<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 March 31, 2000
[ ] 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
- --------------------------------------------------------------------------------
(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 April 28,
2000 was 14,667,270.
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INDEX
VERILINK CORPORATION
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for the 3
nine months ended March 31, 2000 and March 28, 1999
Condensed Consolidated Balance Sheets as of 4
March 31, 2000 and June 27, 1999
Condensed Consolidated Statements of Cash Flows for the 5
nine months ended March 31, 2000 and March 28, 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
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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 Nine Months Ended
----------------------- -----------------------
March 31, March 28, March 31, March 28,
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $17,822 $ 12,003 $ 48,857 $ 46,187
Cost of sales 8,569 7,392 25,380 24,153
------- -------- -------- --------
Gross profit 9,253 4,611 23,477 22,034
------- -------- -------- --------
Operating expenses:
Research and development 1,743 3,964 7,078 10,654
Selling, general and administrative 5,913 6,372 17,009 16,860
Restructuring and other non-recurring charges -- 3,200 8,300 3,200
In-process research and development -- -- -- 3,330
------- -------- -------- --------
Total operating expenses 7,656 13,536 32,387 34,044
------- -------- -------- --------
Income (loss) from operations 1,597 (8,925) (8,910) (12,010)
Interest and other income, net 203 275 596 1,242
------- -------- -------- --------
Income (loss) before provision for income taxes 1,800 (8,650) (8,314) (10,768)
Provision for income taxes -- -- -- 389
------- -------- -------- --------
Net income (loss) $ 1,800 $ (8,650) $ (8,314) $(11,157)
======= ======== ======== ========
Net income (loss) per share - Basic $ 0.13 $ (0.62) $ (0.59) $ (0.80)
======= ======== ======== ========
Net income (loss) per share - Diluted $ 0.11 $ (0.62) $ (0.59) $ (0.80)
======= ======== ======== ========
Shares used in per share computations - Basic 14,348 14,020 14,125 13,952
======= ======== ======== ========
Shares used in per share computations - Diluted 15,944 14,020 14,125 13,952
======= ======== ======== ========
</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>
March 31,
2000 June 27,
(Unaudited) 1999
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,237 $ 6,365
Restricted cash -- 515
Short-term investments 5,718 11,596
Accounts receivable, net of allowance for
doubtful accounts of $207 and $205, respectively 11,897 9,161
Notes receivable 1,425 3,561
Other receivable 2,135 --
Inventories 4,807 6,864
Other current assets 1,441 2,040
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Total current assets 36,660 40,102
Property and equipment, less accumulated depreciation
of $11,331 and $11,810, respectively 4,303 7,706
Notes receivable, long term 2,343 --
Goodwill and other intangibles, less accumulated
amortization of $1,415 and $623, respectively 4,920 5,337
Other assets 661 1,136
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Total assets $48,887 $54,281
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,280 $ 2,818
Accrued liabilities 10,556 11,324
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Total liabilities 13,836 14,142
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Stockholders' equity:
Common stock, $0.01 par value; 40,000,000 shares
authorized; 14,666,520 and 14,113,398 shares issued 151 141
Other stockholders' equity 34,900 39,998
------- -------
Total stockholders' equity 35,051 40,139
------- -------
Total liabilities and stockholders' equity $48,887 $54,281
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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VERILINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
March 31, March 28,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(8,314) $(11,157)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,983 2,270
In-process research and development -- 3,330
Deferred compensation related to stock options 91 122
Net book value of assets charged against
restructuring reserve 1,461 --
Accrued interest on notes receivable from stockholders (43) (11)
Non-cash restructuring related costs -- 264
Changes in assets and liabilities net of effects of
acquisition of TxPort, Inc.:
Accounts receivable (2,736) 2,622
Other receivable (2,135) --
Inventories 2,057 (232)
Other assets 867 (1,780)
Accounts payable 462 (785)
Accrued expenses (768) 2,162
Income tax payable -- (120)
------- --------
Net cash used in operating activities (6,075) (3,315)
------- --------
Cash flows from investing activities:
Purchases of property and equipment (249) (2,274)
Sale of short-term investments 5,878 19,794
Acquisition of TxPort, Inc. (375) (10,000)
------- --------
Net cash provided by investing activities 5,254 7,520
------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 3,093 801
Repurchase of common stock (78) (322)
Proceeds from repayment of notes receivable from
stockholders 167 --
------- --------
Net cash provided by financing activities 3,182 479
------- --------
Effect of exchange rate changes on cash (4) --
------- --------
Net increase in cash and cash equivalents 2,357 4,684
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 $ 9,237 $ 20,988
======= ========
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 March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
Restructuring Reserve
-------------------------------------
Reduction in
Workforce Other costs Total
--------- ----------- -----
<S> <C> <C> <C>
Balance, June 27, 1999 $ 345 $ 2 $ 347
Payment of non-salary benefits (a) (150) -- (150)
Reserve on employee loan (b) -- (2) (2)
-------- ------- --------
Balance, March 31, 2000 $ 195 $ -- $ 195
======== ======= ========
(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 March 31, 2000 (in thousands):
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<TABLE>
<CAPTION>
Restructuring Reserve
-------------------------------------------------------------------------
Lease Write-down
Severance Terminations of Impaired Retention
(a) (a) Assets (b) Bonuses (a) Totals
-------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, June 27, 1999 $ -- $ -- $ -- $ -- $ --
Reserves provided 2,262 1,442 1,696 2,900 8,300
Amounts charged to reserve (2,014) (1,442) (1,567) (2,704) (7,727)
Cash received on disposals (a) -- -- 72 -- 72
------- ------- ------- ------- -------
Balance, March 31, 2000 $ 248 $ -- $ 201 $ 196 $ 645
======= ======= ======= ======= =======
(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>
March 31, June 27,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials $ 343 $ 3,453
Work in process 114 1,309
Finished goods 4,350 2,102
----------- ----------
$ 4,807 $ 6,864
=========== ==========
</TABLE>
NOTE 4. Earnings Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted net income
(loss) per share gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted net income (loss) per share,
the average price of the Company's Common Stock for the period is used in
determining the number of shares assumed to be purchased from exercise of stock
options.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
-------------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
Mar. 31, 2000 Mar. 28, 1999 Mar. 31, 2000 Mar. 28, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) [numerator] $ 1,800 $ (8,650) $ (8,314) $(11,157)
======= ========== ========== ========
Shares calculation [denominator]:
Weighted shares outstanding - Basic 14,348 14,020 14,125 13,952
Effect of dilutive securities:
Potential common stock relating to
stock options (a) 1,596 -- -- --
------- ---------- ---------- --------
Weighted shares outstanding - Diluted 15,944 14,020 14,125 13,952
======= ========== ========== ========
Net loss per share - Basic $ 0.13 $ (0.62) $ (0.59) $ (0.80)
======= ========== ========== ========
Net loss per share - Diluted $ 0.11 $ (0.62) $ (0.59) $ (0.80)
======= ========== ========== ========
</TABLE>
(a) Options to purchase 3,218,598 shares of common stock at prices ranging
from $0.50 to $11.94 per share were outstanding at March 31, 2000 and
were included in the computation of diluted net income per share for
the quarter ended March 31, 2000. These options were not included in
the computation of diluted net
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loss per share for the nine months ended March 31, 2000 because
inclusion of such options would have been antidilutive.
NOTE 5. Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for fiscal years
beginning after June 15, 2000. SFAS 133 establishes new standards of accounting
and reporting for derivative instruments and hedging activities. SFAS 133
requires that all derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. The Company currently
does not hold derivative instruments or engage in hedging activities.
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.
("TxPort"), 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 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 Nine Months Ended
----------------------- -------------------------
March 31, March 28, March 31, March 28,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0 % 100.0 %
Cost of sales 48.1 61.6 51.9 52.3
------- ------ ------ ------
Gross margin 51.9 38.4 48.1 47.7
------- ------ ------ ------
Operating expenses:
Research and development 9.8 33.0 14.5 23.1
Selling, general and administrative 33.1 53.1 34.8 36.5
Restructuring and other non-recurring charges -- 26.7 17.0 6.9
In-process research and development -- -- -- 7.2
------- ------ ------ ------
Total operating expenses 42.9 112.8 66.3 73.7
------ ------ ------ ------
Income (loss) from operations 9.0 (74.4) (18.2) (26.0)
Interest and other income, net 1.1 2.3 1.2 2.7
------- ------ ------ ------
Income (loss) before provision for income taxes 10.1 (72.1) (17.0) (23.3)
Provision for income taxes -- -- -- 0.8
------- ------ ------ ------
Net income (loss) 10.1% (72.1)% (17.0)% (24.1)%
======= ====== ====== ======
</TABLE>
Sales. Net sales for the third quarter of fiscal 2000 increased
approximately 48% to $17.8 million from $12.0 million in the third quarter of
fiscal 1999. This increase is a result of higher demand by the Company's
wireless
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customers, and to a lesser extent, other major customers. Sales to the top five
customers in the third quarter of fiscal 2000 accounted for 65% of net sales
compared to 33% in the third quarter of fiscal 1999.
Net sales for the first nine months of fiscal 2000 increased 6% to $48.9
million from $46.2 million during the first nine months of fiscal 1999. This
increase is primarily due to higher demand by the Company's wireless customers
and an increase in enterprise access products sales as a result of the
acquisition of TxPort in November 1998, offset by a decrease in sales of carrier
and carrier access products to non-major customers. Sales to the Company's top
five customers in the first nine months of fiscal 2000 accounted for 62% of net
sales compared to 60% in the first nine months of fiscal 1999.
Gross Margin. Gross margin increased to 51.9% of net sales for the third
quarter of fiscal 2000 as compared to 38.4% for the third quarter of fiscal
1999. This increase is attributable in part to completion of the Company's
restructuring plan to consolidate its San Jose based operations in Huntsville
during the second quarter of fiscal 2000. However, the most significant reason
for this increase was the low margins in the third quarter of fiscal 1999 that
was impacted by the low sales volume, factory under-utilization, and channel and
product mix. The third quarter of fiscal 2000 is the first full quarter to
benefit from the restructuring and consolidation plan that reduced overall fixed
costs.
On a year-to-date basis, the gross margins remained relatively constant at
approximately 48.1% and 47.7% for the first nine months of fiscal 2000 and
fiscal 1999, respectively. However, the gross margins were impacted during
certain quarters during the first nine months of fiscal 2000 and fiscal 1999, by
under-utilization of the San Jose manufacturing facility (Q3 FY 1999 & Q1 FY
2000), a high level of non-warranty repairs that carried a lower than average
gross margin (Q1 FY 2000), additional warranty reserves associated with the
agreement the Company reached with a customer to share in the expense associated
with correcting an intermittent problem involving one of its products that was
installed in the field (Q1 FY 2000 & Q2 FY 2000), and the benefits of the
restructuring and consolidation plan (Q3 FY 2000).
Research and Development. For the third quarter of fiscal 2000, research and
development expenditures decreased approximately 56% to $1.7 million from $4.0
million in the third quarter of fiscal 1999 and decreased as a percentage of net
sales from 33.0% to 9.8%. Research and development expenditures for the first
nine months of fiscal 2000 decreased approximately 34% to $7.1 million from
$10.7 million in the comparable period of the prior fiscal year and decreased as
a percentage of net sales from 23.1% to 14.5%. 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 continues to add resources in Huntsville to increase
research and development activities, and believes that a significant level of
investment in product development is required to remain competitive and that
such expenses will vary over time as a percentage of net sales.
Selling, general and administrative. Selling, general and administrative
expenses for the third quarter of fiscal 2000 decreased 7% to $5.9 million from
$6.4 million in the third quarter of fiscal 1999 and decreased as a percentage
of net sales from 53.1% to 33.1%. The decrease in spending in the third quarter
of fiscal 2000 from the year ago quarter reflects reduced spending as a result
of the completion of the restructuring and consolidation plan.
Selling, general and administrative expenses for the first nine months of
fiscal 2000 increased about 1% to $17 million from $16.9 million in the first
nine months of fiscal 1999 and decreased as a percentage of net sales from 36.5%
to 34.8%. The increase in spending in fiscal 2000 over fiscal 1999 is due
primarily to the inclusion of TxPort from its acquisition date of November 1998,
offset by reduced spending as a result of the restructuring and consolidation
plan. 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 charges. In the third quarter of
fiscal 1999, the Company announced and began implementing a plan to streamline
operations and eliminate redundant functions involving manufacturing, selling,
marketing, and research and development activities that resulted in a pre-tax
restructuring charge of $3.2 million.
9
<PAGE> 10
During the first quarter of fiscal 2000, the Company announced and began
implementing its plans to consolidate its operations into existing operations
located in Huntsville, Alabama and to outsource its San Jose-based manufacturing
activity. The Company incurred pretax charges totaling $8.3 million for
restructuring and other related non-recurring activities during the first two
quarters of fiscal 2000. See Note 2 in the Notes to Condensed Consolidated
Financial Statements for further details of the restructuring and other
non-recurring charges and the restructuring reserve activity during the current
year.
In-process research and development. During the first nine months of fiscal
1999, the Company acquired TxPort. As a result of this acquisition, the Company
incurred a one-time charge of $3.3 million related to in-process research and
development for which technological feasibility was not achieved at the time of
the acquisition.
Interest and Other Income. Net interest and other income was $203,000 for
the third quarter of fiscal 2000 as compared to $275,000 in the third quarter of
fiscal 1999. Net interest and other income was $596,000 for the first nine
months of fiscal 2000 as compared to $1,242,000 in the first nine months of
fiscal 1999. 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 third
quarter or the first nine months. For fiscal 1999, the Company did not record a
tax benefit or provision for income taxes for the second or third quarter. The
provision for income taxes for the first quarter of fiscal 1999 reflected 35% of
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2000, the Company's principal sources of liquidity included
$15.0 million of cash and cash equivalents and short-term investments.
During the first nine months of fiscal 2000, the Company used approximately
$6.1 million for operating activities, compared to the $3.3 million used during
the first nine months of fiscal 1999. Net cash used in operating activities was
primarily due to the loss from operations of $8.3 million incurred through the
first nine months of fiscal 2000, and an increase in accounts receivable from
higher sales volumes, offset in part by the non-cash depreciation and
amortization and the net book value of assets charged against the restructuring
reserve. Net inventories decreased by $2.1 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 $2.1 million
represents the remaining amount owed to the Company by the outside subcontractor
for the transferred inventory with payments to be received over the six-month
period ending in May 2000.
Cash provided by investing activities was approximately $5.3 million for the
first nine months of fiscal 2000, compared to approximately $7.5 million used in
investing activities for the first nine months of fiscal 1999. 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, offset by the maturity of short-term investments being
reinvested in cash and cash equivalents.
Cash provided by financing activities was approximately $3.2 million for the
first nine months of fiscal 2000, compared to approximately $479,000 for the
first nine months of fiscal 1999. The increase in funds provided by financing
activities of $2.7 million is primarily due to the exercise of stock options by
employees.
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
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<PAGE> 11
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 May 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
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 its 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
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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.
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 that 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 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 fiscal 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. The loss of the services of one or more of the Company's
executive officers or key personnel, or the inability to continue to attract
qualified personnel would delay product development cycles or
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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 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.
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
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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 sales in prior periods have been adversely impacted by
merger activities by 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 and
consolidation plan, 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
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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 in the process of retrofitting the affected equipment. The Company has
negotiated an agreement with the customer whereby 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 product line, and the WANsuite(TM) family of integrated access
devices introduced during the third quarter of fiscal 2000. 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. Sales of
WANsuite(TM) products will begin during the last quarter of fiscal 2000. 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.
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. The Company is now engaged in
converting the system used by the former TxPort operations to the new Oracle
enterprise-wide database and information management system. The Company
anticipates the project completion date to be in the first quarter of fiscal
2001. However, there can be no assurance that the Company will not experience
significant disruption as a result of unexpected delays in the implementation
process, or that the Company will complete the project within the planned time
frame or budget. Due to the relative immaturity of the initial system
implementation at the time of 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,
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regulatory developments, and new entrants. The market for integrated access
devices such as the Company's Access System and WANsuite(TM) product lines is
subject to rapid change. The Company believes that the primary competitive
factors in this market are the development and rapid introduction of new product
features, price and performance, support for multiple types of communications
services, network management, reliability, and quality of customer support.
There can be no assurance that the Company's current products and future
products under development will be able to compete successfully with respect to
these or other factors. The Company's principal competition to date for its
current Access System 2000 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 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, thereby eroding the addressable market for
separate network termination products.
Many of the Company's current and potential competitors have substantially
greater technical, financial, manufacturing and marketing resources than the
Company. In addition, many of the Company's competitors have long-established
relationships with network service providers. There can be no assurance that the
Company will have the financial resources, technical expertise, manufacturing,
marketing, distribution and support capabilities to compete successfully in the
future.
Rapid Technological Change. The network access and telecommunications
equipment markets are characterized by rapidly changing technologies and
frequent new product introductions. The rapid development of new technologies
increases the risk that current or new competitors could develop products that
would reduce the competitiveness of the Company's products. The Company's
success will depend to a substantial degree upon its ability to respond to
changes in technology and customer requirements. This will require the timely
selection, development and marketing of new products and enhancements on a
cost-effective basis. The 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".
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Compliance with Regulations and Evolving Industry Standards. The market for
the Company's products is characterized by the need to meet a significant number
of communications regulations and standards, some of which are evolving as new
technologies are deployed. In the United States, the Company's products must
comply with various regulations defined by the Federal Communications Commission
and standards established by Underwriters Laboratories and Bell Communications
Research. For some public carrier services, installed equipment does not fully
comply with current industry standards, and this noncompliance must be addressed
in the design of the Company's products. Standards for new services such as
frame relay, performance monitoring services and ATM are still evolving. As
these standards evolve, the Company will be required to modify its products or
develop and support new versions of its products. The failure of the Company's
products to comply, or delays in compliance, with the various existing and
evolving industry standards could delay introduction of the Company's products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Government regulatory policies are likely to continue to have a major impact
on the pricing of existing as well as new public network services and therefore
are expected to affect demand for such services and the telecommunications
products that support such services. Tariff rates, whether determined by network
service providers or in response to regulatory directives, may affect the cost
effectiveness of deploying communication services. Such policies also affect
demand for telecommunications equipment, including the Company's products.
Risks Associated With Potential Acquisitions. An important element of the
Company's strategy is to review acquisition prospects that would compliment its
existing product offerings, augment its market coverage, enhance its
technological capabilities or offer growth opportunities. Future acquisitions by
the Company could result in potentially dilutive issuance of equity securities,
use of cash and/or the incurring of debt and the assumption of contingent
liabilities, any of which could have a material adverse effect on the Company's
business and operating results and/or the price of the Company's common stock.
Acquisitions entail numerous risks, including difficulties in the assimilation
of acquired operations, technologies and products, diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has limited or no prior experience and potential loss of key employees
of acquired organizations. The Company's management has limited prior experience
in assimilating acquired organizations. No assurance can be given as to the
ability of the Company to successfully integrate any businesses, products,
technologies or personnel that might be acquired in the future, and the failure
of the Company to do so could have a material adverse effect on the Company's
business, 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
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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 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, the Company's investment portfolio consisted of fixed
income securities of $5.7 million. These securities 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 March 31, 2000, 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index:
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
10.46 Employment Agreement between Registrant and Todd
Westbrook dated February 1, 2000
10.47 Employment Agreement between Registrant and
Edward A. Etzel dated March 27, 2000
27.1 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended March 31,
2000.
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
May 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)
19
<PAGE> 1
EXHIBIT 10.46
February 1, 2000
Mr. Todd Westbrook
605 Sunburst Circle
Brownsboro, AL 35741
Dear Todd:
We are pleased to extend to you an offer of employment for the position of Vice
President of Operations. Your base compensation will be $6,153.85 paid biweekly
(annualized salary of $160,000). 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 the Compensation Committee of the
Board of Directors. In this position you will report directly to me.
Contingent upon your acceptance of this offer of employment, and
subject to the Board of Directors' approval, Verilink will grant to you
a Non-Qualified Stock Option which gives you the right to purchase,
under terms stated in your Stock Option Agreement, 100,000 shares of
Verilink Common Stock at fair market value as determined by the Board
of Directors on the date of the grant. Vesting occurs over 4 years at
the rate of 25% at the end of each year assuming continuous employment.
You will be eligible to participate in the Verilink Management Incentive
Compensation program at a rate of 35% of your base pay. Your participation will
be prorated for the remainder of this fiscal year.
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. The attached schedule of Officers' Benefits sets forth additional
benefits currently available to Verilink executive officers. These benefits are
<PAGE> 2
Todd Westbrook
February 1, 2000
Page 2
subject to review from time-to-time by the Compensation Committee of the Board
of Directors.
Your employment with Verilink Corporation 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.
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 resolved by binding arbitration conducted by the American
Arbitration Association. 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.
This offer of employment is contingent upon:
A completed employment application.
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.
On your date of hire you will be required to sign a Verilink
Confidentiality Agreement as a part of your total employment package.
If you will be driving your personal automobile for company business on
regular basis, you will be required to provide proof of personal auto
insurance policy.
If you have any questions regarding the nature of this documentation, please
contact the Human Resources Department.
This letter, along with any written proprietary rights agreements that you enter
into with Verilink, 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.
<PAGE> 3
Todd Westbrook
February 1, 2000
Page 3
Todd, we are pleased to have you join the Verilink team, and we look forward to
your participation in our continued success.
Sincerely,
/s/ Mike Reiff
Mike Reiff
Chief Operating Officer
I accept the foregoing offer:
/s/ Todd Westbrook 02/02/00
- ----------------------------- ------------
Name Date
02/22/00
- -----------------------------
Expected Start Date
<PAGE> 1
EXHIBIT 10.47
March 27, 2000
Mr. Ed Etzel
11406 St. Andrews Place
Mukilteo, WA 98275
Dear Ed:
We are pleased to extend to you an offer of employment for the position of Sr.
Vice President of Worldwide Sales. Your employment with Verilink Corporation
will commence no later than April 10, 2000. The final page of this offer letter
provides a place for you to sign accepting our offer of employment. Please
indicate your actual planned start date in the space provided.
Your base compensation will be $8,653.85 paid biweekly (annualized salary of
$225,000). Your variable compensation will be an additional $175,000 per year.
This portion of your compensation will be paid quarterly based on attainment of
corporate revenue objectives identified prior to the beginning of each fiscal
year. These quarterly payments will be based on the percent of targeted revenue
that is achieved as of the close of each quarter. Once you reach the established
revenue target for the year, your variable compensation will be paid at 2 times
your normal percentage. Your normal percentage will be calculated by dividing
the annual variable compensation ($175,000) by the established revenue goal for
the year (to be determined for FY '01). Your variable compensation for the
quarter ending June 30, 2000, will be paid as though you reached 100% of the
target for the quarter prorated for the period of the year you are employed by
Verilink. 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 the Compensation Committee of the Board of
Directors. In this position you will report directly to me.
Contingent upon your acceptance of this offer of employment, and
subject to the Board of Directors' approval, Verilink will grant to you
a Non-Qualified Stock Option which gives you the right to purchase,
under terms stated in your Stock Option Agreement, 250,000 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 occurs over 4 years with 25% of the
shares vesting upon completion of one full year of employment, and the
remaining shares vesting at the rate of 2.08% (1/48th) at the end of
each month thereafter, assuming continuous employment.
<PAGE> 2
Mr. Edward Etzel
March 27, 2000
Page 2
For the twelve month period beginning July 1, 2000, Verilink expects to
grant you an additional 25,000 shares for each quarterly revenue
objective that is met. Attainment of these objectives will be evaluated
at the end of each month, and options earned will be granted as of the
beginning of the month following the month in which the objective is
attained. The strike price for these options will be as of the date
they are granted.
On each anniversary of your employment, Verilink expects to grant you
an option to purchase an additional number of shares equal to
approximately 25% of the total number of shares granted to you through
June 30, 2001.
Verilink understands that you intend to maintain your current principal
residence. Verilink shall reimburse you for your commuting costs between
Washington 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. Until such time as you
have an established residence in Alabama, your location for business and tax
purposes shall be your home in Washington.
Verilink shall provide you with a housing assistance loan of $300,000.00 in
accordance with the attached Promissory Note. 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. Repayment of this
Promissory Note is also triggered if within any one year period 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).
Verilink shall reimburse you for any tax liability resulting from such
forgiveness.
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 your health insurance coverage will commence on the first day of your
employment. Please provide the Certificate of Coverage from your current
provider evidencing your existing coverage. The attached schedule of Officers'
Benefits sets forth additional benefits currently available to
<PAGE> 3
Mr. Edward Etzel
March 27, 2000
Page 3
Verilink executive officers. Please note that executive officers do not
participate 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. In addition, the Company will provide a corporate golf membership for
use at your discretion.
Your employment with Verilink Corporation 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.
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 resolved by binding arbitration conducted by the American
Arbitration Association. 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.
This offer of employment is contingent upon:
A completed employment application.
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.
On your date of hire you will be required to sign a Verilink
Confidentiality Agreement and Change of Control Agreement as a part of
your total employment package.
If you will be driving your personal automobile for company business on
regular basis, you will be required to provide proof of personal auto
insurance policy.
If you have any questions regarding the nature of this documentation, please
contact the Human Resources Department.
This letter, along with any written proprietary rights agreements that you enter
into with Verilink, 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.
<PAGE> 4
Mr. Edward Etzel
March 27, 2000
Page 4
Ed, we are pleased to have you join the Verilink team, and we look forward to
your participation in our continued success.
Sincerely,
/s/ Graham Pattison
Graham Pattison
President and Chief Executive Officer
I accept the foregoing offer:
/s/ Edward Etzel 03/31/00
- ------------------------------------ ------------
Name Date
03/31/00
- ------------------------------------
Expected Start Date
<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 THIRD FISCAL QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-28-1999
<PERIOD-END> MAR-31-2000
<CASH> 9,237
<SECURITIES> 5,718
<RECEIVABLES> 12,104
<ALLOWANCES> 207
<INVENTORY> 4,807
<CURRENT-ASSETS> 36,660
<PP&E> 15,634
<DEPRECIATION> 11,331
<TOTAL-ASSETS> 48,887
<CURRENT-LIABILITIES> 13,836
<BONDS> 0
0
0
<COMMON> 151
<OTHER-SE> 34,900
<TOTAL-LIABILITY-AND-EQUITY> 48,887
<SALES> 48,857
<TOTAL-REVENUES> 48,857
<CGS> 25,380
<TOTAL-COSTS> 25,380
<OTHER-EXPENSES> 32,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,314)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,314)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
