-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IOv+2zGrRGIf6xPAFtI1egwnvC5wMFeacyHFLeFdl2PteMLADN2vLDYmfWW/wZZC Me9QDPTAJkblAFdu8x7mtA== 0000891618-98-002286.txt : 19980513 0000891618-98-002286.hdr.sgml : 19980513 ACCESSION NUMBER: 0000891618-98-002286 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980512 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERILINK CORP CENTRAL INDEX KEY: 0000774937 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942857548 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28562 FILM NUMBER: 98616528 BUSINESS ADDRESS: STREET 1: 145 BAYTECH DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089451199 MAIL ADDRESS: STREET 1: 145 BAYTECH DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 FORM 10-Q FOR PERIOD ENDED 3/28/98 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 29, 1998 [ ] 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 VERILINK CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 94-2857548 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 145 BAYTECH DRIVE, SAN JOSE, CALIFORNIA 95134 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 408-945-1199 - -------------------------------------------------------------------------------- (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 May 6, 1998 was 13,820,137. 1 2 INDEX VERILINK CORPORATION FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO. - ------- --------------------- -------- Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three and nine month periods ended March 29, 1998 and March 30, 1997 3 Condensed Consolidated Balance Sheets as of March 29, 1998 and June 29, 1997 4 Condensed Consolidated Statements of Cash Flows for the nine month periods ended March 29, 1998 and March 30, 1997 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION - -------- ----------------- Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VERILINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) (Unaudited)
Three months ended Nine months ended March 29, March 30, March 29, March 30, -------- -------- -------- -------- 1998 1997 1998 1997 -------- -------- -------- -------- Net sales $ 14,081 $ 13,760 $ 33,612 $ 44,722 Cost of sales 7,361 6,943 17,249 21,856 -------- -------- -------- -------- Gross profit 6,720 6,817 16,363 22,866 -------- -------- -------- -------- Operating expenses: Research and development 3,639 2,304 9,201 6,782 Selling, general and administrative 4,034 3,638 11,590 11,004 -------- -------- -------- -------- Total operating expenses 7,673 5,942 20,791 17,786 -------- -------- -------- -------- Income (loss) from operations (953) 875 (4,428) 5,080 Interest and other income, net 483 543 1,565 1,518 -------- -------- -------- -------- Income (loss) before income taxes (470) 1,418 (2,863) 6,598 Provision for (benefit from) income taxes -- 553 (889) 2,574 -------- -------- -------- -------- Net income (loss) $ (470) $ 865 $ (1,974) $ 4,024 ======== ======== ======== ======== Net income (loss) per share - Basic $ (0.03) $ 0.06 $ (0.14) $ 0.30 ======== ======== ======== ======== Shares used in per share computations - Basic 13,798 13,420 13,706 13,246 ======== ======== ======== ======== Net income (loss) per share - Diluted $ (0.03) $ 0.06 $ (0.14) $ 0.28 ======== ======== ======== ======== Shares used in per share computations - Diluted 13,798 14,312 13,706 14,341 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 VERILINK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
March 29, June 29, ----------- -------- 1998 1997 ----------- -------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $21,663 $36,596 Short-term investments 15,323 2,454 Accounts receivable, net 8,174 8,462 Inventories 5,712 4,453 Deferred tax assets 1,840 957 Other current assets 196 215 ------- ------- Total current assets 52,908 53,137 Property and equipment, net 6,482 6,607 Non-current deferred tax assets 616 616 Other assets 965 327 ------- ------- Total assets $60,971 $60,687 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,584 $ 1,258 Accrued expenses 5,846 5,080 Income taxes payable 945 582 ------- ------- Total current liabilities 8,375 6,920 Stockholders' equity 52,596 53,767 ------- ------- Total liabilities and stockholders' equity $60,971 $60,687 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 VERILINK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended March 29, March 30, ----------- --------- 1998 1997 ----------- --------- (unaudited) Cash flows from operating activities: Net income (loss) $ (1,974) $ 4,024 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,705 881 Deferred income taxes (883) -- Deferred compensation related to stock options 121 262 Accrued interest on notes receivable from stockholders (166) -- Changes in assets and liabilities: Accounts receivable 288 1,027 Inventories (1,259) (1,561) Other assets (619) 384 Accounts payable 326 (554) Accrued expenses 766 316 Income taxes payable 363 407 -------- -------- Net cash provided by (used in) operating activities (1,332) 5,186 -------- -------- Cash flows from investing activities: Purchase of property and equipment (1,580) (5,105) Purchase of short-term investments (22,753) (5,485) Maturities of short-term investments 9,884 -- -------- -------- Net cash used in investing activities (14,449) (10,590) -------- -------- Cash flows from financing activities: Net proceeds from issuance of Common Stock 848 592 Repayment of notes receivable -- 426 -------- -------- Net cash provided by financing activities 848 1,018 -------- -------- Net decrease in cash and cash equivalents (14,933) (4,386) Cash and cash equivalents at beginning of period 36,596 40,542 -------- -------- Cash and cash equivalents at end of period $ 21,663 $ 36,156 ======== ======== Supplemental disclosures: Cash paid (refund) for income taxes $ (363) $ 2,167 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1. Interim Financial Statements 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 fiscal 1998 interim periods are not necessarily indicative of results which may be achieved for the entire fiscal year ending June 28, 1998. 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 29, 1997 as filed with the Securities and Exchange Commission. NOTE 2. Inventories (in thousands)
March 29, June 29, ---------- -------- 1998 1997 ---------- ------- (unaudited) Raw materials $2,769 $2,615 Work-in-process 1,135 883 Finished goods 1,808 955 ------ ------ $5,712 $4,453 ====== ======
6 7 NOTE 3. Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) during the second quarter of 1998. The statement simplifies the standards for computing earnings per share (EPS) previously defined in Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB 15) and makes them comparable to international EPS standards. FAS 128 requires presentation of both Basic EPS and Diluted EPS on the face of the income statement. Basic EPS, which replaces primary EPS, is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Unlike the computation of primary EPS, Basic EPS excludes the dilutive effect of stock options. Diluted EPS replaces fully diluted EPS and gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the average price for the period is used in determining the number of shares assumed to be purchased from exercise of stock options rather than the higher of the average or ending price as used in the computation of fully diluted EPS. Earnings per share for all prior periods have been restated to conform to the provisions of FAS 128. Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below:
(in thousands, except per share amounts) --------------------------------------------------- Three Months Ended Nine Months Ended March 29, March 30, March 29, March 30, ---------------------- ----------------------- 1998 1997 1998 1997 ------- ------- -------- ------- Net income (loss) [numerator] $ (470) $ 865 $ (1,974) $ 4,024 ======= ======= ======== ======= Shares Calculation [denominator]: Weighted shares outstanding-Basic 13,798 13,420 13,706 13,246 Effect of Dilutive Securities: Potential common stock relating to stock options(a) -- 892 -- 1,095 ------- ------- -------- ------- Weighted shares outstanding-Diluted 13,798 14,312 13,706 14,341 ======= ======= ======== ======= Net income (loss) per share-Basic $ (0.03) $ 0.06 $ (0.14) $ 0.30 ======= ======= ======== ======= Net income (loss) per share-Diluted $ (0.03) $ 0.06 $ (0.14) $ 0.28 ======= ======= ======== =======
(a) Potential common stock relating to stock options has been excluded for the three and nine month periods ended March 29, 1998 since its inclusion would be antidilutive. Options to purchase 1,811,860 shares of common stock at prices ranging from $0.50 to $31.00 per share were outstanding at March 29, 1998 but were not included in the computation of diluted EPS because inclusion of such options would have been antidilutive. 7 8 NOTE 4. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 130 ("FAS 130"), "Reporting Comprehensive Income". FAS 130 establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from nonowner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The disclosure prescribed by FAS 130 must be made beginning in fiscal 1999. In June 1997, the FASB issued Statement No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has not yet determined the impact, if any, of adopting this new standard. The disclosures prescribed by FAS 131 are effective for fiscal 1999. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 ("SOP 97-2"). "Software Revenue Recognition". The Company has not yet determined the impact, if any, of SOP 97-2 on the financial statements of the Company. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-looking Statements. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions, beliefs or strategies regarding the future. Such forward-looking statements include, but are not limited to, the Company's anticipated expense levels for research and development, and selling, general and administrative operations; the amount of and specific uses of anticipated capital expenditures; expectations regarding inventory balances, liquidity and adequacy of cash resources; and adequacy of current facilities under the sub-headings "Results of Operations" and "Liquidity and Capital Resources." Actual results could differ materially from those projected in any forward-looking statements for the reasons detailed below and in other sections of this Report on Form 10-Q. All forward-looking statements included in this Form 10-Q are based on information available to the Company on the date of this Report on Form 10-Q, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should also consult the risk factors listed from time to time in the Company's Reports on Form 10-K and Annual Report to Stockholders. RESULTS OF OPERATIONS Overview Verilink Corporation develops, manufactures and markets access products for telecommunications network service providers and corporate end users. Verilink designed the Access System 2000 with modular hardware and the Company's software-based Advanced Programmable Architecture(TM) to enable its customers to access increased network capacity and to adopt new communications services in a cost-effective manner. The Access System 2000 provides integrated access to narrowband transmission facilities including fractional or full T1/E1, and to multiple T1/E1 facilities, up to broadband (T3) transmission speeds. Verilink sells its products through a direct sales force and non-exclusive resellers. Verilink's integrated network access products are used by network service providers such as interexchange and local exchange carriers, and providers of Internet, personal communications and cellular services. The Company also sells single purpose network access devices for selected applications. The Company's largest customers include MCI Communications Corp., CompuServe Corp., Northern Telecom, Inc. and QUALCOMM Incorporated. The Company is currently in the process of evaluating its information technology infrastructure for year 2000 compliance. The Company believes that its current product offerings are year 2000 compliant. See "Factors Affecting Future Results." The Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, the Company's results of operations may fluctuate from period to period in the future. 9 10 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.
Three Months Ended Nine Months Ended ---------------------- ----------------------- March 29, March 30, March 29, March 30, --------- --------- --------- --------- 1998 1997 1998 1997 --------- --------- --------- --------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 52.3 50.5 51.3 48.9 ----- ----- ----- ----- Gross margin 47.7 49.5 48.7 51.1 ===== ===== ===== ===== Operating expenses: Research and development 25.8 16.7 27.4 15.2 Selling, general and administrative 28.6 26.4 34.5 24.6 ----- ----- ----- ----- Total operating expenses 54.4 43.1 61.9 39.8 ===== ===== ===== ===== Income (loss) from operations (6.7) 6.4 (13.2) 11.3 Interest and other income, net 3.4 3.9 4.7 3.4 ----- ----- ----- ----- Income (loss) before income taxes (3.3) 10.3 (8.5) 14.7 Provision for (benefit from) income taxes 0.0 4.0 (2.6) 5.7 ----- ----- ----- ----- Net income (loss) (3.3%) 6.3% (5.9%) 9.0% ===== ===== ===== =====
Net Sales. Net sales for the three months ended March 29, 1998 were $14.1 million an increase of 47.9% over net sales for the preceding quarter of $9.5 million and an increase of 2.3% over net sales of $13.8 million for the fiscal quarter ended March 30, 1997. Net sales for the first nine months of fiscal 1998 declined 24.8% to $33.6 million from $44.7 million during the corresponding period of 1997. The increase over the preceding quarter resulted primarily from improved product demand by wireless and system integrator customers, partially offset by a decline in sales to the Company's resellers. The marginal increase in net sales over the year earlier quarter resulted primarily from a shift in channel shipments away from reseller and carrier customers to wireless and system integrator customers. The decrease in net sales for the first nine months of fiscal 1998 compared to the corresponding period of the prior fiscal year is due to reduced shipments to resellers and carrier customers offset in part by improved wireless and system integrator shipments. Sales to the Company's four largest customers as a percentage of total sales were approximately 60%, 49% and 57% during the quarter ended March 29, 1998, the preceding quarter and the year earlier quarter, respectively. Sales to the Company's four largest customers for the nine months ended March 29, 1998 represented 53% of total sales compared to 61% for the corresponding period of fiscal 1997. Gross Margin. Gross margin decreased to 47.7% of total sales in the three months ended March 29, 1998 from 48.7% of total sales during the preceding quarter and from 49.5% of total sales during the fiscal quarter ended March 30, 1997. For the first nine months of fiscal 1998, gross margin was 48.7% compared to 51.1% for the corresponding period of fiscal 1997. The decrease in gross margin from the previous quarter was principally due to changes in product mix and lower absorption of overhead into inventory, partially offset by favorable manufacturing variances. The decrease in gross margin from the year earlier quarter and from the first nine months of fiscal 1997 is due principally to changes in product mix and increased manufacturing overhead costs, partially offset by reduced direct material costs. 10 11 Research and Development. Research and development (R&D) expenditures increased $0.9 million to $3.6 million (25.8% of net sales) in the quarter ended March 29, 1998 from $2.7 million (28.4% of net sales ) during the preceding quarter, and increased $1.3 million from $2.3 million (16.7% of net sales) during the quarter ended March 30, 1997. For the first nine months of fiscal 1998 R&D expenditures were $9.2 million (27.4% of net sales) compared to $6.8 million (15.2 % of net sales) during the same period of fiscal 1997. The increase in R&D expenditures from the previous quarter and from the quarter ended March 30, 1997 principally reflects higher salaries and benefits, increased outside contract development work and increased engineering material expenses. In comparing the nine month period ended March 29, 1998 to the corresponding period ended March 30, 1997, the increase in absolute dollar R&D expenditures reflects increased investment in new product development, while the increase in R&D expenditures as a percentage of net sales reflects increased investment in new product development at lower sales levels. The Company believes that a significant level of investment in product development is required to remain competitive and, accordingly, anticipates that research and development expense will continue to increase in amount during the remainder of fiscal 1998 and will vary over time as a percentage of sales. Selling, general and administrative. Selling, general and administrative (SG&A) expense increased by $0.2 million to $4.0 million (28.6 % of net sales) during the fiscal quarter ended March 29, 1998 from $3.8 million (40.4% of net sales) during the preceding quarter, and increased $0.4 million from $3.6 million (26.4% of net sales) during the year earlier quarter. For the nine month period ended March 29, 1998 SG&A expenditures were $11.6 million (34.5% of net sales) compared to $11.0 million (24.6% of net sales) during the corresponding period of fiscal 1997. The increase in SG&A from the preceding quarter and the year earlier quarter was due principally to increased marketing activities and personnel costs necessary to support the Company's business infrastructure. The decrease in SG&A expenditures as a percentage of net sales between the fiscal quarter ended March 29, 1998 and the preceding quarter is due primarily to increased net sales. The increase in SG&A expenditures as a percentage of net sales between the fiscal quarter ended March 29, 1998 and the corresponding period of the prior fiscal year is due primarily to an increase in absolute dollar spending between periods. In comparing the nine month period ended March 29, 1998 to the corresponding period of fiscal 1997, the increase in absolute dollar SG&A is due principally to expenses associated with an increased sales force and personnel costs necessary to support the Company's business infrastructure, while the increase in SG&A expenditure as a percentage of net sales reflect increased personnel costs necessary to support the Company's business infrastructure at lower sales levels. The Company expects SG&A expense to increase in the future due to expenses associated with an increased sales force and related increases in marketing and support staff as well as increased administrative expenses related to legal and information technology costs necessary to support expanded operations. The Company expects such expenses will vary over time as a percentage of sales. Interest and Other Income, Net. Interest and other income, net was relatively unchanged from the preceding quarter and decreased by approximately $0.1 million from the corresponding quarter of fiscal 1997. Interest and other income, net was relatively unchanged from the first nine months of fiscal 1998 compared to the corresponding period of fiscal 1997. Provision for/Benefit from Income Taxes. The Company elected not to recorded a tax benefit or provision for income taxes for the quarter ended March 29, 1998. The Company has recorded a net tax benefit of 31% for the nine month period ended March 29, 1998 reflecting available net operating loss and credit carry-back capacity in accordance with FAS 109. The provision for income taxes for the three month and nine month periods ended March 30, 1997 each represented an estimated effective tax rate of 39%. LIQUIDITY AND CAPITAL RESOURCES At March 29, 1998, the Company's principal sources of liquidity included $37.0 million of cash and cash equivalents, and short-term investments. During the nine-month period ended March 29, 1998, the Company used $1.3 million for operating activities, down from $5.2 million generated from operations for the nine-month period ended March 30, 1997. Accounts receivable 11 12 was $.3 million lower at March 29, 1998 when compared to June 29, 1997, reflecting improved linearity of shipments between periods. Inventory increased $1.3 million reflecting product staging requirements necessary to meet anticipated future product shipment requirements. Accounts payable increased $.4 million, reflecting increased procurement activities. Cash used for investing activities was $14.4 million for the nine-month period ended March 28, 1998, as compared to $10.6 million for the nine-month period ended March 30, 1997. The increase was primarily a result of greater net purchases of short-term investments. The Company invested $1.6 million in property and equipment during the first nine months of fiscal 1998 compared to $5.1 million during the corresponding period of fiscal 1997. The Company estimates that total capital expenditures for fiscal 1998 could approximate $4.0 million, which are anticipated to be used for test equipment, design tools, enterprise resource planning (ERP) software applications, and new manufacturing capability. The Company expects its current facilities will be adequate through fiscal 1998. The Company's $2.0 million secured revolving line of credit expired in August 1997. There were no borrowings under the line of credit in 1997. 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 committed credit agreements, technology or manufacturing partnerships, equipment financing, and offerings of debt and equity securities. 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. Customer Concentration. A small number of customers have accounted for a majority of the Company's sales in each of the past several fiscal years. In fiscal 1997, NORTEL, MCI, and CompuServe accounted for 22%, 20%, and 11% of the Company's sales, respectively, and sales to the Company's top five customers accounted for 67% of the Company's sales. In fiscal 1996, NORTEL, MCI, and CompuServe accounted for 7%, 29% and 18% of the Company's sales, respectively, and the Company's top five customers accounted for 64% of the Company's sales. In fiscal 1995, MCI and CompuServe each accounted for 14% of the Company's sales and the Company's top five customers accounted for 47% of sales. Other than NORTEL, MCI and CompuServe, no customer accounted for more than 10% of the Company's sales in fiscal years 1997, 1996, or 1995. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at the levels of previous periods, or that the Company will be able to obtain orders from new customers. Certain customers of the Company have been or may be acquired by other existing customers. The impact of such acquisitions on sales to such customers is uncertain, but there can be no assurance that such acquisitions will not result in a reduction in sales to those customers. In addition, such acquisitions could result in further concentration of the Company's customers. The Company's customers are typically not contractually obligated to purchase any quantity of products in any particular period. Product sales to major customers have varied widely from year to year. In some cases, major customers have abruptly terminated purchases of the Company's products. For example, sales of the Company's single purpose network access products to AT&T Paradyne represented 24% of sales in fiscal 1993, but declined to 11% and 2% of sales in fiscal 1994 and 1995, respectively, due to the decision by AT&T Paradyne to focus its sales efforts on competing products developed within the AT&T organization. In addition, sales to Stratacom, Inc. for provision of network management capabilities in a system sold to another AT&T business unit accounted for 9% of the Company's sales during fiscal 1995. Sales to Stratacom ceased during the second half of fiscal 1995 due to the decision by such AT&T business unit to internally provide such management functionality in its system. Loss of, or a material reduction in orders by, one or more of the Company's major customers would materially adversely affect the Company's business, financial condition and results of operations. See "Competition." Fluctuations in Quarterly Operating Results. The Company's sales are subject to quarterly and annual fluctuations due to a number of factors. Most of the Company's sales are in the form of large orders with short delivery times. The 12 13 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. Sales to individual current customers have varied by as much as $4.0 million between consecutive quarters. Delays or lost sales can be caused by other factors beyond the Company's control, including late deliveries by other vendors of components in a customer's system, changes in implementation priorities, slower than anticipated growth in demand for the services that the Company's products support and delays in obtaining regulatory approvals for new services. Delays and lost sales have occurred in the past and may occur in the future. Operating results in recent periods have been adversely affected by delays in receipt of significant purchase orders from customers. The Company believes that recent period sales have been adversely impacted by budgetary constraints caused by pending merger discussions 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 timing of new product announcements and introductions by the Company, its major customers or its competitors, delays in new product introductions by the Company, market acceptance of new or enhanced versions of the Company's products, changes in the product or customer mix of sales, changes in the level of operating expenses, competitive pricing pressures, the gain or loss of significant customers, increased research and development and sales and marketing expenses associated with new product introductions, and general economic conditions. All of the above factors are difficult for the Company to forecast, and these or other factors can materially adversely affect the Company's business, financial condition and results of operations for one quarter or a series of quarters. The Company's expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a large extent. Therefore, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to the Company's expectations or any material delay of customer orders could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to sustain profitability on a quarterly or annual basis. In addition, the Company has had, and in some future quarter may have operating results below the expectations of public market analysts and investors. In such event the price of the Company's Common Stock would likely be materially and adversely affected. See "Potential Volatility of Stock Price." 13 14 The Company's products are covered by warranties and the Company is subject to contractual commitments. 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. 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. These 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 the Company's Access System 2000 product line. The Access System 2000 product line represented approximately 80% of sales in fiscal 1997 and 70% of sales in fiscal 1996. Increased market acceptance of the Company's Access System 2000 products is dependent on a number of factors, not all of which are in the Company's control, including the continued growth in the use of bandwidth intensive applications, continued deployment of new telecommunications services, market acceptance of integrated access devices in general, the availability and price of competing products and technologies, and the success of the Company's sales efforts. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. Failure to introduce new products in a timely manner could cause companies to purchase products from competitors and have a material adverse effect on the Company's business, financial condition and results of operations. Due to a variety of factors, the Company may experience delays in developing its planned products. New products may require additional development work, enhancement, testing or further refinement before they can be made commercially available by the Company. The Company has in the past experienced delays in the introduction of Access System 2000 product applications and enhancements due to a variety of internal factors, such as reallocation of priorities, difficulty in hiring sufficient numbers of qualified personnel and unforeseen technical obstacles, as well as to changes in customer requirements. Although the Company does not believe that such delays have had a material adverse effect on its customer relationships, such delays have deferred the receipt of revenue from the products involved. If the Company's Access System 2000 products have performance, reliability or quality shortcomings, then the Company may experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable and additional warranty and service expenses. Need to Expand Sales Organization and Channels of Distribution. Currently the Company sells its products to a small number of customers through a relatively small sales force. The Company's strategy is to distribute its products to a broader customer base, which will require the Company to significantly expand its sales force and other channels of distribution. There can be no assurance that the Company will be able to recruit, train, motivate and manage additional qualified sales personnel with the requisite experience and knowledge, or attract additional qualified distributors. Availability of qualified sales personnel is limited, and competition for experienced sales personnel in the network access and telecommunications equipment industries is intense. The failure to timely expand the Company's sales force and expand its channels of distribution could have a material adverse effect on the Company's business, financial condition and results of operations. See "Customer Concentration," "Management of Growth" and "Dependence on Key Personnel." Dependence on Component Availability and Key Suppliers. On-time delivery of the Company's products depends upon the availability of components and subsystems used in its products. The Company depends in part upon suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. The Company obtains several components and licenses certain embedded software from single sources. There can be no assurance that these suppliers will continue to be able and willing to meet the Company's requirements for any such components. The Company generally does not have any long-term contracts with such suppliers, other than software vendors. Any significant interruption in the supply of, or degradation in the quality of, any such item could have a material adverse effect on the Company's results of operations. The Company has no current plans to significantly expand its supplier base. 14 15 Purchase orders from the Company's customers frequently require delivery quickly after placement of the order. Because the Company does not maintain significant component inventories, delay in shipment by a supplier could lead to lost sales. The Company uses internal forecasts to determine its general materials and components requirements. Lead times for materials and components may vary significantly, and depend on factors such as specific supplier performance, contract terms and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components. From time to time, the Company has experienced shortages and allocations of certain components, resulting in delays in fulfillment of customer orders. Such shortages and allocations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Fluctuations in Quarterly Operating Results." Competition. The market for network access and telecommunications equipment is highly competitive, and the Company expects competition to increase in the future. This market is subject to rapid technological change, regulatory developments and emerging industry standards. The Company faces different competitive environments for its Access System 2000 products than for its single purpose network access products. The market for integrated access devices such as the Company's Access System 2000 is newly emerging and is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of new product features, price/performance, support for multiple types of communications services, network management, reliability and safety, and quality of customer support. There can be no assurance that the Company's new products and products under development will be able to compete successfully with respect to these or other factors. The Company's principal competition to date for its current Access System 2000 products has been from Digital Link Corporation, Kentrox, a division of ADC Telecommunications (both in Kentrox's own products and products supplied to Kentrox by Premisys Communications, Inc.), and Larscom, Inc. As the Company develops new products for the Access System 2000 line, the Company expects to increasingly compete with Premisys. The Company expects additional competition from companies that are currently competitors in the market for the Company's single purpose network access products, as such companies develop new products. In addition, the Company expects competition from companies in the computer networking market and other related markets such as Newbridge Networks Corporation, Telco Systems, Inc. and Ascend Communications, Inc. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to the Company's products and planned products, the Company's business, financial condition and results of operations could be materially adversely affected. The Company believes that the market for its single purpose network access products is mature. The Company believes that the principal competitive factors in this market are price, installed base and quality of customer support. In this market, the Company primarily competes with Adtran, Inc., Digital Link, Kentrox and Larscom. There can be no assurance that such companies or other competitors will not introduce new products at a lower price and/or that provide greater functionality than the Company's single purpose network access products. In addition, the Company anticipates that competitors and customers may develop products that could be used for selected applications for which the Company's products are currently provided. Successful, timely development of such products could reduce the level of demand for the Company's products. There can be no assurance that the Company's single purpose network access products will be competitive in the future. 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 15 16 increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company's products. The Company's success will depend to a substantial degree upon its ability to respond to changes in technology and customer requirements. This will require the timely selection, development and marketing of new products and enhancements on a cost-effective basis. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation. The development of new products for the integrated access market requires competence in the general areas of telephony, data networking, network management and wireless telephony as well as specific technologies such as DSL, IP, ISDN, Frame Relay and ATM. Furthermore, the communications industry is characterized by the need to design products which meet industry standards for safety, emissions and network interconnection. With new and emerging technologies and service offerings from network service providers, such standards are often changing or unavailable. As a result, there is a potential for product development delay due to the need for compliance with new or modified standards. The introduction of new and enhanced products also requires that the Company manage transitions from older products in order to minimize disruptions in customer orders, avoid excess inventory of old products and ensure that adequate supplies of new products can be delivered to meet customer orders. There can be no assurance that the Company will be successful in developing, introducing or managing the transition to new or enhanced products or that any such products will be responsive to technological changes or will gain market acceptance. The Company's business, financial condition and results of operations would be materially adversely affected if the Company were to be unsuccessful, or to incur significant delays, in developing and introducing such new products or enhancements. See "Dependence on Recently Introduced Products and Products under Development." Year 2000 Compliance. The Company is currently in the process of evaluating its information technology infrastructure for year 2000 compliance, including reviewing what actions are required to make all software systems used internally year 2000 compliant. In connection with the Company's review of it's information technology infrastructure for year 2000 compliance, the Company is evaluating enterprise resource planning (ERP) solutions. The implementation of an ERP solution would require a significant investment by the Company in both internal and external resources. Significant difficulties with or delays by the Company in implementing an ERP solution could have a material impact on the business, operating results and financial condition of the Company. The Company is concerned that many enterprises will be devoting a substantial portion of their information systems spending to resolve year 2000 compliance issues. This may result in customer or potential customer spending being diverted from telecommunication network solutions over the next two years. In the event that the Company or any of the Company's significant suppliers or customers does not successfully and timely achieve year 2000 compliance, the Company's business, financial condition and results of operation could be adversely affected. The Company believes that its current product offerings are year 2000 compliant. Management of Growth. The Company has recently experienced and may continue to experience growth in the number of its employees and the scope of its operations. In particular, the Company intends to increase its sales, marketing and support staff. These increases will result in increased responsibilities for management. To manage potential future growth effectively, the Company must improve its operational, financial and management information systems and must hire, train, motivate and manage a growing number of employees. The future success of the Company also will depend on its ability to increase its customer support capability and to attract and retain qualified technical, sales, marketing and management personnel, for whom competition is intense. In particular, the current availability of qualified sales and engineering personnel is quite limited, and competition among companies for such personnel is intense. The Company is currently attempting to hire a number of sales and engineering personnel and has experienced delays in filling such positions. During strong business cycles, the Company expects to experience continued difficulty in filling its needs for qualified sales, engineering and other personnel. There can be no assurance that the Company will be able to effectively achieve or manage any such growth, and failure to do so could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Need to Expand Sales Organization and Channels of Distribution," and "Dependence on Key Personnel." 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 16 17 Laboratories and Bell Communications Research. For some public carrier services, installed equipment does not fully comply with current industry standards, and this noncompliance must be addressed in the design of the Company's products. Standards for new services such as frame relay and ATM are still evolving. As these standards evolve, the Company will be required to modify its products or develop and support new versions of its products. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of the Company's products, which could have a material adverse effect on the Company's business, financial condition and results of operations. Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network services and therefore are expected to affect demand for such services and the telecommunications products that support such services. Tariff rates, whether determined by network service providers or in response to regulatory directives, may affect the cost effectiveness of deploying communication services. Such policies also affect demand for telecommunications equipment, including the Company's products. Risks Associated With Entry into International Markets. The Company has had minimal direct sales to international customers to date. The Company has little experience in international markets, but intends to expand sales of its products outside of the United States and to enter certain international markets, which will require significant management attention and financial resources. Conducting business outside of the United States is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. To the extent any Company sales are denominated in foreign currency, the Company's sales and results of operations may also be directly affected by fluctuations in foreign currency exchange rates. In order to sell its products internationally, the Company must meet standards established by telecommunications authorities in various countries, as well as recommendations of the Consultative Committee on International Telegraph and Telephony. A delay in obtaining, or the failure to obtain, certification of its products in countries outside the United States could delay or preclude the Company's marketing and sales efforts in such countries, which could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Third Party Claims of Infringement. The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the United States are not publicly disclosed until the patent issues and foreign patent applications generally are not publicly disclosed for at least a portion of the time that they are pending, applications may have been filed which, if issued as patents, would relate to the Company's products. Software comprises a substantial portion of the technology in the Company's products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to a degree of uncertainty which may increase the risk and cost to the Company if the Company discovers third party patents related to its software products or if such patents are asserted against the Company in the future. Patents have been granted recently on fundamental technologies in software, and patents may be issued which relate to fundamental technologies incorporated into the Company's products. The Company has received and may receive in the future communications from third parties asserting that the Company's products infringe or may infringe the proprietary rights of third parties. In its distribution agreements, the Company typically agrees to indemnify its customers for any expenses or liabilities, generally without limitation, resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business, financial condition and results of operations would be materially adversely affected. 17 18 Limited Protection of Intellectual Property. The Company relies upon a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S. and Canadian patents with respect to limited aspects of its single purpose network access technology. The Company has not obtained significant patent protection for its Access System 2000 technology. There can be no assurance that third parties have not or will not develop equivalent technologies or products without infringing the Company's patents or that the Company's patents would be held valid and enforceable by a court having jurisdiction over a dispute involving such patents. The Company has also entered into confidentiality and invention assignment agreements with its employees, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of the Company's technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company's business, financial condition and results of operations could be materially adversely affected. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of misappropriation of the Company's technology and products more likely. Dependence on Key Personnel. The Company's future success will depend to a large extent on the continued contributions of its executive officers and key management, sales and technical personnel. The Company has employment agreements with Leigh S. Belden, the Company's President and Chief Executive Officer, and Steven C. Taylor, the Company's Chief Technical Officer. The Company also 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 could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Management of Growth." 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. 18 19 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index:
Exhibit Number Description of Exhibit -------------- ---------------------- 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 29, 1998. 19 20 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 12, 1998 By: /s/ John C. Batty ---------------------------------- John C. Batty, Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 20 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 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 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-28-1998 DEC-29-1997 MAR-29-1998 21,663 15,323 8,250 76 5,712 52,908 14,919 8,437 60,971 8,375 0 0 0 138 52,458 60,971 14,081 14,081 7,361 7,361 7,673 0 0 (470) 0 (470) 0 0 0 (470) (0.03) (0.03) For Purposes of This Exhibit, Primary means Basic.
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