<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-19360
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VERILINK CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2857548
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
127 JETPLEX CIRCLE, MADISON, ALABAMA 35758
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(Address of principal executive offices) (Zip Code)
256-772-3770
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
The number of shares outstanding of the issuer's common stock as of January 28,
2000 was 14,127,448.
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INDEX
VERILINK CORPORATION
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the 3
six months ended December 31, 1999 and December 27, 1998
Condensed Consolidated Balance Sheets as of 4
December 31, 1999 and June 27, 1999
Condensed Consolidated Statements of Cash Flows for the 5
six months ended December 31, 1999 and December 27, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
- -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERILINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- --------------------------
December 31, December 27, December 31, December 27,
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 16,183 $ 17,107 $ 31,035 $ 34,185
Cost of sales 8,114 8,453 16,811 16,761
----------- ----------- ----------- -----------
Gross profit 8,069 8,654 14,224 17,424
----------- ----------- ----------- -----------
Operating expenses:
Research and development 2,170 3,401 5,335 6,691
Selling, general and administrative 5,498 5,560 11,096 10,488
Restructuring and other non-recurring charges 1,400 -- 8,300 --
In-process research and development -- 3,330 -- 3,330
----------- ----------- ----------- -----------
Total operating expenses 9,068 12,291 24,731 20,509
----------- ----------- ----------- -----------
Loss from operations (999) (3,637) (10,507) (3,085)
Interest and other income, net 222 409 393 968
----------- ----------- ----------- -----------
Loss before provision for income taxes (777) (3,228) (10,114) (2,117)
Provision for income taxes -- -- -- 389
----------- ----------- ----------- -----------
Net loss $ (777) $ (3,228) $(10,114) $ (2,506)
=========== =========== =========== ===========
Net loss per share - Basic $ (0.06) $ (0.23) $ (0.72) $ (0.18)
=========== =========== =========== ===========
Net loss per share - Diluted $ (0.06) $ (0.23) $ (0.72) $ (0.18)
=========== =========== =========== ===========
Shares used in per share computations - Basic 14,028 13,929 14,013 13,918
=========== =========== =========== ===========
Shares used in per share computations - Diluted 14,028 13,929 14,013 13,918
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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VERILINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 June 27,
(Unaudited) 1999
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,313 $ 6,365
Restricted cash 525 515
Short-term investments 3,579 11,596
Accounts receivable, net 12,275 9,161
Notes receivable 1,416 3,561
Other receivable 3,558 --
Inventories 3,487 6,864
Other current assets 1,355 2,040
---------- ----------
Total current assets 33,508 40,102
Property and equipment, net 4,799 7,706
Notes receivable, long term 3,139 --
Other assets 5,210 6,473
---------- ----------
Total assets $ 46,656 $ 54,281
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,684 $ 2,818
Accrued expenses 12,528 11,324
---------- ----------
Total liabilities 16,212 14,142
Stockholders' equity 30,444 40,139
---------- ----------
Total liabilities and stockholders' equity $ 46,656 $ 54,281
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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VERILINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
December 31, December 27,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,114) $ (2,506)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,150 1,210
In-process research and development -- 3,330
Deferred compensation related to stock options 91 28
Net book value of assets charged against restructuring reserve 1,461 --
Accrued interest on notes receivable from stockholders (31) (59)
Changes in assets and liabilities net of effects of acquisition of TxPort, Inc.:
Accounts receivable (3,114) (2,428)
Other receivable (3,558) --
Inventories 3,377 338
Other assets 807 (967)
Accounts payable 866 (748)
Accrued expenses 1,204 422
Income tax payable -- (159)
----------- -----------
Net cash used in operating activities (6,861) (1,539)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (182) (1,660)
Sale of short-term investments 8,017 10,886
Purchase of TxPort, Inc. (375) (10,000)
----------- -----------
Net cash provided by (used in) investing activities 7,460 (774)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 382 535
Repurchase of common stock (78) --
Proceeds from repayment of notes receivable from stockholders 55 --
----------- -----------
Net cash provided by financing activities 359 535
----------- -----------
Effect of exchange rate changes on cash -- (1)
----------- -----------
Net increase (decrease) in cash and cash equivalents 958 (1,779)
Cash and cash equivalents and restricted cash at beginning of period 6,880 16,304
----------- -----------
Cash and cash equivalents and restricted cash at end of period $ 7,838 $ 14,525
=========== ===========
Supplemental disclosures:
Refund from income taxes $ 500 $ 495
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements of Verilink Corporation (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these statements include all
adjustments, consisting of normal and recurring adjustments, considered
necessary for a fair presentation of the results for the periods presented. The
results of operations for the periods presented are not necessarily indicative
of results which may be achieved for the entire fiscal year ending June 30,
2000. The unaudited interim condensed consolidated financial statements should
be read in conjunction with the financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1999 as filed with the Securities and Exchange Commission.
In November 1999, the Board of Directors approved the change in the
Company's fiscal year end from the Sunday nearest to June 30 to the Friday
nearest to June 30, beginning with fiscal year 2000. As a result, fiscal 2000
commenced on Monday, June 28, 1999 and will end on Friday, June 30, 2000. Each
quarter beginning in fiscal 2000 will also end on a Friday. Additionally,
fiscal 2000 consists of 53 weeks resulting in a 14-week period for Q1 as
compared to 13 weeks for all other quarterly periods.
NOTE 2. Restructuring Charge
During the third quarter of fiscal 1999, the Company announced and began
implementing its plans to streamline operations and eliminate redundant
functions by consolidating manufacturing, combining sales and marketing
functions, and restructuring research and development activities. The action
resulted in a pretax restructuring charge of $3.2 million. The following table
represents the restructuring activity from June 27, 1999 to December 31, 1999:
<TABLE>
<CAPTION>
Restructuring Reserve
(in thousands, unaudited)
-------------------------------------------------
Reduction in
Workforce Other Costs Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at June 27, 1999 $ 345 $ 2 $ 347
Payment of non-salary benefits (a) (139) -- (139)
Reserve on employee loan (b) -- (2) (2)
------------ ------------ ------------
Balance at December 31, 1999 $ 206 $ -- $ 206
============ ============ ============
(a) cash; (b) non-cash
</TABLE>
During the first quarter of fiscal 2000, 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 recorded
charges of $6.9 million and $1.4 million in the first and second quarters of
fiscal 2000, respectively, in connection with these restructuring activities
that include: 1) severance and other termination benefits for the approximately
135 San Jose-based employees who were involuntarily terminated, 2) the
termination of certain facility leases, 3) the write-down of certain impaired
assets and 4) the pro-rata portion of the non-recurring retention bonuses
offered to involuntarily terminated employees to support the transition from
California to Alabama. The table below represents all activity from June 27,
1999 to December 31, 1999:
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<TABLE>
<CAPTION>
Restructuring Reserve
(in thousands, unaudited)
-------------------------------------------------------------------------------------
Lease Write-down
Terminations of Impaired Retention
Severance (a) (a) Assets (b) Bonuses (a) Total
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 27, 1999 $ -- $ -- $ -- $ -- $ --
Reserves provided 2,262 1,442 1,696 2,900 8,300
Amounts charged to reserve (1,084) (187) (1,584) (2,493) (5,348)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 $ 1,178 $ 1,255 $ 112 $ 407 $ 2,952
=========== ========== ========== ========== ==========
(a) cash; (b) non-cash
</TABLE>
The severance reserve includes severance, related medical benefits and other
termination benefits.
The balance of the restructuring accrual is included in accrued expenses on
the condensed consolidated balance sheets.
NOTE 3. Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, June 27,
1999 1999
------------ ----------
<S> <C> <C>
Raw materials $ 731 $ 3,453
Work in process 118 1,309
Finished goods 2,638 2,102
---------- ----------
$ 3,487 $ 6,864
========== ==========
</TABLE>
NOTE 4. Earnings Per Share
Basic net loss per share is computed by dividing net loss available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted net loss per share gives
effect to all dilutive potential common shares outstanding during a period. In
computing diluted net 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.
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<TABLE>
<CAPTION>
(in thousands, except per share amount)
----------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Dec. 31, 1999 Dec. 27, 1998 Dec. 31, 1999 Dec. 27, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss [numerator] $ (777) $ (3,228) $ (10,114) $ (2,506)
========== ========== ========== ==========
Shares calculation [denominator]:
Weighted shares outstanding - Basic 14,028 13,929 14,013 13,918
Effect of dilutive securities:
Potential common stock relating to stock options (a) -- -- -- --
---------- ---------- ---------- ----------
Weighted diluted shares outstanding - Diluted 14,028 13,929 14,013 13,918
========== ========== ========== ==========
Net loss per share - Basic $ (0.06) $ (0.23) $ (0.72) $ (0.18)
========== ========== ========== ==========
Net loss per share - Diluted $ (0.06) $ (0.23) $ (0.72) $ (0.18)
========== ========== ========== ==========
</TABLE>
(a) Options to purchase 3,453,964 shares of common stock at prices ranging
from $0.50 to $10.38 per share were outstanding at December 31, 1999 but were
not included in the computation of diluted net loss per share because inclusion
of such options would have been antidilutive.
NOTE 5. Recently issued accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). 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 over the estimated useful life of the software. SOP
98-1 was effective for the Company's current fiscal year. The adoption of this
standard did not have a material impact on the Company's results of operations,
financial position or cash flows.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, including, without limitation, statements relating to the Company's
revenues, expenses, margins, liquidity and capital needs. Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed elsewhere herein under the caption
"Factors Affecting Future Results."
RESULTS OF OPERATIONS
During the second quarter of fiscal 1999, the Company acquired TxPort, Inc.,
a manufacturer of high speed voice and data communications products, based in
Huntsville, Alabama for $10,375,000 in cash, paid out of the Company's working
capital. Accordingly, the results of operations of TxPort, Inc. commencing from
November 16, 1998, the date of acquisition, are consolidated in the Company's
operating results for fiscal 1999 and fiscal 2000.
The following table presents the percentages of net sales represented by
certain line items from the Condensed Consolidated Statements of Operations for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
December 31, December 27, December 31, December 27,
------------ ------------ ------------ ------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.1 49.4 54.2 49.0
-------- -------- -------- --------
Gross margin 49.9 50.6 45.8 51.0
Operating expenses:
Research and development 13.4 19.9 17.2 19.6
Selling, general and administrative 34.0 32.5 35.8 30.7
Restructuring and other non-recurring charges 8.7 -- 26.7 --
In-process research and development -- 19.5 -- 9.7
-------- -------- -------- --------
Total operating expenses 56.1 71.9 79.7 60.0
-------- -------- -------- --------
Loss from operations (6.2) (21.3) (33.9) (9.0)
Interest and other income, net 1.4 2.4 1.3 2.8
-------- -------- -------- --------
Loss before income taxes (4.8) (18.9) (32.6) (6.2)
Provision for income taxes -- -- -- 1.1
-------- -------- -------- --------
Net loss (4.8)% (18.9)% (32.6)% (7.3)%
======== ======== ======== ========
</TABLE>
Sales. Net sales for the three months ended December 31, 1999 decreased
approximately 5% to $16.2 million from $17.1 million in the comparable period
of the prior fiscal year. Net sales for the six months ended December 31, 1999
decreased 9% to $31.0 million from $34.2 million during the comparable period
of the prior year. These decreases from the corresponding periods in the prior
year are a result of the decline in sales to the Company's top fiscal 1999
customer, MCI Worldcom, that decreased 41% and 51% for the three-month and
six-month periods ended December 31, 1999, respectively. Offsetting these
declines, in part, was an increase in demand for the Company's enterprise
access products which was principally the result of the contribution of
products acquired in the acquisition of TxPort, Inc. in November 1998. Net
sales of $16.2 million for the three months ended December 31, 1999 represents
a 9% increase over the previous quarter's sales of $14.9 million due to
increased demand by the Company's carrier and carrier access customers. In
particular, net sales to wireless customers in the second quarter of fiscal
2000 increased 87% to $5.7 million as compared to $3.0 million for the first
quarter of this year.
Gross Margin. Gross margin decreased slightly to 49.9% of net sales for the
three months ended December 31, 1999 as compared to 50.6% for the three months
ended December 27, 1998 due to lower volume. For the six-month
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periods, gross margin decreased to 45.8% of net sales in fiscal 2000 as
compared to 51% in fiscal 1999. The gross margin decrease for the first six
months of fiscal 2000 is primarily due to under-utilization of the San
Jose-based manufacturing facility, a high level of non-warranty repairs that
carry a lower than average gross margin, and an increase in excess inventory
reserves associated with product rationalization decisions. In addition, the
Company was notified by one of its major customers during the fourth quarter of
fiscal 1999 of an intermittent problem involving one of its products that is
installed in the field. The Company has negotiated with its customer to share
in the expense associated with correcting this problem and has completely
provided for this expense during the fourth quarter of fiscal 1999 and the
first two quarters of fiscal 2000. Gross margin increased to 49.9% from 41.4%
in the previous sequential quarter due primarily to the completion of the
Company's plan to consolidate it's San Jose operations in Huntsville, Alabama,
and the absence of the high level of non-warranty repairs and excess inventory
reserves mentioned above that were incurred during the first quarter of this
year.
Research and Development. Research and development expenditures for the
three months ended December 31, 1999 decreased approximately 36% to $2.2
million from $3.4 million in the comparable period of the prior fiscal year and
decreased as a percentage of net sales from 19.9% to 13.4%. Research and
development expenditures for the six months ended December 31, 1999 decreased
approximately 20% to $5.3 million from $6.7 million in the comparable period of
the prior fiscal year and decreased as a percentage of net sales from 19.6% to
17.2%. The decrease in both periods in absolute dollars and as a percentage of
net sales is due to the decrease in personnel, personnel-related costs, and
related support costs from the completion of the Company's restructuring and
consolidation in Huntsville, Alabama. The Company believes that a significant
level of investment in product development is required to remain competitive
and such expenses will vary over time as a percentage of net sales.
Selling, general and administrative. Selling, general and administrative
expenses for the three months ended December 31, 1999 decreased 1% to $5.5
million from $5.6 million in the comparable period of the prior fiscal year and
increased slightly as a percentage of net sales from 32.5% to 34.0%. Selling,
general and administrative expenses for the six months ended December 31, 1999
increased 6% to $11.1 million from $10.5 million in the comparable period of
the prior fiscal year and increased as a percentage of net sales from 30.7% to
35.8%. The decrease in spending in the second quarter of fiscal 2000 from the
year ago quarter reflects reduced spending in San Jose as a result of the
completion of the restructuring and consolidation plan, offset by increased
expenses in Huntsville that are included from the TxPort, Inc. acquisition date
of November 1998. For the six-month periods, the increase in spending in fiscal
2000 over fiscal 1999 is due primarily to the acquisition of TxPort, Inc. The
Company expects selling, general and administrative expense to increase in the
future as a result of increased spending for marketing and support staffs
needed for continued revenue growth. The Company expects such expenses will
vary over time as a percentage of net sales.
Restructuring and other non-recurring charge. The Company announced and
began implementing during the first quarter of fiscal 2000, its plans to
consolidate its operations into its existing operations located in Huntsville,
Alabama, and to outsource its San Jose-based manufacturing activity. The
Company incurred pretax charges of $6.9 million and $1.4 million for
restructuring and other related non-recurring activities for the three-month
periods ended October 1, 1999 and December 31, 1999, respectively. See Note 2
in the Notes to Condensed Consolidated Financial Statements for further details
of the restructuring and other non-recurring charge and the restructuring
reserve activity during the current quarter.
Interest and Other Income. Net interest and other income was approximately
$222,000 for the three month period ended December 31, 1999 as compared to
$409,000 in the comparable period of the prior fiscal year. Net interest and
other income was approximately $393,000 for the six month period ended December
31, 1999 as compared to $968,000 in the comparable period of the prior fiscal
year. The decrease in both periods from the corresponding periods in the prior
year was a result of lower cash and cash equivalents, restricted cash and
short-term investment balances.
Provision for Income Taxes. Based on the estimated taxable loss for fiscal
2000, the Company did not record a tax benefit for income taxes for the three
or six months ended December 31, 1999. For fiscal 1999, the Company did not
record a tax benefit or provision for income taxes for the three months ended
December 27, 1998. The provision for income taxes for the quarter ended
September 27, 1998 reflected 35% of taxable income.
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LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1999, the Company's principal sources of liquidity included
$11.4 million of cash and cash equivalents, restricted cash, and short-term
investments.
During the six-month period ended December 31, 1999, the Company used
approximately $6.9 million for operating activities, compared to the $1.5
million used during the six-month period ended December 27, 1998. Net cash used
in operating activities was primarily due to the loss from operations of $10.1
million incurred through the six months ended December 31, 1999, and an
increase in accounts receivable as customers stretched out payments on their
open accounts, offset in part by the reserve established as part of the
restructuring activities and included in accrued expenses on the condensed
balance sheet. Net inventories decreased by $3.4 million as a result of
outsourcing the San Jose-based manufacturing. As part of the outsourcing
agreement, raw material and work in process inventories were transferred to our
outside subcontractor at the end of October 1999. The other receivable of $3.6
million represents the amount owed to the Company by the outside subcontractor
for the transferred inventory with payments to be received over a six-month
period ending in May 2000.
Cash provided by investing activities was approximately $7.5 million for the
six-month period ended December 31, 1999, as compared to approximately $800,000
used in investing activities for the six-month period ended December 27, 1998.
The increase in funds provided by investing activities in fiscal 2000 is
primarily a result of the maturity of short-term investments being reinvested
in cash and cash equivalents. In fiscal 1999, the Company used cash of $10.0
million for the purchase of TxPort, Inc., offset by the maturity of short-term
investments being reinvested in cash and cash equivalents.
Cash provided by financing activities was approximately $359,000 for the
six-month period ended December 31, 1999, as compared to approximately $535,000
for the six-month period ended December 27, 1998. The decrease in funds
provided by financing activities of $176,000 is primarily due to the timing of
the exercise of stock options by employees and the participation by fewer
employees in the employee stock participation plan as a result of reduced
headcount from the restructuring activities described in Note 2 of the Notes to
the Condensed Financial Statements.
While the Company believes that its existing cash and cash equivalents,
short-term investments and anticipated cash flows from operations will satisfy
the Company's near-term cash needs, the Company continues to investigate the
possibility of generating financial resources through credit agreements,
technology or manufacturing partnerships, equipment financing, and offerings of
debt and equity securities. To the extent that the Company needs additional
public or private financing, no assurance can be given that additional
financing will be available or that, if available, it will be available on
terms favorable to the Company or its stockholders. If additional capital is
needed and adequate funds are not available to satisfy the Company's capital
requirements, the Company would be required to significantly limit its
operations, which would have a material adverse effect on the Company's
business, financial condition and results of operation. In the event the
Company raises additional equity financing, further dilution to the Company's
stockholders will result.
YEAR 2000 READINESS
The Company has completed its evaluation of year 2000 ("Y2K") risk as it
existed in the following four areas: information technology infrastructure;
information systems used by the Company's suppliers; potential warranty and Y2K
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 Y2K compliance issues. As of February 10, 2000, the
Company's products, computing, and communications infrastructure systems have
operated without Y2K related problems and appear to be Y2K ready. The Company
is not aware that any of its major customers or third-party suppliers have
experienced significant Y2K related problems.
The Company believes that all its critical systems are Y2K compliant.
However, there is no guarantee that the Company has discovered all matters that
could lead to a possible break down. Specific factors contributing to this
uncertainty include failure to identify all systems, non-ready third parties
whose systems and operations impact the Company, and other similar
uncertainties. The Company's contingency plans are complete in those areas
where
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<PAGE> 12
Y2K non-compliance could have a material adverse effect on the Company's
business, financial condition and results of operations. However, the Company
does not have a contingency plan to address every potential Y2K non-compliance
situation.
During fiscal 1999, the Company purchased and implemented an enterprise
resource planning (ERP) solution that was determined to be Y2K compliant. All
software systems and tools that were identified as non-compliant were either
upgraded or replaced. For the non-compliant systems, the cost to bring the
systems to Y2K compliance was not material to the Company's operating results.
Costs. The total cost to address Y2K was not material to the Company's
financial condition. The Company used both internal and external resources to
reprogram, or replace, and test its software for Y2K modifications. The Company
did not separately track internal costs incurred in connection with it's
Y2K efforts, which principally included payroll and related costs for
Information Management employees that were expensed as incurred. These costs
were funded through operating 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-Q 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 regarding
the Company's consolidation of its operations and outsourcing its manufacturing
operations (the "Restructuring"); the goals, intended benefits and success of
the Restructuring, particularly the goal of reducing expenses; the expected
decrease in selling, general and administrative expenses; and the adequacy of
the Company's cash position for the near-term. These forward-looking statements
involve risks and uncertainties, and it is important to note that the Company's
actual results could differ materially from those in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are the factors detailed below as well as the other factors set
forth in Item 2 hereof, particularly those related to the Y2K issue, and the
Company's cash needs. All forward-looking statements and risk factors included
in this document are made as of the date hereof, based on information available
to the Company as of the date hereof, and the Company 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 Forms 10-Q
and 10-K.
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. The Company's revenues, operating
results, and financial condition, could be adversely affected by the Company's
ability to manage effectively after the transition to Huntsville, improve new
product development processes, and support its existing and future customers
from the outside manufacturing subcontractor . In particular, there is a risk
that the company may be unable to efficiently manage its operations due to the
departure of all members of its senior management team, except Graham Pattison,
President and CEO, and Steve Turner, Vice President, Huntsville Business Unit,
and the inherent complexities included in managing operations in both Alabama
and California. See "Dependence on Key Personnel". Moreover, the Company's
outsourcing of 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, financial
condition, and results of operations, particularly in light of the Company's
recent disappointing operating results.
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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 MCI Worldcom.
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, net sales to MCI Worldcom, Nortel, and Ericsson accounted for 27%,
17%, and 5% of the Company's net sales, respectively, and net sales to the
Company's top five customers accounted for 57% of the Company's net sales. In
fiscal 1998, net sales to MCI Worldcom, Nortel, and Ericsson accounted for 31%,
20%, and 12% of the Company's net sales, respectively, and net sales to the
Company's top five customers accounted for 64% of the Company's net sales. In
fiscal 1997, MCI Worldcom, Nortel and Ericsson accounted for 33%, 22%, and 9%
of the Company's net sales, respectively, and the Company's top five customers
accounted for 67% of the Company's net sales. Other than MCI Worldcom, Nortel,
and Ericsson, no customer accounted for more than 10% of the Company's net
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 net sales to such customers is
uncertain, but there can be no assurance that such acquisitions will not result
in a reduction in net 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 net 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
Company's customers will not have a similar adverse affect on the Company's net
sales and results of operations. The Company's customers are typically not
contractually obligated to purchase any quantity of products in any particular
period. Product sales to major customers have varied widely from 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 Outside Contractors. The Company has entered into arrangements
with a single outside contractor to outsource substantially all of the
Company's San Jose-based manufacturing operations, including its procurement,
assembly, and system integration operations. During 1999, products manufactured
by the outside contractor located in California generated a majority of the
Company's revenues. There can be no assurance that this contractor will be able
to meet the Company's future requirements for manufactured products, or that
the contractor will not experience quality problems in manufacturing the
Company's products. The inability of the Company's contractor 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 outside contractors could cause a delay in
the Company's ability to fulfill orders while the Company identifies a
replacement contractor. Because the establishment of new manufacturing
relationships involves numerous uncertainties, including those relating to
payment terms, cost of manufacturing, adequacy of manufacturing capacity,
quality control and timeliness of delivery, the Company is unable to predict
whether such relationships would be on terms that the Company regards as
satisfactory. Any significant disruption in the Company's relationships with
its manufacturing sources would 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 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 only existing executive
officers who have continued employment with the Company after the transition
are Graham Pattison, President and CEO, and Steve Turner, Vice President of the
Huntsville Business Unit. If the Company cannot fill these vacated positions
with either existing personnel from Huntsville or with new personnel, it may be
unable to effectively manage its operations and its business, financial
condition, and results of operations will
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<PAGE> 14
suffer. The loss of the services of one or more of the Company's remaining
executive officers or key personnel, or the inability to continue to attract
qualified personnel would delay product development cycles or otherwise would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Management of Growth. 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 may be 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 some delays in filling such
positions. 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 generally relies 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 and third party sub-contractors depend upon suppliers to manufacture,
assemble and deliver components in a timely and satisfactory manner. The
Company has historically obtained several components and licenses for 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
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 MCI Worldcom, Nortel, and
Ericsson have varied between quarters by as much as $4.0 million and orders
delayed by these customers had a significant negative impact on the Company's
third and fourth quarter results in fiscal 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.
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<PAGE> 15
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 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 ability of
the Company to achieve the intended benefits of the Restructuring, particularly
the ability to reduce expenses while maintaining effective operations, 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 and 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 of fiscal 1999, 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 is
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<PAGE> 16
in the process of retrofitting the affected equipment. The Company has
negotiated an agreement with the customer where by it will 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 net sales in fiscal 1999, 86% of
net sales in fiscal 1998 and 80% of net 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 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, and 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 acquisition of TxPort and
related Restructuring. There can be no assurance that the Company will realize
the desired benefits of this acquisition or Restructuring. 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 Y2K 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 Y2K 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 that could contain
defects associated with the Y2K 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 Y2K related failure. Any
Y2K 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
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<PAGE> 17
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 Y2K compliance issues, and the Company is aware 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 (i) a corruption of data contained in the
Company's internal information systems, or (ii) a 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 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.
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
move to Huntsville, Alabama, problems with the system, due to software or
configuration problems, 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 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 Systems and Nortel
Networks, into other equipment such as routers and switches. These include
direct wide area network (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
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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 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 Digital Subscriber
Lines (DSL), Integrated Services Digital Networks (ISDN), Frame Relay,
Asynchronous Transfer Mode (ATM), and Internet Protocols (IP). Furthermore, the
communications industry is characterized by the need to design products that
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
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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, financial condition and
results of operations.
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 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 may receive 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 a court having jurisdiction over a
dispute involving such patents would hold the Company's patents valid and
enforceable. 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
19
<PAGE> 20
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.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the Company's investment portfolio consisted of fixed
income securities of $4.1 million. 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 December 31, 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.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on November
16, 1999 (the "Annual Meeting"). The voting of holders of record of
14,000,326 shares of the Company's Common Stock outstanding at the
close of business on October 1, 1999 was solicited by proxy pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
(b) The following individuals were elected as Class III Directors of the
Company at the Annual Meeting:
<TABLE>
<S> <C> <C>
CLASS III DIRECTOR VOTES FOR VOTES WITHHOLDING AUTHORITY
Leigh S. Belden 10,136,825 123,319
Steven C. Taylor 10,095,533 164,611
</TABLE>
The following Directors' terms of office as Director continued after
the meeting: John Major, Graham G. Pattison, John A. McGuire, and
Howard Oringer.
(c) The amendment to the Company's Amended and Restated 1993 Stock Option
Plan to limit the maximum number of options that may be awarded to an
employee in any one fiscal year of the Company in order to ensure
compliance with the requirements of Section 162 (m) of the Internal
Revenue Code of 1986, as amended, was ratified. The stockholders' vote
was 9,877,914 shares FOR; 198,227 shares AGAINST; and 28,963 shares
ABSTAINED from voting.
(d) The appointment of PricewaterhouseCoopers LLP as the Company's
independent certified public accountants for fiscal year 2000 was
ratified. The stockholders' vote on such appointment was 10,214,165
shares FOR; 34,005 shares AGAINST; and 11,974 shares ABSTAINED from
voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index:
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
10.44 Employment Agreement between Registrant and Michael L. Reiff dated
October 25, 1999.
10.45 Termination of Lease agreement dated January 3, 2000 between the
Registrant and Baytech Associates
27.1 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1999.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERILINK CORPORATION
February 11, 2000 By: /s/ C. W. Smith
-------------------------------------------------
C. W. Smith,
Vice President and Corporate Controller and
Acting Chief Financial Officer (Duly Authorized
Officer and Principal Financial Officer)
22
<PAGE> 1
EXHIBIT 10.44
October 25, 1999
Mr. Mike Reiff
1 Abbott Run Road
Cumberland, RI 02864
Dear Mike:
I am pleased to extend to you an offer of employment for the position of
Executive Vice President and Chief Operating Officer ("COO") of Verilink
Corporation. The terms and conditions of your employment will be as follows:
1. Your employment will commence not later than November 29, 1999. You
will report to the CEO, and will be a member of Verilink's Strategy
Committee. At the time of your acceptance, Verilink will establish the
Office of the President, consisting of the Company's CEO and COO. The
Office of the President will be responsible for all business matters
relating to Verilink. The COO will be responsible for the day-to-day
operations of the Company, and may act for the CEO on all business
operations matters. The CEO will be responsible for all Verilink
matters, will focus on strategic issues, and will report to the
Company's Board of Directors.
2. Your base compensation will initially be $9,615.38 paid bi-weekly
(annualized salary of $250,000.00). Executive compensation is reviewed
annually after the end of Verilink's June 30 fiscal year end. Any
increase in salary is at the discretion of the CEO with approval of
Compensation Committee of the Board of Directors.
3. You will receive such benefits as are customarily granted to Verilink
employees. You will receive personal time off (PTO) in accordance with
Verilink's existing policy. PTO initially accrues at the rate of
1 1/2 days per month of employment, and may be used for vacation,
illness, personal business, etc. Verilink confirms that any conditions
covered by your existing health insurance will be covered by
Verilink's health insurance, commencing on the first day of your
employment, provided that you obtain a Certificate of Coverage
evidencing your existing coverage. Attachment 1 sets forth additional
benefits currently available to Verilink executive officers. Please
note that executive officers do not participate
<PAGE> 2
Mike Reiff
October 25, 1999
Page 2
in the profit sharing plan. Executive officer benefits are subject to
review from time-to-time by the Compensation Committee of the Board of
Directors.
4. Contingent upon your acceptance of this offer of employment, and
subject to the Board of Directors' approval, Verilink will grant you a
Non-Qualified Stock Option which gives you the right to purchase,
under terms stated in your Stock Option Agreement, 350,000 shares of
Verilink Common Stock at the fair market value of that stock as
determined by the Board of Directors on the first day of your
employment by Verilink. Vesting will occur over 4 years at the rate of
2.08% (1/48th) at the end of each month, assuming continuous
employment. On each anniversary of your employment, Verilink expects
to grant you an option to purchase an additional 89,500 shares of
Verilink Common Stock at the then existing fair market value of that
Stock, vesting after four years of continuous employment after each
such grant.
5. You will be eligible for participation in Verilink's Management
Incentive Plan for fiscal 2000 (July 1, 1999 - June 30, 2000) and
thereafter. The Plan will provide for a target potential payout to you
of 50% of your base salary upon achievement of your objectives under
the Plan, but in no event less than a guaranteed payment to you for
fiscal 2000 of $50,000, which payment shall be made at the end of
three months of employment by Verilink.
6. If you terminate your employment (i) on or before one (1) year from
the date of your employment, (ii) subsequent to Graham Pattison no
longer being employed by the company; or (iii) if at any time, your
employment is terminated by Verilink other than for cause, or you
terminate your employment for good reason, you will receive one (1)
year's base salary and applicable benefits, including COBRA costs, for
a period of one (1) year. If such termination occurs after a change in
control, you will also receive such additional benefits as are
provided in the Verilink Change of Control Severance Benefits
Agreement (Attachment 2). At Verilink's option, the foregoing
severance may be paid as salary continuation or as a lump sum. For
purposes of this paragraph, "cause" shall be defined as any act or
failure to act involving dishonesty towards Verilink; unethical
business practices; embezzlement or misappropriation of corporate
funds, property or proprietary information; unreasonable and
willful refusal to perform the duties required by Verilink; willful
breach of this Agreement or habitual neglect of duties and
responsibilities, other than due to illness or disability; aiding and
abetting a competitor; or participation in any fraud or any criminal
activities. "Good reason" shall be defined as set forth in section 6.4
(a) of Attachment 2.
<PAGE> 3
Mike Reiff
October 25, 1999
Page 3
7. Verilink understands that you intend to maintain your principal
residence in Rhode Island. Verilink shall reimburse you for your
commuting costs between Rhode Island and Alabama, including the tax
impact of such reimbursement. To the extent possible, you shall
combine such commuting with business trips to reduce the cost to
Verilink. For the earlier of a period of six months or until you
purchase a second residence in Alabama, Verilink shall provide you
with a furnished apartment at no cost to you. In lieu of reimbursement
for relocation costs, Verilink shall also provide you with a payment
of $50,000 for relocation costs, including moving expenses, real
estate taxes, insurance and similar costs. Verilink shall reimburse
you for income taxes on the portion of the cost of the apartment and
the relocation payment, including the amount of the reimbursement you
are unable to deduct for tax purposes.
8. Verilink shall provide you with a housing assistance loan of
$300,000.00 in accordance with Attachment 3. This Note will be secured
by a second deed of trust on the Alabama property you intend to
purchase. The Note will bear no interest. In the event you sell your
property in Alabama for less than you paid for that property, after
deducting costs of sale, the principal balance of the Note shall be
reduced by such amount. Verilink shall reimburse you for any tax
liability resulting from such forgiveness.
9. Verilink shall provide you with an additional loan of $300,000.00 in
accordance with Attachment 4. The outstanding principal balance of
that loan will be repaid by you upon the earlier of (i) your leaving
the Company for any reason, provided, however, that, for the purposes
of this paragraph (i) 50% of the loan will be forgiven for each full
year that you remain employed by Verilink; or (ii) within one (1) year
after the value of your exercisable Verilink stock options exceeds
$2,000,000 (fair market value of stock subject to exercisable options
less total exercise price of such options). Interest shall be
forgiven. Verilink shall reimburse you for any tax liability resulting
from forgiveness of the principal of this loan.
10. Subject to any severance benefits described in this letter, your
employment with Verilink is voluntarily entered into and is for no
specific period. As a result, you are free to resign at any time, for
any reason or for no reason. Similarly, Verilink is free to conclude
its at-will employment relationship with you at any time, with or
without cause.
11. In the event of any dispute or claim relating to or arising out of our
employment relationship, you and Verilink agree that all such disputes
shall be fully and finally
<PAGE> 4
Mike Reiff
October 25, 1999
Page 4
resolved by binding arbitration conducted by the American Arbitration
Association in Huntsville, Alabama. However, we agree that this
arbitration provision shall not apply to any dispute or claims
relating to or arising out of the misuse or misappropriation of the
Company's trade secrets or proprietary or confidential information, or
to enforcement of your rights under the Change of Control Severance
Benefits Agreement.
12. This offer of employment is contingent upon the following:
(a) A completed employment application.
(b) Full compliance with the Immigration Reform and Control Act
of 1986, which requires new employees to provide
documentation/identification to establish both identity and
work authorization within three (3) days of your employment.
(c) On your date of hire, you will be required to sign a Verilink
Confidentiality Agreement (Attachment 5) as part of your
total employment package.
(d) If you will be driving your personal automobile for company
business on a regular basis, you will be required to provide
proof of personal auto insurance.
If you have any questions regarding the nature of any of this
documentation, please contact the Human Resources Department.
13. This letter, together with all attachments hereto, set forth the terms
of your employment with Verilink and supersede any prior
representations or agreements, whether written or oral. This letter
may not be modified or amended except by an instrument in writing,
signed by Verilink and by you.
14. If you accept this offer, Verilink intends to publicly announce that
acceptance at its Annual Meeting of Stockholders on November 16, 1999.
We will be pleased to have you join the Verilink team, and we look forward to
your participation in our continued success.
<PAGE> 5
Mike Reiff
October 25, 1999
Page 5
This offer remains effective until November 9, 1999. Please acknowledge your
acceptance by signing this letter and returning it to me at your earliest
convenience.
Sincerely,
VERILINK CORPORATION
/s/ Graham G. Pattison
Graham G. Pattison
President and CEO
I accept the foregoing offer:
/s/ Mike Reiff
- ----------------------------
Mike Reiff
Date: 11/09/99
-----------------------
<PAGE> 1
EXHIBIT 10.45
TERMINATION OF LEASE
THIS TERMINATION OF LEASE ("Termination") is made and entered into
this 3rd day of January, 2000, by and between Baytech Associates, a California
general partnership (the "Baytech"), and Verilink Corporation, a Delaware
corporation (the "Verilink").
RECITALS:
A. Baytech and Verilink are parties to that certain Lease dated
February 27, 1986 as amended by First Amendment to Lease dated as of January
22, 1987, Second Amendment to Lease dated April 30, 1996, and Third Amendment
to Lease (the "Baytech Drive Lease"), for the real property located at 145
Baytech Drive, San Jose, California, including the building, additions,
enlargements and improvements located thereon (the "Baytech Drive Property").
B. Baytech and Verilink are parties to that certain Sublease dated
August ___, 1999 (the "Nortech Drive Lease"), for the real property located at
161 Nortech Drive, San Jose, California, including the building, additions,
enlargements and improvements located thereon (the "Nortech Drive Property").
The Baytech Drive Lease and the Nortech Drive Lease shall be referred to
together herein as the "Leases". The Baytech Drive Property and the Nortech
Drive Property shall be referred to together herein as the "Leased Property".
C. Verilink advanced certain funds to Baytech as evidenced by that
certain Promissory Note dated February 9, 1999, in the original principal
amount of $500,000.00 from Baytech in favor of Verilink (the "Promissory
Note").
D. Baytech and Verilink desire to terminate the Leases on the terms
and conditions set forth below.
AGREEMENT:
1. TERMINATION DATE. Subject to the payment by Verilink of the
Termination Fee, as hereinafter defined, the Leases shall be terminated and
cancelled on December 31, 1999 (the "Termination Date").
2. TERMINATION FEE. Verilink shall pay to Baytech the sum of One
Million One Hundred Eight-Nine Thousand One Hundred Eighty Dollars
($1,189,180.00) on the Termination Date. Concurrently with payment of the
Termination Fee, Verilink shall return the original Promissory Note to Baytech
marked paid.
3. TERMINATION OF VERILINK'S OBLIGATIONS. All of Verilink's
obligations under the Leases, including the obligations to pay base rent,
additional rent, and the costs of utilities, taxes and insurance shall continue
to the Termination Date. Except as otherwise specified in this Termination of
Lease, all of Verilink's obligations under the Leases shall terminate on the
Termination Date. On the Termination Date Verilink shall fully remove itself
and all of its personal property, including without limitation, all inventory,
equipment and supplies owned by Verilink, and Verilink shall on such date leave
the Nortech Drive Property broom clean and in good condition and repair
reasonable wear and tear excepted. The Baytech Drive Property shall be
surrendered in accordance with the terms and conditions of Paragraph 14 of the
Baytech
1
<PAGE> 2
Drive Lease. Verilink shall repair all damage caused by removal of any of its
property from both the Nortech Drive Property and the Baytech Drive Property
and Verilink shall remove all signs and repair all damage to original
condition. Nothing herein shall relieve Baytech or Verilink from any of their
respective obligations under the Leases to indemnify each other as to matters
arising prior to the Termination Date, and all such obligations shall survive
the termination of the Leases.
4. TERMINATION OF BAYTECH'S OBLIGATIONS. Except as provided in
Paragraph 3 above, all of Baytech's obligations under the Leases shall
terminate upon the Termination Date.
5. WARRANTIES AND REPRESENTATIONS.
(a) Baytech hereby warrants and represents to Verilink, and Verilink
hereby warrants and represents to Baytech, that it has the power and authority
to enter into and carry out the terms and provisions of this Agreement, and
that no consent or approval of any third party is required to accomplish the
same.
(b) Verilink hereby warrants and represents to Baytech that Verilink
has not previously granted any other party any right to occupy the Leased
Property or any portion thereof, by means of a lease or otherwise, and Verilink
has not assigned, transferred or otherwise encumbered Verilink's interest in
the Leases or any portion thereof.
(c) Baytech hereby warrants and represents to Verilink, and Verilink
hereby warrants and represents to Baytech, that it is the sole and lawful owner
of all right, title and interest, in and to all of the Released Matters (as
hereinafter defined) and that it has not heretofore voluntarily, by operation
of law or otherwise, assigned or transferred to any person whomsoever any
Released Matter or any part or portion thereof.
6. TERMINATION AND MUTUAL GENERAL RELEASE.
(a) As of the Termination Date, provided that Verilink has fully and
timely performed all of its obligations under this Agreement, Verilink and
Baytech shall be deemed to have no further rights or obligations under the
Lease, except as provided in Paragraph 3 above. As of the Effective Date and
except with respect to the obligations created by, acknowledged, or arising out
of this Agreement, Baytech, on the one hand, and Verilink, on the other hand,
do hereby for themselves and their respective legal successors and assigns,
release and absolutely and forever discharge each other and their respective
shareholders, officers, directors, partners, employees, agents, real estate
brokers, attorneys, legal successors and assigns, of and from any and all
claims, demands, damages, debts, liabilities, accounts, reckonings,
obligations, costs, expenses, liens, actions and causes of action of every kind
and nature whatsoever, whether now known or unknown, suspected or unsuspected
which either now has, owns or holds or at any time heretofore ever had, owned
or held or could, shall or may hereafter have, own or hold against the other
based upon or arising out of any matter, cause, fact, thing, act or omission
whatsoever occurring or existing at any time to and including the date hereof,
and relating in any way to the Leases, and/or the Leased Property (all of which
are hereinafter referred to as and included within the "Released Matters"). The
Released Matters shall not include any indemnification under the terms of the
Leases concerning any cause of action which is covered
2
<PAGE> 3
by such indemnification and which may have arisen prior to the Termination
Date, nor shall it release Verilink from its obligation to surrender possession
of the Leased Property in accordance with the terms of this Agreement and
otherwise as required by the terms of the Leases. It is the intention of the
parties in executing this Agreement and in paying and receiving the
consideration called for by this Agreement that this Agreement shall be
effective as a full and final accord and satisfaction and mutual general
release of and from all Released Matters.
(b) In furtherance of the intentions set forth herein, each of the
parties acknowledges that it is familiar with Section 1542 of the Civil Code of
the State of California which provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must
have materially affected his settlement with the debtor."
Each of the parties waives and relinquishes any right or benefit which it has
or may have under Section 1542 of the Civil Code of the State of California or
any similar provision of the statutory or nonstatutory law of any other
jurisdiction, to the full extent that it may lawfully waive all such rights and
benefits pertaining to the subject matter of this Agreement. In connection with
such waiver and relinquishment, each of the parties acknowledges that it is
aware that it or its attorneys or accountants may hereafter discover claims or
facts in addition to or different from those which it now knows or believes to
exist with respect to the subject matter of this Agreement or the other party
hereto, but that it is its intention hereby fully, finally and forever to
settle and release all of the Released Matters, whether known or unknown,
suspected or unsuspected, which now exist, may exist or heretofore have existed
between Baytech, on the one hand, and Verilink, on the other hand, relating in
any way to the Leases and/or the Leased Property, except as otherwise expressly
provided herein. In furtherance of this intention, the releases herein given
shall be and remain in effect as full and complete mutual releases
notwithstanding the discovery or existence of any such additional or different
claim or fact.
7. MISCELLANEOUS.
(a) BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of the parties and their heirs, personal representative, successors
and, assigns.
(b) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without regard to its
conflict of laws principles.
(c) ENTIRE AGREEMENT AND MODIFICATION. This Agreement contains the
entire agreement between the parties hereto and supersedes all prior and
contemporaneous representations and statements between the parties, whether
written or oral. Each party hereto warrants and represents to the other party
that this Agreement is the entire agreement between the parties hereto
concerning the subject matter hereof. This Agreement may not be modified except
in a writing signed by all parties.
3
<PAGE> 4
(d) FURTHER DOCUMENTS. Each party agrees to promptly execute,
acknowledge and deliver any and all further documents and instruments necessary
or property to effectuate the purpose of this Agreement.
(e) TIME OF ESSENCE. Time is of the essence in the performance of
all provisions of this Agreement.
(f) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, which when taken together shall constitute one and the same
instrument. The parties contemplate that they may be executing counterparts of
the Termination transmitted by facsimile and agree and intend that a signature
by facsimile machine shall bind the party so signing with the same effect as
though the signature were an original signature.
(g) ATTORNEYS FEES. If either party hereto fails to perform any of
its obligations under this Agreement or if a dispute arises between the parties
hereto concerning the meaning or interpretation of any provision of this
Agreement, then the defaulting party or the party not prevailing in such
dispute shall pay any and all costs and expenses incurred by the other party on
account of such default and/or in enforcing or establishing its rights
hereunder, including, without limitation, court costs and attorneys' fees and
disbursements. Any such attorneys' fees and other expenses incurred by either
party in enforcing a judgment in its favor under this Agreement shall be
recoverable separately from and in addition to any other amount included in
such judgment, and such attorneys' fees obligation is intended to be severable
from the other provisions of this Agreement and to survive and not be merged
into any such judgment.
IN WITNESS WHEREOF, the parties have executed this Termination as of
the day and year first written above.
<TABLE>
<S> <C>
Baytech Associates, a California general Verilink Corporation, a Delaware
partnership corporation
By: /s/ Leigh S. Belden By: /s/ C. W. Smith
------------------------------ -----------------------------------
Its: General Partner Its: VP and Corporate Controller
----------------------------------
</TABLE>
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q OF VERILINK CORPORATION FOR
THE SECOND FISCAL QUARTER ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000774937
<NAME> VERILINK CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-28-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,838
<SECURITIES> 3,579
<RECEIVABLES> 12,479
<ALLOWANCES> 204
<INVENTORY> 3,487
<CURRENT-ASSETS> 33,508
<PP&E> 15,567
<DEPRECIATION> 10,768
<TOTAL-ASSETS> 46,656
<CURRENT-LIABILITIES> 16,212
<BONDS> 0
0
0
<COMMON> 145
<OTHER-SE> 30,299
<TOTAL-LIABILITY-AND-EQUITY> 46,656
<SALES> 31,035
<TOTAL-REVENUES> 31,035
<CGS> 16,811
<TOTAL-COSTS> 16,811
<OTHER-EXPENSES> 24,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,114)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
