its operations in Huntsville, Alabama, the Company believes that it is highly
likely that all of its officers, with the exception of Graham Pattison,
President and CEO, and Steve Turner, Vice President of the Huntsville Business
Unit, will not continue employment with the Company after the transition,
although to date, none has provided notice of termination and therefore, these
positions will need to be replaced with either existing personnel from
Huntsville or with new managers. 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".
Management of Growth. The Company has recently experienced growth in the
scope of its operations as a result of its recent acquisition. To manage
potential future growth effectively, the Company must improve its operational,
financial and management information systems and must hire, train, motivate and
manage its 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, marketing and management personnel, for whom competition is
intense. In particular, the current availability of qualified personnel is quite
limited, and competition among companies for such personnel is intense. The
Company is currently attempting to hire a number of executive management,
product marketing and engineering personnel and has experienced delays in
filling such positions and expects to experience continued difficulty in filling
its needs for qualified 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 and introduction cycles or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Dependence on Key Personnel".
Dependence on Component Availability and Key Suppliers. Under the
outsourcing plan, the Company will generally rely upon a contract manufacturer
to buy component parts that are incorporated into board assemblies used in its
products. On-time delivery of the Company's products depends upon the
availability of components and subsystems used in its products. Currently, the
Company depends upon and in the future, third party sub-contractors will depend
upon suppliers to manufacture, assemble and deliver components in a timely and
satisfactory manner. The Company has historically obtained several components
and licenses certain embedded software from single or limited sources. There can
be no assurance that these suppliers will continue to be able and willing to
meet the Company and third party sub-contractors requirements for any such
components. The
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Company and third party sub-contractors generally do 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. Any
loss in a key supplier, increase in required lead times, increase in prices of
component parts, interruption in the supply of any of these components, or the
inability of the Company or its third party sub-contractor to procure these
components from alternative sources at acceptable prices and within a reasonable
time, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Purchase orders from the Company's customers frequently require delivery
quickly after placement of the order. As 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, and suppliers may demand longer lead times,
higher prices, or termination of contracts. 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 may occur in
the future, and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Fluctuations in Quarterly
Operating Results".
Fluctuations in Quarterly Operating Results. The Company's sales are
subject to quarterly and annual fluctuations due to a number of factors
resulting in more variability and less predictability in the Company's
quarter-to-quarter sales and operating results. For example, sales to
MCIWorldCom, Nortel, and Ericsson have varied between quarters by as much as
$4.0 million and delayed orders by these customers substantially negatively
impacted the Company's third and fourth quarter results in 1999. 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. 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.
Delays or lost sales can be caused by other factors beyond the Company's
control, including late deliveries by the third party subcontractors the Company
is using to outsource its manufacturing operations as well as by other vendors
of components used 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
and products. 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. The Company
believes that recent period sales have been adversely impacted by merger
activities at some of its top customers. 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" and "Dependence on
Component Availability and Key Suppliers".
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
objectives, 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
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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, and 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 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, the
Company has had, and in some future quarter may have operating results 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 "Potential Volatility of Stock Price".
The Company's products are covered by warranties and the Company is subject
to contractual commitments concerning its products. If unexpected circumstances
arise such that the product does not perform as intended and the Company is not
successful in resolving product quality or performance issues, there could be an
adverse effect on the Company's business, financial condition and results of
operations. In particular, during the fourth quarter, the Company was notified
by one of its major customers of an intermittent problem involving one of its
products that is installed in the field. The Company believes it has identified
a firmware fix for this problem and may be required to share in the expense
associated with this upgrade.
Potential Volatility of Stock 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.
Company-specific factors or broad market fluctuations may materially adversely
affect the market price of the Company's common stock. The Company has
experienced significant fluctuations in its stock price and share trading volume
since its initial public offering in June 1996. There is no assurance that such
fluctuations will not continue.
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 both the Company's
Access System 2000 and the Access System 3000 product lines. The Access System
2000 product line represented approximately 67% of sales in fiscal 1999, 86% of
sales in fiscal 1998 and 80% of sales in fiscal 1997. Market acceptance of both
the Company's current and future product lines 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
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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
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. Failure to introduce
new 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 the Company can make them commercially available. The Company
has in the past experienced delays in the introduction of new products, product
applications and enhancements due to a variety of internal factors, such as
reallocation of priorities, difficulty in hiring sufficient qualified personnel
and unforeseen technical obstacles, as well as changes in customer requirements.
Such delays have deferred the receipt of revenue from the products involved. If
the Company's 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.
Risks Associated with the Acquisition of TxPort. In addition to risks
described below under "Risks Associated With Potential Acquisitions," the
Company faces significant risks associated with its recent acquisition of TxPort
and related reduction in workforce associated with the acquisition. There can be
no assurance that the Company will realize the desired benefits of this
acquisition. In order to successfully integrate TxPort, the Company must, among
other things, continue to attract and retain key personnel, integrate the
acquired products and technology from engineering, sales and marketing
perspectives, and consolidate functions and facilities. Difficulties encountered
in the integration may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company applied the purchase method of accounting in connection with
its acquisition of TxPort, resulting in a charge to be taken in each of the next
three to ten years for the amortization of intangible assets.
Risks Associated with Year 2000. There can be no assurances that the
Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in material costs or
liabilities to the Company. In addition, there can be no assurances that the
Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in material costs to
the Company. Moreover, the Company's products directly and indirectly interact
with a large number of other hardware and software systems could contain defects
associated with the year 2000 date. The Company is unable to predict to what
extent its business may be affected if its software or the systems that operate
in conjunction with its products experience a material year 2000 related
failure. Any year 2000 defect in the Company's products or the software and
hardware systems with which the Company's products operate could expose the
Company to litigation that could have a material adverse impact on the Company.
The risks of such litigation may be particularly acute due to the
mission-critical applications for which the Company's products are used. Some
commentators have stated that a significant amount of litigation will arise out
of year 2000 compliance issues, and the Company is aware of a growing number of
lawsuits against other software vendors. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent the Company may be
affected by it.
The Company could also experience serious unanticipated negative
consequences caused by undetected year 2000 defects in its internal systems,
including third party software and hardware products. Internal systems are
primarily composed of third-party software and third-party hardware which
contain embedded software and the Company's own software products. For example,
the Company could experience a (i) corruption of data contained in the Company's
internal information systems or a (ii) failure of hardware, software, or other
information technology systems, causing an interruption or failure of normal
business operations. Any such events could have a material adverse impact on the
Company. In addition, the Company could experience serious unanticipated
negative consequences caused by the failure of services or products provided by
third parties that are critical to the continued day-to-day operations of the
Company, such as electrical power, telecommunications services, and shipping
services (particularly outside of countries such as
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the United States where year 2000 remediation has progressed the furthest),
which consequences could have a material adverse effect on the Company's
business operations.
In addition, a widely-predicted freeze in deployment of new communications
systems by large corporations in the second half of calendar year 1999 related
to remediation of the Y2K problem could result in an unusual fluctuation of
orders, in which an unusually large number of orders are received in the middle
of 2000, followed by an unusual decrease in orders in subsequent quarters.
Enterprise Resource Planning (ERP). The Company went live in March 1999
with an upgrade to its enterprise-wide database and information management
systems, based principally on software from Oracle. This change in systems and
processes was substantial, and involved significant outside contract resources
to implement. Due to the relative immaturity of this system implementation and
the need to move it to Huntsville, Alabama, problems with the system, due to
software or configuration problems, or lack of trained personnel could cause
delays in order processing, shipments of products, and in the accumulation and
analysis of financial data. There can be no assurance that these problems, if
they occur, will not have an adverse effect on the Company's business, financial
condition, and results from operations.
Competition. The market for telecommunications network access 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 new entrants. The market for integrated access devices such as
the Company's Access System product line 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 and performance, support
for multiple types of communications services, network management, reliability,
and quality of customer support. There can be no assurance that the Company's
current products and future 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 and
Larscom, Inc., a subsidiary of Axel Johnson. In addition, the Company expects
substantial competition from companies in the computer networking market and
other related markets such as Newbridge Networks Corporation, Telco Systems,
Inc., a division of World Access, Inc., Visual Networks Inc., and Adtran, 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 basic network termination products
is mature and 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, Paradyne 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 like products. In addition, advanced termination
products are emerging which represent both new market opportunities as well as a
threat to current products. Furthermore, basic line termination functions are
increasingly being integrated by competitors, such as Cisco and Nortel Networks,
into other equipment such as routers and switches. These include direct WAN
interfaces in certain products, eroding the addressable market for separate
network termination 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.
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 enhancements on a
cost-effective basis. The
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development of new, technologically advanced products is a complex and uncertain
process, requiring high levels of innovation. The development of new products
for the WAN access market requires competence in the general areas of telephony,
data networking, network management and wireless telephony as well as specific
technologies such as DSL, ISDN, Frame Relay, ATM and IP. Furthermore, 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 delays 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".
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, performance monitoring services 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 effectiveness of deploying communication services. Such
policies also affect demand for telecommunications equipment, including the
Company's products.
Risks Associated With Potential Acquisitions. An important element of the
Company's strategy is to review acquisition prospects that would compliment its
existing product offerings, augment its market coverage, enhance its
technological capabilities or offer growth opportunities. Future acquisitions by
the Company could result in potentially dilutive issuance of equity securities,
use of cash and/or the incurring of debt and the assumption of contingent
liabilities, any of which could have a material adverse effect on the Company's
business and operating results and/or the price of the Company's common stock.
Acquisitions entail numerous risks, including difficulties in the assimilation
of acquired operations, technologies and products, diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has limited or no prior experience and potential loss of key employees
of acquired organizations. The Company's management has limited prior experience
in assimilating acquired organizations. No assurance can be given as to the
ability of the Company to successfully integrate any businesses, products,
technologies or personnel that might be acquired in the future, and the failure
of the Company to do so could have a material adverse effect on the Company's
business and operating results.
Risks Associated With Entry into International Markets. The Company to date
has had minimal direct sales to customers outside of North America. The Company
has little experience in the European and Far
26
<PAGE> 27
Eastern markets, but intends to expand sales of its products outside of North
America and to enter certain international markets, which will require
significant management attention and financial resources. Conducting business
outside of North America 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.
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 related
patent is issued 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, could 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 be
issued which relate to fundamental technologies incorporated into the Company's
products. The Company has received and may receive in the future communications
from third parties 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 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.
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 technology. 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 independent contractors, 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
27
<PAGE> 28
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.
Antitakeover Effects of Certain Charter Provisions. The Company's Board of
Directors has 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 27, 1999, the Company's investment portfolio consisted of fixed
income securities of $11.6 million. See Note 5 of "Notes to Consolidated
Financial Statements". These securities, like all fixed income instruments, are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10% from levels as of June 27, 1999, the decline in the fair value of the
portfolio would not be material. Additionally, the Company has the ability to
hold its fixed income investments until maturity and therefore, the Company
would not expect to recognize such an adverse impact in income or cash flows.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. The Company
believes that the effect, if any, of reasonably possible near-term changes in
interest rates on the Company's financial position, results of operations and
cash flows would not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The chart entitled "Financial Information by Quarter (Unaudited)" contained
in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8
of Part II of this form 10-K.
28
<PAGE> 29
VERILINK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 30
Consolidated Balance Sheets as of June 27, 1999 and June 28,
1998...................................................... 31
Consolidated Statements of Operations for each of the three
years in the period ended
June 27, 1999............................................. 32
Consolidated Statements of Cash Flows for each of the three
years in the period ended
June 27, 1999............................................. 33
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended June 27, 1999......... 34
Notes to Consolidated Financial Statements.................. 35
Schedule for each of the three years in the period ended
June 27, 1999 included in Item 14(a):
II -- Valuation and Qualifying Accounts and Reserves...... 53
</TABLE>
Schedules other than those listed above have been omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes thereto.
29
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Verilink Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Verilink Corporation and its subsidiaries at June 27, 1999 and June
28, 1998, and the results of their operations and their cash flows for each of
the three years in the period ended June 27, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
July 21, 1999, except as to
Note 9 which is as
of September 22, 1999
30
<PAGE> 31
VERILINK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,365 $16,304
Restricted cash........................................... 515 --
Short-term investments.................................... 11,596 26,111
Accounts receivable, net of allowances of $205 and $62.... 9,161 5,992
Inventories............................................... 6,864 4,900
Notes receivable.......................................... 3,561 --
Deferred tax assets....................................... -- 1,532
Other current assets...................................... 2,040 342
------- -------
Total current assets.............................. 40,102 55,181
Property and equipment, net................................. 7,706 7,047
Deferred tax assets......................................... -- 436
Goodwill and other intangible assets........................ 5,337 --
Other assets................................................ 1,136 1,164
------- -------
$54,281 $63,828
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,818 $ 2,527
Accrued expenses.......................................... 11,324 6,747
Income taxes payable...................................... -- 744
------- -------
Total liabilities................................. 14,142 10,018
------- -------
Commitments and contingencies (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; 14,113,398 and 13,821,649 shares issued and
outstanding............................................ 141 138
Additional paid-in capital................................ 45,935 45,143
Notes receivable from stockholders........................ (1,288) (1,260)
Treasury stock; 3,637,210 shares and 3,352,710 shares of
Common Stock at cost................................... (8,257) (7,320)
Deferred compensation related to stock options............ (101) (266)
Retained earnings......................................... 3,709 17,375
------- -------
Total stockholders' equity........................ 40,139 53,810
------- -------
$54,281 $63,828
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 27,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net sales................................................... $ 59,553 $50,915 $57,170
Cost of sales............................................... 31,824 25,794 28,325
-------- ------- -------
Gross profit................................................ 27,729 25,121 28,845
-------- ------- -------
Operating expenses:
Research and development.................................. 13,391 12,484 9,373
Selling, general and administrative....................... 22,709 16,382 14,640
In-process research and development charge related to
acquisition............................................ 3,330 -- --
Restructuring charge...................................... 3,200 -- --
-------- ------- -------
Total operating expenses.......................... 42,630 28,866 24,013
-------- ------- -------
Income (loss) from operations............................... (14,901) (3,745) 4,832
Interest and other income, net.............................. 1,235 2,066 2,043
-------- ------- -------
Income (loss) before income taxes........................... (13,666) (1,679) 6,875
Provision for (benefit from) income taxes................... -- (608) 2,681
-------- ------- -------
Net income (loss)........................................... $(13,666) $(1,071) $ 4,194
======== ======= =======
Net income (loss) per share:
Basic..................................................... $ (0.98) $ (0.08) $ 0.31
======== ======= =======
Diluted................................................... $ (0.98) $ (0.08) $ 0.29
======== ======= =======
Weighted average common shares:
Basic..................................................... 13,929 13,742 13,324
======== ======= =======
Diluted................................................... 13,929 13,742 14,289
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 27,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(13,666) $ (1,071) $ 4,194
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 3,419 2,312 1,394
Deferred income taxes.................................. 1,968 (395) (145)
Tax benefit from exercise of stock options............. -- 271 897
Deferred compensation related to stock options......... 165 95 261
Accrued interest on notes receivable from
stockholders......................................... (63) (174) (71)
In-process research and development.................... 3,330 -- --
Changes in assets and liabilities net of effects of
acquisition of TxPort, Inc.:
Accounts receivable.................................. (537) 2,470 (2,280)
Inventories.......................................... (254) (447) 499
Other assets......................................... (1,688) (964) 42
Accounts payable..................................... (662) 1,269 (941)
Accrued expenses..................................... 1,547 1,667 135
Income taxes payable................................. (744) 162 (258)
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... (7,185) 5,195 3,727
-------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (2,586) (2,752) (6,471)
Sale (purchase) of short-term investments................. 14,515 (23,668) (2,454)
Issuance of loan to director.............................. (3,561) -- --
Acquisition of TxPort, Inc................................ (10,500) -- --
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... (2,132) (26,420) (8,925)
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net............... 795 933 797
Repurchase of Common Stock................................ (937) -- --
Proceeds from repayment of notes receivable from
stockholders........................................... 35 -- 455
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... (107) 933 1,252
-------- -------- -------
Net decrease in cash and cash equivalents................... (9,424) (20,292) (3,946)
Cash and cash equivalents and restricted cash at beginning
of year................................................... 16,304 36,596 40,542
-------- -------- -------
Cash and cash equivalents and restricted cash at end of
year...................................................... $ 6,880 $ 16,304 $36,596
======== ======== =======
Supplemental disclosures:
Cash paid for (refund from) income taxes.................. $ (307) $ 92 $ 2,042
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
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, 1996........ 13,122,833 $131 $42,432 $(1,445) $(7,320) $(816) $ 14,252 $ 47,234
Issuance of Common Stock under
stock plans................... 463,453 5 817 (25) -- -- -- 797
Amortization of deferred
compensation................ -- -- -- -- -- 261 -- 261
Reversal of deferred
compensation related to
forfeited stock options....... -- -- (205) -- -- 205 -- --
Accrued interest on notes
receivable from
stockholders.................. -- -- -- (71) -- -- -- (71)
Repayment of notes receivable
from stockholders............. -- -- -- 455 -- -- -- 455
Tax benefit of stock options.... -- -- 897 -- -- -- -- 897
Net income...................... -- -- -- -- -- -- 4,194 4,194
---------- ---- ------- ------- ------- ----- -------- --------
Balance at June 29, 1997........ 13,586,286 136 43,941 (1,086) (7,320) (350) 18,446 53,767
Issuance of Common Stock under
stock plans................... 235,363 2 931 -- -- -- -- 933
Amortization of deferred
compensation.................. -- -- -- -- -- 84 -- 84
Accrued interest on notes
receivable from
stockholders.................. -- -- -- (174) -- -- -- (174)
Tax benefit of stock options.... -- -- 271 -- -- -- -- 271
Net loss........................ -- -- -- -- -- -- (1,071) (1,071)
---------- ---- ------- ------- ------- ----- -------- --------
Balance at June 28, 1998........ 13,821,649 138 45,143 (1,260) (7,320) (266) 17,375 53,810
Issuance of Common Stock under
stock plans................... 291,749 3 792 -- -- -- -- 795
Purchase of treasury stock...... -- -- -- -- (937) -- -- (937)
Amortization of deferred
compensation.................. -- -- -- -- -- 165 -- 165
Accrued interest on notes
receivable from
stockholders.................. -- -- -- (63) -- -- -- (63)
Repayment of notes receivable
from stockholders............. -- -- -- 35 -- -- -- 35
Net loss........................ -- -- -- -- -- -- (13,666) (13,666)
---------- ---- ------- ------- ------- ----- -------- --------
Balance at June 27, 1999........ 14,113,398 $141 $45,935 $(1,288) $(8,257) $(101) $ 3,709 $ 40,139
========== ==== ======= ======= ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED JUNE 27, 1999
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. The Company develops, manufactures and markets integrated
access products and customer premise equipment products (CPE) for use by
telecommunications network service providers ("NSPs") and corporate end users on
wide area networks. The Company's integrated network access and customer premise
equipment products are used by network service providers such as interexchange
and local exchange carriers, and providers of Internet, personal communications
and cellular services to provide seamless connectivity and interconnect for
multiple traffic types on wide area networks ("WANs").
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 subsidiaries in the United Kingdom and Barbados. All
significant intercompany accounts and transactions have been eliminated.
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal 1999,
1998 and 1997 ended June 27, June 28, and June 29 respectively, and consisted of
52 weeks. References to 1999, 1998, and 1997 shall be to the respective fiscal
year unless otherwise stated or the context otherwise requires.
FOREIGN CURRENCY
The functional currency of the Company's foreign subsidiaries 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 instruments with a maturity of
three months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company classifies its investment securities as available for sale.
Realized gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized gains or losses are recorded
directly in stockholders' equity except those unrealized losses which are deemed
to be other than temporary which are reflected in the statements of operations.
No such losses were recorded during any of the periods presented.
35
<PAGE> 36
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
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
The Company recognizes a sale when the product has been shipped, no
material vendor or post-contract support obligations remain outstanding, except
as provided by a separate service agreement, and collection of the resulting
receivable is probable. The Company accrues related product return reserves,
warranty and royalty expenses at the time of sale. The Company extends limited
product return and price protection rights to certain distributors and
resellers. Such rights are generally limited to a certain percentage of sales
over a prior six-month period. The Company warrants its products for a five-year
period.
The following table summarizes the percentage of total sales for customers
accounting for more than 10% of the Company's sales:
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 27,
---------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Nortel, Inc................................................. 17% 20% 22%
MCIWorldCom(*).............................................. 27% 31% 33%
Ericsson(**)................................................ -- 12% --
</TABLE>
- ---------------
(*) In September 1998, MCI and WorldCom completed their merger and now operate
under the name MCIWorldCom. Percentages of total revenue have been restated
for 1999 and prior years as if the merger had been in effect for all
periods presented.
(**) In May 1999, Ericsson completed its acquisition of Qualcomm's terrestrial
Code Division Multiple Access wireless infrastructure business. Percentages
of total revenue have been restated for fiscal 1999 and prior years as if
the acquisition had been in effect for all periods presented.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company limits the amount of
investment exposure to any one financial institution and financial instrument.
The Company's trade accounts receivables are derived from sales to customers
primarily in North America. 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 based upon
the expected collectibility of the accounts receivable. Historically such losses
have been immaterial.
36
<PAGE> 37
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
The following table summarizes accounts receivable from customers
comprising 10% or more of the gross accounts receivable balance as of the dates
indicated:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Nortel Networks......................................... 12% 26% 34%
MCIWorldCom(*).......................................... 16% 26% 32%
Ericsson(**)............................................ -- 19% --
</TABLE>
- ---------------
(*) In September 1998, MCI and WorldCom completed their merger and now operate
under the name MCIWorldCom. Percentages of total revenue have been restated
for 1999 and prior years as if the merger had been in effect for all
periods presented.
(**) In May 1999, Ericsson completed its acquisition of Qualcomm's terrestrial
Code Division Multiple Access wireless infrastructure business. Percentages
of total revenue have been restated for fiscal 1999 and prior years as if
the acquisition had been in effect for all periods presented.
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. 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.
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as permitted
under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Under APB 25, if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
37
<PAGE> 38
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
EARNINGS PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted net income
(loss) per share gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted net income (loss) per share,
the average price of the Company's Common Stock for the period is used in
determining the number of shares assumed to be purchased from exercise of stock
options. Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share for the years ended June 27, 1999,
June 28, 1998, and June 29, 1997.
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net income (loss) as reported [numerator]............ $(13,666) $(1,071) $ 4,194
-------- ------- -------
Shares calculation [denominator]:
Weighted shares outstanding -- Basic................. 13,929 13,742 13,324
Effect of dilutive securities:
Potential common stock from the exercise of stock
options............................................ -- -- 965
-------- ------- -------
Weighted shares outstanding -- Diluted............... 13,929 13,742 14,289
======== ======= =======
Basic net income (loss) per share.................... $ (0.98) $ (0.08) $ 0.31
======== ======= =======
Diluted net income (loss) per share.................. $ (0.98) $ (0.08) $ 0.29
======== ======= =======
</TABLE>
Options to purchase 2,855,405, 1,833,134 and 606,676 shares of common stock
were outstanding at June 27, 1999, June 28, 1998 and June 29, 1997 respectively,
but were not included in the computation of diluted net income (loss) per share
because inclusion of such options would have been antidilutive.
COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") during fiscal 1999. FAS 130
establishes standards for reporting comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gain/loss on
available-for-sale securities. The Company's reported net income (loss)
approximates its comprehensive net income (loss) for each of the periods
presented.
SEGMENT INFORMATION
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes standards for the way
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The Company is organized
and operates as one operating segment and is engaged in the development,
manufacture and marketing of integrated access products for telecommunications
network service providers and corporate end users. The Company also operates in
one geographic area, the United States.
38
<PAGE> 39
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for fiscal years
beginning after June 15, 2000. SFAS 133 establishes new standards of accounting
and reporting for derivative instruments and hedging activities. SFAS 133
requires that all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. The Company currently
does not hold derivative instruments or engage in hedging activities.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The adoption of this standard will not
have a material impact on the Company's results of operations, financial
position or cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, cash equivalents, short-term investments and
other current assets and liabilities such as accounts receivable, accounts
payable, and accrued liabilities, as presented in the financial statements,
approximate fair value based on the short-term nature of these instruments.
GOODWILL AND OTHER PURCHASED INTANGIBLES
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of businesses acquired, and other purchased
intangibles are amortized on a straight-line basis over the estimated economic
lives, which range from three to ten years. Amortization expense relating to
goodwill and other intangible assets was $896,000 for 1999. No amortization
expense with respect to goodwill and other intangible assets was recognized in
1998 and 1997.
LONG-TERM ASSETS
The Company periodically reviews the recoverability of long-term assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal
1999 financial statement presentation.
NOTE 2 -- ACQUISITIONS:
On November 16, 1998, the Company acquired TxPort, Inc. ("TxPort") from
Acme-Cleveland Corporation by purchasing all the outstanding shares of TxPort at
a cost of $10,500,000. TxPort is a manufacturer of high-speed voice and data
communications products.
The transaction was accounted for using the purchase method, and the
purchase price was allocated to the assets acquired, including core technology,
and liabilities assumed based on the estimated fair market values at the date of
acquisition. The in-process research and development, which was expensed at the
39
<PAGE> 40
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
acquisition date, represented the estimated current fair market value of
specified technologies which had not reached technological feasibility and had
no alternative future uses at the date of acquisition.
At the time of the acquisition the Company was involved in research and
development projects in relation to three areas, enhancement and augmentation of
the CSU product line, enhancement and augmentation of the CSU/DSU product line
and development of packet and frame aware CSU/DSU products along with a virtual
private network product. The in-process research and development of $3.3
million, which was expensed at the acquisition date, represented the estimated
current fair market value of the research and development projects which had not
reached technological feasibility and had no alternative future uses at the date
of acquisition. The value of in-process research and development was determined
by estimating the expected cash flows from the projects once commercially
viable, discounting the net cash flows back to their present value and then
applying a percentage of completion. The net cash flows from the identified
projects were based on management estimates of revenues, cost of sales, research
and development costs, selling, general and administrative costs, and income
taxes from the project. The research and development costs included in the model
reflect costs to sustain the project, but exclude costs to bring the in-process
project to technological feasibility. The estimated revenues were based on
management projections for the projects. Projected gross margins reflect recent
historical performance of other Company products and are in line with industry
expectations. The estimated selling, general and administrative costs, and
research and development costs were estimated excluding synergies expected from
the acquisition.
The discount rate used in discounting the net cash flows from in-process
research and development is 35%. This discount rate reflects the uncertainties
surrounding the successful development of the in-process research and
development, market acceptance of the technology, the useful life of such
technology, the profitability levels of such technology and the uncertainty of
technological advances that could potentially impact the estimates described
above.
The percent of completion for the three project areas was determined by
comparing both effort expected and research and development costs incurred as of
November 1998, to the remaining effort to be expended and research and
development costs to be incurred, based on management's estimates, to bring the
projects to technological feasibility. Based on these comparisons management
estimated the three project areas to be approximately 55%, 35%, and 60% complete
as of the date of acquisition. The projects were substantially completed by June
1999. The effort and costs required to complete the projects approximated the
estimates made by management at the date of acquisition.
Recent actions and comments from the Securities and Exchange Commission
have indicated that they are reviewing the current valuation methodology of
purchased in-process research and development relating to acquisitions. The
Commission is concerned that some companies are writing off more of the value of
an acquisition than is appropriate. The Company believes that it is in
compliance with all of the rules and related guidance as they currently exist.
However, there can be no assurance that the Commission will not seek to reduce
the amount of purchased in-process research and development previously expensed
by the Company. This would result in the restatement of previously filed
financial statements of the Company and could have a material negative impact on
the financial results for the period subsequent to the acquisition.
The results of the operations of TxPort have been included with those of
the Company from the date of acquisition. Intangible assets have been recorded
as other assets, and are being amortized over the estimated
40
<PAGE> 41
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
useful lives ranging from three to ten years. The allocation of the purchase
price was as follows (in thousands):
<TABLE>
<S> <C>
In-process research and development........................ $ 3,330
Intangible assets.......................................... 5,960
Accounts receivable........................................ 2,632
Inventories................................................ 1,710
Other assets............................................... 10
Property and equipment..................................... 841
Liabilities assumed........................................ (3,983)
-------
Total............................................ $10,500
=======
</TABLE>
The total purchase price is as follows:
<TABLE>
<S> <C>
Cash payment............................................... $10,000
Other expenses............................................. 500
-------
Total............................................ $10,500
=======
</TABLE>
The following unaudited pro forma financial information is presented to
give effect to the purchase as if the transaction had occurred as of the
beginning of each of the periods presented. The pro forma information gives
effect to certain adjustments, including amortization of goodwill and other
intangibles, based on the value allocated to the assets acquired. In-process
research and development costs of $3,330,000, which were written off immediately
after the purchase was completed, and all non-recurring and related party
transactions have been excluded from the results for both periods presented.
The pro forma information is presented for illustrative purposes only and
does not purport to be indicative of the operating results that would have
occurred had the acquisition been effected for the periods indicated nor is it
indicative of the future operating results of the Company.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
JUNE 27, 1999 JUNE 28, 1998
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Pro forma net sales........................................ $ 67,413 $75,136
Pro forma net income (loss)................................ $(11,396) $ 70
Pro forma net income (loss) per share -- Basic............. $ (0.82) $ 0.01
Pro forma net income (loss) per share -- Diluted........... $ (0.82) $ 0.01
Shares used in per share computation -- Basic.............. 13,929 13,742
Shares used in per share computation -- Diluted............ 13,929 14,223
</TABLE>
41
<PAGE> 42
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
NOTE 3 -- RESTRUCTURING CHARGE:
In March 1999, the Company recorded a pretax restructuring charge of
$3,200,000 in connection with the streamlining of its operations and the
elimination of redundant functions. The action included consolidating certain
manufacturing activities, combining sales and marketing functions, and
integrating certain research and development activities. This resulted in a
reduction in workforce of approximately 52 employees, or 13% of the Company's
total workforce. The components of the restructuring charge, activity during
fiscal 1999 and the remaining accrual at June 27, 1999 are as follows:
RESTRUCTURING RESERVE
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDUCTION IN OTHER
WORKFORCE COSTS TOTAL
------------ ----- ------
<S> <C> <C> <C>
Restructuring charge................................... $2,916 $284 $3,200
Fiscal 1999 activity................................... (2,571) (282) (2,853)
------ ---- ------
Ending accrual......................................... $ 345 $ 2 $ 347
====== ==== ======
</TABLE>
The charge for reduction in workforce includes severance, related medical
benefits and other termination benefits or obligations to employees. The
workforce reductions were in the sales, marketing, engineering and operations
functions and impacted employees in both California and Alabama.
The charge for other restructuring costs primarily relates to the reserve
of employee loans who were part of the reduction in workforce. Other than
payment of ongoing non-salary employee benefit costs, the restructuring
activities were substantially completed as of June 27, 1999. The balance of the
restructuring accrual is included in accrued expenses on the consolidated
balance sheet and is anticipated to be paid within nine months.
NOTE 4 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
INVENTORIES:
Raw materials............................................. $ 3,453 $ 2,313
Work-in-process........................................... 1,309 926
Finished goods............................................ 2,102 1,661
-------- -------
$ 6,864 $ 4,900
======== =======
PROPERTY AND EQUIPMENT:
Furniture, fixtures and office equipment.................. $ 11,105 $ 7,734
Machinery and equipment................................... 5,517 5,564
Leasehold improvements.................................... 2,894 2,791
-------- -------
19,516 16,089
Less: Accumulated depreciation and amortization........... (11,810) (9,042)
-------- -------
$ 7,706 $ 7,047
======== =======
ACCRUED EXPENSES:
Compensation and related benefits......................... $ 2,631 $ 1,968
Warranty.................................................. 1,877 634
Other..................................................... 6,816 4,145
-------- -------
$ 11,324 $ 6,747
======== =======
</TABLE>
42
<PAGE> 43
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
NOTE 5 -- RESTRICTED CASH AND SHORT-TERM INVESTMENTS:
As of June 27, 1999, the Company had restricted cash in the form of
certificates of deposit, in the amount of $515,000. The cash is restricted as it
relates to a guarantee provided by the Company to a bank to secure a director's
borrowings from that bank. The Company's short-term investments consist
primarily of municipal and corporate bonds, and auction rate preferred stock and
are stated at fair value in the accompanying balance sheet.
NOTE 6 -- COMMON STOCK:
During fiscal 1999, the Company repurchased 284,500 shares of Common Stock
at prices ranging from $2.56 to $3.84 per share.
NOTE 7 -- INCOME TAXES:
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 27,
--------------------------
1999 1998 1997
------- ----- ------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $(313) $2,528
State.................................................. -- 100 298
------- ----- ------
-- (213) 2,826
------- ----- ------
Deferred:
Federal................................................ -- (283) (200)
State.................................................. -- (112) 55
------- ----- ------
-- (395) (145)
------- ----- ------
$ -- $(608) $2,681
======= ===== ======
</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>
THREE YEARS ENDED JUNE 27,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Provision at statutory rate................................. (34.0)% (34.0)% 34.0%
State taxes, net of federal benefit......................... -- 3.9 5.1
Change in valuation allowance............................... 25.1 -- --
Credits..................................................... (1.9) (2.7) (2.6)
In-process research and development......................... 8.3 -- --
Goodwill amortization....................................... 1.5 -- --
Other....................................................... 1.0 (3.4) 2.5
----- ----- ----
0.0% (36.2)% 39.0%
===== ===== ====
</TABLE>
43
<PAGE> 44
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
Deferred tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------- --------
<S> <C> <C>
Net operating loss.......................................... $ 1,124 $ --
Credit carryforwards........................................ 479 222
Inventory reserves.......................................... 773 451
Warranty.................................................... 514 263
Other reserves and accruals................................. 1,476 417
Depreciation................................................ 116 369
Other....................................................... 97 246
------- ------
Total deferred tax assets................................... 4,579 1,968
Valuation allowance......................................... (4,579) --
------- ------
Net deferred tax assets..................................... $ -- $1,968
======= ======
</TABLE>
At June 27, 1999, the Company established a full valuation allowance
against its deferred tax assets. Prior to June 27, 1999, the Company believed
that, based upon available objective evidence, it was more likely than not that
its deferred tax assets would be realized based on available carryback capacity.
As of June 27, 1999, management believes that due to the Company's recent
history of losses, it is now more likely than not that the deferred tax assets
will not be realized.
During 1999, the valuation allowance increased by $1,155,000 for deferred
tax assets of an acquired business for which uncertainty exists surrounding the
realization of such assets. The valuation allowance will be used to reduce costs
in excess of net assets of the acquired company when any portion of the related
deferred tax assets is recognized.
At June 27, 1999, the Company had net operating loss carryforwards of
approximately $2,600,000 for federal income tax purposes, which expire in the
year 2019, and $1,600,000 for state income tax purposes, which expire in 2005.
The Company also had credit carryforwards of $400,000 available to offset future
income which expire in 2006 through 2019.
The Tax Reform Act of 1996 limits the use of net operating losses in
certain situations where changes occur in the stock ownership of a company. The
availability and timing of net operating losses carried forward to offset the
taxable income may be limited due to the occurrence of certain events, including
change of ownership.
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
The 1993 Amended and Restated 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 27, 1999, a total of 6,050,000 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 over a four-year period, 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
44
<PAGE> 45
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
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.
The following summarizes stock option activity under the Company's 1993
Plan:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
BALANCE AT JUNE 30, 1996......................... 701,751 1,327,876 $ 2.00
Approved....................................... 750,000 -- --
Granted........................................ (1,450,913) 1,450,913 17.01
Exercised...................................... -- (429,698) 0.67
Canceled....................................... 777,415 (777,415) 20.68
---------- ----------
BALANCE AT JUNE 29, 1997......................... 778,253 1,571,676 6.98
Granted........................................ (608,650) 608,650 7.39
Exercised...................................... -- (119,332) 1.44
Canceled....................................... 227,860 (227,860) 7.12
---------- ----------
BALANCE AT JUNE 28, 1998......................... 397,463 1,833,134 7.46
Approved....................................... 2,000,000 -- --
Granted........................................ (2,198,519) 2,198,519 4.03
Exercised...................................... -- (117,489) 1.03
Canceled....................................... 1,058,759 (1,058,759) 8.15
---------- ----------
BALANCE AT JUNE 27, 1999......................... 1,257,703 2,855,405 $ 4.83
========== ==========
</TABLE>
On June 11, 1997, the Company canceled options to purchase 346,000 shares
of Common Stock with exercise prices ranging from $16.13 to $36.13 previously
granted to employees, and reissued all such options at an exercise price of
$10.38, the fair market value of the stock on such date. The reissued options
have a ten year term and vest over four years from the date of reissuance.
The following table summarizes information concerning outstanding and
vested stock options as of June 27, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
----------------------------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE VESTED PRICE
- --------------- ----------- ---------------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.50 - $ 0.88... 192,759 5.81 $0.82 168,699 $0.82
$2.88 - $ 4.50... 1,407,586 9.38 3.63 113,077 3.50
$5.00 - $ 6.00... 627,275 7.90 5.54 231,834 5.69
$6.06 - $ 6.75... 164,500 8.04 6.53 87,541 6.60
$6.88 - $10.38... 463,285 7.95 8.55 284,853 8.64
--------- -------
$0.50 - $10.38... 2,855,405 8.50 4.83 886,004 5.52
========= =======
</TABLE>
1996 EMPLOYEE STOCK PURCHASE PLAN
In April 1996, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") under which 500,000 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 successive offering periods with a
maximum duration of
45
<PAGE> 46
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
24 months. Each offering period is divided into two consecutive semi-annual
purchase periods. The price at which Common Stock is purchased under the
Purchase Plan is equal to 85% of the fair value of the Common Stock on the first
day of the offering period, or the last day of the purchase period, whichever is
lower. During fiscal 1999, 1998 and 1997, a total of 174,260, 116,031 and 33,755
shares of Common Stock were issued under the Purchase Plan at an average
purchase price of $3.88, $6.39 and $12.65, respectively.
ESTIMATED FAIR VALUE AWARDS UNDER THE COMPANY'S STOCK PLANS
The weighted average estimated grant date fair value, as defined by SFAS
123, of options granted during fiscal 1999, 1998 and 1997 under the Company's
stock option plan was $1.79, $3.17 and $6.17, respectively. The weighted average
estimated grant date fair value of Common Stock issued pursuant to the Company's
employee stock purchase plan during fiscal 1999, 1998 and 1997 was $2.30, $1.91,
and $3.89, respectively. The estimated grant date fair values disclosed by the
Company are calculated using the Black-Scholes model. The Black-Scholes model,
as well as other currently accepted option valuation models, was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option and purchase
awards:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
STOCK OPTION PLAN:
Expected dividend yield................................... 0.0% 0.0% 0.0%
Expected stock price volatility........................... 73% 70% 61%
Risk free interest rate................................... 4.80% 5.58% 6.07%
Expected life (years)..................................... 2.40 2.32 2.55
STOCK PURCHASE PLAN:
Expected dividend yield................................... 0.0% 0.0% 0.0%
Expected stock price volatility........................... 73% 70% 61%
Risk free interest rate................................... 4.69% 5.31% 5.36%
Expected life (years)..................................... 0.50 0.50 0.50
</TABLE>
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
Had the Company recorded compensation based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its stock option
plan and stock purchase plan, the Company's net income (loss) and net income
(loss) per share would have been reduced to the pro forma amounts below for the
years ended June 27, 1999, June 28, 1998, and June 29, 1997 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Net income (loss) as reported......................... $(13,666) $(1,071) $4,194
Pro forma net income (loss)........................... $(14,719) $(2,753) $2,716
Basic net income (loss) per share as reported......... $ (0.98) $ (0.08) $ 0.31
Diluted net income (loss) per share as reported....... $ (0.98) $ (0.08) $ 0.29
Pro forma basic net income (loss) per share........... $ (1.06) $ (0.20) $ 0.20
Pro forma diluted net income (loss) per share......... $ (1.06) $ (0.20) $ 0.19
</TABLE>
46
<PAGE> 47
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
The pro forma effect on net income (loss) and net income (loss) per share
is not representative of the pro forma effect on net income (loss) in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1996.
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
$165,000, $84,000, and $261,000 for fiscal 1999, 1998 and 1997, respectively,
and will aggregate approximately $968,000 over the vesting period of four years.
Awards under the Company's profit sharing plan are based on achieving
targeted levels of profitability. The Company provided for awards of $35,000 in
fiscal 1998. No expense was incurred under the plan in fiscal 1999 and fiscal
1997.
NOTE 9 -- RELATED PARTY TRANSACTIONS:
The Company leases its principal headquarters facility and its
manufacturing facility from Baytech Associates ("Baytech") under operating
leases which expire in April 2001 and November 2001, respectively. Baytech is
owned by two stockholders who hold an aggregate of 37% of the Company's Common
Stock and who are also directors of the Company. In September 1998, the Company
began occupying an additional 16,000 square feet of space at 161 Nortech Drive
leased from Baytech in accordance with an agreement that was being negotiated.
The Company agreed to loan Baytech funds for leasehold improvements and rent
obligations at 161 Nortech Drive in consideration of certain lease concessions
made by Baytech to the Company. As of June 27, 1999, $418,000 had been borrowed
by Baytech against this facility. The loan to Baytech is evidenced by a
promissory note bearing interest at 8% and will be payable out of the net lease
proceeds received by Baytech from leasing a portion of the Nortech building. In
August 1999, Verilink formalized its agreement with Baytech by entering into an
arms length sublease covering the entire 42,000 square feet of manufacturing
space it occupies at 161 Nortech Drive. In addition, Baytech will begin paying
down the promissory note based upon the difference between the lease rate the
Company had been paying and the new lease rate, until the outstanding balance is
paid in full. The sublease between the Company and Baytech expires on November
30, 2001. During fiscal 1999, 1998 and 1997, rent expense totaled $690,000,
$428,000 and $428,000, respectively.
During fiscal 1997, the Company entered into an agreement with RISC
Communication Network Systems ("RC Network") which provided for the performance
of research and development services by RC Network on behalf of the Company. RC
Network is owned in part by Baytech Associates and a former director of the
Company. During fiscal 1999, 1998 and 1997, the Company paid $99,000, $1,260,000
and $98,000, respectively to RC Network for research and development services.
Included in other assets as of June 27, 1999 and June 28, 1998 are advances
of $502,000 due from certain former officers of the Company. These advances bear
interest at varying rates up to 7.5%, with various maturities to August 2002.
The Company paid approximately $50,000 and $110,000 to an outside director
during fiscal 1999 and 1997, respectively and $240,000 to two of its outside
directors during fiscal 1998 for consulting services.
In September 1993, the Company issued 1,600,000 shares of Common Stock to
one of its principal stockholders and 100,000 shares to one of its officers in
exchange for notes totaling $800,000 and $50,000, respectively. The issued
shares of Common Stock secured the notes. During fiscal 1997, the $50,000 note
was repaid. In February 1998 the maturity of the $800,000 note which bears
interest at 5% per annum was extended to September 1999, and the security
interest was reduced to 130,398 shares. As of June 27, 1999, $1,061,000 of
principal and interest was outstanding.
47
<PAGE> 48
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
In September 1998, the Company approved a loan facility of up to $1.0
million to a principal stockholder and director in return for a note that bears
interest at 6% per annum and that had a maturity date of December 31, 1998. In
January 1999 the maturity on this note was extended to December 1999. As of June
27, 1999, $986,000 of principal and interest was outstanding.
In February 1999 the Company approved an additional loan facility of up to
$3.0 million to the same principal stockholder and director in return for a note
that bears interest at 6% per annum and that had a maturity date of March 1,
2000. In addition, all or a portion of the aforementioned facility may be made
available through guarantees by the Company of third party loans. As of June 27,
1999, $2,575,000 of principal and interest was outstanding, and $515,000 had
been pledged as security to a bank to secure a director's borrowing from that
bank. This facility is secured by an interest in Baytech Associates.
In September 1999 the Company entered into a note modification agreement
that resulted in a modification of the repayment terms of the September 1993
note, the September 1998 note, and the February 1999 note, and increased
security held by the Company to 1.8 million shares of Common Stock. The
amendment requires repayments on two of the notes to commence in September 2000
and to continue through maturity in March 2002. The agreement also requires
repayment of principal and interest on the $1.0 million September 1998 note by
June 2000.
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. During fiscal 1997 and 1999, a total of
$405,000 and $35,000, respectively, of such loans was repaid. The remaining
loans outstanding are secured by 134,000 shares of the Company's Common Stock
and other real and personal property, mature on dates ranging from November 2000
to February 2001 and bear interest at 5% per annum. Principal plus accrued
interest is repayable at maturity.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
The Company leases its headquarters facility under a non-cancelable
operating lease that expires on April 2001 and November 2001.
The Company also leases buildings in Huntsville, Alabama under
non-cancelable operating leases that expire on various dates ranging from
December 2000 through June 2002.
Future minimum lease payments under all non-cancelable operating leases
with terms in excess of one year and future minimum sublease rental receipts
under non-cancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING SUBLEASE
FISCAL YEAR, LEASES INCOME
------------ --------- --------
<S> <C> <C>
2000............................................ $ 2,382 $ 122
2001............................................ 1,952 --
2002............................................ 496 --
2003............................................ 11 --
--------- --------
Total minimum lease payments.................... $ 4,841 $ 122
========= ========
</TABLE>
48
<PAGE> 49
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED JUNE 27, 1999
Rent expense under all non-cancelable operating leases totaled $1,391,000,
$873,000 and $797,000 for fiscal 1999, 1998 and 1997, respectively.
The Company is subject to a legal claim arising from an acquisition by
TxPort, Inc. prior to the acquisition of TxPort, Inc. by the Company. The
Company believes that it is indemnified against the claim by the seller of
TxPort, Inc. Management believes that the claim will be resolved without
material effect on the Company's financial position and results of operations.
NOTE 11 -- SUBSEQUENT EVENTS:
On July 21, 1999, the Company announced its plans to consolidate its San
Jose operations with its facilities in Huntsville, Alabama, and outsource its
San Jose-based manufacturing operations. The Company expects to record a
restructuring charge in the first quarter of fiscal year 2000 related to this
action.
49
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appearing under the caption "Election of
Directors" in the Proxy Statement is hereby incorporated by reference.
Information regarding executive officers is incorporated herein by
reference from Part I hereof under the heading "Executive Officers of the
Company" immediately following Item 4 in Part I hereof.
Information regarding compliance with Section 16(a) of the Securities Act
of 1934, as amended, is hereby incorporated by reference to the Company's Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements (including the notes thereto) listed in the Index
to Consolidated Financial Statements and Financial Statement Schedule (set forth
in Item 8 of Part II of this Form 10-K) are filed within this Annual Report on
Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
The financial statement schedule listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule (set forth in Item 8 of
Part II of this Form 10-K) is filed as part of this Annual Report on Form 10-K.
3. EXHIBITS
The exhibits listed under Item 14(c) hereof are filed as part of this
Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on form 8-K were filed during the quarter ended June 27, 1999.
50
<PAGE> 51
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.
10.2 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)
10.7 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)
10.11 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)
10.16* Promissory Note of Robert F. Griffith in favor of the
Registrant dated as of August 27, 1997.(2)
10.17* Change of Control Severance Benefits Agreements.(3)
10.18 Guarantee of lease obligation between the Registrant and
Baytech Associates, a California general partnership, dated
September 30, 1996.(4)
10.19 Amended Common Stock Purchase Agreement and Promissory Note
between the Registrant and Leigh S. Belden, dated as of
February 10, 1998.(4)
10.20 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated June 30, 1994.(4)
10.21 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated February 21, 1996.(4)
10.22 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated May 23, 1996.(4)
10.23 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated June 4, 1997.(4)
10.24 Loan facility dated September 1, 1998, provided by the
Registrant to Leigh S. Belden.(4)
10.25 Agreements with Civic Bank: Assignment of Deposit Account,
Corporate Resolution to Guarantee and Corporate Resolution
to Grant Collateral.(5)
10.26 Loan facility dated January 1, 1999 provided by the
Registrant to Leigh S. Belden.(5)
10.27 Promissory Note of Baytech Associates in favor of the
Registrant dated February 9, 1999.(5)
10.28* Employment Agreement between the Registrant and Graham
Pattison dated March 22, 1999.(6)
10.29 Retirement Agreement between the Registrant and Leigh S.
Belden dated April 9, 1999.(6)
10.30 Retirement Agreement between the Registrant and Steve S.
Taylor dated April 9, 1999.(6)
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.31 Severance Agreement between the Registrant and Stephen M.
Tennis dated April 9, 1999.(6)
10.32 Severance Agreement between the Registrant and John C. Batty
dated July 19, 1999.(7)
10.33 Severance Agreement between the Registrant and Thomas A.
Flak dated August 20, 1999.(7)
10.34 Severance Agreement between the Registrant and Stephen G.
Heinen dated July 19, 1999.(7)
10.35 Severance Agreement between the Registrant and Henry L.
Tinker dated July 19, 1999.(7)
10.36+ Purchase Agreement between the Registrant and Wellex
Corporation.(7)
10.37 Lease Agreement between the Registrant and Industrial
Properties of the South for 9668 Highway 20 West, dated July
23, 1993.(7)
10.38 Lease Agreement between the Registrant and Industrial
Properties of the South for 127 Jetplex Circle, dated July
23, 1993.(7)
10.39 Lease Agreement between the Registrant and Industrial
Properties of the South for 129 Jetplex Circle, dated
January 19, 1995.(7)
10.40 Promissory Note Modification Agreement of Leigh S. Belden
dated September 22, 1999.(7)
10.41 Lease Agreement between the Registrant and Baytech
Associates, a California general partnership, effective May
1, 1999.(7)
10.42 Sublease Agreement between the Registrant and Baytech
Associates, a California general partnership, dated August
1999.(7)
10.43 Bonus Agreement between the Registrant and Graham G.
Pattison dated September 21, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.(7)
27.1 Financial Data Schedule.(7)
</TABLE>
- ---------------
(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.
(2) Incorporated by reference to identically numbered exhibit filed in response
to Item 14(a), "Exhibits," of Registrant's Report on Form 10-K for the
fiscal year ended June 29, 1997.
(3) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits and Reports on Form 8-K," for the quarterly period
ended December 28, 1997.
(4) Incorporated by reference to identically numbered exhibit filed in response
to Item 14(a), "Exhibits," of Registrant's Report on Form 10-K for the
fiscal year ended June 28, 1998.
(5) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits and Reports on Form 8-K" for the quarterly period
ended December 27, 1998.
(6) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits and Reports on Form 8-K" for the quarterly period
ended March 28, 1999.
(7) Filed herewith.
* Management contracts or compensatory plans or arrangements.
+ Confidential treatment granted as to portions of this exhibit.
52
<PAGE> 53
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ASSUMED ON ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING THE ACQUISITION CHARGED TO FROM END
OF YEAR OF TXPORT, INC. INCOME RESERVES OF YEAR
---------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Inventory Reserves
Year ended June 27, 1999............... $1,088 $1,450 $1,783 $(961) $3,360
Year ended June 28, 1998............... $ 923 $ -- $ 165 $ -- $1,088
Year ended June 29, 1997............... $ 658 $ -- $ 265 $ -- $ 923
Allowance for Doubtful Accounts
Year ended June 27, 1999............... $ 62 $ 143 $ -- $ -- $ 205
Year ended June 28, 1998............... $ 76 $ -- $ -- $ 14 $ 62
Year ended June 29, 1997............... $ 76 $ -- $ -- $ -- $ 76
</TABLE>
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Verilink Corporation
September 27, 1999 By: /s/ GRAHAM G. PATTISON
------------------------------------
Graham G. Pattison
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
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/ GRAHAM G. PATTISON President, Chief Executive September 27, 1999
- ----------------------------------------------------- Officer and Director
Graham G. Pattison (Principal Executive
Officer)
/s/ JOHN C. BATTY Vice President, Finance and September 27, 1999
- ----------------------------------------------------- Chief Financial Officer
John C. Batty (Principal Financial and
Accounting Officer)
/s/ HOWARD ORINGER Chairman of the Board of September 27, 1999
- ----------------------------------------------------- Directors
Howard Oringer
/s/ STEVEN C. TAYLOR Vice Chairman of the Board September 27, 1999
- ----------------------------------------------------- of Directors
Steven C. Taylor
/s/ LEIGH S. BELDEN Director September 27, 1999
- -----------------------------------------------------
Leigh S. Belden
/s/ JOHN MAJOR Director September 27, 1999
- -----------------------------------------------------
John Major
/s/ JOHN A. MCGUIRE Director September 27, 1999
- -----------------------------------------------------
John A. McGuire
</TABLE>
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.
10.2 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)
10.7 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)
10.11 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)
10.16* Promissory Note of Robert F. Griffith in favor of the
Registrant dated as of August 27, 1997.(2)
10.17* Change of Control Severance Benefits Agreements.(3)
10.18 Guarantee of lease obligation between the Registrant and
Baytech Associates, a California general partnership, dated
September 30, 1996.(4)
10.19 Amended Common Stock Purchase Agreement and Promissory Note
between the Registrant and Leigh S. Belden, dated as of
February 10, 1998.(4)
10.20 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated June 30, 1994.(4)
10.21 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated February 21, 1996.(4)
10.22 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated May 23, 1996.(4)
10.23 Promissory Note of Stephen M. Tennis in favor of the
Registrant dated June 4, 1997.(4)
10.24 Loan facility dated September 1, 1998, provided by the
Registrant to Leigh S. Belden.(4)
10.25 Agreements with Civic Bank: Assignment of Deposit Account,
Corporate Resolution to Guarantee and Corporate Resolution
to Grant Collateral.(5)
10.26 Loan facility dated January 1, 1999 provided by the
Registrant to Leigh S. Belden.(5)
10.27 Promissory Note of Baytech Associates in favor of the
Registrant dated February 9, 1999.(5)
10.28* Employment Agreement between the Registrant and Graham
Pattison dated March 22, 1999.(6)
10.29 Retirement Agreement between the Registrant and Leigh S.
Belden dated April 9, 1999.(6)
10.30 Retirement Agreement between the Registrant and Steve S.
Taylor dated April 9, 1999.(6)
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.31 Severance Agreement between the Registrant and Stephen M.
Tennis dated April 9, 1999.(6)
10.32 Severance Agreement between the Registrant and John C. Batty
dated July 19, 1999.(7)
10.33 Severance Agreement between the Registrant and Thomas A.
Flak dated August 20, 1999.(7)
10.34 Severance Agreement between the Registrant and Stephen G.
Heinen dated July 19, 1999.(7)
10.35 Severance Agreement between the Registrant and Henry L.
Tinker dated July 19, 1999.(7)
10.36+ Purchase Agreement between the Registrant and Wellex
Corporation.(7)
10.37 Lease Agreement between the Registrant and Industrial
Properties of the South for 9668 Highway 20 West, dated July
23, 1993.(7)
10.38 Lease Agreement between the Registrant and Industrial
Properties of the South for 127 Jetplex Circle, dated July
23, 1993.(7)
10.39 Lease Agreement between the Registrant and Industrial
Properties of the South for 129 Jetplex Circle, dated
January 19, 1995.(7)
10.40 Promissory Note Modification Agreement of Leigh S. Belden
dated September 22, 1999.(7)
10.41 Lease Agreement between the Registrant and Baytech
Associates, a California general partnership, effective May
1, 1999.(7)
10.42 Sublease Agreement between the Registrant and Baytech
Associates, a California general partnership, dated August
1999.(7)
10.43 Bonus Agreement between the Registrant and Graham G.
Pattison dated September 21, 1999.
23.1 Consent of PricewaterhouseCoopers LLP.(7)
27.1 Financial Data Schedule.(7)
</TABLE>
- ---------------
(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.
(2) Incorporated by reference to identically numbered exhibit filed in response
to Item 14(a), "Exhibits," of Registrant's Report on Form 10-K for the
fiscal year ended June 29, 1997.
(3) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits and Reports on Form 8-K," for the quarterly period
ended December 28, 1997.
(4) Incorporated by reference to identically numbered exhibit filed in response
to Item 14(a), "Exhibits," of Registrant's Report on Form 10-K for the
fiscal year ended June 28, 1998.
(5) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits and Reports on Form 8-K" for the quarterly period
ended December 27, 1998.
(6) Incorporated by reference to identically numbered exhibit filed in response
to Item 6(a), "Exhibits and Reports on Form 8-K" for the quarterly period
ended March 28, 1999.
(7) Filed herewith.
* Management contracts or compensatory plans or arrangements.
+ Confidential treatment granted as to portions of this exhibit.
<PAGE> 1
EXHIBIT 10.32
July 19, 1999
Mr. John Batty
C/O Verilink Corporation
145 Baytech Drive
San Jose, CA 95134
Dear John:
This letter will set forth the agreement between you and Verilink Corporation
("Verilink") regarding your employment by Verilink during the period that
Verilink consolidates its operations at its Huntsville, Alabama facility. You
shall continue to be employed by Verilink as VP of Finance until at least
October 31, 1999, but no longer than December 31, 1999. You may terminate your
employment after October 31, 1999, if Verilink has successfully completed the
transition of operations to its Huntsville facility. Such completion of
consolidation shall be deemed to be a "Covered Termination" under the Change of
Control Severance Benefits Agreement between you and Verilink dated January 22,
1998, and shall entitle you to receive the benefits provided in that Agreement
for a "Covered Termination" with the exception of the eligibility period to
exercise all vested stock options, which will be changed to six months from your
termination of employment with Verilink. For purposes of this Agreement, the
transition shall be successfully completed if each area of functional
responsibility within Verilink, excluding Operations and necessary support
functions, have been transferred to Huntsville and become substantially
operational at that location.
Very truly yours,
VERILINK CORPORATION
By: /s/ Howard Oringer
--------------------------------
Title: Chairman of the Board
-----------------------------
<PAGE> 1
EXHIBIT 10.33
August 20, 1999
Mr. Thomas A. Flak
1515 Cordilleras Avenue
San Carlos, CA 94070
Dear Tom:
This letter will set forth our agreement regarding your continued employment by
Verilink Corporation. If you remain employed through September 30, 1999, upon
termination of your employment after that date, other than for cause, you shall
receive a severance payment equal to six (6) months salary. In addition, you
shall receive company-paid Cobra benefits for a maximum of six (6) months.
Sincerely,
Graham G. Pattison
President and CEO
<PAGE> 1
EXHIBIT 10.34
July 19, 1999
Mr. Stephen Heinen
C/O Verilink Corporation
145 Baytech Drive
San Jose, CA 95134
Dear Steve:
This letter will set forth the agreement between you and Verilink Corporation
("Verilink") regarding your employment by Verilink during the period that
Verilink consolidates its operations at its Huntsville, Alabama facility. You
shall continue to be employed by Verilink as VP of Engineering until at least
October 31, 1999, but no longer than December 31, 1999. You may terminate your
employment after October 31, 1999, if Verilink has successfully completed the
transition of operations to its Huntsville facility. Such completion of
consolidation shall be deemed to be a "Covered Termination" under the Change of
Control Severance Benefits Agreement between you and Verilink dated October 15,
1998, and shall entitle you to receive the benefits provided in that Agreement
for a "Covered Termination" with the exception of the eligibility period to
exercise all vested stock options, which will be changed to six months from your
termination of employment with Verilink. For purposes of this Agreement, the
transition shall be successfully completed if each area of functional
responsibility within Verilink, excluding Operations and necessary support
functions, have been transferred to Huntsville and become substantially
operational at that location.
Very truly yours,
VERILINK CORPORATION
By: /s/ Howard Oringer
--------------------------------
Title: Chairman of the Board
-----------------------------
<PAGE> 1
EXHIBIT 10.35
July 19, 1999
Mr. Henry Tinker
C/O Verilink Corporation
145 Baytech Drive
San Jose, CA 95134
Dear Henry:
This letter will set forth the agreement between you and Verilink Corporation
("Verilink") regarding your employment by Verilink during the period that
Verilink consolidates its operations at its Huntsville, Alabama facility. You
shall continue to be employed by Verilink as VP of Operations until at least
October 31, 1999, but no longer than December 31, 1999. You may terminate your
employment after October 31, 1999, if Verilink has successfully completed the
transition of operations to its Huntsville facility. Such completion of
consolidation shall be deemed to be a "Covered Termination" under the Change of
Control Severance Benefits Agreement between you and Verilink dated January 7,
1998, and shall entitle you to receive the benefits provided in that Agreement
for a "Covered Termination" with the exception of the eligibility period to
exercise all vested stock options, which will be changed to six months from your
termination of employment with Verilink. For purposes of this Agreement, the
transition shall be successfully completed if each area of functional
responsibility within Verilink, excluding Operations and necessary support
functions, have been transferred to Huntsville and become substantially
operational at that location.
Very truly yours,
VERILINK CORPORATION
By: /s/ Howard Oringer
------------------------------
Title: Chairman of the Board
------------------------------
<PAGE> 1
CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
EXHIBIT 10.36
MANUFACTURING AGREEMENT
THIS PURCHASE AGREEMENT is entered into as of this 13th day of September 1999 by
and between Wellex Corporation, a California corporation, whose principal place
of business is located at 44141 S. Grimmer Blvd., Fremont, CA 94538 (hereinafter
referred to as ("MANUFACTURER") and Verilink Corporation, a Delaware
corporation, having its principal office at 127 Jetplex Circle, Madison, AL
35758 (hereinafter referred to as "PURCHASER").
1. TERM
This Agreement shall become effective on the date hereof and shall be in
effect for two (2) years. The term of this Agreement shall be
automatically extended for an additional one (1) year period unless
either party elects to terminate the Agreement by written notice given
to the other party at least ninety (90) days before the end of the
initial two (2) year term.
2. SPECIFICATIONS; QUALITY; Y2K
(a) All products to be manufactured pursuant to this Agreement
("Products") shall be in accordance with PURCHASER's specifications
and drawings, which have been provided to MANUFACTURER
(b) All work performed by MANUFACTURER shall be performed in a skillful
and professional manner and shall be consistent with best commercial
standards of the industry, including but not limited to, ISO 9002,
BABT, Production Quality Assurance Approval (PQAA) facility
certification, and PURCHASER'S "Quality Plan" (see Exhibit D).
(c) MANUFACTURER represents and warrants that its internal processes and
that, to the best of its knowledge, the internal processes of its
suppliers and vendors are Y2K compliant. As used herein, "Y2K
Compliant" shall mean that neither performance nor functionality is
affected by dates prior to, during, and after the Year 2000.
IN PARTICULAR:
Rule 1. No value for current date will cause any interruption in any
operation.
Rule 2. Date-based functionality must behave consistently for dates
prior to, during and after Year 2000.
Rule 3. In all interfaces and data storage, the century in any date must
be specified either explicitly or by unambiguous algorithms or
inferencing rules.
Rule 4. Year 2000 must be recognized as a leap year.
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MANUFACTURER is required to use its best efforts to avoid the
interruptions of critical operations (including: security systems,
capital HVAC Systems, power systems, computer systems, phone systems,
and all company facilities used to support this Agreement.
MANUFACTURER will provide PURCHASER a written Y2K plan (within one
(1) month of the signing of this Agreement) addressing as a minimum
all requirements called out in the Y2K section of this Agreement.
Status of outstanding items will be reported monthly to PURCHASER
until resolution is complete. Y2K status reports must include as a
minimum evidence of facility equipment and services inventory. Y2K
impacts analysis of said inventory, outstanding issues and
contingency plans are required.
In addition, MANUFACTURER shall provide:
1) Availability of key personnel beginning December 19, 1999 through
January 31, 2000.
2) List of contact numbers and methods to reach MANUFACTURER's
personnel during this period. This list should include direct dial
lines (outside the PBX), cellular numbers, pagers, satellite phone
numbers, internet based instant messages/chat programs, e-mail
addresses, and any other means to rapidly communicate between
MANUFACTURER and PURCHASER during this specified period.
3. Shipping
All shipments of Products shall be MANUFACTURER F.O.B PURCHASERS' bonded
stores area in MANUFACTURER's facility and title shall pass to PURCHASER
upon such shipment.
4. Products
All Products to be manufactured pursuant to this Agreement are listed on
Exhibit A hereto. Products may be added to or deleted from Exhibit A,
subject to the terms and conditions of this Agreement.
5. PRODUCT PAYMENT TERMS
Payment terms for all Products shall be one percent (1%) ten (10) days,
net thirty (30) days. All "invoices" shall contain such detail, as may
be necessary to support its MANUFACTURER's charges.
6. INVENTORY PURCHASE
(a) Purchase. MANUFACTURER shall purchase all of PURCHASER's inventory
(RAW STOCK), including inventory ordered but not yet delivered. That
inventory shall be transferred to MANUFACTURER on or before October
29, 1999 and shall be maintained by MANUFACTURER in a controlled
stock room to insure that either party may validate physical and
book inventory. MANUFACTURER shall conduct cycle
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counts in accordance with a schedule mutually agreed upon by
MANUFACTURER and PURCHASER.
(b) Payment Terms. MANUFACTURER shall make monthly payments to PURCHASER
for the inventory purchased pursuant to this Agreement, commencing
thirty five (35) days from the initial (10-29-99) date that
inventory is transferred to MANUFACTURER. Each payment shall equal
the greater of: (i) one sixth (1/6) of PURCHASER's cost of the
transferred inventory; or (ii) PURCHASER's cost of the inventory
consumed in the manufacture of Products during thirty (30) day
period immediately preceding the payment date. However, in no event
shall the total amount paid under this clause exceed the dollar
amount of inventory transferred.
(c) Six Month Review. At the end of six (6) months from the date that
the inventory is transferred, MANUFACTURER and PURCHASER shall
evaluate the remaining inventory. Any inventory determined by mutual
agreement to be obsolete or excess (i.e., not forecasted to be used
in the manufacture of Products within nine (9) months from the date
of evaluation) shall be repurchased by PURCHASER at MANUFACTURER's
cost plus a minimum handling charge agreed to by each party. No
"Purchased from PURCHASER" inventory will be held longer than one
(1) year without a Material Carrying Charge agreed to by each party.
(One and a half % (1.5 %) per month).
(d) Last Time Buys. PURCHASER will identify all inventory purchased by
PURCHASER as part of a last time buy. Such inventory will not be
subject to the buy-back provision of Section 6(c) of this Agreement.
SEE EXHIBIT C. (to be provided fifteen (15) days from Agreement
signing.) Exhibit C will identify Part Number, "where used" and
projected "depletion" date for each " Last Time Buy" item.
PURCHASER's engineering department will identify replacement
components for these items prior to usage of the last units.
7. WIP PURCHASE
MANUFACTURER shall purchase from PURCHASER at PURCHASER's cost all of
PURCHASER's non-obsolete work in process ("WIP") included in the
PURCHASER's initial purchase order and/or forecast. All WIP purchased
hereunder shall be paid for by PURCHASER within thirty (30) days from
transfer to MANUFACTURER. The cost for completing and testing of WIP
shall be determined in accordance with Exhibit B to this Agreement and
paid by PURCHASER in accordance with Section 5 of this Agreement. No
partially completed sub-assemblies will be transferred to MANUFACTURER.
8. CONSIGNMENT OF EQUIPMENT; TRAINING
PURCHASER will deliver to MANUFACTURER its test equipment and
manufacturing equipment unique to PURCHASER's Products for use by
MANUFACTURER in manufacturing and testing Products. PURCHASER will
retain title to such equipment, which shall be immediately returned to
PURCHASER upon termination of this Agreement in good working order.
MANUFACTURER shall maintain and upgrade the equipment as may be required
to perform its obligations under this Agreement. PURCHASER shall
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provide at its cost such additional test equipment as may be necessary
to meet production requirements. Any modifications required to be made
to equipment provided to MANUFACTURER pursuant to this section shall be
documented by an Engineering Change Order ("ECO") or (Equivalent
Manufacturing Control Documents) and shall be at PURCHASER's expense.
PURCHASER shall provide such training to MANUFACTURER's personnel as may
be necessary for MANUFACTURER to manufacture and test Products.
9. PRICING; MATERIAL COSTS
(a) MANUFACTURER's prices for its services shall be determined in
accordance with the following formula:
o [*]
o [*]
o [*]
[*]
[*] The revenue forecast will be reviewed July 1, 2000, and each
quarter thereafter, and in the event the revenue does not meet
expectations, forward adjustments will be made reflecting an
increase/decrease in Material Margin as agreed to between PURCHASER
and MANUFACTURER as defined below in Section 9(d); no retroactive
adjustments will be made. No adjustment will be made under this
paragraph to the material margin on a quarterly basis if the total
of the MANUFACTURER's actual revenue year to date plus the
PURCHASER's forecast is equal to the annual revenue target on an
annualized basis.
(b) MANUFACTURER shall review its actual cost information, and provide
PURCHASER with costed Bills-of-Material on a quarterly basis. After
the quarterly cost review, MANUFACTURER will revise PURCHASER's
cost, based on actual cost of raw material, plus agreed to mark-up.
If MANUFACTURER, at PURCHASER's request, must pay premiums for
expedited material shipments, MANUFACTURER will review with
PURCHASER increased pricing prior to implementation, for PURCHASER's
approval. PURCHASER will be responsible for documented and approved
premium cost.
(c) MANUFACTURER shall use its best efforts to obtain the lowest
possible costs and to obtain flexibility to accommodate PURCHASER's
schedule changes, based on PURCHASER's forecasts. Purchaser shall
transfer to MANUFACTURER any volume purchase or unique pricing
agreements it may have relating to Products.
(d) Prices are based on the following assumptions:
1. Major items are defined as main cards, snaps, shelves, power
supplies. (See Exhibit B).
2. Minor Items are defined as cables, CDs, manuals, & other
accessory items.
[*] Confidential Treatment Requested.
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3. [*]
4. No shipping preparation labor charge will be incurred for minor
items.
5. [*]
6. [*]
7. [*]
8. Material margin structure defined during a calendar year [each
one (1) year period beginning 01-01-00].
<TABLE>
<CAPTION>
Revenue Material Margin
<S> <C>
[*] [*]
[*] [*]
[*] [*]
[*] [*]
</TABLE>
At the end of the first one-year period, MANUFACTURER and
PURCHASER will review the opportunity to reduce the [*] rate,
based on the revenue and future projections.
(e) No MANUFACTURER's inventory will be held longer than one (1) year
without a material carrying charge agreed to by each party per
agreement in Item 6C.
(f) Non Cancelable Non Returnable material purchased by MANUFACTURER per
PURCHASER'S Purchase Orders or Letter of Agreement will be the sole
liability of PURCHASER.
10. PURCHASE ORDERS; FORECASTS
(a) All purchases made pursuant to this Agreement shall be made pursuant
to a Purchase Order, which shall be signed by an authorized
representative of PURCHASER and shall contain PURCHASER's part
number, revision level of Products to be shipped, and PURCHASER's
delivery schedule.
(b) Every thirty (30) days, PURCHASER shall provide MANUFACTURER with a
firm Purchase Order for its requirements for the next thirty (30)
day period and a forecast for the subsequent five (5) month period.
Within the thirty (30) day period, MANUFACTURER shall provide a
cycle time of five (5) working days from production release to
shipment to MANUFACTURER'S bonded stock inventory.
(c) MANUFACTURER shall use PURCHASER's Purchase Orders and forecasts as
a basis for purchasing materials required for Products. PURCHASER
shall be responsible for the costs of any material purchased for
Products subject to a Purchase Order and forecast not used for the
manufacture of Products due to cancellations by PURCHASER.
MANUFACTURER shall use its best efforts to mitigate PURCHASER's
liability pursuant to this section.
[*] Confidential Treatment Requested.
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(d) PURCHASER shall be entitled to cancel, reschedule, or modify
Purchase Orders that provide for delivery beyond thirty (30) days,
provided PURCHASER provides MANUFACTURER with at least fourteen (14)
days written notice of such cancellation, rescheduling, or
modification. If such action by PURCHASER represents an acceleration
of shipment date or increase in quantity of Products, MANUFACTURER
will use its best efforts to meet PURCHASER's request, subject to
material availability and capacity, and expedite labor charges.
11. WARRANTY
(a) MANUFACTURER warrants that the Product sold hereunder will be free
from defects in material and workmanship according to IPC 610
Workmanship Standards and other appropriate quality standards for a
period of one (1) year from the date of shipment, provided that: (i)
MANUFACTURER is notified in writing by PURCHASER within thirty (30)
days after PURCHASER's discovery of any Product failure, or (ii) the
defective Product is returned to MANUFACTURER no longer than ten
(10) days following the last day of the warranty period.
MANUFACTURER shall include serial numbers and/or date stamps, as
designated by PURCHASER, on each Product to facilitate warranty
tracking. PURCHASER shall forward defective Products to MANUFACTURER
freight prepaid, and MANUFACTURER will use its best efforts to
return the repaired or replaced Products freight prepaid by
MANUFACTURER to PURCHASER no later than thirty (30) days from the
date MANUFACTURER received the defective Product. The foregoing
warranty shall not be valid if the Product or component parts have
been subjected to abuse, misuse, accident, alteration, neglect,
unauthorized repair or installation.
(b) Subject to Exhibit D, the foregoing warranty provisions set forth
the MANUFACTURER's sole liability and the PURCHASER's exclusive
remedies for claims (except as to title) based on defects in, or
failure of, any Product sold hereunder when the claim is based on
breach of warranty. Upon the expiration of the applicable warranty
for any Product sold hereunder, all such liability shall terminate.
(c) The above warranty periods shall not be extended by the repair or
replacement of Products pursuant to any of the above warranties. The
above warranties shall apply to PURCHASER, its successors, assigns
and those who purchase or use Products. PURCHASER shall deal
directly with MANUFACTURER for returns and repairs.
(d) EXCEPT AS HEREINABOVE PROVIDED, THE FOREGOING WARRANTIES ARE
EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
OR STATUTORY, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
12. DELIVERY
(a) Products shall be delivered to PURCHASER in accordance with the
delivery dates as specified on PURCHASER's Purchase Orders as agreed
to by MANUFACTURER.
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(b) Upon learning of any potential delays, MANUFACTURER will immediately
notify PURCHASER in writing as to the cause and extent of such
delay. MANUFACTURER and PURCHASER will review the cause and extent
of such delay, and the Purchase Order Line Item delivery date will
be modified if Material is determined to be on allocation,
defective, or incorrect, in a manner that could not be reasonably
anticipated by MANUFACTURER. If the above circumstances do not
apply, the delivery schedule in the Purchase Order shall remain in
effect.
(c) PURCHASER requires a compliance to agreed upon delivery date greater
than 95%. Delivery Commitment is defined as a Purchase Order Line
Item, 100% quantity shipped as acknowledged in Purchase Order
Delivery Date. MANUFACTURER shall be responsible for any financial
penalties or additional expenses as a result of MANUFACTURER's
failure to meet the mutually agreed to delivery commitments.
If MANUFACTURER is performing below 95% delivery commitment to
individual line item requirement into PURCHASER's stores area,
PURCHASER will withhold 3% of the dollar amount of the delinquent
Purchase Order line item until performance achieves 95% within
thirty (30) days or a mutually agreed upon recovery period.
PURCHASER will refund the withheld amount if the performance
achieves 95% within thirty (30) days or the mutually agreed to
recovery period, whichever is applicable. If performance does not
achieve 95% within the applicable period, PURCHASER shall retain all
amounts withheld.
13. TERMINATION
This Agreement may be terminated by either party at any time upon the
occurrence of any one or more of the following events of default:
(a) Failure of the other party (i) to perform pursuant to the terms and
conditions of this Agreement; and (ii) to cure such performance
deficiency within sixty (60) days after receiving written notice
thereof given by the aggrieved party;
(b) The entering into or filing by the other party of a petition,
arrangement or proceeding seeking an order for relief under the
bankruptcy laws of the United States, a receivership for any of the
assets of the other party, a composition with or assignment for the
benefit of its creditors, a readjustment of debt, or the dissolution
or liquidation of the other party;
(c) The insolvency of the other party.
Upon termination, by MANUFACTURER pursuant to PURCHASER's default,
PURCHASER shall be liable for any material acquired by MANUFACTURER,
pursuant to PURCHASER's Purchase Orders, current forecasts and approved
material Purchase authorizations.
14. INSPECTION
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(a) Source Inspection. Upon request from PURCHASER, MANUFACTURER agrees
to allow PURCHASER to inspect and review the work being performed
under this Agreement, including materials and supplies being used.
However, shipments will not be delayed if PURCHASER fails to conduct
such source inspection. Source inspection does not constitute
acceptance of Products.
(b) Approved MANUFACTURERs. In the course of purchasing component parts
on behalf of PURCHASER, MANUFACTURER must follow PURCHASER's
Approved Vendors List for all component parts. If MANUFACTURER
offers alternatives to PURCHASER's AVL, the alternatives must be
approved in writing by PURCHASER prior to acquisition by
MANUFACTURER of alternative component parts.
(c) Bonded Stores Inventory Accuracy. While PURCHASER owns "Bonded
Stores Inventory", MANUFACTURER is responsible for staffing,
maintenance, data and inventory accuracy. A formal cycle count
process and/or physical inventories will be required by
MANUFACTURER. In the event the MANUFACTURER's inventory accuracy
defined as book-to-physical units and dollars, falls below 98%
accuracy, PURCHASER will require MANUFACTURER to complete a physical
inventory, at MANUFACTURER's expense, until such time inventory
accuracy is compliant. Failure to meet these requirements will
require the MANUFACTURER to provide a root cause analysis,
containment plan, and preventive action plan based on PURCHASER's
periodic audits.
15. ENGINEERING CHANGE ORDERS ("ECOs")
From time to time MANUFACTURER will be asked to implement ECOs. The
following shall apply to ECOs:
(a) PURCHASER shall notify MANUFACTURER in writing of a proposed ECO.
This notification should include the documentation of the change to
effectively support MANUFACTURER's investigation of the impact of
this proposal.
(b) Upon notice of a change, MANUFACTURER will make best effort to
review all costs impacted within five (5) working days. All cost
impacts and material availability issues will be mutually reviewed
and agreed to with PURCHASER prior to implementation.
(c) Emergency ECOs will be immediately implemented at PURCHASER's
request. PURCHASER will be liable for costs (material and labor)
associated with emergency ECO implementation.
16. CONFIDENTIALITY
Both parties acknowledge that, by reason of their relationship, they may
have access to certain information and materials concerning the other's
business, plans, and products (including, but not limited to,
information and materials contained in technical data provided to the
other party) which is confidential and of substantial value to the other
party, which value would be impaired if such information were used by
the other
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party or disclosed to third parties. Both parties agree that they shall
not use in any way, for their own account or the account of any third
party, nor disclose to any third party, any such confidential
information which is revealed to it by the other party without written
authorization from the other party. Each party will take every
reasonable precaution to protect the confidentiality of such information
consistent with the efforts exercised by it with respect to its own
confidential information. Each party shall advise the other of
information or materials it considers to be confidential. Upon
termination of this Agreement, all confidential information shall be
returned to owners of that confidential information. This provision
shall survive termination of this Agreement.
17. INDEMNIFICATION
Each party shall indemnify and defend the other party against all
claims, suits, losses, expenses and liabilities for bodily injury,
personal injury, death and property damage directly or indirectly caused
by any Products of through the intentional acts or negligence of a party
or of any person for whose actions such party is legally liable. Both
parties shall carry and maintain liability insurance coverage to
satisfactorily cover its obligations under this Agreement.
18. COMPLIANCE WITH APPLICABLE LAWS
MANUFACTURER has been, and shall continue to be, in material compliance
with the provisions of all applicable federal, state and local laws,
regulations, rules and ordinances applicable to the transactions
governed by this Agreement.
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19. FORCE MAJEURE
In the event that performance by either party of its obligations under
this Agreement is prevented due to any Act of God, fire, casualty,
flood, earthquake, war, strike, lockout, epidemic, destruction of
production facilities, riot, insurrection, or any other similar cause
beyond the reasonable control of the party invoking this section, and if
such party shall give prompt written notice to the other party, the time
for its performance shall be excused, and the time for the performance
shall be extended for the period of delay or inability to perform due to
such occurrences.
20. MISCELLANEOUS
(a) Severability. In the event that one or more of the provisions, or
parts thereof, contained in this Agreement shall for any reason be
held to be invalid, illegal, or unenforceable by a court of
competent jurisdiction, the same shall not invalidate or otherwise
affect any other provision in the Agreement, and the Agreement shall
be construed as if such invalid, illegal or unenforceable provision
had never been contained herein.
(b) Entire Agreement; Modification. This Agreement constitutes the
entire and exclusive statement by PURCHASER and MANUFACTURER of the
terms of their agreement, notwithstanding any additional or
different terms that may be contained in any quotation,
acknowledgment, confirmation, purchase order, invoice or other form
of PURCHASER or MANUFACTURER. All prior and contemporaneous
proposals, negotiations, representations and agreements are merged
into this Agreement. The terms of this Agreement may not be altered,
modified, superseded, amended or rescinded, and no additional terms
shall become a part of this Agreement, except pursuant to a writing
specifically referencing this Agreement and signed by a
representative of the party against whom enforcement is sought.
(c) Notice. Unless otherwise specified in this Agreement, all notices
and other communications permitted or required by the provisions
hereof shall be in writing and shall be mailed, faxed or delivered
to the other party at the address set forth below (or at such other
address as either party shall designate in writing to the other
party during the term of this Agreement) and shall be effective and
deemed received: i) if mailed, when actually received; ii) if faxed,
when actually received; or iii) if personally delivered, when
delivered. Each notice to MANUFACTURER or PURCHASER shall be
addressed, until notice of change thereof, as follows:
i) If intended for MANUFACTURER, to:
Wellex Corporation
44141 S. Grimmer Blvd.
Fremont, CA 94538
Attn: Richard L. Fitzgerald
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ii) If intended for PURCHASER, to:
Verilink Corporation
127 Jetplex Circle
Madison, AL 35758
Attn: Thomas E. Abernathy, Jr.
(d) Assignment. This Agreement shall not be assignable by either party
without the prior written consent of the other party.
(e) Waiver. No failure or delay on the part of either party hereto in
exercising any right or remedy under this Agreement, or any single
or partial exercise of any such right or remedy, shall operate as a
waiver thereof. No provision of this Agreement may be waived except
in writing signed by the party granting such waiver.
(f) Governing Law; Interpretation. This Agreement shall be governed by
and construed in accordance with the laws of the State of
California. Acceptance or acquiescence in a course of performance
rendered under this Agreement shall not be relevant to determining
the meaning of the Agreement, even though the accepting or
acquiescing party had knowledge of the nature of the performance and
an opportunity for objection. No course of prior dealing between the
parties and no usage of the trade shall be relevant to supplement or
explain any terms used in this Agreement.
(g) Moving Costs. The responsibility for moving costs required to
implement this Agreement shall be governed by PURCHASER's letter to
MANUFACTURER, dated July 30, 1999.
(h) PURCHASER's Personnel. MANUFACTURER will make available working
space for a mutually agreed upon number of PURCHASER's personnel.
(i) COOPERATION. PURCHASER will assist MANUFACTURER in identifying
current or former employees of PURCHASER as potential employees of
MANUFACTURER and in making such persons available for interview.
21. RETURN MATERIAL AUTHORIZATION
If product is found to be defective pursuant to Section 11 of this
Agreement, PURCHASER will notify MANUFACTURER and MANUFACTURER will
provide a Return Material Authorization number prior to PURCHASER
returning the Product. MANUFACTURER will make best effort to provide an
RMA number within twenty-four (24) hours.
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22. QUARTERLY REVIEWS
PURCHASER and MANUFACTURER will jointly work towards process
improvements in the following areas:
- Total Price
- Quality
- Cycle Time
- On-time Delivery
- Design improvements on manufacturability, quality and price
PURCHASER and MANUFACTURER will meet every three (3) months to review
current worldwide material prices for higher dollar components and
determine a procurement strategy to achieve best total pricing.
23. REPAIR CENTER
MANUFACTURER agrees to provide a repair center for Products subject to
mutual agreement between MANUFACTURER and PURCHASER. Among the terms to
be agreed upon are pricing for repair of Products, and refurbishment and
modification of field equipment. Repair costs will be twenty-two (22%)
of the actual product cost which includes internal handling and repair
(excluding transportation). Repair cycle time will be five (5) work days
on current products, where material is immediately available.
After completion of first year of this Agreement, both parties will
review actual cost of repair, including labor, material, and overhead,
and will agree upon any adjustment of repair cost.
24. CONTROL OF CONSIGNED INSPECTION; MEASURING & TEST EQUIPMENT
MANUFACTURER shall track consigned inspection measuring and test
equipment within the MANUFACTURER's recall system. This includes:
- Calibrating equipment,
- Maintaining calibration certification records (per ISO 9002),
- Supplying the purchaser with a quarterly summary of equipment
calibration status.
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ACCEPTED FOR ACCEPTED FOR
Verilink Corporation Wellex Corporation
By: /s/ Grahmam G. Pattison By: /s/ Chern H. Lee
Print: Grahmam G. Pattison Print: Chern H. Lee
Title: President and CEO Title: President & CEO
Date: September 13, 1999 Date: September 13, 1999
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EXHIBIT D
QUALITY PLAN
PRODUCT QUALITY LEVELS
1st Pass Final Test Yields.
Subcontractor is required to meet or exceed 1st pass final test yields of 97%
(for each model manufactured) and must show evidence of continuous improvement.
This requirement is based on monthly data collected by MANUFACTURER for each
model manufactured during the month, with a minimum lot size of 25 units for the
month. PURCHASER reserves the right to monitor testing processes and verify 1st
pass final test yields. Analysis of 1st pass test yields must be completed by
MANUFACTURER within ten (10) working days of the previous month end during which
the data was collected.
Failure to meet these requirements will require that the MANUFACTURER provide a
written root cause analysis, containment plan, and preventive action plan within
five (5) working days of capturing the prior month's data.
Field Return Rate
The field return rate, due to any workmanship or related discrepancies,
excluding NTF (No Trouble Found), as defined in IPC 610 (latest revision) must
not exceed 0.2% for each model shipped under this Agreement. Failure to meet
this requirement will result in MANUFACTURER repairing defective product at no
charge to PURCHASER. Failure to meet these requirements will require that the
MANUFACTURER provide a written root cause analysis, containment plan, and
preventive action plan within five (5) working days of capturing the prior
month's data.
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EXHIBIT 10.37
INDUSTRIAL PROPERTIES OF THE SOUTH
600 ST. CLAIR, SUITE 24
HUNTSVILLE, AL 35801
LEASE AGREEMENT
This Lease Agreement dated the 23rd day of July, 1993 between Industrial
Properties of the South, an Alabama General Partnership (herein referred to as
the "Lessor") and TxPort, Inc. (herein referred to as the "Lessee").
WITNESSETH: That the Lessor hereby demises and leases unto the Lessee, from the
Lessor, for the term and upon the rentals hereinafter specified, the premises
described herein and in Exhibit A.
PREMISES
1. Square footage 19,800
--------------------------------------------------------
Street Address 9668 Highway 20 West 3rd floor
--------------------------------------------------------
City/Township Madison
--------------------------------------------------------
County Madison
----------------------------------------------------------------
State Alabama
-----------------------------------------------------------------
Zip Code 35758
--------------------------------------------------------------
For purposes of this Lease Agreement the above-described premises shall
be deemed the "Demised Premises". See Exhibit A, incorporated herein by
reference, for additional information on the Demised Premises.
TERM
2. The Initial Term of this Lease Agreement shall be 3 years and 0 months,
commencing on September 1, 1993 or completion of construction, but no
later than October 1, 1993, and terminating on August 31, 1996. The
full term of the Lease may be extended by mutual written agreement of
the parties' authorized representatives, or upon exercise of any
options described herein.
1
<PAGE> 2
RENT
3. Lessee shall pay to the Lessor, without previous demand for this rent
by the Lessor, rent in monthly installments and due on the first of
each month and forwarded via U.S. mail, overnight courier, or by hand
to the office of the Lessor as provided herein or such other address as
may otherwise be directed by Lessor in writing; provided, that the
Lessor has performed all covenants contained herein and is not in
default hereof. If the term of this Lease Agreement shall commence or
terminate on a day other than the first day of the calendar month, the
rent for any partial month shall be prorated based on 1/365 of the
annual rent for each day. For the Initial Term the rent shall be an
annual rent of $99,000, payable in equal monthly installments of
$8,250.00. No base rent will be charged the first three months of
occupancy. See section 16 for services and utility payments.
QUIET ENJOYMENT
4. Lessor covenants that during the full term of this Lease Agreement,
upon the payment of the rent herein provided and the performance by the
Lessee of all covenants herein, Lessee shall have and hold the Demised
Premises, free from any interference from the Lessor.
PEACEFUL POSSESSION
5. Lessor covenants that during the full term of this Lease Agreement,
upon the payment of the rent herein provided and the performance by the
Lessee of all covenants herein, that the Lessee shall peaceably and
quietly have, hold, and enjoy peaceful possession of the Demised
Premises.
PERMITTED USES
6. Lessee covenants and agrees to use the Demised Premises as general
office space and agrees not to use or permit the premises to be used
for any other purpose without the prior written consent of the Lessor.
Lessor covenants that the premises may be lawfully used for these
purposes.
SUBLETTING AND ASSIGNMENT
7. Lessee shall not sublet the Demised Premises nor any portion thereof,
nor shall this Lease Agreement be assigned by the Lessee without the
prior written consent of the Lessor, which consent shall not be
unreasonably withheld.
2
<PAGE> 3
ATTORNMENT
8. In the event the Demised Premises are sold due to any foreclosure sale
or sales, by virtue of judicial proceedings or otherwise, this Lease
Agreement shall continue in full force and effect, and Lessee agrees,
upon request, to attorn to and acknowledge the foreclosure purchaser or
purchasers at such sale as Lessors hereunder; provided, however, that
such purchaser will accept all obligations of Lessor as contained in
this Lease Agreement.
ESTOPPEL CERTIFICATE
9. The Lessee agrees to execute an Estoppel Certificate for the benefit of
Lessor's lender or lenders; provided, however, that such Estoppel
Certificate consists solely of an acknowledgement of the terms and
conditions of this Lease Agreement.
RULES AND REGULATIONS
10. Lessee covenants and agrees that Lessee shall observe and comply with
those Rules and Regulations (if any) contained in Exhibit B, attached,
initialed by Lessee, and made a part hereof. All rules & regulations
made a part of this Lease by Lessor are implemented subject to Tenant's
right of quiet enjoyment and peaceful use of Premises.
LESSOR INSURANCE
11. Lessor shall maintain replacement fire and extended coverage insurance
on the Demised Premises, unless otherwise specified in this Lease
Agreement in sufficient amounts so as to be able to make all necessary
repairs to the Demised Premises in the event of a fire in or other
destruction of the Demised Premises, as well as insurance sufficient to
cover bodily injury and personal injury in the event of a claim against
Lessor for same. Certificates of insurance may be issued at Lessee's
request at reasonable times during the term of the Lease Agreement. Any
increase in building insurance caused by Lessee's business will be paid
for be Lessee.
LESSEE INSURANCE
12. Lessee agrees to procure and maintain at Lessee's expense throughout
the term of this Lease Agreement and any extension thereof, a policy or
policies of insurance
3
<PAGE> 4
as follows: (a) workers' compensation (statutory); (b) Employers'
Liability ($1,000,000 per occurrence, bodily injury by accident or
disease, including death); Commercial General Liability ($1,000,000
combined limit, bodily injury, personal injury and property damage,
including blanket contractual liability). The Lessor shall be included
as an additional insured under Commercial General Liability as respects
this lease of premises. Certificates of insurance may be issued at
Lessor's request at reasonable times during the term of the Lease
Agreement.
All personal property of Lessee in the demised premises or in the
building of which the demised premises is a part shall be at the sole
risk of Lessee. Lessor shall not be liable for any damage thereto or
for the theft or misappropriation thereof, unless such damage, theft or
misappropriation is directly attributable to the negligence or
intentional acts of Lessor, its agents, or employees. Lessor shall not
be liable for any accident to or damage to property of Lessee resulting
from the use or operation of mechanical, electrical or plumbing
apparatus, unless caused by and due to the negligence of Lessor, its
agents or employees.
LESSEE'S AND LESSOR'S OBLIGATIONS
13. Lessor shall take all reasonable and necessary precautions to prevent
damage, injury, or loss of life in and around the Demised Premises.
Lessor agrees to indemnify and save Lessee harmless from and against
any and all claims, actions, damages, liability and expense in
connection with or arising out of Lessee's use of the Demised Premises
occasioned wholly or in part by any willful misconduct or negligent act
or omission of Lessor, its agents, clients, or customers. In case
Lessee shall, without material fault on its part, be made a party to
any litigation commenced by or against Lessor, Lessor shall protect and
hold Lessee harmless and shall pay all costs, expenses and reasonable
attorneys' fees incurred or paid by Lessee in connection with such
litigation. The aforementioned, indemnification by Lessor of Lessee
shall not be effective as to any claim arising from or to the extent of
negligence or willful misconduct of the Lessee.
Lessee shall take all reasonable and necessary precautions to prevent
damage, injury, or loss of life in and around the Demised Premises.
Lessee agrees to indemnify and save Lessor harmless from and against
any and all claims, actions, damages, liability and expense in
connection with or arising out of Lessee's use of the Demised Premises
occasioned wholly or in part by any willful misconduct or negligent act
or omission of Lessee, its agents, clients, or customers. In case
Lessor shall, without material fault on its part, be made a party to
any litigation commenced by or against Lessee, Lessee shall protect and
hold Lessor harmless and shall pay all costs, expenses and reasonable
attorneys' fees incurred or paid by Lessor in connection with such
litigation.
4
<PAGE> 5
MUTUAL WAIVER OF SUBROGATION
13. Each of (Landlord/Lessor) and (Tenant/Lessee) shall cause its insurance
carriers to waive all rights of subrogation against the other party
hereto to the extent of (Landlord's/Lessor's) or (Tenant's/Lessee's)
undertaking set forth in Clauses 11, 12, & 13.
EVENT OF DESTRUCTION
14. In the event of the whole or partial destruction of the Demised
Premises or of the building containing the Demised Premises by fire,
explosion, the elements or otherwise during the term of this Lease
Agreement or previous thereto as to render the Demised Premises
untenantable or unfit for occupancy in whole or in part, or should the
Demised Premises be so badly injured that the same cannot be repaired
within ten days from the occurrence to the Demised Premises of such
destruction and injury then the Lessee may, at its option, terminate
this Lease Agreement and surrender the Demised Premises and all the
Lessee's interest therein to the Lessor as of the date of termination,
and shall pay rent only to the time of such event of destruction.
Should the Demised Premises be rendered untenantable and unfit for
occupancy in whole or in part, but yet be repairable within ten days
from the happening of such injury, the Lessor may enter and repair the
same, and the rent shall not accrue after such injury or while repairs
are being made, but shall recommence immediately after such repairs
shall be completed; provided such repairs are completed within the ten
days. But if the premises shall be so slightly injured as not to be
rendered untenantable and unfit for occupancy in whole or in part and
in the opinion of the Lessee, then the Lessor agrees to repair the same
with reasonable promptness and in that case the rent accrued and
accruing shall not cease. Nothing in this clause, however, shall be
construed as requiring the Lessor to repair the Demised Premises in the
event of their whole or partial destruction. However, if the Lessor
either does not repair within the appropriate time limits or states his
intention not to repair, then the Lessee's rights shall be the same as
though the Demised Premises were injured beyond repair.
In any event if the Lessor is unable to make repairs of such damage or
destruction within ten days of the occurrence of such an event the
Lessee may terminate the lease for other than default (unless such
damage or destruction was the result of the willful misconduct or
negligence of Lessor, its agents, clients, or customers, in which case
the termination shall be deemed one for default) by written notice to
the Lessor without any further obligations hereunder from the date of
the occurrence of such destruction.
5
<PAGE> 6
OBSERVATION OF LAWS
15. The Lessor and Lessee agree to observe and comply with all laws,
ordinances, rules, and regulations of the Federal, State, County, and
Municipal authorities applicable to the Demised Premises. The Lessor
and Lessee agree not to do or permit anything to be done in the Demised
Premises or the building in which the Demised Premises exist, or keep
anything therein which would obstruct or conflict with the regulations
of the Fire Department.
SERVICES AND UTILITIES
16. Services and utilities furnished to the Demised Premises UTILITIES
shall be provided and paid for as follows:
<TABLE>
<CAPTION>
BY LESSEE ITEM BY LESSOR
--------- ---- ---------
<S> <C> <C>
Water & sewer b & d
------------------------ charges -------------------
Electric, fuel oil, b & d
------------------------ and/or gas, & hot -------------------
water charges
Plumbing mechanical b & d
------------------------ & maintenance -------------------
Heating mechanical b & d
------------------------ Maintenance -------------------
Air conditioning b & d
------------------------ mechanical & -------------------
maintenance
Interior building b & d
------------------------ maintenance -------------------
Capital expenditures a
------------------------ for plumbing, heating & -------------------
cooling repair
Exterior building b & d
------------------------ maintenance, e.g., -------------------
window cleaning, etc.
Real estate taxes b & d
------------------------ or other government -------------------
assessments
Trash removal b & d
------------------------ -------------------
c Janitorial service
------------------------ -------------------
All of the third
------------------------ floor -------------------
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
Common area b & d
------------------------ janitorial, except -------------------
third floor
c Any security above
------------------------ "normally" locked -------------------
doors
Lawn care & land- b & d
------------------------ scaping maintenance -------------------
Driveway, parking b & d
------------------------ lot & sidewalk -------------------
maintenance
Snow glowing, side- b & d
------------------------ walk snow & ice -------------------
removal
Structural a
------------------------ maintenance -------------------
Roof maintenance a
------------------------ -------------------
Fire alarm hookup & b & d
------------------------ maintenance charges -------------------
Fire extinguishers, b & d
------------------------ installation & service -------------------
Building insurance b & d
------------------------ -------------------
</TABLE>
In each instance, the following key indicates how the cost of such
services will be paid by Lessee:
(a) Included in the annual rent amount;
(b) Actual metered or incurred amounts at a stop of $2.38 (office)
to be paid by Lessee to Lessor within thirty days of receipt
of written notice of a request to be reimbursed by the Lessor;
necessary records to support the amounts will be kept by the
Lessor and copies made available to Lessee upon request;
Lessee may require such records prior to payment;
(c) Actual cost of services or metered amounts to be paid by
Lessee to the provider of the service (e.g., the utility
company or contractor).
(d) A proportionate share of the cost in excess of $2.38 per
square foot (the operating expense stop) for providing the
service to the entire building or facility of which the
Demised Premises are a part. In this case the proportionate
share is 34.5%, which is determined by dividing 19,800 (the
area of the Demised Premises) by 57,451 (the total area of the
building or facility). Necessary records to support the
amounts will be kept by the Lessor and copies made available
to Lessee upon request; Lessee may
7
<PAGE> 8
require such records prior to payment. Payments are to be made
within thirty days of receipt of invoice. So long as the space
is used only for office space, the operating expense stop may
not increase more than the CPI for the year.
INTERRUPTION OF SERVICES
17. Notwithstanding anything contained herein to the contrary, Lessee shall
have the right upon written notification to the Lessor to terminate
this Lease Agreement for default if any stoppage in any of the services
listed in the immediately preceding paragraph as being provided by the
Lessor continues for twenty days for whatever reason.
HOLDING OVER BY LESSEE
18. Nothing contained herein shall constitute the consent of Lessor to the
holding over of Lessee after the expiration of this Lease Agreement.
However, if Lessee shall for any reason remain in possession of any of
the Demised Premises after the expiration or earlier termination of the
Term hereof, except as specifically provided, such possession shall be
as a month-to-month Tenancy during which time Lessee shall pay as
rental, rent on the first day of each month at a rate equal to
one-twelfth the amount of annual rent payable monthly during the prior
year of the term of this Lease Agreement. Unless evidenced otherwise in
writing as the exercise of an option stated herein or as a modification
to this Lease Agreement, in no event shall any holding over by the
Lessee be construed as creating any new tenancy other than a month to
month tenancy.
CARE OF PREMISES
19. The Lessee agrees that it will take good care of the Demised Premises,
fixtures and appurtenances, and suffer no waste or injury, that it will
make all repairs to the Demised Premises, fixtures and appurtenances
necessitated by the fault of the Lessee, its agents, employees or
guests.
REPAIRS
20. The Lessor agrees to make such repairs as may be necessary to keep the
Demised Premises and appurtenances in good order and condition within
reasonable time after it knows or should know of the need of such
repairs; provided, however, when such repairs are necessitated by the
fault of the Lessee, its agents, employees
8
<PAGE> 9
or guests, Lessee shall reimburse Lessor for its reasonable costs
expended in making such repairs; and provided further that minor
repairs to the Demised Premises not exceeding $50.00 (inclusive of
service charges) in any one instance shall be the responsibility of
Lessee except for lighting ballasts. Lessee shall first be afforded the
opportunity to review all such costs prior to accrual thereof and may
request competitive bids where Lessee deems costs are excessive. Costs
shall only include actual out-of-pocket expenses of Lessor and shall
not include profit or overhead or any costs which have not been
reviewed and approved by the Lessee. Lessor shall make available to
Lessee copies of any and all records necessary to support the costs
levied against Lessor under this clause for which reimbursement is
being sought.
ENVIRONMENTAL
21. Lessor warrants and represents to Lessee that, to the best of its
knowledge: (a) Lessor, its agents, employees, representatives, tenants,
and its predecessors in interest in the Premises did not discharge,
release, or dispose of, in any form, any hazardous material or
substance into or onto the Premises and that no condition exists in or
on the Premises that may result in any violation of any federal, state
or local laws, regulations or ordinances relating to the protection of
the environment or the public health and welfare (collectively
hereinafter called "Environmental Laws"); and (b) Lessor has no
liability and there are no outstanding claims against Lessor for the
clean up of any hazardous material or substance deposited in the
environment, either directly on the Premises or elsewhere, that
resulted from or were ownership of the Premises. Lessee acknowledges
receipt of a Phase I Environmental Study dated July 22, 1993 by ATEC
Engineering Company (copy attached).
Lessee warrants and represents to Lessor that: (a) Lessee, its agents,
employees, representatives and subleases, if any, will not discharge,
release, or dispose of in any form any hazardous materials or
substances into or onto the Premises and that Lessee, will not create,
or permit to be created, any condition in or on the Premises that may
result in any violation of any environmental Laws: and (b) Lessee will
not allow any hazardous material or substance to exist or be stored,
located, discharged, possessed, managed, processed or otherwise handled
on the Premises except those customarily used in the conduct of
Lessee's normal business activities, and that Lessee shall comply with
all Environmental Laws affecting the Premises; and (c) Lessee shall
immediately notify Lessor should Lessee become aware of (i) any
hazardous material or substance or any other environmental problem or
liability with respect to the Premises, (ii) any lien, action or notice
related to any such environmental problem or liability, or (iii) any
material or substance or the existence of any hazardous material or
substance or other environmental contamination, liability or problem
with respect to or arising out of or in connection with the premises.
9
<PAGE> 10
Lessor shall indemnify, defend, and hold harmless Lessee, its agents,
employees, representatives, and affiliate organizations from and
against any and all claims, suits, loss, costs, damage or liability
relating to or arising out of any operations by Lessor, its agents,
employees, representatives, tenants, and predecessors in interest at
the Premises, such operations including, but not limited to, the
release or discharge into the environment, or disposal of hazardous
materials or substances at or in connection with the Premises.
Lessee shall indemnify, defend, and hold harmless Lessor, its agents,
employees, representatives, and affiliate organizations from and
against any and all claims, suits, loss, costs, damage or liability
relating to or arising out of any operations by Lessee, its agents,
employees, representatives or subleases, if any, at the Premises, such
operations including, but not limited to, the release or discharge into
the environment, or disposal of materials or other Substances at or in
connection with the Premises.
Upon termination of this lease, Lessee agrees to provide Lessor, as
satisfaction of Lessee indemnification paragraph above, a "Phase One
Environmental Site Assessment" performed by a certified testing and
engineering firm and Lessee shall be responsible to address identified
items or problems created by Lessee.
IMPROVEMENTS
22. The Lessor and Lessee have agreed as to the extent of improvements to
be made to the Demised Premises, and-the work will proceed in order to
meet the commitments herein provided. Such work to be completed by
Lessor is described in Exhibit C to this Lease Agreement. The parties
agree to cooperate in order for the work to proceed to be completed on
a timely basis. Improvements to be made by Lessee are described in
Exhibit D to this Lease Agreement
NOTICES
23. Formal notices or communications pertaining to this Lease Agreement
shall be deemed to have been duly given if personally provided to the
other party in writing or if sent to the other by U.S. mail, or an
independent delivery service, postage and other costs prepaid. Until
otherwise specified in writing, the addresses and telephone numbers of
the parties hereto for the purpose of any such notice or communications
are:
10
<PAGE> 11
LESSEE: LESSOR:
TxPort, Inc. Industrial Properties of the South
---------------------------- ----------------------------------
600 St. Clair, Suite 24
---------------------------- ----------------------------------
Huntsville AL 35801
---------------------------- ----------------------------------
Attn: Attn: Charlene B. Graham
----------------------- ------------------------------
Telephone: Telephone: (205) 536-4511
------------------ ------------------------
Telefax: Telefax: (205) 464-0193
-------------------- --------------------------
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST
24. This Lease Agreement is subject and is hereby subordinated to all
present mortgages, deeds of trust and other encumbrances affecting the
Demised Premises or the property of which said premises are a part. The
Lessor agrees to cause the mortgagee to provide to the Lessee, in
recordable form, an agreement not to disturb Lessee's right in or
possession of the premises so long as Lessee is not in default
hereunder, in the event this Lease Agreement is subordinated to
mortgage deeds of trust or other encumbrances and the subordination of
this Lease Agreement is conditioned upon the Lessee receiving such
nondisturbance agreement from the mortgagee.
LEASE BINDING ON HEIRS, SUCCESSORS, ETC.
25. All of the terms, covenants, and conditions of this Lease Agreement
shall inure to the benefit of and be binding upon the respective heirs,
executors, administrators, successors, and assigns of the parties
hereto.
EMINENT DOMAIN, CONDEMNATION
26. If the entire property or any material part thereof wherein the Demised
Premises are located shall be taken by public or quasi-public authority
under any power of eminent domain or condemnation, this Lease Agreement
shall forthwith terminate and the Lessee shall have the right through
the Lessor to a claim for such taking, limited only to the cost or
value of material stock and cost of removal of stock, furniture and
fixtures owned by Lessee.
A material part is defined as taking which could interfere with the
Lessee's continued enjoyment and utilization of the premises as
described herein.
11
<PAGE> 12
SEVERABILITY
27. Each covenant and agreement in this Lease Agreement shall for all
purposes be construed to be a separate and independent covenant or
agreement. If any provision in this Lease Agreement or the application
thereof shall to any extent be invalid, illegal or otherwise
unenforceable, the remainder of this Lease Agreement, and the
application of such provision other than as invalid, illegal or
unenforceable, shall not be affected thereby) and such provisions in
this Lease Agreement shall be valid and enforceable to the fullest
extent permitted by law.
ADDITIONAL SIGNS
28. Lessor, at Lessee's expense, provided the necessary approvals can be
obtained from the appropriate governing authorities, may erect an
exterior sign or signs indicating the presence of Lessee in the Demised
Premises of the design and format to be agreed upon by the Lessor and
Lessee both using reasonable judgment and standards, and both using
good faith efforts to obtain any necessary approvals. All signage must
be maintained in very good condition by Lessee.
LESSOR'S RIGHT TO ENTRY
29. Lessor and Lessor's agents may enter the Demised Premises for the
following purposes only: to make repairs, alterations, or improvements
necessary under the terms of this Lease Agreement; to perform Lessor's
covenants as set forth in this Lease Agreement; for purposes of
inspection and, during the last two months of the Lease Term, to show
the Demised Premises to perspective tenants. Such entry shall not be so
frequent or of such a type as to disturb Lessee's peaceful enjoyment of
the Leased Premises. Such entry shall only take place with reasonable
prior notice to and consent of Lessee; consent shall not be
unreasonably withheld. If Lessor or its agent reasonably believes that
an emergency exists which requires immediate entry, such entry may be
made without Lessee's consent, but Lessor shall so inform Lessee of
such entry at the earliest practicable time afterwards. All persons who
enter the Demised Premises at Lessor's request must first obtain
clearance from Lessee before entry.
Notwithstanding anything in this Lease Agreement to the contrary, upon
any entry by Lessor or its duly authorized agents, servants, or
employees at any time during the Lease Term, such entry shall conform
to Lessee's security requirements as may be required by Lessee, the
federal government or any agency thereof, or any of Lessee's clients.
12
<PAGE> 13
LESSEE'S ALTERATIONS, IMPROVEMENTS, OR ADDITIONS
30. Any alterations, improvements, or additions to the Demised Premises in
the form of fixtures to the Demised Premises (collectively referred to
as "Alterations") and made by or at the request of Lessee shall remain
upon the Demised Premises at the expiration or earlier termination of
this Lease Agreement and shall become the property of Lessor unless
Lessor prior to the expiration or termination of this Lease Agreement,
gives written notice to Lessee to remove all such Alterations. Lessee
shall repair any damage caused by such removal and restore the Demised
Premises to substantially the same condition in which it existed prior
to the time that any such Alterations were made.
Lessee shall not, without on each occasion first obtaining Lessor's
prior written consent, make any Alterations to the Demised Premises,
except that Lessee may, without the consent of the Lessor but with
prior written notice to Lessor, make minor improvements to the interior
of the Demised Premises provided that they do not impair the structural
strength, operation, or value of the building of which Demised Premises
are a part, or violate any zoning, fire or building code. The cost of
any such violation shall be the responsibility of the Lessee.
RENEWAL OPTION
31. Lessee is given and granted an option to renew the term of this Lease
Agreement for two (2) successive terms of one year each on the same
terms and conditions except for the rental rate and the length of the
term. To exercise its option, the Lessee shall give the Lessor a notice
in writing not less than sixty days prior to the end of the original
term and any renewal terms and as a condition precedent to the notice
and the renewal that the Lessee not be in default under the terms and
conditions of this Lease Agreement.
The rental rates during each of the renewal periods shall be as
follows:
<TABLE>
<CAPTION>
Annual Monthly
Option Term Rent (base) Rent (base)
------ ---- ----------- -----------
<S> <C> <C> <C> <C>
1 09/96 through 08/97 $5.50/sf $.4583/sf
2 09/97 through 08/98 $5.50/sf $.4583/sf
</TABLE>
Actual dates to coincide with original lease commitment date.
13
<PAGE> 14
LESSEE'S DEFAULT
32. The Lessee shall be considered in default of this Lease Agreement upon
failure to pay when due the rent or any other sum required by the terms
of this Lease; the failure to perform any material term, covenant, or
condition of this Lease Agreement; the commencement of any action or
proceeding for the dissolution, liquidation, or reorganization under
the Bankruptcy Act, of Lessee, or for the appointment of a receiver or
trustee of the Lessee's property; the making of any assignment for the
benefit of creditors by Lessee; the suspension of business; or the
abandonment of the Demised Premises by the Lessee. In each case, Lessee
shall only be in default if the Lessee is given written notice by
Lessor of the specific grounds for the default termination and twenty
business days from receipt of such notice to correct such default and
Lessee fails to do so.
LESSOR'S DEFAULT
33. The Lessor shall be considered in default of this Lease Agreement upon
the failure to perform any material term, covenant, or condition of
this Lease Agreement; the commencement of any action or proceeding for
the dissolution, liquidation, or reorganization under the Bankruptcy
Act, of Lessor, or for the appointment of a receiver or trustee of the
Lessor's property; the making of any assignment for the benefit of
creditors by Lessor; the suspension of business; or any other reason
provided for herein. In each case, Lessor shall only be in default if
the Lessor is given written notice by Lessee of the specific grounds
for the default termination and twenty business days from receipt of
such notice to correct such default and Lessor fails to do so.
GENERAL
34. (a) This Lease Agreement shall be governed by and under the laws
of the State/Commonwealth of Alabama.
(b) Each party acknowledges that it has read this Lease Agreement,
understands it, and agrees to be bound by its terms, and
further agrees that this is the complete and exclusive
statement of the Lease Agreement between the parties, which
supersedes and merges all prior proposals, understandings, and
all other agreements, oral or written, between the parties
relating to this Lease Agreement. Any change in this Lease
Agreement must be made in writing and signed by authorized
representatives of both the Lessee and the Lessor.
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<PAGE> 15
(c) If either party cannot perform any or all of its respective
obligations under this Lease Agreement because of the
occurrence of any event which is beyond its reasonable
control, then the non-performing party shall (i) notify the
other party, (ii) take reasonable steps to resume performance
as soon as possible, and (iii) not be considered in breach
during the period performance is beyond the party's reasonable
control.
(d) The failure of either party at any time to require performance
by the other party of any provision hereof shall not affect in
any way the full right to require such performance at any time
thereafter. The waiver by either party of a portion of a
provision herein shall not be taken or held by the other party
to be a waiver of the provision itself unless such a waiver
shall be express and in writing.
(e) In the event of any inconsistency between its component parts,
this Lease Agreement shall be construed with the following
order of precedence:
(1) The Basic Lease Agreement (This document)
(2) Exhibit A
(3) Exhibit C
(4) Exhibits B and D
(5) Other Exhibits (if any)
(f) The titles of the clauses in this Lease Agreement, including
all Exhibits thereto, shall be read as references only and
shall not be read as references only and shall not be read as
affecting, contradicting, negating, or explaining the meaning
or interpretation of this Lease Agreement.
(g) Each party represents and warrants that it has the right and
authority to enter into this Lease Agreement.
(h) Unless otherwise specifically noted, "days" shall mean
calendar days.
(i) In no event shall either party be liable to the other for
indirect, consequential, incidental or special damages, even
if it has been made aware of the possibility of such.
MECHANICS' LIENS
35. In the event that any mechanics' lien is filed against the premises as
a result of alterations, additions or improvements made by the Lessee,
the Lessor shall have the option, if the Lessee shall be unable to
procure effective cancellation, bonding or discharge of the lien within
30 days following written notice of the existence of such condition, to
take such steps and pay such monies as may be necessary to
15
<PAGE> 16
obtain an effective cancellation or discharge of such notice or claim,
in which event such monies as shall be expended by the Lessor shall be
considered additional rent hereunder and shall be due and payable on
the first day of the next month succeeding such payment by the Lessor.
RIGHT OF FIRST REFUSAL
36. Provided Lessee is not in default hereunder, Lessee shall have the
right of refusal to lease additional space within the building within
which the Demised Premises exist subject to previously granted refusal
options to other tenants in chronological order of granting of such
options.
Lessee will have forty-eight hours from the receipt of notice from
Lessor to Lessee to lease the space and execute an Agreement of Lease
in the same form and with the same conditions as this lease except for
rent and term. The rent and term for such additional space shall be the
same as the rent and term accepted by the third party prospective
tenant.
PARKING
37. Lessor agrees to provide adequate parking for Lessee's employees and
visitors with 5 spaces reserved for Lessee in front of the building.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day
and year first written above.
LESSEE
TxPort, Inc.
-----------------------------------------------------------------------
125 West Park Loop
-----------------------------------------------------------------------
Huntsville, AL 35806
-----------------------------------------------------------------------
By: /s/ Mark H. Hoffman
--------------------------------------------------
Printed Name: Mark H. Hoffman
--------------------------------------------------
Title: President
--------------------------------------------------
Date: July 23, 1993
--------------------------------------------------
LESSOR
Industrial Properties of the South
-----------------------------------------------------------------------
600 St. Clair Avenue, Suite 24
-----------------------------------------------------------------------
Huntsville, Alabama 35801
-----------------------------------------------------------------------
By: /s/ Charlene B. Graham
--------------------------------------------------
Printed Name: Charlene B. Graham
--------------------------------------------------
Title: Partner
--------------------------------------------------
Date: July 23, 1993
--------------------------------------------------
17
<PAGE> 18
EXHIBIT A
DESCRIPTION OF DEMISED PREMISES
9668 Highway 20 West
Madison, Alabama 35758
The entire third floor.
18
<PAGE> 19
EXHIBIT B
RULES AND REGULATIONS
Rule 1: No sign, picture, advertisement, or notice shall be displayed,
inscribed, painted or affixed on any part of the outside, or inside of the
building or on or about the Demised Premises except on the doors of said Demised
Premises and on the Directory Board of the building, and then only of such
color, size and style and materials as shall be first specified by the Lessor.
No "For Rent" signs shall be displayed by the Lessee, and no showcases, or
obstructions, signs, flags, statuary, or any advertising device of any kind
whatever shall be placed in front of said building or in the passageways, halls,
lobbies, or corridors thereof by the Lessee; and the Lessor reserves the right
to remove all such showcases, obstructions, signs, flags, statuary, or
advertising devices and all signs other than those provided for, without notice
to the Lessee and at its expense.
Rule 2: The Lessor will maintain the grounds. Any person employed by the Lessor
to do grounds work, shall, while outside of said Demised Premises be subject to,
and under the control and direction of the Lessor (but not as agent or servant
of the Lessor).
Rule 3: No person shall disturb the occupants of this or any adjoining building
premises by the use of any musical instrument, unseemly noises, whistling,
singing or in any other way.
Rule 4: The Demised Premises leased shall not be used for lodging or sleeping,
not for any immoral or illegal purposes for any purpose that will damage the
Demised Premises.
Rule 5: Canvassing, soliciting and peddling in the building are prohibited and
each Lessee shall cooperate to prevent the same.
Rule 6: The water closets, wash basins, sinks, and other apparatus shall not be
used for any other purpose than those for which they were constructed, and no
sweeping, rubbish, or other substances shall be thrown therein.
Rule 7: All glass, locks and trimmings, in or about the doors and windows, and
all electrical globes and shades, broken by any Lessee, shall be immediately
replaced or repaired and put in order by such Lessee under the direction and to
the satisfaction of the Lessor, and on removal shall be left whole and in good
repair, normal wear and tear excluded.
Rule 8: Lessee will not block ingress and egress of the driveways or docks
leased to others.
Rule 9: The Lessor reserves the right to rescind any rules and to make such
other and further rules and regulations as, in Lessor's judgment, may from time
to time be needed for the safety, care, maintenance, operation and cleanliness
of the building, and for the preservation of good order therein, which, when so
made, and notice thereof given to the Lessee; shall have the
19
<PAGE> 20
same force and effect as if originally made a part of the foregoing lease; and
such other further rules, not however, to be inconsistent with the proper and
rightful enjoyment by the Lessee under the foregoing lease of the premises
therein referred to.
Rule 10: No smoking shall be allowed within any part of the premises herein
described.
20
<PAGE> 21
Madison County
State of Alabama
ADDENDUM NO. 1
TO
LEASE AGREEMENT
Whereas TxPort, Inc. and Industrial Properties of the South, an Alabama General
Partnership, as Lessor and TxPort, Inc. (TxPort), as lessee did execute a Lease
Agreement for 19,800 square feet on the third floor of 9668 Highway 20 West,
Madison, Alabama 35758 dated June, l993 and effective September 22, 1993, and
Now TxPort, Inc. hereby leases from Lessor the second floor of approximately
18,666 square feet starting April 1, 1996 for a two-year period ending March 31,
1998. The rate will be $6.25 base rate plus a $2.38 operating expense stop
(excludes janitorial) for $8.63 full service. A credit of $27,999.00 will be
applied against the rent due the first months (first two months free, rent for
third month of lease shall be $12,272.88), giving an effective base rate of
$5.50. Monthly rent will be 18,666 square feet x $8.63 = $161,087.58 divided by
12 = $13,423.96.
A one year option to renew the lease for the second floor hereby granted for the
period April 1, 1998 through March 31, 1999 at a rate of $6.25 base and $2.38
expense stop. Notice to be given as per Section 31 of the Master Lease
Agreement. The expense stop is still subject to adjustment per section 16(d) of
the Master Lease Agreement.
Further Terms and Conditions applicable to this second floor space:
1. IPS to approve all drawings and finish schedule, carpet, and paint
which approval shall not be unreasonably withheld. TxPort to have the
modifications made and pay for them on a timely basis - creating no
liens on the building.
2. Use Cox Corporation to modify HVAC duct work, thermostats, etc. Have
Cox remove and save all thermostats for reinstallation.
3. Finish schedule: comparable to what is existing, except wall paper is
not required may use painted sheet rock. Doors, frames and hardware to
match existing. Carpet to be a 26 ounce minimum weight commercial grade
carpet with appropriate vinyl base. Ceiling and grid to match existing.
4. Obtain permit from City of Madison - Call for and obtain all
inspections. Give a copy of the Certificate of Completion to IPS.
21
<PAGE> 22
5. TxPort to remove, save, and have re-installed the smoke detectors tying
in the fire alarm system of the building. Upon re-activation, have
re-certified by a licensed fire alarm contractor.
6. Deliver and turn over to Industrial Properties of the South all unused
doors, frames and hardware.
7. TxPort will assume all liability for any possible damage to the
building caused by construction.
8. Only one (1) lease contract agreement for the second floor - not two
(2).
All other terms and conditions of the lease remain in effect.
TxPort, Inc. Industrial Properties of the South
By: /s/ Donna M. Flammang By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Title: Secretary Title: Managing Partner
------------------------------ -----------------------------
Date: 04/03/96 Date: 04/04/96
------------------------------- -------------------------------
22
<PAGE> 23
Madison County July 22, 1998
State of Alabama
ADDENDUM NO. 2
TO
LEASE AGREEMENT
Whereas TxPort, Inc. and Industrial Properties of the South (IPS), an Alabama
General Partnership, as Lessor and TxPort, Inc. (TxPort), as Lessee did execute
a Lease Agreement for 19,800 square feet on the third floor of 9668 Highway 20
West, Madison, Alabama 35758 dated June, 1993 and effective September 22, 1993,
and
Now, with this addendum, an extension is contracted for the period September 22,
1998 through December 31, 1999, at a base rate of $6.90 and expense stop of
$2.58 per square foot per year. Rent will be 19,800 square feet x $9.48 =
$187,704.00 (annual rate) divided by 12 = $15,642.00 (per month).
This Lease will automatically renew for the period January 1, 2000 through
December 31, 2000 at the same rate stated above unless notice is received by May
1, 1999 indicating that Lessee will not be renewing. The expense stop is still
subject to adjustment per section 16(d) of the Master Lease Agreement.
All other terms and conditions of the lease remain in effect.
TxPort, Inc. Industrial Properties of the South
By: /s/ C. W. Smith By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Title: VP & Treasurer Title: Managing Partner
------------------------------ ------------------------------
Date: 08/10/98 Date: 08/11/98
------------------------------- -------------------------------
Prepared by:
Industrial Properties of the South
2903 Wall Triana Hwy. Suite #7
Huntsville, Alabama 35824
23
<PAGE> 24
Madison County March 16, 1999
State of Alabama
ADDENDUM NO. 3
TO
LEASE AGREEMENT
Whereas, (as successor to TxPort, Inc.), Verilink, as Lessee, and Industrial
Properties of the South (IPS), as Lessor did enter into a Lease Agreement on
April 3, 1996 for the second floor of 9668 Madison Boulevard consisting of
approximately 18,666 square feet, which terminates on March 31, 1999,
Now, with this Addendum, an extension is contracted for the period April 1, 1999
through March 31, 2002, at a base rate of $6.40 per square foot per year plus
$2.58 per square foot per year operating expense stop which excludes janitorial.
Rent will be 18,666 square feet x $8.98 = $167,620.68 (annual rate) divided by
12 = $13,968.39 (per month).
All other terms and conditions of the lease remain in effect.
Verilink Industrial Properties of the South
By: /s/ C. W. Smith By: /s/ Charlene B. Graham
--------------------------------- ----------------------------------
Title: Controller, Huntsville
Business Unit Title: Managing Partner
------------------------------ ------------------------------
Date: 03/19/99 Date: 03/22/99
------------------------------- --------------------------------
Prepared by:
Industrial Properties of the South
2903 Wall Triana Hwy. Suite #7
Huntsville, Alabama 35824
24
<PAGE> 25
August 25, 1999
ADDENDUM NO. 4
TO
LEASE AGREEMENT
INDUSTRIAL PROPERTIES OF THE SOUTH AS LESSOR AND VERILINK CORPORATION
(AS SUCCESSOR TO TXPORT, INC.)
AS LESSEE DATED JUNE, 1993 AND EFFECTIVE SEPTEMBER 22, 1993 AND
HEREIN AFTER REFERRED TO AS THE MASTER LEASE
At Lessee's request, this Addendum No. 4 is executed to add approximately 10,226
S.F. of office space on the 1st floor to the Master Lease.
A. Location: Airport Office Center, 9668 Madison Boulevard, Madison, AL
35758
B. Term: Starting September 07, 1999 and terminating on December 31, 2000,
the same date as the Master Intense.
C. Rate This Addendum is at a base rate of $6.40 per square foot per year
plus $2.58 per square foot per year operating expense stop which
excludes janitorial. Rent will be 10,226 square feet x $8.98 =
$91,829.48 (annual rate) divided by 12 = $7,652.46 (per month).
Lessee to install one hallway at Lessee's expense, with wall construction to
deck, 4' minimum, and remove door to hallway from front entrance, hall to have
cased entrance, flush side walls to hall opening, and a door to the hallway
opening to the occupied space. See Exhibit A-4.
Lessee may install water in new Break Room, may take double doors down between
Lessee's office space and vacant office space next door and sheet rock the
opening at Lessee's expense.
All other terms and conditions of the Lease Agreement remain the same.
Verilink Corporation Industrial Properties of the South
By: /s/ C. W. Smith By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Date: 09/07/99 Date: 09/07/99
--------------------------------- ---------------------------------
Prepared by:
Industrial Properties of the South
2903 Wall Triana Hwy., Suite 7
Huntsville, AL 35824
25
<PAGE> 1
EXHIBIT 10.38
INDUSTRIAL PROPERTIES OF THE SOUTH
600 ST. CLAIR, SUITE 24
HUNTSVILLE, AL 35801
LEASE AGREEMENT
This Lease Agreement dated the 23rd day of July, 1993 between Industrial
Properties of the South, an Alabama General Partnership (herein referred to as
the "Lessor") and TxPort, Inc. (herein referred to as the "Lessee").
WITNESSETH: That the Lessor hereby demises and leases unto the Lessee, from the
Lessor, for the term and upon the rentals hereinafter specified, the premises
described herein and in Exhibit A.
PREMISES
1. Square footage 21,875
--------------------------------------------------------
Street Address 127 Jetplex Circle
--------------------------------------------------------
City/Township Madison
--------------------------------------------------------
County Madison
----------------------------------------------------------------
State Alabama
-----------------------------------------------------------------
Zip Code 35758
--------------------------------------------------------------
For purposes of this Lease Agreement the above-described premises shall
be deemed the "Demised Premises". See Exhibit A, incorporated herein by
reference, for additional information on the Demised Premises.
TERM
2. The Initial Term of this Lease Agreement shall be 3 years and 0 months
commencing on September 1, 1993, or completion of construction, but no
later than October 1, 1993, and terminating on August 31, 1996. The
full term of the Lease may be extended by mutual written agreement of
the parties' authorized representatives, or upon exercise of any
options described herein.
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<PAGE> 2
RENT
3. Lessee shall pay to the Lessor, without previous demand for this rent
by the Lessor, rent in monthly installments and due on the first of
each month and forwarded via U.S. mail, overnight courier, or by hand
to the office of the Lessor as provided herein or such other address as
may otherwise be directed by Lessor in writing; provided, that the
Lessor has performed all covenants contained herein and is not in
default hereof. If the term of this Lease Agreement shall commence or
terminate on a day other than the first day of the calendar month, the
rent for any partial month shall be prorated based on l/365 of the
annual rent for each day. For the Initial Term the rent shall be an
annual rent of $98,875.00 payable in equal monthly installments of
$8,239.58. No base rent will be charged the first three months of
occupancy.
QUIET ENJOYMENT
4. Lessor covenants that during the full term of this Lease Agreement,
upon the payment of the rent herein provided and the performance by the
Lessee of all covenants herein, Lessee shall have and hold the Demised
Premises, free from any interference from the Lessor.
PEACEFUL POSSESSION
5. Lessor covenants that during the full term of this Lease Agreement,
upon the payment of the rent herein provided and the performance by the
Lessee of all covenants herein, that the Lessee shall peaceably and
quietly have, hold, and enjoy peaceful possession of the Demised
Premises.
PERMITTED USES
6. Lessee covenants and agrees to use the Demised Premises as general
office and manufacturing space and agrees not to use or permit the
premises to be used for any other purpose without the prior written
consent of the Lessor. Lessor covenants that the premises may be
lawfully used for these purposes.
SUBLETTING AND ASSIGNMENT
7. Lessee shall not sublet the Demised Premises nor any portion thereof,
nor shall this Lease Agreement be assigned by the Lessee without the
prior written consent of the Lessor, which consent shall not be
unreasonably withheld.
2
<PAGE> 3
ATTORNMENT
8. In the event the Demised Premises are sold due to any foreclosure sale
or sales, by virtue of judicial proceedings or otherwise, this Lease
Agreement shall continue in full force and effect, and Lessee agrees,
upon request, to attorn to and acknowledge the foreclosure purchaser or
purchasers at such sale as Lessors hereunder; provided, however, that
such purchaser will accept all obligations of Lessor as contained in
this Lease Agreement.
ESTOPPEL CERTIFICATE
9. The Lessee agrees to execute an Estoppel Certificate for the benefit of
Lessor's lender or lenders; provided, however, that such Estoppel
Certificate consists solely of an acknowledgement of the terms and
conditions of this Lease Agreement.
RULES AND REGULATIONS
10. Lessee covenants and agrees that Lessee shall observe and comply with
those Rules and Regulations (if any) contained in Exhibit B, attached,
initialed by Lessee, and made a part hereof. All Rules & Regulations
made a part of this lease by Lessor are implemented subject to Tenant's
Right of Quiet Enjoyment and Peaceful use of premises.
LESSOR INSURANCE
11. Lessor shall maintain replacement fire and extended coverage insurance
on the Demised Premises, unless otherwise specified in this Lease
Agreement in sufficient amounts so as to be able to make all necessary
repairs to the Demised Premises in the event of a fire in or other
destruction of the Demised Premises, as well as insurance sufficient to
cover bodily injury and personal injury in the event of a claim against
Lessor for same. Certificates of insurance may be issued at Lessee's
request at reasonable times during the term of the Lease Agreement. Any
increase in building insurance caused by Lessee's business will be paid
for by Lessee.
LESSEE INSURANCE
12. Lessee agrees to procure and maintain at Lessee's expense throughout
the term of this Lease Agreement and any extension thereof, a policy or
policies of insurance as follows: (a) workers' compensation
(statutory); (b) Employers' Liability
3
<PAGE> 4
($1,000,000 per occurrence, bodily injury by accident or disease,
including death); Commercial General Liability ($l,000,000 combined
limit, bodily injury, personal injury and property damage, including
blanket contractual liability). The Lessor shall be included as an
additional insured under Commercial General Liability as respects this
lease of premises. Certificates of insurance may be issued at Lessor's
request at reasonable times during the term of the Lease Agreement.
All personal property of Lessee in the demised premises or in the
building of which the demised premises is a part shall be at the sole
risk of Lessee. Lessor shall not be liable for any damage thereto or
for the theft or misappropriation thereof, unless such damage, theft or
misappropriation is directly attributable to the negligence or
intentional acts of Lessor, its agents, or employees. Lessor shall not
be liable for any accident to or damage to property of Lessee resulting
from the use or operation of mechanical, electrical or plumbing
apparatus, unless caused by and due to the negligence of Lessor, its
agents or employees.
LESSEE'S AND LESSOR'S OBLIGATIONS
13. Lessor shall take all reasonable and necessary precautions to prevent
damage, injury, or loss of life in and around the Demised Premises.
Lessor agrees to indemnify and save Lessee harmless from and against
any and all claims, actions, damages, liability and expense in
connection with or arising out of Lessee's use of the Demised Premises
occasioned wholly or in part by any willful misconduct or negligent act
or omission of Lessor, its agents, clients, or customers. In case
Lessee shall, without material fault on its part, be made a party to
any litigation commenced by or against Lessor, Lessor shall protect and
hold Lessee harmless and shall pay all costs, expenses and reasonable
attorneys' fees incurred or paid by Lessee in connection with such
litigation. The aforementioned indemnification by Lessor of Lessee
shall not be effective as to any claim arising from or to the extent of
negligence or willful misconduct of the Lessee.
Lessee shall take all reasonable and necessary precautions to prevent
damage, injury, or loss of life in and around the Demised Premises.
Lessee agrees to indemnify and save Lessor harmless from and against
any and all claims, actions, damages, liability and expense in
connection with or arising out of Lessee's use of the Demised Premises
occasioned wholly or in part by any willful misconduct or negligent act
or omission of Lessee, its agents, clients, or customers. In case
Lessor shall, without material fault on its part, be made a party to
any litigation commenced by or against Lessee, Lessee shall protect and
hold Lessor harmless and shall pay all costs, expenses and reasonable
attorneys' fees incurred or paid by Lessor in connection with such
litigation.
4
<PAGE> 5
MUTUAL WAIVER OF SUBROGATION
13A. Each of (Landlord/Lessor) and (Tenant/Lessee) shall cause its insurance
carriers to waive all rights of subrogation against the other party
hereto to the extent of (Landlord's/Lessor's) or (Tenant's/Lessee's)
undertaking set forth in Clauses 11, 12, & 13.
EVENT OF DESTRUCTION
14. In the event of the whole or partial destruction of the Demised
Premises or of the building containing the Demised Premises by fire,
explosion, the elements or otherwise during the term of this Lease
Agreement or previous thereto as to render the Demised Premises
untenantable or unfit for occupancy in whole or in part, or should the
Demised Premises be so badly injured that the same cannot be repaired
within ten days from the occurrence to the Demised Premises of such
destruction and injury then the Lessee may, at its option, terminate
this Lease Agreement and surrender the Demised Premises and all the
Lessee's interest therein to the Lessor as of the date of termination,
and shall pay rent only to the time of such event of destruction.
Should the Demised Premises be rendered untenantable and unfit for
occupancy in whole or in part, but yet be repairable within ten days
from the happening of such injury, the Lessor may enter and repair the
same, and the rent shall not accrue after such injury or while repairs
are being made, but shall recommence immediately after such repairs
shall be completed; provided such repairs are completed within the ten
days. But if the premises shall be so slightly injured as not to be
rendered untenantable and unfit for occupancy in whole or in part and
in the opinion of the Lessee, then the Lessor agrees to repair the same
with reasonable promptness and in that case the rent accrued and
accruing shall not cease. Nothing in this clause, however, shall be
construed as requiring the Lessor to repair the Demised Premises in the
event of their whole or partial destruction. However, if the Lessor
either does not repair within the appropriate time limits or states his
intention not to repair, then the Lessee's rights shall be the same as
though the Demised Premises were injured beyond repair.
In any event if the Lessor is unable to make repairs of such damage or
destruction within ten days of the occurrence of such an event the
Lessee may terminate the lease for other than default (unless such
damage or destruction was the result of the willful misconduct or
negligence of Lessor, its agents, clients, or customers, in which case
the termination shall be deemed one for default) by written notice to
the Lessor without any further obligations hereunder from the date of
the occurrence of such destruction.
5
<PAGE> 6
OBSERVATION OF LAWS
15. The Lessor and Lessee agree to observe and comply with all laws,
ordinances, rules, and regulations of the Federal, State, County, and
Municipal authorities applicable to the Demised Premises. The Lessor
and Lessee agree not to do or permit anything to be done in the Demised
Premises or the building in which the Demised Premises exist, or keep
anything therein which would obstruct or conflict with the regulations
of the Fire Department.
SERVICES AND UTILITIES
16. Services and utilities furnished to the Demised Premises UTILITIES
shall be provided and paid for as follows:
<TABLE>
<CAPTION>
BY LESSEE ITEM BY LESSOR
--------- ---- ---------
<S> <C> <C>
c Water & sewer
------------------------ charges -------------------
c Electric, fuel oil,
------------------------ and/or gas, & hot -------------------
water charges
c Plumbing mechanical
------------------------ & maintenance, except -------------------
capital expenditures
c Heating mechanical
------------------------ maintenance, except -------------------
capital expenditures
c Air conditioning
------------------------ mechanical & maintenance, -------------------
except capital expenditures
c Interior building
------------------------ maintenance -------------------
c Trash & janitorial
------------------------ at dock area -------------------
c Exterior building
------------------------ maintenance, e.g., -------------------
window cleaning, etc.
Real estate taxes a
------------------------ or other government -------------------
assessments
c Trash removal
------------------------ -------------------
c Janitorial service
------------------------ -------------------
c Any security
------------------------ -------------------
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
Lawn care & land- a
------------------------ scaping maintenance -------------------
c Driveway, parking
------------------------ lot & sidewalk maintenance -------------------
c Snow plowing, sidewalk
------------------------ snow & ice removal -------------------
Structural maintenance a
------------------------ -------------------
Roof maintenance a
------------------------ -------------------
c Fire alarm hookup &
------------------------ maintenance charges -------------------
c Fire extinguishers,
------------------------ installation & service -------------------
Building insurance a
------------------------ -------------------
</TABLE>
In each instance, the following key indicates how the cost of such
services will be paid by Lessee:
(a) Included in the annual rent amount;
(b) Actual metered or incurred amounts to be paid by Lessee to
Lessor within thirty days of receipt of written notice of a
request to be reimbursed by the Lessor; necessary records to
support the amounts will be kept by the Lessor and copies made
available to Lessee upon request; Lessee may require such
records prior to payment;
(c) Actual cost of services or metered amounts to be paid by
Lessee to the provider of the service (e.g., the utility
company or contractor).
(d) A proportionate share of the cost in excess of $______ per
square foot for providing the service to the entire building
or facility of which the Demised Premises are a part. In this
case the proportionate share is 43.75%, which is determined by
dividing 21,875 (the area of the Demised Premises) by 50,000
(the total area of the building or facility). Necessary
records to support the amounts will be kept by the Lessor and
copies made available to Lessee upon request; Lessee may
require such records prior to payment. Payments are to be made
within thirty days of receipt of invoice.
INTERRUPTION OF SERVICES
17. Notwithstanding anything contained herein to the contrary, Lessee shall
have the right upon written notification to the Lessor to terminate
this Lease Agreement for default if any stoppage in any of the services
listed in the immediately preceding
7
<PAGE> 8
paragraph as being provided by the Lessor continues for twenty days for
whatever reason.
HOLDING OVER BY LESSEE
18. Nothing contained herein shall constitute the consent of Lessor to the
holding over of Lessee after the expiration this Lease Agreement.
However, if Lessee shall for any reason remain in possession of any of
the Demised Premises after the expiration or earlier termination of the
Term hereof, except as specifically provided, such possession shall be
as a month-to-month Tenancy during which time Lessee shall pay as
rental, rent on the first day of each month at a rate equal to
one-twelfth the amount of annual rent payable monthly during the prior
year of the term of this Lease Agreement. Unless evidenced otherwise in
writing as the exercise of an option stated herein or as a modification
to this Lease Agreement, in no event shall any holding over by the
Lessee be construed as creating any new tenancy other than a month to
month tenancy.
CARE OF PREMISES
19. The Lessee agrees that it will take good care of the Demised Premises,
fixtures and appurtenances, and suffer no waste or injury, that it will
make all repairs to the Demised Premises, fixtures and appurtenances
necessitated by the fault of the Lessee its agents, employees or
guests.
REPAIRS
20. The Lessor agrees to make such repairs as may be necessary to keep the
Demised Premises and appurtenances in good order and condition within a
reasonable time after it knows or should know of the need of such
repairs; provided, however, when such repairs are necessitated by the
fault of the Lessee, its agents, employees or guests, Lessee shall
reimburse Lessor for its reasonable costs expended in making such
repairs; and provided further that minor repairs to the Demised
Premises not exceeding $50.00 (inclusive of service charges) in any one
instance shall be the responsibility of Lessee except for lighting
ballasts. Lessee shall first be afforded the opportunity to review all
such costs prior to accrual thereof and may request competitive bids
where Lessee deems costs are excessive. Costs shall only include actual
out-of-pocket expenses of Lessor and shall not include profit or
overhead or any costs that have not been reviewed and approved by the
Lessee. Lessor shall make available to Lessee copies of any and all
records necessary to support the costs levied against Lessor under this
clause for which reimbursement is being sought.
8
<PAGE> 9
ENVIRONMENTAL
21. Lessor warrants and represents to Lessee that, to the best of its
knowledge: (a) Lessor, its agents, employees, representatives, tenants,
and its predecessors in interest in the Premises did not discharge,
release, or dispose of, in any form, any hazardous material or
substance into or onto the Premises and that no condition exists in or
on the Premises that may result in any violation of any federal, state
or local laws, regulations or ordinances relating to the protection of
the environment or the public health and welfare (collectively
hereinafter called "Environmental Laws ": and (b) Lessor has no
liability and there are no outstanding claims against Lessor for the
clean up of any hazardous material or substance deposited in the
environment, either directly on the Premises or elsewhere, that
resulted from or were ownership of the Premises. Lessee acknowledges
receipt of a Phase I Environmental Study dated July 22, 1993 by ATEC
Engineering Company (copy attached).
Lessee warrants and represents to Lessor that: (a) Lessee, its agents,
employees, representatives and sublessees, if any, will not discharge,
release, or dispose of in any form any hazardous materials or
substances into or onto the Premises and that Lessee, will not create,
or permit to be created, any condition in or on the Premises that may
result in any violation of any environmental Laws: and (b) Lessee will
not allow any hazardous material or substance to exist or be stored,
located, discharged, possessed, managed, processed or otherwise handled
on the Premises except those customarily used in the conduct of
Lessee's normal business activities, and that Lessee shall comply with
all Environmental Laws affecting the Premises; and (c) Lessee shall
immediately notify Lessor should Lessee become aware of (i) any
hazardous material or substance or any other environmental problem or
liability with respect to the Premises, (ii) any lien, action or notice
related to any such environmental problem or liability, or (iii) any
material or substance or the existence of any hazardous material or
substance or other environmental contamination, liability or problem
with respect to or arising out of or in connection with the premises.
Lessor shall indemnify, defend, and hold harmless Lessee, its agents,
employees, representatives, and affiliate organizations from and
against any and all claims, suits, loss, costs, damage or liability
relating to or arising out of any operations by Lessor, its agents,
employees, representatives, tenants, and predecessors in interest at
the Premises, such operations including, but not limited to, the
release or discharge into the environment, or disposal of hazardous
materials or substances at or in connection with the Premises.
Lessee shall indemnify, defend, and hold harmless Lessor, its agents,
employees, representatives, and affiliate organizations from and
against any and all claims, suits, loss, costs, damage or liability
relating to or arising out of any operations by Lessee, its agents,
employees, representatives or sublessees, if any, at the
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<PAGE> 10
Premises such operations including, but not limited to, the release or
discharge into the environment, or disposal of materials or other
substances at or in connection with the Premises.
Upon termination of this lease, Lessee agrees to provide Lessor, as
satisfaction of Lessee indemnification paragraph above, a "Phase One
Environmental Site Assessment" performed by a certified testing and
engineering firm and Lessee shall be responsible to address identified
items or problems created by Lessee.
IMPROVEMENTS
22. The Lessor and Lessee have agreed as to the extent of improvements to
be made to the Demised Premises, and the work will proceed in order to
meet the commitments herein provided. Such work to be completed by
Lessor is described in Exhibit C to this Lease Agreement. The parties
agree to cooperate in order for the work to proceed to be completed on
a timely basis. Improvements to be made by Lessee are described in
Exhibit D to this Lease Agreement.
NOTICES
23. Formal notices or communications pertaining to this Lease Agreement
shall be deemed to have been duly given if personally provided to the
other party in writing or if sent to the other by U.S. mail, or an
independent delivery service, postage and other costs prepaid. Until
otherwise specified in writing, the addresses and telephone numbers of
the parties hereto for the purpose of any such notice or communications
are:
LESSEE: LESSOR:
TxPort, Inc. Industrial Properties of the South
---------------------------- ----------------------------------
600 St. Clair, Suite 24
---------------------------- ----------------------------------
Huntsville, AL 35801
---------------------------- ----------------------------------
Attn: Attn: Charlene B. Graham
----------------------- ------------------------------
Telephone: Telephone: (205) 536-4511
------------------ ------------------------
Telefax: Telefax: (205) 464-0193
-------------------- --------------------------
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST
24. This Lease Agreement is subject and is hereby subordinated to all
present mortgages, deeds of trust and other encumbrances affecting the
Demised Premises or the property of which said premises are a part. The
Lessor agrees to cause the mortgagee to provide to the Lessee, in
recordable form, an agreement not to
10
<PAGE> 11
disturb Lessee's right in or possession of the premises so long as
Lessee is not in default hereunder, in the event this Lease Agreement
is subordinated to mortgage deeds of trust or other encumbrances and
the subordination of this Lease Agreement is conditioned upon the
Lessee receiving such nondisturbance agreement from the mortgagee.
LEASE BINDING ON HEIRS, SUCCESSORS, ETC.
25. All of the terms, covenants, and conditions of this Lease Agreement
shall inure to the benefit of and be binding upon the respective heirs,
executors, administrators, successors, and assigns of the parties
hereto.
EMINENT DOMAIN, CONDEMNATION
26. If the entire property or any material part thereof wherein the Demised
Premises are located shall be taken by public or quasi-public authority
under any power of eminent domain or condemnation, this Lease Agreement
shall forthwith terminate and the Lessee shall have the right through
the Lessor to a claim for such taking, limited only to the cost or
value of material stock and cost of removal of stock, furniture and
fixtures owned by Lessee.
A material part is defined as taking which could interfere with the
Lessee's continued enjoyment and utilization of the premises as
described herein.
SEVERABILITY
27. Each covenant and agreement in this Lease Agreement shall for all
purposes be construed to be a separate and independent covenant or
agreement. If any provision in this Lease Agreement or the application
thereof shall to any extent be invalid, illegal or otherwise
unenforceable, the remainder of this Lease Agreement, and the
application of such provision other than as invalid, illegal or
unenforceable, shall not be affected thereby; and such provisions in
this Lease Agreement shall be valid and enforceable to the fullest
extent permitted by law.
ADDITIONAL SIGNS
28. Lessor, at Lessee's expense, provided the necessary approvals can be
obtained from the appropriate governing authorities, may erect an
exterior sign or signs indicating the presence of Lessee in the Demised
Premises of the design and format to be agreed upon by the Lessor and
Lessee both using reasonable
11
<PAGE> 12
judgment and standards, and both using good faith efforts to obtain any
necessary approvals. All signage must be maintained in very good
condition by Lessee.
LESSOR'S RIGHT TO ENTRY
29. Lessor and Lessor's agents may enter the Demised Premises for the
following purposes only: to make repairs, alterations, or improvements
necessary under the terms of this Lease Agreement; to perform Lessor's
covenants as set forth in this Lease Agreement; for purposes of
inspection and, during the last two months of the Lease Term, to show
the Demised Premises to perspective tenants. Such entry shall not be so
frequent or of such a type as to disturb Lessee's peaceful enjoyment of
the Leased Premises. Such entry shall only take place with reasonable
prior notice to and consent of Lessee; consent shall not be
unreasonably withheld. If Lessor or its agent reasonably believes that
an emergency exists which requires immediate entry, such entry may be
made without Lessee's consent, but Lessor shall so inform Lessee of
such entry at the earliest practicable time afterwards. All persons who
enter the Demised Premises at Lessor's request must first obtain
clearance from Lessee before entry.
Notwithstanding anything in this Lease Agreement to the contrary, upon
any entry by Lessor or its duly authorized agents, servants, or
employees at any time during the Lease Term, such entry shall conform
to Lessee's security requirements as may be required by Lessee, the
federal government or any agency thereof, or any of Lessee's clients.
LESSEE'S ALTERATIONS, IMPROVEMENTS, OR ADDITIONS
30. Any alterations, improvements, or additions to the Demised Premises in
the form of fixtures to the Demised Premises (collectively referred to
as "Alterations") and made by or at the request of Lessee shall remain
upon the Demised Premises at the expiration or earlier termination of
this Lease Agreement and shall become the property of Lessor unless
Lessor prior to the expiration or termination of this Lease Agreement,
gives written notice to Lessee to remove all such Alterations. Lessee
shall repair any damage caused by such removal and restore the Demised
Premises to substantially the same condition in which it existed prior
to the time that any such Alterations were made.
Lessee shall not, without on each occasion first obtaining Lessor's
prior written consent, make any Alterations to the Demised Premises,
except that Lessee may, without the consent of the Lessor but with
prior written notice to Lessor, make minor improvements to the interior
of the Demised Premises provided that they do not impair the structural
strength, operation, or value of the building of which Demised Premises
are a part, or violate any zoning, fire or building code. The cost of
any such violation shall be the responsibility of the Lessee.
12
<PAGE> 13
RENEWAL OPTION
31. Lessee is given and granted an option to renew the term of this Lease
Agreement for two (2) successive terms of one year each on the same
terms and conditions except for the rental rate and the length of the
term. To exercise its option, the Lessee shall give the Lessor a notice
in writing not less than sixty days prior to the end of the original
term and any renewal terms and as a condition precedent to the notice
and the renewal that the Lessee not be in default under the terms and
conditions of this Lease Agreement. The rental rates during each of the
renewal periods shall be as follows:
<TABLE>
<CAPTION>
Annual Monthly
Option Term Rent (base) Rent (base)
------ ---- ----------- -----------
<S> <C> <C> <C>
1 09/96 through 08/97 $3.50/sf $.2917/sf
2 09/97 through 08/98 $3.50/sf $.2917/sf
</TABLE>
Actual dates to coincide with original lease commitment date.
LESSEE'S DEFAULT
32. The Lessee shall be considered in default of this Lease Agreement upon
failure to pay when due the rent or any other sum required by the terms
of this Lease; the failure to perform any material term, covenant, or
condition of this Lease Agreement; the commencement of any action or
proceeding for the dissolution, liquidation, or reorganization under
the Bankruptcy Act, of Lessee, or for the appointment of a receiver or
trustee of the Lessee's property; the making of any assignment for the
benefit of creditors by Lessee; the suspension of business; or the
abandonment of the Demised Premises by the Lessee. In each case, Lessee
shall only be in default if the Lessee is given written notice by
Lessor of the specific grounds for the default termination and twenty
business days from receipt of such notice to correct such default and
Lessee fails to do so.
LESSOR'S DEFAULT
33. The Lessor shall be considered in default of this Lease Agreement upon
the failure to perform any material term, covenant, or condition of
this Lease Agreement; the commencement of any action or proceeding for
the dissolution, liquidation, or reorganization under the Bankruptcy
Act, of Lessor, or for the appointment of a receiver or trustee of the
Lessor's property; the making of any assignment for the benefit of
creditors by Lessor; the suspension of business; or any other reason
provided for herein. In each case, Lessor shall only be in default if
the Lessor is given written notice by Lessee of the specific grounds
for the
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<PAGE> 14
default termination and twenty business days from receipt of such
notice to correct such default and Lessor fails to do so.
GENERAL
34. (a) This Lease Agreement shall be governed by and under the laws
of the State/Commonwealth of Alabama.
(b) Each party acknowledges that it has read this Lease Agreement,
understands it, and agrees to be bound by its terms, and
further agrees that this is the complete and exclusive
statement of the Lease Agreement between the parties, which
supersedes and merges all prior proposals, understandings, and
all other agreements, oral or written, between the parties
relating to this Lease Agreement. Any change in this Lease
Agreement must be made in writing and signed by authorized
representatives of both the Lessee and the Lessor.
(c) If either party cannot perform any or all of its respective
obligations under this Lease Agreement because of the
occurrence of any event which is beyond its reasonable
control, then the non-performing party shall (i) notify the
other party, (ii) take reasonable steps to resume performance
as soon as possible, and (iii) not be considered in breach
during the period performance is beyond the party's reasonable
control.
(d) The failure of either party at any time to require performance
by the other party of any provision hereof shall not affect in
any way the full right to require such performance at any time
thereafter. The waiver by either party of a portion of a
provision herein shall not be taken or held by the other party
to be a waiver of the provision itself unless such a waiver
shall be express and in writing.
(e) In the event of any inconsistency between its component parts,
this Lease Agreement shall be construed with the following
order of precedence:
(1) The Basic Lease Agreement (This document)
(2) Exhibit A
(3) Exhibit C
(4) Exhibits B and D
(5) Other Exhibits (if any)
(f) The titles of the clauses in this Lease Agreement, including
all Exhibits thereto, shall be read as references only and
shall not be read as references only and shall not be read as
affecting, contradicting, negating, or explaining the meaning
or interpretation of this Lease Agreement.
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<PAGE> 15
(g) Each party represents and warrants that it has the right and
authority to enter into this Lease Agreement.
(h) Unless otherwise specifically noted, "days" shall mean
calendar days.
(i) In no event shall either party be liable to the other for
indirect, consequential, incidental or special damages, even
if it has been made aware of the possibility of such.
MECHANICS' LIENS
35. In the event that any mechanics' lien is filed against the premises as
a result of alterations, additions or improvements made by the Lessee,
the Lessor shall have the option, if the Lessee shall be unable to
procure effective cancellation, bonding or discharge of the lien within
30 days following written notice of the existence of such condition, to
take such steps and pay such monies as may be necessary to obtain an
effective cancellation or discharge of such notice or claim, in which
event such monies as shall be expended by the Lessor shall be
considered additional rent hereunder and shall be due and payable on
the first day of the next month succeeding such payment by the Lessor.
RIGHT OF FIRST REFUSAL
36. Provided Lessee is not in default hereunder, Lessee shall have the
right of refusal to lease additional space within the building within
which the Demised Premises exist.
Lessee will have forty-eight hours from the receipt of notice from
Lessor to Lessee to lease the space and execute an Agreement of Lease
in the same form and with the same conditions as this lease except for
rent and term. The rent and term for such additional space shall be the
same as the rent and term accepted by the third party prospective
tenant.
PARKING
37. Parking to be provided per code. Five (5) spaces reserved for TxPort
and area serving docks for this area. All other on a first come basis.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day
and year first written above.
LESSEE
TxPort, Inc.
-----------------------------------------------------------------------
125 West Park Loop
-----------------------------------------------------------------------
Huntsville, AL 35806
-----------------------------------------------------------------------
By: /s/ Mark H. Hoffman
--------------------------------------------------
Printed Name: Mark H. Hoffman
--------------------------------------------------
Title: President
--------------------------------------------------
Date: July 23, 1993
--------------------------------------------------
LESSOR
Industrial Properties of the South
-----------------------------------------------------------------------
600 St. Clair Avenue, Suite 24
-----------------------------------------------------------------------
Huntsville, Alabama 35801
-----------------------------------------------------------------------
By: /s/ Charlene B. Graham
--------------------------------------------------
Printed Name: Charlene B. Graham
--------------------------------------------------
Title: Partner
--------------------------------------------------
Date: July 23, 1993
--------------------------------------------------
16
<PAGE> 17
EXHIBIT A
DESCRIPTION OF DEMISED PREMISES
Southern most end of 127 Jetplex Circle, approximately 21,875 square feet.
17
<PAGE> 18
EXHIBIT B
RULES AND REGULATIONS
Rule 1: No sign, picture, advertisement, or notice shall be displayed,
inscribed, painted or affixed on any part of the outside, or inside of the
building or on or about the Demised Premises except on the doors of said Demised
Premises and on the Directory Board of the building, and then only of such
color, size and style and materials as shall be first specified by the Lessor.
No "For Rent" signs shall be displayed by the Lessee, and no showcases, or
obstructions, signs, flags, statuary, or any advertising device of any kind
whatever shall be placed in front of said building or in the passageways, halls,
lobbies, or corridors thereof by the Lessee; and the Lessor reserves the right
to remove all such showcases, obstructions, signs, flags, statuary, or
advertising devices and all signs other than those provided for, without notice
to the Lessee and at its expense.
Rule 2: The Lessor will maintain the grounds. Any person employed by the Lessor
to do grounds work, shall, while outside of said Demised Premises be subject to,
and under the control and direction of the Lessor (but not as agent or servant
of the Lessor).
Rule 3: No person shall disturb the occupants of this or any adjoining building
premises by the use of any musical instrument, unseemly noises, whistling,
singing or in any other way.
Rule 4: The Demised Premises leased shall not be used for lodging or sleeping,
not for any immoral or illegal purposes for any purpose that will damage the
Demised Premises.
Rule 5: Canvassing, soliciting and peddling in the building are prohibited and
each Lessee shall cooperate to prevent the same.
Rule 6: The water closets, wash basins, sinks, and other apparatus shall not be
used for any other purpose than those for which they were constructed, and no
sweeping, rubbish, or other substances shall be thrown therein.
Rule 7: All glass, locks and trimmings, in or about the doors and windows, and
all electrical globes and shades, broken by any Lessee, shall be immediately
replaced or repaired and put in order by such Lessee under the direction and to
the satisfaction of the Lessor, and on removal shall be left whole and in good
repair, normal wear and tear excluded.
Rule 8: Lessee will not block ingress and egress of the driveways or docks
leased to others.
Rule 9: The Lessor reserves the right to rescind any rules and to make such
other and further rules and regulations as, in Lessor's judgment, may from time
to time be needed for the safety, care, maintenance, operation and cleanliness
of the building, and for the preservation of good order therein, which, when so
made, and notice thereof given to the Lessee, shall have the
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<PAGE> 19
same force and effect as if originally made a part of the foregoing lease; and
such other further rules, not however, to be inconsistent with the proper and
rightful enjoyment by the Lessee under the foregoing lease of the premises
therein referred to.
Rule 10: No smoking shall be allowed within any part of the premises herein
described.
19
<PAGE> 20
EXHIBIT C
ALTERATIONS TO BE MADE BY LESSOR
Lessor agrees to make these improvements as well as those of Exhibit C-1 through
C-8 of the Lease Agreement for 127 Jetplex Circle, executed concurrently. Any
changes other than these Exhibits which are additional required changes are
subject to approval by Lessee and at the expense of the Lessee.
C-1. Walls, doors & fencing
C-2. Compressed air schematic
C-3. Reflective lighting plan
C-4. Electrical requirements for manufacturing area
C-5. HVAC plans (existing and to be added)
C-6. Grounding schematic
C-7. Speaker System - Installation only
C-8. Proposal for TxPort, Inc. cost of construction dated July 1, 1993
20
<PAGE> 21
Madison County
State of Alabama
ADDENDUM NO. 1
TO
LEASE AGREEMENT
Whereas TxPort, Inc. and Industrial Properties of the South did execute a Lease
Agreement for 127 Jetplex Circle, Suite #4, dated June 1993 and effective
September 22, 1993 and
Now TxPort, Inc. hereby leases from Lessor the 15,625 square feet contiguous
with current space on the north. The rate for this added space is $3.25 per
square foot per year which is an additional $4,231.77 per month.
The term for this added space will begin on March 11, 1994 and end the same as
the original lease, i.e., ending August 31, 1996 unless mutually extended in
writing or upon the exercise of any options.
Lessor agrees to:
(1) Construct a fire wall of approximately 63 l.f. at the area
indicated.
(2) Remove all items belonging to Lessor.
(3) Install door closures on exterior doors.
(4) Confirm that exit lights are operational.
All other terms and conditions of the lease remain in effect.
TxPort, Inc. Industrial Properties of the South
By: /s/ Mark H. Hoffman By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Mark H. Hoffman Charlene B. Graham
President Partner - Lessor
Date: 03/02/94 Date: 03/03/94
------------------------------- -------------------------------
21
<PAGE> 22
Madison County July 22, 1998
State of Alabama
ADDENDUM NO. 2
TO
LEASE AGREEMENT
Whereas TxPort, Inc. and Industrial Properties of the South (IPS), an Alabama
General Partnership, as Lessor and TxPort, Inc. (TxPort), as Lessee did execute
a Lease Agreement for 21,875 square fees at 127 Jetplex Circle, Madison, Alabama
35758 dated June, 1993 end made effective September 22, 1993, which has now been
increased to 37,500 square feet,
And now, with this addendum, an extension is contracted for the period September
22, 1998 through December 31, 1999, at a rate of $3.85 per square foot per year.
Rent will be 37,500 square feet x $3.85 = $144,375.00 (annually) divided by 12 =
$12,031.25 (monthly).
This Lease will automatically renew for the period January 1, 2000 through
December 31, 2000 at the same rate stated above unless notice is received by May
1, 1999 indicating that Lessee will not be renewing.
All other terms and conditions of the lease remain in effect.
TxPort, Inc. Industrial Properties of the South
By: /s/ C. W. Smith By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Title: VP & Treasurer Title: Managing Partner
------------------------------ ------------------------------
Date: 08/10/98 Date: 08/11/98
--------------------------------- -------------------------------
Prepared by:
Industrial Properties of the South
2903 Wall Triana Hwy. Suite #7
Huntsville, Alabama 35824
22
<PAGE> 1
EXHIBIT 10.39
INDUSTRIAL PROPERTIES OF THE SOUTH
2903 Wall Triana Hwy., #7
HUNTSVILLE, AL 35824
LEASE AGREEMENT
This Lease Agreement dated the 17th day of January, 1995 between Industrial
Properties of the South, an Alabama General Partnership (herein referred to as
the "Lessor") and TxPort, Inc. (herein referred to as the "Lessee").
WITNESSETH: That the Lessor hereby demises and leases unto the Lessee, from the
Lessor, for the term and upon the rentals hereinafter specified, the premises
described herein and in Exhibit A.
PREMISES
1. Square footage Approximately 11,250 square feet of warehouse space
--------------------------------------------------------
Street Address 129 Jetplex Circle, Suite 3
--------------------------------------------------------
City/Township Madison
----------------------------------------------------------
County Madison
-----------------------------------------------------------------
State Alabama
------------------------------------------------------------------
Zip Code 35758
--------------------------------------------------------------
For purposes of this Lease Agreement the above-described premises shall
be deemed the "Demised Premises". See Exhibit A, incorporated herein by
reference, for additional information on the Demised Premises. Rent
will be $2,578.13 per month prorated for any partial month plus
utilities prorated based on usage as warehouse space.
TERM
2. The Initial Term of this Lease Agreement shall be 12 months commencing
on January 19, 1995 and terminating on January 18, 1996. The full term
of the Lease may be extended by mutual written agreement of the
parties' authorized representatives, or upon exercise of any options
described herein.
1
<PAGE> 2
RENT
3. Lessee shall pay to the Lessor, without previous demand for this rent
by the Lessor, rent in monthly installments and due on the first of
each month and forwarded via U.S. mail, overnight courier, or by hand
to the office of the Lessor as provided herein or such other address as
may otherwise be directed by Lessor in writing; provided, that the
Lessor has performed all covenants contained herein and is not in
default hereof. If the term of this Lease Agreement shall commence or
terminate on a day other than the first day of the calendar month, the
rent for any partial month shall be prorated. For the Initial Term the
rental rate shall be payable in monthly installments of $2,578.13 with
$1,101.88 being due January 19, 1995 for 13 days in January, $2,578.13
being due on the first day of each month from February 1995 through
December 1995, and $1,525.69 due January 1, 1996 for 18 days in
January.
QUIET ENJOYMENT
4. Lessor covenants that during the full term of this Lease Agreement,
upon the payment of the rent herein provided and the performance by the
Lessee of all covenants herein, Lessee shall have and hold the Demised
Premises, free from any interference from the Lessor.
PEACEFUL POSSESSION
5. Lessor covenants that during the full term of this Lease Agreement,
upon the payment of the rent herein provided and the performance by the
Lessee of all covenants herein, that the Lessee shall peaceably and
quietly have, hold, and enjoy peaceful possession of the Demised
Premises.
PERMITTED USES
6. Lessee covenants and agrees to use the Demised Premises as warehouse,
storage, and shipping space (3-4 people) and agrees not to use or
permit the premises to be used for any other purpose without the prior
written consent of the Lessor. Utilities are to be prorated based upon
warehouse, storage, and shipping use. A change from this will result in
higher utility charges. Lessor covenants that the premises may be
lawfully used for these purposes.
2
<PAGE> 3
SUBLETTING AND ASSIGNMENT
7. Lessee shall not sublet the Demised Premises nor any portion thereof,
nor shall this Lease Agreement be assigned by the Lessee without the
prior written consent of the Lessor, which consent shall not be
unreasonably withheld.
ATTORNMENT
8. In the event the Demised Premises are sold due to any foreclosure sale
or sales, by virtue of judicial proceedings or otherwise, this Lease
Agreement shall continue in full force and effect, and Lessee agrees,
upon request, to attorn to and acknowledge the foreclosure purchaser or
purchasers at such sale as Lessors hereunder; provided, however, that
such purchaser will accept all obligations of Lessor as contained in
this Lease Agreement.
ESTOPPEL CERTIFICATE
9. The Lessee agrees to execute an Estoppel Certificate for the benefit of
Lessor's lender or lenders; provided, however, that such Estoppel
Certificate consists solely of an acknowledgement of the terms and
conditions of this Lease Agreement.
RULES AND REGULATIONS
10. Lessee covenants and agrees that Lessee shall observe and comply with
those Rules and Regulations (if any) contained in Exhibit B, attached,
initialed by Lessee, and made a part hereof.
Lessee acknowledges that Rule 10 states that there shall be no smoking
allowed within any part of the premises and Lessee agrees to abide by
this rule.
LESSOR INSURANCE
11. Lessor shall maintain fire and extended coverage insurance on the
Demised Premises, unless otherwise specified in this Lease Agreement in
sufficient amounts so as to be able to make all necessary repairs to
the Demised Premises in the event of a fire in or other destruction of
the Demised Premises, as well as insurance sufficient to cover bodily
injury and personal injury in the event of a claim against Lessor for
same. Certificates of insurance may be issued at Lessee's request at
reasonable times during the term of the Lease Agreement.
3
<PAGE> 4
LESSEE INSURANCE
12. Lessee agrees to procure and maintain at Lessee's expense throughout
the term of this Lease Agreement and any extension thereof, a policy or
policies of insurance as follows: (a) workers' compensation
(statutory); (b) Employers' Liability ($1,000,000 per occurrence,
bodily injury by accident or disease, including death); Commercial
General Liability ($l,000,000 combined limit, bodily injury, personal
injury and property damage, including blanket contractual liability).
The Lessor shall be included as an additional insured under Commercial
General Liability as respects this lease of premises. Certificates of
insurance may be issued at Lessor's request at reasonable times during
the term of the Lease Agreement.
All personal property of Lessee in the demised premises or in the
building of which the demised premises is a part shall be at the sole
risk of Lessee. Lessor shall not be liable for any damage thereto or
for the theft or misappropriation thereof, unless such damage, theft or
misappropriation is directly attributable to the negligence or
intentional acts of Lessor, its agents, or employees. Lessor shall not
be liable for any accident to or damage to property of Lessee resulting
from the use or operation of mechanical, electrical or plumbing
apparatus, unless caused by and due to the negligence of Lessor, its
agents or employees.
LESSEE'S AND LESSOR'S OBLIGATIONS
13. Lessor shall take all reasonable and necessary precautions to prevent
damage, injury, or loss of life in and around the Demised Premises.
Lessor agrees to indemnify and save Lessee harmless from and against
any and all claims, actions, damages, liability and expense in
connection with or arising out of Lessee's use of the Demised Premises
occasioned wholly or in part by any willful misconduct or negligent act
or omission of Lessor, its agents, clients, or customers. In case
Lessee shall, without material fault on its part, be made a party to
any litigation commenced by or against Lessor, Lessor shall protect and
hold Lessee harmless and shall pay all costs, expenses and reasonable
attorneys' fees incurred or paid by Lessee in connection with such
litigation. The aforementioned indemnification by Lessor of Lessee
shall not be effective as to any claim arising from or to the extent of
negligence or willful misconduct of the Lessee.
Lessee shall take all reasonable and necessary precautions to prevent
damage, injury, or loss of life in and around the Demised Premises.
Lessee agrees to indemnify and save Lessor harmless from and against
any and all claims, actions, damages, liability and expense in
connection with or arising out of Lessee's use of the Demised Premises
occasioned wholly or in part by any willful misconduct or negligent act
or omission of Lessee, its agents, clients, or customers. In case
Lessor shall, without material fault on its part, be made a party to
any litigation
4
<PAGE> 5
commenced by or against Lessee, Lessee shall protect and hold Lessor
harmless and shall pay all costs, expenses and reasonable attorneys'
fees incurred or paid by Lessor in connection with such litigation.
EVENT OF DESTRUCTION
14. In the event of the whole or partial destruction of the Demised
Premises or of the building containing the Demised Premises by fire,
explosion, the elements or otherwise during the term of this Lease
Agreement or previous thereto as to render the Demised Premises
untenantable or unfit for occupancy in whole or in part, or should the
Demised Premises be so badly injured that the same cannot be repaired
within ten days from the occurrence to the Demised Premises of such
destruction and injury then the Lessee may, at its option, terminate
this Lease Agreement and surrender the Demised Premises and all the
Lessee's interest therein to the Lessor as of the date of termination,
and shall pay rent only to the time of such event of destruction.
Should the Demised Premises be rendered untenantable and unfit for
occupancy in whole or in part, but yet be repairable within ten days
from the happening of such injury, the Lessor may enter and repair the
same, and the rent shall not accrue after such injury or while repairs
are being made, but shall recommence immediately after such repairs
shall be completed; provided such repairs are completed within the ten
days. But if the premises shall be so slightly injured as not to be
rendered untenantable and unfit for occupancy in whole or in part and
in the opinion of the Lessee, then the Lessor agrees to repair the same
with reasonable promptness and in that case the rent accrued and
accruing shall not cease. Nothing in this clause, however, shall be
construed as requiring the Lessor to repair the Demised Premises in the
event of their whole or partial destruction. However, if the Lessor
either does not repair within the appropriate time limits or states his
intention not to repair, then the Lessee's rights shall be the same as
though the Demised Premises were injured beyond repair.
In any event if the Lessor is unable to make repairs of such damage or
destruction within ten days of the occurrence of such an event the
Lessee may terminate the lease for other than default (unless such
damage or destruction was the result of the willful misconduct or
negligence of Lessor, its agents, clients, or customers, in which case
the termination shall be deemed one for default) by written notice to
the Lessor without any further obligations hereunder from the date of
the occurrence of such destruction.
5
<PAGE> 6
OBSERVATION OF LAWS
15. The Lessor and Lessee agree to observe and comply with all laws,
ordinances, rules, and regulations of the Federal, State, County, and
Municipal authorities applicable to the Demised Premises. The Lessor
and Lessee agree not to do or permit anything to be done in the Demised
Premises or the building in which the Demised Premises exist, or keep
anything therein which would obstruct or conflict with the regulations
of the Fire Department.
SERVICES AND UTILITIES
16. Services and utilities furnished to the Demised Premises UTILITIES
shall be provided and paid for as follows:
<TABLE>
<CAPTION>
BY LESSEE ITEM BY LESSOR
--------- ---- ---------
<S> <C> <C>
Water & sewer a
------------------------ charges for drinking -------------------
and rest room only, not
for business use
Electricity for d
------------------------ lighting only -------------------
Electric, fuel oil, None provided
------------------------ (not for heating or cooling) -------------------
and/or gas, & hot
water charges
Plumbing mechanical None provided
------------------------ & maintenance -------------------
Heating mechanical None provided
------------------------ maintenance -------------------
Air conditioning None provided
------------------------ mechanical & maintenance -------------------
c Interior building
------------------------ maintenance -------------------
Exterior building a
------------------------ maintenance, e.g., -------------------
window cleaning, etc.
------------------------ Real estate taxes a
c Trash removal -------------------
------------------------ -------------------
c Janitorial service
------------------------ -------------------
c Any security above
------------------------ "normally" locked doors -------------------
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
Lawn care & land- a
------------------------ scaping maintenance -------------------
Driveway, parking lot a
------------------------ & sidewalk maintenance, -------------------
except trash & debris asso-
ciated with shipping process
Snow plowing, sidewalk a
------------------------ snow & ice removal -------------------
Structural maintenance a
------------------------ -------------------
Roof maintenance a
------------------------ -------------------
c Fire extinguishers,
------------------------ installation & service -------------------
c Building insurance
------------------------ -------------------
</TABLE>
In each instance, the following key indicates how the cost of such
services will be paid by Lessee:
(a) Included in the annual rent amount;
(b) Actual metered or incurred amounts to be paid by Lessee to
Lessor within thirty days of receipt of written notice of a
request to be reimbursed by the Lessor; necessary records to
support the amounts will be kept by the Lessor and copies made
available to Lessee upon request; Lessee may require such
records prior to payment;
(c) Actual cost of services or metered amounts to be paid by
Lessee to the provider of the service (e.g., the utility
company or contractor).
(d) A proportionate share of the cost, estimated at about $.50 per
square foot per year, of providing the service to the entire
building or facility of which the Demised Premises are a part.
In this case the proportionate share is 28%, which is
determined by dividing 11,250 (the area of the Demised
Premises) by 40,000 (the total metered space of this area).
Necessary records to support the amounts will be kept by the
Lessor and copies made available to Lessee upon request;
Lessee may require such records prior to payment. Payments are
to be made within thirty days of receipt of invoice.
INTERRUPTION OF SERVICES
17. Notwithstanding anything contained herein to the contrary, Lessee shall
have the right upon written notification to the Lessor to terminate
this Lease Agreement for default if any stoppage in any of the services
listed in the immediately preceding
7
<PAGE> 8
paragraph as being provided by the Lessor continues for twenty days for
whatever reason.
HOLDING OVER BY LESSEE
18. Nothing contained herein shall constitute the consent of Lessor to the
holding over of Lessee after the expiration this Lease Agreement.
However, if Lessee shall for any reason remain in possession of any of
the Demised Premises after the expiration or earlier termination of the
Term hereof, except as specifically provided, such possession shall be
as a month-to-month Tenancy during which time Lessee shall pay as
rental, rent on the first day of each month at a rate equal to
one-twelfth the amount of annual rent payable monthly during the prior
year of the term of this Lease Agreement. Unless evidenced otherwise in
writing as the exercise of an option stated herein or as a modification
to this Lease Agreement, in no event shall any holding over by the
Lessee be construed as creating any new tenancy other than a month to
month tenancy.
CARE OF PREMISES
19. The Lessee agrees that it will take good care of the Demised Premises,
fixtures and appurtenances, and suffer no waste or injury, that it will
make all repairs to the Demised Premises, fixtures and appurtenances
necessitated by the fault of the Lessee its agents, employees or
guests.
REPAIRS
20. The Lessor agrees to make such repairs as may be necessary to keep the
Demised Premises and appurtenances in good order and condition within a
reasonable time after it knows or should know of the need of such
repairs; provided, however, when such repairs are necessitated by the
fault of the Lessee, its agents, employees or guests, Lessee shall
reimburse Lessor for its reasonable costs expended in making such
repairs. Lessee shall first be afforded the opportunity to review all
such costs which exceed $300.00 prior to accrual thereof and may
request competitive bids where Lessee deems costs are excessive. Costs
shall only include actual out-of-pocket expenses of Lessor and shall
not include profit or overhead or any costs that have not been reviewed
and approved by the Lessee. Lessor shall make available to Lessee
copies of any and all records necessary to support the costs levied
against Lessor under this clause for which reimbursement is being
sought.
8
<PAGE> 9
RESERVED PARRING
20. Parking is on a first come basis for the complex. Total truck and car
parking may not exceed 28% of the area serving this building.
IMPROVEMENTS
21. The Lessor and Lessee have agreed as to the extent of improvements to
be made to the Demised Premises, and the work will proceed in order to
meet the commitments herein provided. Such work to be completed by
Lessor is described in Exhibit C to this Lease Agreement. The parties
agree to cooperate in order for the work to proceed to be completed on
a timely basis. Should work beyond that required by Exhibit C be
required by Lessee, it shall be described in Exhibit D, and performed
and paid for by Lessee.
NOTICES
23. Formal notices or communications pertaining to this Lease Agreement
shall be deemed to have been duly given if personally provided to the
other party in writing or if sent to the other by U.S. mail, or an
independent delivery service, postage and other costs prepaid. Until
otherwise specified in writing, the addresses and telephone numbers of
the parties hereto for the purpose of any such notice or communications
are:
LESSEE: LESSOR:
TxPort, Inc. Industrial Properties of the South
---------------------------- ----------------------------------
127 Jetplex Circle 2903 Wall Triana Hwy., #7
---------------------------- ----------------------------------
Madison, AL 35758 Huntsville, AL 35824
---------------------------- ----------------------------------
Attn: Doyle Weeks Attn: Charlene B. Graham
---------------------- ----------------------------
Manager, Finance Managing Partner
---------------------- ----------------------------
Telephone: (205) 772-3770 ext. 204 Telephone: (205) 461-7482
------------------ ------------------------
Telefax: (205) 461-0140 Telefax: (205) 460-0193
-------------------- --------------------------
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST
24. This Lease Agreement is subject and is hereby subordinated to all
present mortgages, deeds of trust and other encumbrances affecting the
Demised Premises or the property of which said premises are a part. The
Lessor agrees to cause the mortgagee to provide to the Lessee, if
requested, in recordable form, an agreement not to disturb Lessee's
right in or possession of the premises so long as Lessee is
9
<PAGE> 10
not in default hereunder, in the event this Lease Agreement is
subordinated to mortgage deeds of trust or other encumbrances and the
subordination of this Lease Agreement is conditioned upon the Lessee
receiving such nondisturbance agreement from the mortgagee.
LEASE BINDING ON HEIRS, SUCCESSORS, ETC.
25. All of the terms, covenants, and conditions of this Lease Agreement
shall inure to the benefit of and be binding upon the respective heirs,
executors, administrators, successors, and assigns of the parties
hereto.
EMINENT DOMAIN, CONDEMNATION
26. If the entire property or any material part thereof wherein the Demised
Premises are located shall be taken by public or quasi-public authority
under any power of eminent domain or condemnation, this Lease Agreement
shall forthwith terminate and the Lessee shall have the right through
the Lessor to a claim for such taking, limited only to the cost or
value of material stock and cost of removal of stock, furniture and
fixtures owned by Lessee.
A material part is defined as taking which could interfere with the
Lessee's continued enjoyment and utilization of the premises as
described herein.
SEVERABILITY
27. Each covenant and agreement in this Lease Agreement shall for all
purposes be construed to be a separate and independent covenant or
agreement. If any provision in this Lease Agreement or the application
thereof shall to any extent be invalid, illegal or otherwise
unenforceable, the remainder of this Lease Agreement, and the
application of such provision other than as invalid, illegal or
unenforceable, shall not be affected thereby; and such provisions in
this Lease Agreement shall be valid and enforceable to the fullest
extent permitted by law.
ADDITIONAL SIGNS
28. Lessor will identify Lessee's name on one exterior sign for the complex
and one exterior sign at the entrance to Lessee's dock. No other
signage may be installed Lessee on the building or common area.
10
<PAGE> 11
LESSOR'S RIGHT TO ENTRY
29. Lessor and Lessor's agents may enter the Demised Premises for the
following purposes only: to make repairs, alterations, or improvements
necessary under the terms of this Lease Agreement; to perform Lessor's
covenants as set forth in this Lease Agreement; for purposes of
inspection and, during the last two months of the Lease Term, to show
the Demised Premises to perspective tenants. Such entry shall not be so
frequent or of such a type as to disturb Lessee's peaceful enjoyment of
the Leased Premises. Such entry shall only take place with reasonable
prior notice to and consent of Lessee; consent shall not be
unreasonably withheld. If Lessor or its agent reasonably believes that
an emergency exists which requires immediate entry, such entry may be
made without Lessee's consent, but Lessor shall so inform Lessee of
such entry at the earliest practicable time afterwards. All persons who
enter the Demised Premises at Lessor's request must first obtain
clearance from Lessee before entry.
Notwithstanding anything in this Lease Agreement to the contrary, upon
any entry by Lessor or its duly authorized agents, servants, or
employees at any time during the Lease Term, such entry shall conform
to Lessee's security requirements as may be required by Lessee, the
federal government or any agency thereof, or any of Lessee's clients.
LESSEE'S ALTERATIONS, IMPROVEMENTS, OR ADDITIONS
30. Any alterations, improvements, or additions to the Demised Premises in
the form of fixtures to the Demised Premises (collectively referred to
as "Alterations") and made by or at the request of Lessee shall remain
upon the Demised Premises at the expiration or earlier termination of
this Lease Agreement and shall become the property of Lessor unless
Lessor prior to the expiration or termination of this Lease Agreement,
gives written notice to Lessee to remove all such Alterations. Lessee
shall repair any damage caused by such removal and restore the Demised
Premises to substantially the same condition in which it existed prior
to the time that any such Alterations were made.
Lessee shall not, without on each occasion first obtaining Lessor's
prior written consent, make any Alterations to the Demised Premises,
except that Lessee may, without the consent of the Lessor but with
prior written notice to Lessor, make minor improvements to the interior
of the Demised Premises provided that they do not impair the structural
strength, operation, or value of the building of which Demised Premises
are a part, or violate any zoning, fire or building code. The cost to
correct any such violation shall be the responsibility of the Lessee.
Lessee accepts the facility "as is" except for those alterations stated
in Exhibit C. Cost of
11
<PAGE> 12
any modifications needed due to additional personnel or change of use
will be paid by Lessee.
RENEWAL OPTION
31. Lessee is given and granted an option to renew the term of this Lease
Agreement for none successive terms of no year(s) each on the same
terms and conditions except for the rental rate and the length of the
term. To exercise its option, the Lessee shall give the Lessor a notice
in writing not less than sixty days prior to the end of the original
term and any renewal terms and as a condition precedent to the notice
and the renewal that the Lessee not be in default under the terms and
conditions of this Lease Agreement.
LESSEE'S DEFAULT
32. The Lessee shall be considered in default of this Lease Agreement upon
failure to pay when due the rent or any other sum required by the terms
of this Lease; the failure to perform any material term, covenant, or
condition of this Lease Agreement; the commencement of any action or
proceeding for the dissolution, liquidation, or reorganization under
the Bankruptcy Act, of Lessee, or for the appointment of a receiver or
trustee of the Lessee's property; the making of any assignment for the
benefit of creditors by Lessee; the suspension of business; or the
abandonment of the Demised Premises by the Lessee. In each case, Lessee
shall only be in default if the Lessee is given written notice by
Lessor of the specific grounds for the default termination and twenty
business days from receipt of such notice to correct such default and
Lessee fails to do so.
LESSOR'S DEFAULT
33. The Lessor shall be considered in default of this Lease Agreement upon
the failure to perform any material term, covenant, or condition of
this Lease Agreement; the commencement of any action or proceeding for
the dissolution, liquidation, or reorganization under the Bankruptcy
Act, of Lessor, or for the appointment of a receiver or trustee of the
Lessor's property; the making of any assignment for the benefit of
creditors by Lessor; the suspension of business; or any other reason
provided for herein. In each case, Lessor shall only be in default if
the Lessor is given written notice by Lessee of the specific grounds
for the default termination and twenty business days from receipt of
such notice to correct such default and Lessor fails to do so.
12
<PAGE> 13
GENERAL
34. (a) This Lease Agreement shall be governed by and under the laws
of the State/Commonwealth of Alabama.
(b) Each party acknowledges that it has read this Lease Agreement,
understands it, and agrees to be bound by its terms, and
further agrees that this is the complete and exclusive
statement of the Lease Agreement between the parties, which
supersedes and merges all prior proposals, understandings, and
all other agreements, oral or written, between the parties
relating to this Lease Agreement. Any change in this Lease
Agreement must be made in writing and signed by authorized
representatives of both the Lessee and the Lessor.
(c) If either party cannot perform any or all of its respective
obligations under this Lease Agreement because of the
occurrence of any event which is beyond its reasonable
control, then the non-performing party shall (i) notify the
other party, (ii) take reasonable steps to resume performance
as soon as possible, and (iii) not be considered in breach
during the period performance is beyond the party's reasonable
control.
(d) The failure of either party at any time to require performance
by the other party of any provision hereof shall not affect in
any way the full right to require such performance at any time
thereafter. The waiver by either party of a portion of a
provision herein shall not be taken or held by the other party
to be a waiver of the provision itself unless such a waiver
shall be express and in writing.
(e) In the event of any inconsistency between its component parts,
this Lease Agreement shall be construed with the following
order of precedence:
(1) The Basic Lease Agreement (This document)
(2) Exhibit A
(3) Exhibit C
(4) Exhibits B and D
(5) Other Exhibits (if any)
(f) The titles of the clauses in this Lease Agreement, including
all Exhibits thereto, shall be read as references only and
shall not be read as references only and shall not be read as
affecting, contradicting, negating, or explaining the meaning
or interpretation of this Lease Agreement.
(g) Each party represents and warrants that it has the right and
authority to enter into this Lease Agreement.
13
<PAGE> 14
(h) Lessee agrees to relocate, at Lessor's expense to space of
equal quality within the building if this space is needed to
accommodate a tenant requiring larger space.
(i) Unless otherwise specifically noted, "days" shall mean
calendar days.
(j) In no event shall either party be liable to the other for
indirect, consequential, incidental or special damages, even
if it has been made aware of the possibility of such.
MECHANICS' LIENS
35. In the event that any mechanics' lien is filed against the premises as
a result of alterations, additions or improvements made by the Lessee,
the Lessor shall have the option, if the Lessee shall be unable to
procure effective cancellation, bonding or discharge of the lien within
30 days following written notice of the existence of such condition, to
take such steps and pay such monies as may be necessary to obtain an
effective cancellation or discharge of such notice or claim, in which
event such monies as shall be expended by the Lessor shall be
considered additional rent hereunder and shall be due and payable on
the first day of the next month succeeding such payment by the Lessor.
ENVIRONMENTAL
36. Lessor warrants and represents to Lessee that: (a) Lessor, its agents,
employees, representatives, tenants, and its predecessors in interest
in the Premises did not discharge, release, or dispose of, in any form,
any hazardous material or substance into or onto the Premises and that
no condition exists in or on the Premises that may result in any
violation of any federal, state or local laws, regulations or
ordinances relating to the protection of the environment or the public
health and welfare (collectively hereinafter called "Environmental
Laws"); and (b) Lessor has no liability and there are no outstanding
claims against Lessor for the clean up of any hazardous material or
substance deposited in the environment, either directly on the premises
or elsewhere, that resulted from or were ownership of the Premises.
Lessee warrants and represents to Lessor that: (a) Lessee, its agents,
employees, representatives and sublessees, if any, will not discharge,
release, or dispose of in any form any hazardous materials or
substances into or onto the Premises and that Lessee, will not create,
or permit to be created, any condition in or on the Premises that may
result in any violation of any environmental laws: and (b) Lessee will
not allow any hazardous material or substance to exist or be stored,
located, discharged, possessed, managed, processed or otherwise handled
on the Premises except those customarily used in the conduct of
Lessee's normal
14
<PAGE> 15
business activities, and that Lessee shall comply with all
Environmental Laws affecting the Premises; and (c) Lessee shall
immediately notify Lessor should Lessee become aware of (i) any
hazardous material or substance or any other environmental problem or
liability with respect to the Premises, (ii) any lien, action or notice
related to any such environmental problem or liability, or (iii) any
material or substance or any other problem with respect to or arising
out of or in connection with the premises.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day
and year first written above.
LESSEE
------
TxPort, Inc.
-----------------------------------------------------------------------
127 Jetplex Circle
-----------------------------------------------------------------------
Madison, AL 35425
-----------------------------------------------------------------------
By: /s/ Mark H. Hoffman
---------------------------------------------------
Printed Name: Mark H. Hoffman
---------------------------------------------------
Title: President
---------------------------------------------------
Date: 01/18/95
---------------------------------------------------
LESSOR
------
Industrial Properties of the South
-----------------------------------------------------------------------
2903 Wall Triana Hwy., Suite #7
-----------------------------------------------------------------------
Huntsville, Alabama 35824
-----------------------------------------------------------------------
By: /s/ Charlene B. Graham
---------------------------------------------------
Printed Name: Charlene B. Graham
---------------------------------------------------
Title: Managing Partner
---------------------------------------------------
Date: 01/19/95
---------------------------------------------------
16
<PAGE> 17
EXHIBIT B
RULES AND REGULATIONS
Rule 1: No sign, picture, advertisement, or notice shall be displayed,
inscribed, painted or affixed on any part of the outside or inside of the
building or on or about the Demised Premises except on the doors of said Demised
Premises and on the Directory Board of the building, and then only of such
color, size and style and materials as shall be first specified by the Lessor.
No t' For Rent" signs shall be displayed by the Lessee, and no showcases, or
obstructions, signs, flags, statuary, or any advertising device of any kind
whatever shall be placed in front of said building or in the passageways, halls,
lobbies, or corridors thereof by the Lessee; and the Lessor reserves the right
to remove all such showcases, obstructions, signs, flags, statuary, or
advertising devices and all signs other than those provided for, without notice
to the Lessee and at its expense.
Rule 2: The Lessor will maintain the grounds. Any person employed by the Lessor
to do grounds work, shall, while outside of said Demised Premises be subject to,
and under the control and direction of the Lessor (but not as agent or servant
of the Lessor).
Rule 3: No person shall disturb the occupants of this or any adjoining building
premises by the use of any musical instrument, unseemly noises, whistling,
singing or in any other way.
Rule 4: The Demised Premises leased shall not be used for lodging or sleeping,
not for any immoral or illegal purposes for any purpose that will damage the
Demised Premises.
Rule 5: Canvassing, soliciting and peddling in the building are prohibited and
each Lessee shall cooperate to prevent the same.
Rule 6: The water closets, wash basins, sinks, and other apparatus shall not be
used for any other purpose than those for which they were constructed, and no
sweeping, rubbish, or other substances shall be thrown therein.
Rule 7: All glass, locks and trimmings, in or about the doors and windows, and
all electrical globes and shades, broken by any Lessee, shall be immediately
replaced or repaired and put in order by such Lessee under the direction and to
the satisfaction of the Lessor, and on removal shall be left whole and in good
repair, normal wear and tear excluded.
Rule 8: Lessee will not block ingress and egress of the driveways or docks
leased to others.
Rule 9: The Lessor reserves the right to rescind any rule and to make such other
and further rules and regulations as, in Lessor's judgment, may from time to
time be needed for the safety care, maintenance, operation and cleanliness of
the building, and for the preservation of
17
<PAGE> 18
good order therein, which, when so made, and notice thereof given to the Lessee,
shall have the same force and effect a. if originally made a part of the
foregoing lease; and such other further rules, not however, to be inconsistent
with the proper and rightful enjoyment by the Lessee under the foregoing lease
of the premises therein referred to.
Rule 10: No smoking shall be allowed within any part of the premises herein
described.
18
<PAGE> 19
EXHIBIT C
ALTERATIONS TO BE MADE BY LESSOR
ALTERATIONS:
1. Construct a tenant demising fire wall at column line 3.
2. Add a rest room for the existing tenant in the southeast corner so
TxPort can have the existing rest room.
3. Rewire ceiling lights so lights can be turned on inside this area.
4. Broom sweep floor area.
5. Make available for tenants use, two gas fired heaters. Cost of
installation by tenant and cost of new meter by tenant.
EXHIBIT D
ALTERATIONS TO BE MADE BY LESSEE
1. Installation of all Communications, voice and data lines and equipment.
2. Installation of all fire extinguishers per code or ordinances.
3. Cost to add new gas meter and piping to serve this area.
4. Rewiring or new wiring for all electrical plugs needed for shipping
process or other.
5. If required or needed by tenant, the cost to upgrade the electrical
service to this area.
19
<PAGE> 20
ADDENDUM NO. 1
TO
LEASE AGREEMENT
Whereas TxPort, Inc. and Industrial Properties of the South did execute a Lease
Agreement for 11,250 square feet of warehouse space at 129 Jetplex Circle, dated
January 17, 1995 and effective January 19, 1995 and
Now TxPort, Inc. hereby leases from Lessor the 11,250 square feet contiguous
with the current 11,250 square feet, see Exhibit l-A. The rate for this added
space is $2.75 per square foot per year which is an additional $30,937.50 per
year or $2,578.13 per month.
The term for this added space will begin on June 15, 1995 and end June 14, 1997.
The term for the original 11,250 square feet of lease space will be extended
from January 19, 1996 to end concurrently with the new 11,250 square feet of
leased space, which is June 14, 1997.
Lessee agrees to:
(1) Reimburse Industrial Properties of the South within ten work
days of execution of this addendum for construction costs of
an existing fire wall between the two 11,250 square feet
sections - $9,218.75. ($8,600 drywall, $618.75 painting -
supporting invoices attached).
(2) Take the space as is for warehouse use.
(3) Pay all costs of any improvements or modifications for any
other use of the building needed by Lessee.
(4) Install a separate electric meter to serve the 22,500 square
foot area and contract directly with the utility company for
services.
Lessor agrees that heating and cooling units installed by Lessee or on Lessee's
behalf by Lessor may be removed by Lessee at its option at the end of the lease
term so long as any damage caused by any such removal is repaired by Lessee at
Lessee's expense.
All other terms and conditions of the lease remain in effect.
TxPort, Inc. Industrial Properties of the South
By: /s/ Donna M. Flammang By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Title: Secretary Title: Managing Partner
------------------------------ ------------------------------
Date: May 12, 1995 Date: June 1, 1995
------------------------------- -------------------------------
20
<PAGE> 21
ADDENDUM NO. 2
TO
LEASE AGREEMENT
Whereas TxPort, Inc. and Industrial Properties of the South did execute a Lease
Agreement for 11,250 square feet of warehouse space at 129 Jetplex Circle, dated
January 17, 1995 to be elective January 19, 1995; and added 11,250 square feet
as of June 15, 1995 all of which expired dune 14, 1997 with TxPort holding over
per Section 18 of the Lease Agreement.
See Exhibit 2-A dated June 18, 1997 with areas A and B of 11,250 square feet
each indicated.
Now TxPort, Inc. hereby leases from Lessor the 11,250 square feet of area B for
the time period July 1, 1997 through June 30, 1999 at a rate of $2.90 per square
foot per year or $2,718.75 payable monthly. TxPort, Inc. hereby leases from
Lessor the 11,250 square feet of area A from July 1, 1997 through December 31,
1997 and month-to-month thereafter with either party having the right to cancel
by giving 30 days written notice. The rate will be $2.90 per square foot per
year or $2,718.75 payable monthly.
In lieu of not having to meter the area separately, and not having to repair
damage caused by the removal of HVAC units, Lessee agrees that all HVAC units
will be left in place upon termination of the lease.
Lessee agrees to pay their pro rata share of utilities should Lessor be able to
continue pro rating utilities without adding new meters. Should new meters be
required, lessee agrees to pay one-half the cost of adding a new meter to serve
their area. Lessor is not obligated to provide utilities to lessee without
reimbursement.
All other terms and conditions of the lease remain in effect.
TxPort, Inc. Industrial Properties of the South
By: /s/ C. W. Smith By: /s/ Charlene B. Graham
--------------------------------- ---------------------------------
Title: VP & Treasurer Title: Managing Partner
------------------------------ ------------------------------
Date: 09/25/97 Date: 10/06/97
------------------------------- -------------------------------
21
<PAGE> 1
EXHIBIT 10.40
NOTE MODIFICATION AGREEMENT
This agreement is entered into this 22nd day of September, 1999,
between Verilink Corporation ("Verilink") and Leigh S. Belden ("Belden").
WHEREAS, Belden is indebted to Verilink pursuant the following
Promissory Notes:
(a) Promissory Note dated February 10, 1998, in the principal amount of
$800,000, plus accrued interest as of September 1, 1999, of $269,978.52, which
is secured by a pledge of 130,398 shares of Verilink common stock ("Note 1");
(b) Promissory Note dated January 1, 1999, in the principal amount of
$1,000,000, plus accrued interest as of September 1, 1999, of $44,664.78, which
is unsecured ("Note 2"); and
(c) Promissory Note dated February 22, 1999, in the principal amount of
$2,513,173.00, plus accrued interest as of September 1, 1999, of 45,990.75,
which note is secured by a pledge of Belden's general partnership interest in
Baytech Associates, a California General partnership ("Note 3"). In addition,
Belden's liability under Note 3 includes a Promissory Note payable to CivicBank
of Commerce in the principal amount of $500,000, which note is guaranteed by
Verilink.
WHEREAS, Belden has agreed to provide additional security for the
foregoing notes, in consideration of a modification of their terms,
NOW THEREFORE, the parties agree as follows:
1. Note 1. Note 1 shall be paid in six (6) quarterly installments
of $115,000, commencing on September 30, 2000, and ending on
December 31, 2001, and one installment on March 31, 2002, of
$110,000, plus all accrued but then unpaid interest on Note 1.
2. Note 2. Principal and accrued interest of Note 2 shall be paid
in full on or before June 30, 2000; provided however, that if
Baytech sells one or both of its properties located at 145
Baytech Drive and 161 Nortech Parkway, San Jose, California,
Belden shall pay to Verilink the lesser of one-half of
Baytech's interest in the net proceeds of such sale, or
$500,000.
3. Note 3. Note 3 shall be paid in six (6) quarterly installments
of $360,000, commencing on September 30, 2000, and ending on
December 31, 2001, and one installment on March 31, 2002, of
$339,085.88, plus accrued but then unpaid interest on Note 3.
In addition, on or before March 31, 2002, Belden shall repay
all principal
<PAGE> 2
and accrued interest due under the CivicBank Note. Until such
CivicBank Note is paid in full, Verilink shall maintain its
guaranty of that Note.
4. Additional Security. Belden shall secure Notes 1 and 3 by a
pledge of 1,800,000 shares of Common Stock of Verilink and
Note 2 by a pledge of Belden's general partnership in Baytech.
All pledges shall be made pursuant to the Security Agreement
between Belden and Verilink, dated February 22, 1999 (the
"Security Agreement"). Verilink and Belden agree that in the
event of default by Belden under Note 1, Note 2, or Note 3, or
in the event that Baytech is unable to sell either or both of
its properties by June 30, 2000, Verilink shall not exercise
its rights as a secured creditor without first consulting with
Belden so that Verilink's resort to its security is
accomplished in the best interests of Verilink, its
stockholders and Belden. Belden and Verilink shall meet
quarterly to discuss the adequacy of the security for Notes 1,
2, and 3, and if appropriate, Verilink shall release excess
collateral to Belden.
5. Further Assurances. Belden and Verilink shall take such action
and execute such documents as may be required or appropriate
to carry out the intent and purposes of this agreement.
6. Binding Effect. Except as set forth above, Notes 1, 2, and 3
and the Security Agreement shall remain in full force and
effect.
VERILINK CORPORATION
By: /s/ JOHN C. BATTY /s/ LEIGH S. BELDEN
--------------------------------- ---------------------------------
Leigh S. Belden
Title: CFO
------------------------------
<PAGE> 1
EXHIBIT 10.41
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease is entered into by and between Baytech
Associates, a California general partnership ("Landlord") and Verilink
Corporation, a California corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into a lease (the "Original Lease") dated
February 27, 1986 concerning 54,851 square feet of space in the building located
at 145 Baytech Drive, San Jose, CA.
B. The Original Lease was modified by First Amendment to Lease (the
"First Amendment") dated January 22, 1987 and by Second Amendment (the "Second
Amendment") to Lease dated April 30, 1996. The Original Lease, together with
the First Amendment and the Second Amendment, is attached hereto as Exhibit A.
The Original Lease as modified by the First Amendment and Second Amendment is
hereinafter referred to as the "Lease."
C. Landlord and Tenant now desire to modify the Lease upon the terms and
conditions hereinafter provided. Any capitalized term not defined herein shall
have the same meaning ascribed to it in the Lease.
NOW THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
1. Rent. Effective May 1, 1999, Monthly Rent shall be Seventy-One
Thousand Three Hundred Six Dollars 30/100 ($71,306.30) per month.
2. Option To Extend Term.
(a) At the expiration of the original five (5) year term the Lease
(the "Expiration Date"), Tenant may extend the term of the Lease for one
additional period of five (5) years (the "Second Extended Term"), commencing
immediately following the Expiration Date of the First Extended Term. Tenant
shall exercise this option, if at all, by giving Landlord notice of Tenant's
intention to do so at least six (6) months but no more than twelve (12) months
prior to the Expiration Date of the First Extended Term. In no event shall any
purported exercise of such option by Tenant be effective if Tenant is in default
of any material term, covenant, agreement or obligation on its part under this
Lease during the period from the date Tenant exercises its option hereunder up
to and including the commencement of the Second Extended Term, provided that
Tenant shall have received written notice of such default and then failed to
cure such default within the applicable cure period. The Second Extended Term
shall be upon all the terms and conditions of the Lease, except that Monthly
Rent shall be adjusted as set forth in Subparagraph 2(b) below.
(b) The Monthly Rent for the Extended Term shall be the greater of
(i) the Monthly Rent payable hereunder for the last full month of the Lease
Term immediately preceding
<PAGE> 2
commencement of the Second Extended Term, or (ii) the fair market rental for the
Premises. In the event the parties fail to agree upon the amount of the Monthly
Rent for the first year of the Second Extended Term on or before one hundred
fifty (150) days prior to the commencement thereof, the Monthly Rent for the
first twelve (12) months of the Extended Term shall be determined by appraisal
in the manner hereinafter set forth, provided that in no event shall the
Monthly Rent for the Extended Term be less than the Monthly Rent payable
hereunder for the last full month of the Lease term immediately preceding
commencement of the Second Extended Term.
(c) In the event it becomes necessary under this Paragraph 2 to
determine the fair market monthly rent by appraisal, one hundred fifty (150)
days prior to commencement of the Second Extended Term, Landlord and Tenant
shall each appoint a real estate appraiser (MAI or AIREA) who has at least five
(5) years experience in appraising commercial real property in the San Jose
area. Such appraisers shall each determine the fair market Monthly Rent for the
Premises taking into account the value of the Premises and the amenities
provided by the Building and prevailing comparable rentals and other relevant
factors. Such appraisers shall, within twenty (20) business days after the
appointment, complete their appraisal and submit their appraisal report to
Landlord and Tenant. If the two (2) appraisals of fair market Monthly Rent for
the Premises vary by five (5%) percent or less of the higher appraisal, the
average of the two shall be the Monthly Rent for the Premises for the first year
of the Extended Term, (except as provided in Paragraph 2(b) above.) If said
appraisals of fair market Monthly Rent vary by more than five (5%) percent of
the higher appraisal, the appraisers, within ten (10) days after submission of
the last appraisal, shall appoint a third appraiser who shall be a certified
real estate appraiser having five (5) years experience appraising commercial
real property in the San Jose area. Such third appraiser shall, within twenty
(20) business days after its appointment, determine by appraisal the fair market
Monthly Rent for the Premises, taking into account the same factors referred to
above, and submit his appraisal report to Landlord and Tenant. The fair market
Monthly Rent determined by the third appraiser for the Premises shall be
averaged with whichever of the other two appraised values is closest to that
determined by the third appraiser, and the average thereof shall be the Monthly
Rent for the first year of the Second Extended Term (provided that if the third
appraiser's value is equally close to the other two appraised values, the fair
market Monthly Rent shall be as determined by the third appraiser), subject to
Paragraph 2(b) above. If either Landlord or Tenant fails to appoint an
appraiser, or if an appraiser appointed by either of them fails, after his
appointment, to submit his appraisal within the required period in accordance
with the foregoing, the appraisals submitted by the appraiser properly appointed
and timely submitting his appraisal shall be controlling. If the two appraisers
appointed by Landlord and Tenant are unable to agree upon a third appraiser,
within the required period in accordance with the foregoing, application shall
be made within twenty (20) days thereafter by either Landlord or Tenant to the
nearest office of the American Arbitration Association, which shall appoint a
licensed appraiser satisfying the requirements set forth above. Each Party shall
pay its own real estate appraiser, and the parties shall evenly share the cost
for the third appraiser.
3. Confirmation. Except as modified hereby, the Lease shall remain
in full force and effect.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Third Amendment to
Lease effective as of the latest date set forth next to their signatures below.
Landlord:
Baytech Associates,
a California general partnership
By /s/ LEIGH S. BELDEN
- -------------------------------
Leigh S. Belden
Its
- --------------------------------
Tenant:
Verilink Corporation,
a California corporation
By /s/ JOHN C. BATTY
- --------------------------------
John C. Batty
Its CFO
- --------------------------------
The undersigned, lender under the lease referred to as the "Lease" in
the foregoing Third Amendment to Lease, hereby consent to the foregoing Third
Amendment to Lease.
Lender:
- ----------------------------
- ----------------------------
By:
--------------------------
Its:
--------------------------
3
<PAGE> 1
EXHIBIT 10.42
SUBLEASE
This Sublease, dated, for reference purposes only, as of August __, 1999,
is made by and between Baytech Associates, a California general partnership
("Sublandlord") and Verilink Corporation, a Delaware corporation ("Subtenant").
RECITALS
A. IDEC Corporation, as "Landlord," and Sublandlord, as "Tenant,"
entered into a lease agreement (the "Master Lease") dated September 30, 1996
concerning approximately 71,800 square feet of space located in the building
(the "Building") at 161 Nortech Parkway, San Jose, California. A copy of the
Master Lease is attached hereto as Exhibit A.
B. Sublandlord now desires to sublease to Subtenant, and Subtenant now
desires to sublease from Sublandlord, a portion of the Building consisting of
approximately 42,000 square feet of space (the "Premises") as shown on Exhibit
B attached hereto.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
the parties agree as follows:
1. PREMISES. Sublandlord hereby subleases to Subtenant and Subtenant
hereby subleases from Sublandlord for the term, at the rental, and upon all of
the conditions set forth herein, the Premises.
2. TERM. The term of this Sublease shall commence on November 1, 1999
and end on November 30, 2001 (the "Expiration Date") unless sooner terminated
pursuant to any provision hereof.
3. RENT.
(a) Subtenant shall pay to Sublandlord as base rent ("Base Rent")
for the Premises during he term hereof the sum of Forty-Five Thousand Eighty
Dollars ($45,080) per month. In addition to Base Rent, during the term of this
Sublease, Subtenant shall pay to Sublandlord Subtenant's share ("Subtenant's
Share") of all additional rent ("Additional Rent") payable to Landlord under
Paragraph 5(b) of the Master Lease and all expenses incurred by Sublandlord in
performing the obligations set forth in Paragraph 17.B. of the Master Lease.
Subtenant's Share of Additional Rent shall be fifty-eight and five tenths
percent (58.5%).
(b) Collectively, Base Rent and Additional Rent shall hereinafter be
referred to as "Rent". Rent for any period during the term hereof which is for
less than one month shall be a pro rata portion of the monthly installment. Rent
shall be payable in advance on the first day of every month, without demand,
offset, counterclaim or setoff. All Rent shall be paid to Sublandlord at its
address set forth in Paragraph 18 hereof or at such other place as Sublandlord
may designate by written notice to Subtenant.
(c) Any Rent or other amount due hereunder to Sublandlord that is
not paid when due shall bear interest at the rate of ten percent (10%) per
annum or the maximum rate
<PAGE> 2
allowed by law, whichever is less. In addition, for each payment of Rent that is
not paid within ten (10) days after the date of Rent payment is due, Subtenant
shall pay to Sublandlord an additional sum equal to four percent (4%) of the
amount overdue as a late charge. Payment and acceptance of interest and a late
charge hereunder shall not excuse any failure by Subtenant to pay Rent when due.
4. USE. The Premises shall be used and occupied only for any lawful
purpose, including, without limitation, research development manufacturing,
sales, warehouse, office and general administration activities required to
produce and sell components and/or products which are used and/or sold in the
electronics industry and related incidental uses.
5. SECURITY DEPOSIT. Concurrently with the execution of this Sublease,
Subtenant shall deposit with Sublandlord the sum of Forty-Five Thousand Eighty
Dollars ($45,080), as a security deposit (the "Deposit"). Sublandlord shall hold
the Deposit as security for the full and faithful performance by Subtenant of
its covenants and obligations under this Sublease. If Subtenant defaults in the
full and timely performance of any or all of Subtenant's covenants and
obligations under this Sublease and any applicable cure period shall have
expired, than Sublandlord may, from time to time, without waiving any other
remedy available to Sublandlord, use the Deposit, or any portion of it, to the
extent necessary to cure or remedy the default or to compensate Sublandlord for
all or a part of the damages sustained by Sublandlord resulting from Subtenant's
default. Subtenant shall pay to Sublandlord, within five (5) business days after
receipt of demand, the amount so applied in order to restore the Deposit to its
original amount. Sublandlord shall promptly return the Deposit to Subtenant at
the expiration or earlier termination of the Sublease term, provided that there
does not then exist any uncured event of default by Subtenant under this
Sublease. Sublandlord shall not be required to segregate the Deposit from
Sublandlord's general or other funds. Subtenant shall not at any time be
entitled to interest on the Deposit.
6. CONDITION OF THE PREMISES. Subtenant acknowledges that it is
subleasing the Premises "AS IS," that Sublandlord is not making any
representation or warranty concerning the condition of the Premises, and that
Sublandlord is not obligated to perform any work to prepared the Premises for
Subtenant's occupancy. Subtenant acknowledges that it is not authorized to make
or do any alterations or improvements in or to the Premises except as permitted
by the provisions of this Sublease and the Master Lease and that Subtenant must
deliver the Premises to Sublandlord upon expiration of the Sublease term in the
condition required by the Master Lease.
7. SIGNAGE Subtenant may install any such signage that is approved in
writing by Landlord and allowed by the terms of the Master Lease. Subtenant
shall be solely responsible to negotiate directly with Landlord with respect to
any signage rights that Subtenant desires. The failure for any reason of
Landlord to approve Subtenant's proposed signage shall not excuse the
performance of Subtenant's obligations under this Sublease.
8. PARKING. Subtenant shall be entitled to use Subtenant's Share of all
parking available with respect to the Building on a non-exclusive basis.
9. SUBTENANT'S OBLIGATION. Except as provided herein to the contrary and
except as modified by this Sublease, Subtenant covenants and agrees that all
obligations of Sublandlord
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<PAGE> 3
under the Master Lease shall be performed by Subtenant with respect to the
Premises. Except to the extent due to the negligence or willful misconduct of
Sublandlord or Sublandlord's agents, contractors or employees, Subtenant agrees
to indemnify, protect and defend Sublandlord, and hold it harmless, from and
against any and all claims, damages, losses, expenses and liabilities (including
reasonable attorneys' fees) incurred as a result of the non-performance,
non-observance or non-payment of any of Sublandlord's obligations under the
Master Lease or any related agreement which, as a result of this Sublease,
becomes an obligation of Subtenant.
10. SUBLANDLORD'S OBLIGATIONS. Sublandlord agrees that Subtenant shall be
entitled to receive all services, utilities and repairs to be provided by
Landlord to Sublandlord under the Master Lease which pertain to the Premises.
Subtenant shall look solely to Landlord for all such services and utilities and
shall not, under any circumstances, seek or require Sublandlord to perform any
of such services or provide any utilities, nor shall Subtenant make any claim
upon Sublandlord for any damages which may arise by reason of Landlord's default
under the Master Lease unless such default is caused by Sublandlord. Any
condition resulting from a default by Landlord under the Master Lease (other
than a default caused by Sublandlord) shall not constitute as between
Sublandlord and Subtenant an eviction, actual or constructive, of Subtenant and
no such default shall excuse Subtenant from the performance or observance of any
of its obligations to be performed or observed under this Sublease, or entitle
Subtenant to receive any reduction in or abatement of the Rent provided for in
this Sublease, except to the extent Sublandlord receives an abatement in its
rent under the terms of the Master Lease with respect to the Premises.
Sublandlord covenants and agrees with Subtenant that Sublandlord will pay when
due all fixed rent and additional rent payable by Sublandlord pursuant to the
Master Lease to the extent that such payment is not the obligation of Subtenant
hereunder. Sublandlord agrees to indemnify, protect and defend Subtenant and
hold it harmless from and against any and all claims, damages, losses, expenses
and liabilities (including reasonable attorneys' fees) incurred as a result of
the non-performance or non-observance of any obligation of Sublandlord under the
Master Lease that has not become an obligation of Subtenant pursuant to this
Sublease, except to the extent that such non-performance or non-observance is
caused by Subtenant's negligence or willful misconduct or the failure to perform
any of Subtenant's obligations hereunder, or that of its agents, employees or
contractors. If the Master Lease and/or this Sublease terminates as a result of
a default by Sublandlord under the terms of the Master Lease or this Sublease,
Sublandlord shall indemnify, defend, protect and hold harmless Subtenant from
and against any and all claims, liabilities, judgments, causes of action,
damages, costs, and expenses (including reasonable attorneys' fees), caused by
or arising in connection with such termination.
11. DEFAULT BY SUBTENANT. In the event Subtenant shall be in default of
any covenant of this Sublease, Sublandlord, upon giving any required notice and
subject to the right, if any, of Subtenant to cure any such default within any
applicable cure period provided in the Master Lease or this Sublease, shall
have available to it against Subtenant all of the remedies available to
Landlord under the Master Lease in the event of a similar default on the part
of Sublandlord thereunder or at law.
12. QUIET ENJOYMENT. As long as Subtenant pays all of the Rent due
hereunder and performs all of Subtenant's other obligations hereunder,
Sublandlord shall do nothing to affect Subtenant's right to peaceably and
quietly have, hold and enjoy the Premises.
-3-
<PAGE> 4
13. ASSIGNMENT AND SUBLETTING. Subtenant shall not assign this Sublease
or any of Subtenant's rights hereunder, and shall not sub-sublet the Premises or
any portion thereof, except in conformance with the terms of the Master Lease
and with Sublandlord's prior written consent which will not be unreasonably
withheld.
14. HOLDING OVER. Subtenant shall surrender possession of the Premises
immediately upon the expiration of the Sublease term or earlier termination of
this Sublease in accordance with all of the terms of the Master Lease. If
Subtenant shall continue to occupy or possess the Premises after such expiration
or termination without the consent of Sublandlord, then unless Sublandlord and
Subtenant have otherwise agreed in writing, Subtenant shall be a tenant at
sufferance and not a tenant from month-to-month. All the terms, provisions and
conditions of this Sublease shall apply to such tenancy at sufferance except
those terms, provisions and conditions pertaining to the Sublease term, provided
that the monthly Base Rent shall be immediately adjusted upward upon the
expiration or termination of this Sublease to one hundred fifty percent (150%)
of the monthly Base Rent for the Premises in effect under this Sublease during
the month that includes the day immediately prior to the date of the expiration
or termination of this Sublease. Further, Subtenant shall indemnify, protect,
defend with counsel reasonably acceptable to Sublandlord and hold harmless
Sublandlord from and against any and all claims, liabilities, judgments, causes
of action, damages, losses, costs and expenses (including reasonable attorneys'
fees and experts' fees) caused by or arising in connection with Subtenant's
failure to surrender possession of the Premises to Sublandlord upon expiration
of the Sublease term and in the manner required by the Master Lease.
15. BROKERS. Each party represents and warrants to the other that such
party has not dealt with any broker or finder in connection with the
negotiation or consummation of this Sublease. Each party agrees to indemnify
and defend the other, and hold it harmless, from and against any and all
claims, damages, losses, expenses and liabilities (including reasonable
attorneys' fees) incurred by the other party as a result of any breach by such
party or any of its representations, warranties or covenants in this Section.
16. ENFORCEMENT OF MASTER LEASE. Subtenant, at its sole cost and
expense, may (but only to the extent applicable to the Premises) enforce
against Landlord the rights given Sublandlord under the Master Lease in order
to realize Subtenant's rights under this Sublease, including rights of
reasonable approval, rights of access rights of repair and rights to abate
rent; provided, however, that Subtenant may only abate rent pursuant to this
Section to the extent that Sublandlord may abate rent under the Master Lease.
Sublandlord hereby assigns to Subtenant Sublandlord's rights under the Master
Lease to enforce provisions of the Master Lease against Landlord, but only,
to the extent that such rights apply to the Premises, reserving to Sublandlord
a non-exclusive right to enforce the rights given Sublandlord under the
Master Lease. Sublandlord agrees to join in any arbitration or lawsuit
commenced by Subtenant hereunder and agrees to use reasonable efforts to assist
Subtenant in any such action, provided that Subtenant shall reimburse
Sublandlord for reasonable out-of-pocket costs and expenses incurred by
Sublandlord to provide such assistance including reasonable attorneys' fees.
Subtenant shall defend, protect, indemnify and hold Sublandlord harmless for any
breach by Subtenant of the Master Lease, and shall indemnify, protect, defend
and hold Sublandlord harmless in connection with any enforcement action under
this Section, except to the extent incurred as a result of Sublandlord's
negligence or willful misconduct.
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<PAGE> 5
17. INCORPORATION OF TERMS OF MASTER LEASE.
(a) This Sublease is subject and subordinate to the Master Lease.
Subject to the modifications set forth in this Sublease, the terms of the Master
Lease are incorporated herein by reference, and shall, as between Sublandlord
and Subtenant (as if they were Landlord and Tenant, respectively, under the
Master Lease) constitute the terms of this Sublease except to the extent that
they are inapplicable to, inconsistent with, or modified by the terms of this
Sublease. In the event of any inconsistencies between the terms and provisions
of the Master Lease and the terms and provisions of this Sublease the terms and
provisions of this Sublease shall govern. Sublandlord represents and warrants
that (a) the copy of the Master Lease attached hereto as Exhibit A is a true and
complete copy of the Master Lease and there are no additional agreements between
Sublandlord and Landlord with respect to the Premises, (b) all of the initial
tenant improvement work required to be performed in the Premises pursuant to the
terms of the Master Lease has been completed in accordance with the provisions
of the Master Lease and (c) to the best of Sublandlord's knowledge, there are no
defaults on the part of either Landlord or Sublandlord under the Master Lease
and no event has occurred which, with the giving of notice and the passage of
time, would constitute a default under the Master Lease. Furthermore,
Sublandlord shall not modify or amend the Master Lease in any way that would
materially adversely affect Subtenant's use of, access to or quiet enjoyment of
the Premises or that would materially increase Subtenant's obligations, or
materially diminish Subtenant's rights under this Sublease without Subtenant's
consent, which consent Subtenant may withhold in its sole and absolute
discretion. Subtenant acknowledges that it has reviewed the Master Lease and is
familiar with the terms and conditions thereof.
(b) For the purposes of incorporation herein, the terms of the
Master Lease are subject to the following additional modifications:
(i) In all provisions of the Master Lease (under the terms
thereof and without regard to modifications thereof for the purposes
of incorporation into this Sublease) requiring the approval or consent
of Landlord, Subtenant shall be required to obtain the approval or
consent of both Sublandlord and Landlord.
(ii) In all provisions of the Master Lease requiring Sublandlord
to submit, exhibit to, supply or provide Landlord with evidence,
certificates, or any other matter or thing, Subtenant shall be
required to submit, exhibit to, supply or provide, as the case may be,
the same to both Landlord and Sublandlord. In any such instance,
Sublandlord reasonably shall determine if such evidence, certificate
or other matter or thing shall be satisfactory.
(iii) Sublandlord shall have no obligation to repair the Premises
or the Building to restore or rebuild any portion of the Premises or
the Building after any destruction or taking by eminent domain or to
perform any services or other obligations of Landlord under the Master
Lease.
(iv) In each instance in which the Master Lease affords
Sublandlord a period within which to cure a breach or event of
default, such period, as applied to Subtenant, shall expire two (2)
business days before the expiration of the cure
-5-
<PAGE> 6
period specified in the Master Lease; provided, however, that if such
period is two (2) business days or fewer, Subtenant shall have two (2)
business days to perform.
(c) The following provisions of the Master Lease are specifically
excluded from incorporation in this Sublease: Paragraphs 1, 2, 4, 5, 6, 7, 8,
10, 11(a), 17.B, 18, 29, 35, 38, Exhibit A, Exhibit B, and Exhibit C. The
exclusion of certain provisions of the Master Lease from incorporation into this
Sublease shall not in any way limit or affect (i) the obligations of Landlord to
Sublandlord and, subject to the applicable conditions and limitations set forth
in this Sublease, Sublandlord to enforce Landlord's compliance with such
obligations.
18. NOTICES. Sublandlord agrees to forward to Subtenant, promptly upon
receipt thereof by Sublandlord, a copy of each notice, including notices of
default, received by Sublandlord in its capacity as Tenant under the Master
Lease. Subtenant agrees to forward to Sublandlord, promptly upon receipt
thereof, copies of any notices received by Subtenant from Landlord or from any
governmental authorities. All notices, demands and requests shall be in writing
and shall be sent either by hand delivery or by a nationally recognized
overnight courier service (e.g., Federal Express), in either case return receipt
requested, to the address of the appropriate party. Notices, demands and
requests so sent shall be deemed given when the same are received. Notices shall
be sent to the attention of:
If to Sublandlord: Baytech Associates
145 Baytech Drive
San Jose, CA 95134
If to Subtenant: Verilink Corporation
145 Baytech Drive
San Jose, CA 95134
19. TIME OF THE ESSENCE. Time is strictly of the essence with respect to
each and every term, condition, obligation and provision of this Sublease.
20. GOVERNING LAW. California law shall govern the construction and
enforcement of this Sublease.
21. INTERPRETATION OF SUBLEASE. Section and Subsection headings in this
Sublease are included solely for ease of reference and shall not affect the
construction of this Sublease. This Sublease shall be construed as if it had
been prepared jointly by Sublandlord and Subtenant. Unless otherwise indicated,
all references to Sections and Subsections are to Sections and Subsections in
this Sublease. Each exhibit referred to in this Sublease is an exhibit attached
to this Sublease and is incorporated herein by reference. If any portion of this
Sublease shall be declared to be invalid, illegal or unenforceable by any court
of competent jurisdiction, such portion shall be deemed severed from this
Sublease and the remaining portions shall continue in full force and effect.
22. ENTIRE AGREEMENT; AMENDMENTS IN WRITING. There are no oral agreements
between the parties hereto affecting this Sublease and this Sublease supersedes
and cancels any
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<PAGE> 7
and all previous negotiations, arrangements, agreements and understandings, if
any, between the parties hereto by Sublandlord to Subtenant with respect to the
subject matter thereof. This Sublease, and the exhibits and schedules attached
hereto, contain all of the terms, covenants, conditions, warranties and
agreements of the parties relating in any manner to the Premises and shall be
considered to be the only agreements between the parties hereto and their
representatives and agents. None of the terms, covenants, conditions or
provisions of this Sublease can be modified, deleted or added to except in
writing signed by the parties hereto.
23. INDEMNITY.
(a) Except to the extent caused by Sublandlord's negligence or
willful misconduct, Subtenant shall indemnify, protect, defend with counsel
reasonably acceptable to Sublandlord and hold harmless Sublandlord from and
against any and all claims, liabilities, judgments, causes of action, damages,
costs and expenses (including reasonable attorneys' and experts' fees), caused
by or arising in connection with: (i) the use, occupancy or condition of the
Premises, or (ii) the negligence or willful misconduct of Subtenant or its
employees, contractors, agents, or invitees, or (iii) a breach of Subtenant's
obligations under this Sublease; or (iv) a breach of Subtenant's obligations
under the Master Lease; or (v) any Hazardous Materials used, stored, released,
disposed, generated or transported by Subtenant, its agents, employees,
contractors or invitees in, on or about the Premises.
(b) Except to the extent caused by Subtenant's negligence or willful
misconduct, Subtenant shall indemnify, protect, defend with counsel reasonably
acceptable to Subtenant and hold Subtenant harmless from and against any and all
claims, liabilities, judgments, causes of action, damages, costs, and expenses
(including reasonable attorneys' and experts' fees), caused by or arising in
connection with: (i) a breach of Sublandlord's obligations under this Sublease;
or (ii) a breach of Sublandlord's obligations as Tenant under the Master Lease
to the extent those obligations are not assumed by Subtenant under this
Sublease; or (iii) the negligence or willful misconduct of Sublandlord, its
employees, contractors, agents, or invitees occurring on or about the Premises;
or (iv) Hazardous Materials used, stored or disposed of by Sublandlord in, on or
about the Premises.
(c) The obligations of Sublandlord and Subtenant set forth in this
Paragraph 23 shall survive termination of this Sublease.
24. TERMINATION AND MODIFICATION OF MASTER LEASE BY SUBLANDLORD.
Sublandlord shall not voluntarily terminate the Master Lease during the term of
this Sublease. Sublandlord shall not modify the Master Lease in any way that
will adversely affect Subtenant's rights or obligations under this Sublease.
25. SURRENDER. Notwithstanding anything to the contrary contained in this
Sublease or the Master Lease, Subtenant's obligation to surrender the Premises
shall be fulfilled if Subtenant surrenders possession of the Premises in the
condition required by the Master Lease, except that Subtenant shall have no
obligation to remove any additions, alterations or improvements made to the
Premises by Sublandlord or any predecessor in interest of Sublandlord prior to
the commencement date of the term of this Sublease.
-7-
<PAGE> 8
26. RIGHT TO CURE. If Sublandlord defaults in the performance or
observance of any of Sublandlord's remaining obligations under the Master Lease
or fails to perform Sublandlord's stated obligations under this Sublease to
enforce, for Subtenant's benefit, Landlord's obligations under the Master Lease,
then Subtenant shall give Sublandlord notice specifying in what manner
Sublandlord has defaulted, and if such default shall not be cured by Sublandlord
within thirty (30) days thereafter (except that if such default cannot be cured
within said thirty (30)-day period, this period shall be extended for an
additional reasonable time, provided the Sublandlord commences to cure such
default within such thirty (30)-day period and proceeds diligently thereafter to
effect such cure as quickly as possible), then in addition, Subtenant shall be
entitled, at Subtenant's option, to cure such default and promptly collect from
Sublandlord Subtenant's reasonable expenses in so doing (including, without
limitation, reasonable attorneys' fees and court costs). Subtenant shall not be
required, however, to wait the entire cure period described herein if earlier
action is required to comply with the Master Lease or with any applicable
governmental law, regulation or order.
IN WITNESS WHEREOF, the Parties have entered into this Sublease as of the
date first written above.
Sublandlord:
BAYTECH ASSOCIATES,
a California General Partnership
By: /s/ LEIGH S. BELDEN
----------------------------------
Name: Leigh S. Belden
--------------------------------
Title:
-------------------------------
Subtenant:
VERILINK CORPORATION
a Delaware corporation
By: /c/ JOHN C BATTY
----------------------------------
Name: John C Batty
--------------------------------
Title: CFO
-------------------------------
-8-
<PAGE> 1
Exhibit 10.43
September 21, 1999
Mr. Graham G. Pattison
145 Baytech Drive
San Jose, CA 95134
Dear Graham:
This letter will set forth the agreement between you and Verilink Corporation
regarding the relocation of Verilink's San Jose operations to its Huntsville
location. In consideration of your managing a successful transition to
Huntsville as Verilink's CEO by December 31, 1999, Verilink shall pay you a
bonus of $300,000. This bonus shall be subject to applicable withholdings and
shall be paid on or before December 31, 1999.
Very truly yours,
VERILINK CORPORATION
By: /s/ John C. Batty, CFO
------------------------
John C. Batty, CFO
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-05651 and 333-69755) of Verilink Corporation of
our report dated July 21, 1999, except as to Note 9 which is as of September 22,
1999, relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial schedule contains summary financial information extracted from
the financial statements contained in the Form 10-K of Verilink Corporation for
the fiscal year ended June 27, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> JUN-27-1999
<CASH> 6,880
<SECURITIES> 11,596
<RECEIVABLES> 9,366
<ALLOWANCES> 205
<INVENTORY> 6,864
<CURRENT-ASSETS> 40,102
<PP&E> 19,516
<DEPRECIATION> 11,810
<TOTAL-ASSETS> 54,281
<CURRENT-LIABILITIES> 14,142
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 39,998
<TOTAL-LIABILITY-AND-EQUITY> 54,281
<SALES> 59,553
<TOTAL-REVENUES> 59,553
<CGS> 31,824
<TOTAL-COSTS> 31,824
<OTHER-EXPENSES> 42,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,666)
<INCOME-TAX> (0)
<INCOME-CONTINUING> (13,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,666)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
