-----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, Dh4GUKSrbNg1Dsqk8kD9GyTkWaJcJBJv+JD9BKjL1zAn9pl8eEUB9uyV4eTreGM7 6tXlH5XM55wZXaGJsHnYhg== 0000891618-97-001753.txt : 19970416 0000891618-97-001753.hdr.sgml : 19970416 ACCESSION NUMBER: 0000891618-97-001753 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970415 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-K405/A SEC ACT: SEC FILE NUMBER: 001-11809 FILM NUMBER: 97581116 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-K405/A 1 FORM 10-K/405 AMENDMENT #1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-28562 VERILINK CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 94-2857548 - ---------------------------------- ------------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 145 BAYTECH DRIVE, SAN JOSE, CALIFORNIA 95134 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (408) 945-1199 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered None N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ . No / / . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. / X / The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Common Stock on September 11, 1996, as reported by the Nasdaq National Market was $121,200,763. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes. 2 This Amendment to Verilink Corporation's Report on Form 10-K for its fiscal year ended June 30, 1996 is being filed solely for the purpose of re-submitting via EDGAR Exhibit 13.1 (Annual Report to Stockholders), the last 11 pages of which were inadvertently omitted by Verilink Corporation's filing agent from the initial filing of the Report on Form 10-K. 3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended Report to be signed on its behalf by the undersigned, thereunto duly authorized. Verilink Corporation April 15, 1997 By: /s/ Leigh S. Belden --------------- Leigh S. Belden President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this amended Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Leigh S. Belden President, Chief Executive Officer and Director (Principal April 15, 1997 --------------- Executive Officer) Leigh S. Belden /s/ Timothy G. Conley Vice President, Finance and Chief Financial Officer April 15, 1997 --------------- (Principal Financial and Accounting Officer) Timothy G. Conley /s/ Howard Oringer Chairman of the Board of Directors April 15, 1997 -------------- Howard Oringer /s/ Steven C. Taylor Chief Technical Officer, April 15, 1997 ----------------- Vice Chairman of the Board of Directors Steven C. Taylor /s/ David L. Lyon Director April 15, 1997 --------------- David L. Lyon
2 4 INDEX TO EXHIBITS 3.1 Registrant's Amended and Restated Certificate of Incorporation. (1) 3.2 Registrant's Amended and Restated Bylaws. (1) 4.1 Reference is made to Exhibits 3.1 and 3.2. 10.1 Common Stock and Option Purchase Agreement, dated as of June 27, 1985 between the Registrant and the stockholders set forth herein, and Standstill Agreement dated as of November 15, 1989 between the Registrant, TA Associates, and the stockholders set forth therein. (1) 10.2 Form of Indemnification Agreement between the Registrant and each of its executive officers and directors. (1) 10.3* Employment Agreement between the Registrant and Leigh S. Belden dated as of April 16, 1986. (1) 10.4* Employment Agreement between the Registrant and Steven C. Taylor dated as of April 16, 1986. (1) 10.5* Executive Incentive Compensation Agreement between the Registrant and Timothy G. Conley dated as of July 1, 1995. (1) 10.6* Executive Incentive Compensation Agreement between the Registrant and James G. Regel dated as of July 1, 1995. (1) 10.7 Common Stock Purchase Agreement and Promissory Note between the Registrant and Leigh S. Belden each dated as of September 16, 1993. (1) 10.8 Promissory Notes of Timothy G. Conley in favor of the Registrant dated as of November 16, 1995 and January 2, 1996. (1) 10.9 Promissory Note of James G. Regel in favor of the Registrant dated as of January 1, 1996. (1) 10.10 Promissory Note of Henry L. Tinker in favor of the Registrant dated as of November 16, 1995. (1) 10.11 Promissory Note of Howard Oringer in favor of the Registrant dated as of January 2, 1996. (1) 10.12 Lease Agreement between the Registrant and Baytech Associates, a California general partnership, dated February 27, 1986, and Memorandum of Lease Modification dated January 22, 1987. (1) 10.13+ Software License Agreement between the Registrant and Integrated Systems, Inc. dated January 27, 1993, as amended. (1) 10.14* Registrant's Amended and Restated 1993 Stock Option Plan, including forms of agreements thereunder. (1) 10.15* Form of Registrant's 1996 Employee Stock Purchase Plan, including forms of agreements thereunder. (1) 11.1** Statement regarding calculation of net income per share. 13.1 Annual Report to Stockholders. 3 5 23.1** Consent of Price Waterhouse LLP. 27.1** Financial Data Schedule. (b) Reports on Form 8-K. N/A ----------------- (1) Incorporated by reference to identically numbered Exhibit to the Company's Registration Statement on Form S-1 (Commission File No. 333-4010), which became effective on June 10, 1996. * Management contracts or compensatory plans or arrangements. + Confidential treatment granted as to portions of this exhibit. ** Filed previously. 4 EX-13.1 2 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 [LOGO-verilink corporation] Annual Report 1996 2 CORPORATE PROFILE Verilink Corporation develops, manufactures and markets integrated access products for telecommunications network service providers and corporate end users. The Company's Access System 2000 product line provides flexible access solutions for a broad range of network services. Verilink designed the Access System 2000 platform with modular hardware and software to enable its customers to access increased network capacity and adopt new communications services in a cost-effective manner. The Company's strategy is to continue to expand the functionality of its integrated access product line as its customers access new network services and migrate to emerging telecommunications technologies. Verilink completed an initial public offering on June 11, 1996. Its common stock is traded on the NASDAQ National Market under the symbol VRLK. CONTENTS Financial Highlights 1 Letter to Our Stockholders 2 Financial Information Management's Discusssion and Analysis of Financial Condition and Results of Operations 8 Consolidated Financial Statements 14 Notes to Consolidated Financial Statements 18 Report of Independent Accountants 27 Selected Consolidated Financial Data 28 Quarterly Financial Data 28 Common Stock Profile 28 Corporate Information 29
3 FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED JUNE 30, --------------------------- 1996 1995 % CHANGE - ---------------------------------------------------------------------------------------- (in thousands, except per share data) Sales $41,608 $31,447 32% Gross profit 21,174 14,620 45% Income from operations 3,232 347 831% Net income 2,716 448 506% Net income per share $ 0.24 $ 0.04 500% Shares used to compute net income per share 11,367 10,676 6% Cash and cash equivalents $40,542 $ 3,243 1150% Working capital 45,015 5,695 690% Total assets 55,218 12,617 338% Total stockholders' equity 47,234 7,433 535%
[GRAPHIC ] 4 LETTER TO OUR STOCKHOLDERS To Our Fellow Stockholders: Fiscal 1996 was a particularly eventful one for Verilink, reflecting the continued expansion of the market for communications services and our ability to meet the growing demand for access to those services. We would like to tell you about some of the year's highlights that preceded our successful initial public offering in June and contributed to record sales for the year. We are particularly pleased to report that sales for the fiscal year ended June 30, 1996 were $41,608,000, an increase of 32 percent over the prior year's sales of $31,447,000. Net income for the year was $2,716,000, a 506 percent increase over net income of $448,000 for the previous fiscal year. Earnings per share were $.24, compared with $.04 in fiscal 1995. Since this is our first annual report to our stockholders as a publicly owned company, let us tell you about Verilink's business. Verilink products provide access to existing and emerging communications services. For example, when a corporate employee sends an e-mail, logs on to the Internet, or conducts a videoconference with a remote location, Verilink equipment can be involved either on the company's Verilink provides integrated access solutions that enable customers to adopt emerging communications technologies and services as their business needs evolve and change. 2 5 premises, or at the carrier that handles the communication. Our products are purchased both by network service providers and by large corporations for their own private networks. GROWING NEED FOR ACCESS The market for communications services is exploding. Business users are demanding virtually instant access to more information, in more forms, wherever they are, which is intensifying the need for fast, easy access to greater and greater network bandwidth. In addition to the increased amount of information flowing over public and private networks, many emerging communications capabilities, like videoconferencing and multimedia applications, demand significantly higher bandwidth to transmit huge amounts of data. This demand for increased bandwidth and the growing use of new and existing services such as frame relay, Integrated Services Digital Network (ISDN), Switched Multimegabit Data Service (SMDS) and Asynchronous Transfer Mode (ATM) has driven the expansion of communications networks. Both corporations and network service providers are finding that they must manage an increasingly complex web of communications services to meet the information needs of today's businesses. Whether at the customer premises or the service provider site, this provides a costly challenge in an environment that traditionally has required individual, single-purpose [GRAPHIC "The market for communications services is exploding." ] 3 6 [GRAPHIC "Demand for increased bandwidth... has driven the expansion of communications networks." ] access devices for each type of communications service. For example, one piece of equipment provided access to dedicated T1 service, a second to frame relay, and so forth. Each new service needed a new dedicated access device with its own requirements for physical space, management and maintenance. It is easy to imagine the increasing complexity and cost of managing such a growing communications infrastructure. INTEGRATED ACCESS-OUR SOLUTION Verilink's flagship product, the Access System 2000, is aimed squarely at this emerging market opportunity. The Access System 2000 provides integrated access to multiple communications services from a single, flexible platform. In place of several dedicated devices, the Access System 2000 is a single piece of equipment, a system, with individual cards for different communications services. Most important, the system is scalable; as access to a new communications service is required, the addition of a single card is generally all that is necessary. The convergence of voice, video, multimedia and data-intensive applications creates the need for access to increased network bandwidth. To meet this growing demand, Verilink redefines intelligent network access by offering an expandable, modular solution. 4 7 WAN, INTERNET AND WIRELESS ACCESS The market for access devices is large and growing rapidly. Within the total access market, however, there are three specific areas-Wide Area Network (WAN) access, Internet access and wireless access-where we believe our products offer particularly attractive solutions. Industry analysts have projected that these three areas will comprise a worldwide market of nearly $10 billion by the end of the decade. Businesses that link Local Area Networks at different locations can rely on the Access System 2000 for WAN access. Internet Service Providers use the Access System 2000 to provide access to high-speed transmission facilities between their regional switching centers and within their backbone network infrastructures. And, the growth of wireless communications services offers yet a third opportunity for us. Specifically, the emergence of Personal Communications Services and the ability to send data over wireless networks are increasing the need for access to wireless networks. Verilink provides this access. 1996 IN REVIEW In fiscal 1996, Verilink made significant strides toward addressing the opportunities in WAN, Internet and wireless access. To provide access to new higher-speed broadband services, we added important functionality to our Access System 2000 platform. We introduced inverse multiplexing capability for T1 and E1 (international) lines, and an even higher-speed DS3 access card. This brings the number of communications services supported by the Access System 2000 to ten. 5 8 We expanded our relationships with key customers, including MCI, CompuServe and QUALCOMM, and added significant new customers, such as Northern Telecom (Nortel) and SunGard Recovery Services Inc. Augmenting our executive staff, Tom Clark joined Verilink as Vice President of Engineering. Previously, Tom had been Vice President of Engineering for Larscom Incorporated. Bob Griffith, formerly Vice President of Carrier Sales at Network Equipment Technologies, Inc., joined the Company as Vice President of Sales. David Lyon, Co-founder and President of Pacific Communications Services, Inc., joined Verilink's Board of Directors, and long-time board member Howard Oringer became Chairman of the Board. NEW PRODUCTS, NEW MARKETS While we are pleased with the milestones we reached during fiscal 1996, we are particularly excited about our plans for the future. In fiscal 1997 , we expect to introduce ISDN and ATM capabilities for the Access System 2000 and will continue our major investment in the development of new communications access solutions. Verilink protects customer investments in communications networks by providing multiple product applications, all from a highly reliable and flexible platform. 6 9 To date, nearly all of our business has been from within the United States. In the future, we expect significant opportunities to emerge in international markets, and we are developing the products and building the infrastructure to address those markets. Additionally, we are expanding our sales force and distribution network to further increase and support our growing customer base. We believe our business prospects are exciting. Verilink has built a solid business foundation based on highly reliable products and has an experienced and motivated team in place to achieve its growth plans. Verilink is committed to continuing to offer leading-edge communications access solutions. In closing, we would like to take this opportunity to thank our stockholders, customers, suppliers and dedicated employees for their support and contribution to the success of Verilink. /s/ Steven C. Taylor /s/ Leigh S. Belden - -------------------- ------------------- Steven C. Taylor Leigh S. Belden Founder, Vice Chairman & Founder, Chief Technical Officer President & CEO [PICTURE FLUSH RIGHT OF SIGNATURES - Steven C. Taylor & Leigh S. Belden] 7 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Over the past several years, Verilink has transitioned its business from supplying single-purpose network access and termination equipment to supplying integrated network access systems. From its inception in December 1982 through fiscal 1988, Verilink engaged primarily in the development, marketing and support of T1 data service units, channel service units and diagnostic equipment. In fiscal 1989, the Company began the design of its integrated access product line, the Access System 2000. Since fiscal 1990, the Company has committed significant resources to expand the features and functionality of the Access System 2000 product line.These efforts now represent nearly all of the Company's product development activities. In fiscal 1992, the Company introduced its first Access System 2000 product application. Sales related to the Company's Access System 2000 product line represented 70%, 53% and 43% of total sales in fiscal 1996, 1995 and 1994, respectively. Sales of Access System 2000 products, including recently developed applications, are expected to represent an increasing percentage of future sales. The Company's business is characterized by the concentration of sales to a limited number of customers. Sales to the Company's top five customers accounted for 64%, 47% and 46% of sales in fiscal 1996, 1995 and 1994, respectively. These customers are network service providers (NSPs) and resellers. Sales to NSPs generally relate to the deployment of equipment for specific projects. Sales for these projects are often difficult to forecast due to a relatively long sales cycle and acceleration or delays in the timing of such projects. The Company has experienced fluctuations in both annual and quarterly sales due to the timing of receipt of customer orders and decisions by major customers to cease marketing, purchasing and reselling the Company's products. Since the Company continues to have significant sales to a small number of customers, similar sales fluctuations may occur in the future. The Company sells its products primarily in the United States to NSPs through a direct sales force and through a variety of resellers, including original equipment manufacturers (OEMs), value added resellers (VARs) and distributors. To date, international sales have not been significant. The Company intends to expand the marketing of its products generally and to commence sales outside the United States. 8 11 RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of operations data as a percentage of sales for the periods indicated:
YEAR ENDED JUNE 30, ------------------------------- 1996 1995 1994 ------------------------------- Sales 100.0% 100.0% 100.0% Cost of sales 49.1 53.5 51.7 ------------------------------- Gross margin 50.9 46.5 48.3 ------------------------------- Operating expenses: Research and development 16.8 20.6 16.4 Selling, general and administrative 26.3 24.8 24.1 Total operating expenses 43.1 45.4 40.5 ------------------------------- Income from operations 7.8 1.1 7.8 Interest and other income, net 0.3 0.4 0.1 ------------------------------- Income before income taxes 8.1 1.5 7.9 Provision for income taxes 1.6 0.1 1.7 ------------------------------- Net income 6.5% 1.4% 6.2% ===============================
The following table summarizes sales by product line for the periods indicated:
YEAR ENDED JUNE 30, ------------------------------------- 1996 1995 1994 ------------------------------------- Sales: Access System 2000 $29,261 $16,519 $15,881 Other products and services 12,347 14,928 20,652 ------------------------------------- Total $41,608 $31,447 $36,533 ===================================== Access System 2000, as a percent of total 70% 53% 43% =====================================
9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 1996 AND 1995 Sales Sales in fiscal 1996 increased by 32% to $41.6 million as compared with sales of $31.4 million in fiscal 1995. This was due to an increase of 77% in sales of Access System 2000 products resulting primarily from increased sales to MCI and CompuServe associated with expansion of their networks, as well as the initial shipment of a new product for Personal Communications Service applications. The increase in sales between fiscal 1996 and 1995 was offset in part by a decline in sales of non-Access System 2000 products of 17%, or $2.6 million, primarily due to reduced sales by resellers. The Company has not made significant investment in the development of non-Access System 2000 products during recent years and consequently expects such sales to further decline as a percentage of sales. During fiscal 1996, sales to MCI, CompuServe and the Company's top five customers in total accounted for 29%, 18% and 64% of sales, respectively. Sales to MCI, CompuServe and the Company's top five customers in total accounted for 14%, 14% and 47%, respectively, of sales during fiscal 1995. Gross Profit Gross profit in fiscal 1996 increased by 45% to $21.2 million, as compared with gross profit of $14.6 million in fiscal 1995. This increase was primarily due to increased sales volume as well as lower per unit component costs for the Access System 2000. Gross margin increased from 47% to 51% between these two periods, due to improved material costs for Access System 2000 products and lower manufacturing overhead expenses, as a percentage of sales, due to greater sales volume. Research and Development Research and development expenses consist primarily of salaries and other personnel-related expenses, material costs for development of product prototypes, equipment depreciation, facility expenses and spending related to outside consultants. Research and development expenses increased by 8%, to $7.0 million in fiscal 1996, as compared to $6.5 million in fiscal 1995, primarily due to the addition of personnel and related expenses, but decreased as a percentage of sales to 17% from 21% over the same period due to increased sales volume. The Company believes that a significant level of investment in product research and development is required to remain competitive and, accordingly, anticipates that research and development expenses in fiscal 1997 will increase from fiscal 1996 levels. All research and development costs have been charged to operation as incurred. Selling, General and Administrative Selling, general and administrative expenses consist primarily of personnel-related expenses, travel, advertising, promotion and outside professional services. Personnel-related expenses include salaries, sales commissions, bonuses and profit-sharing. Selling, general and administrative expenses increased by 40%, to $10.9 million in fiscal 1996, as compared to $7.8 million in fiscal 1995, primarily due to incentive compensation, including commissions and the amortization of deferred compensation expense related to the Company's stock option plan. 10 13 As a percentage of sales, selling, general and administrative expenses increased to 26% in fiscal 1996 from 25% in fiscal 1995. The Company expects selling, general and administrative expenses to increase in amount in the future due to expenses associated with an increased sales force and the legal, accounting and administrative expenses associated with public company reporting requirements. Provision for Income Taxes The provision for income taxes of $663,000 in fiscal 1996 represented an effective tax rate of 20%. The effective tax rate was less than the combined federal and state statutory rates primarily due to the recognition of previously reserved deferred tax assets based on carryback capacity and, to a lesser extent, expectations of future income in the next twelve months. The provision for income taxes of $40,000 in fiscal 1995 represented minimum state income and franchise taxes. FISCAL YEARS ENDED JUNE 30, 1995 AND 1994 Sales Sales decreased 14% to $31.4 million in fiscal 1995 from $36.5 million in fiscal 1994, primarily due to the decrease in sales of non-Access System 2000 products, including a $3.4 million decrease in sales to AT&T Paradyne. Sales of the Company's single purpose network access products to AT&T Paradyne declined to 2% of sales in fiscal 1995 from 11% of sales in fiscal 1994, due to the decision by AT&T Paradyne to focus its sales efforts on competing products developed within the AT&T organization. Sales of Access System 2000 products increased by the net amount of $638,000, which included a decrease in sales to MCI of $3.0 million. During fiscal 1995 and 1994, sales to MCI accounted for 14% and 20%, respectively, of the Company's sales. In addition, CompuServe accounted for 14% of the Company's sales during fiscal 1995. Gross Profit Gross profit decreased 17% to $14.6 million in fiscal 1995 from $17.6 million in fiscal 1994, primarily due to the decrease in sales volume. Gross margin declined to 47% in fiscal 1995 from 48% in fiscal 1994 due to changes in product mix and a higher rate of manufacturing overhead expenses as a result of the reduced sales level, even though such expenses declined in amount. Research and Development Research and development expenses increased by 9% to $6.5 million in fiscal 1995 from $6.0 million in fiscal 1994, primarily due to material costs for development of product prototypes. Selling, General and Administrative Selling, general and administrative expenses declined by 12% to $7.8 million in fiscal 1995 from $8.8 million in fiscal 1994, primarily due to a reduction in profit-sharing expenses, which was partially offset by increased personnel-related expenses as a result of staff additions, primarily in sales and marketing. 11 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provision for Income Taxes During fiscal 1995, the Company recorded a tax provision of $40,000, representing minimum state income and franchise taxes. During fiscal 1994, the Company recorded a provision for income taxes of $630,000, or 22% of income before taxes, which included a tax benefit of $659,000 related to a reduction in the valuation allowance for deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company raised $36.8 million through its initial public offering of common stock in June 1996. Prior to the offering, the primary source of financing for the Company had been cash flow from operations. In addition, the Company had used proceeds from the private sale of equity securities and bank borrowings to support its operations, acquire capital equipment and finance inventory and accounts receivable growth. During fiscal 1996, net cash provided by operating activities was $1.7 million, primarily due to increased profitability. During fiscal 1995, net cash used in operating activities was $2.0 million, primarily due to the payment of accrued compensation expense. Net cash provided by operating activities during fiscal 1994 totaled $6.2 million. The Company made capital expenditures of approximately $958,000, $782,000 and $861,000 in fiscal 1996, 1995 and 1994, respectively, primarily for the purchase of computers and test equipment. The Company expects to incur capital expenditures of approximately $3.0 to $4.0 million in fiscal 1997, primarily for leasehold improvements and computer and test equipment. The Company believes that cash generated from the proceeds of its initial public offering, other available funds and anticipated cash flows from operations will satisfy the Company's working capital and capital expenditure requirements through at least the next twelve months. However, there can be no assurance that future events will not require the Company to seek additional capital sooner or, if so required, that adequate capital will be available on terms acceptable to the Company, or at all. 12 15 FACTORS THAT MAY AFFECT FUTURE RESULTS The statements contained in this annual report which are not purely historical are forward looking statements, including statements regarding the Company's expectations, hopes or intentions regarding the future. Forward looking statements include statements regarding the future of the network access and telecommunications equipment industries and Verilink's strategy under the heading "Letter to Our Stockholders"; statements regarding Verilink's liquidity, anticipated cash needs and availability, anticipated expense levels, expected sales of Access System 2000 products as a percentage of future sales, and Verilink's intention to expand marketing efforts and commence sales outside the United States under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward looking statements included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and Verilink assumes no obligation to update any forward looking statement. It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Among the factors that could cause the Company's actual quarterly and year-to-year operating results to differ materially are the following: competition; the mix of products sold; the Company's success in developing, introducing and shipping new products; the Company's dependence on single or limited source suppliers for certain components used in its products; price reductions for the Company's products; the timing of orders from and shipments to customers; and general economic conditions. As previously noted, a small number of customers have accounted for a majority of the Company's sales. Loss of, or a material reduction in orders by, one or more of these customers would materially adversely affect the Company's business, financial condition and results of operations. The Company believes competition in the integrated access portion of the telecommunications industry will increase significantly in the future and could adversely affect the Company's business, results of operations and financial condition. The Company expects that its gross margins could be adversely affected in future periods by price adjustments as a result of increased competition. The Company typically operates with a relatively small backlog. As a result, quarterly sales and operating results generally depend on the volume of, timing of and ability to fulfill orders received within the quarter, which are difficult to forecast. A significant portion of the Company's expense levels is relatively fixed and difficult to reduce in the short term. If sales are below expectations in any given quarter, the adverse impact of the shortfall on the Company's operating results may be magnified by the Company's inability to adjust spending to compensate for the shortfall. The Company may also increase spending in response to competition or to pursue new market opportunities. Accordingly, there can be no assurance that the Company will be able to sustain profitability. You should consult the risk factors which shall be listed from time to time in the Company's reports on SEC forms 10-K, 10-Q and 8-K. 13 16 CONSOLIDATED BALANCE SHEETS
JUNE 30, ------------------------ 1996 1995 - ------------------------------------------------------------------------------------------------ (in thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 40,542 $ 3,243 Accounts receivable, net of allowance of $76 for each date 6,182 3,913 Inventories 4,952 2,720 Deferred tax assets 815 411 Other current assets 508 592 ------------------------ Total current assets 52,999 10,879 Property and equipment, net 1,530 1,418 Deferred tax assets 613 248 Other assets 76 72 ------------------------ $ 55,218 $ 12,617 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,199 $ 1,303 Accrued expenses 4,945 3,440 Income taxes payable 840 269 Current portion of long-term debt -- 172 ------------------------ Total current liabilities 7,984 5,184 ------------------------ Commitments (Note 10) Stockholders' equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding -- -- Common Stock, $0.01 par value; 40,000,000 shares authorized; 13,122,833 and 9,519,512 shares issued and outstanding 131 95 Additional paid-in capital 42,432 3,894 Notes receivable from stockholders (1,445) (850) Treasury stock; 3,352,710 shares of Common Stock at cost for each date (7,320) (7,320) Deferred compensation related to stock options (816) -- Retained earnings 14,252 11,614 ------------------------ Total stockholders' equity 47,234 7,433 ------------------------ $ 55,218 $ 12,617 ========================
The accompanying notes are an integral part of these consolidated financial statements. 14 17 CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, ----------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------- (in thousands, except per share data) Sales $41,608 $31,447 $36,533 Cost of sales 20,434 16,827 18,886 ----------------------------------- Gross profit 21,174 14,620 17,647 ----------------------------------- Operating expenses: Research and development 7,004 6,484 5,975 Selling, general and administrative 10,938 7,789 8,803 ----------------------------------- Total operating expenses 17,942 14,273 14,778 ----------------------------------- Income from operations 3,232 347 2,869 Interest and other income, net 147 141 24 ----------------------------------- Income before income taxes 3,379 488 2,893 Provision for income taxes 663 40 630 ----------------------------------- Net income $ 2,716 $ 448 $ 2,263 =================================== Net income per share $ 0.24 $ 0.04 $ 0.23 =================================== Shares used to compute net income per share 11,367 10,676 9,900 ===================================
The accompanying notes are an integral part of these consolidated financial statements. 15 18 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ---------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 2,716 $ 448 $ 2,263 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 846 977 1,121 Deferred income taxes (769) -- (659) Deferred compensation related to stock options 357 -- -- Accrued interest on notes receivable from stockholders (18) -- -- Changes in assets and liabilities: Accounts receivable (2,269) (1,381) 970 Inventories (2,232) 409 832 Other assets 80 271 (311) Accounts payable 896 (236) (575) Accrued expenses 1,505 (2,645) 2,519 Income taxes payable 628 182 87 ---------------------------------------- Net cash provided by (used in) operating activities 1,740 (1,975) 6,247 ---------------------------------------- Cash flows from investing activities for purchases of property and equipment (958) (782) (861) ---------------------------------------- Cash flows from financing activities: Proceeds from issuance of Common Stock, net 36,872 5 1 Repurchase of Common Stock (183) (8) (13) Repayment of long-term debt (172) (158) (144) ---------------------------------------- Net cash provided by (used in) financing activities 36,517 (161) (156) ---------------------------------------- Net increase (decrease) in cash and cash equivalents 37,299 (2,918) 5,230 Cash and cash equivalents at beginning of year 3,243 6,161 931 ---------------------------------------- Cash and cash equivalents at end of year $ 40,542 $ 3,243 $ 6,161 ======================================== Supplemental disclosures: Cash paid for interest $ 8 $ 29 $ 52 Cash paid (refund) for income taxes $ 805 $ (142) $ 1,141 Supplemental disclosure of noncash financing activities: Common stock issued for notes receivable $ 577 $ -- $ 850 Tax benefit of stock options $ 57 $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. 16 19 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES COMMON STOCK ADDITIONAL RECEIVABLE ------------------- PAID-IN FROM TREASURY SHARES AMOUNT CAPITAL STOCKHOLDERS STOCK - ------------------------------------------------------------------------------------------------------------ (in thousands, except share data) Balance at June 30, 1993 7,844,140 $ 78 $ 3,066 $ -- $(7,314) Issuance of Common Stock 1,700,000 17 833 (850) -- Issuance of Common Stock under stock option plans 1,500 -- 1 -- -- Repurchase of 12,612 shares of Common Stock for treasury (12,612) -- -- -- (6) Repurchase and retirement of shares of Common Stock (14,076) -- (6) -- -- Net income -- -- -- -- -- ------------------------------------------------------------------ Balance at June 30, 1994 9,518,952 95 3,894 (850) (7,320) Issuance of Common Stock under stock option plans 10,162 -- 5 -- -- Repurchase and retirement of shares of Common Stock (9,602) -- (5) -- -- Net income -- -- -- -- -- ------------------------------------------------------------------ Balance at June 30, 1995 9,519,512 95 3,894 (850) (7,320) Issuance of Common Stock in initial public offering, net 2,555,000 25 36,742 -- -- Issuance of Common Stock under stock option plans 1,258,711 13 669 (577) -- Repurchase and retirement of shares of Common Stock (210,390) (2) (103) -- -- Deferred compensation related to stock options -- -- 1,173 -- -- Amortization of deferred compensation -- -- -- -- -- Accrued interest on notes receivable from stockholders -- -- -- (18) -- Tax benefit of stock options -- -- 57 -- -- Net income -- -- -- -- -- ------------------------------------------------------------------ Balance at June 30, 1996 13,122,833 $ 131 $ 42,432 $ (1,445) $(7,320) ================================================================== DEFERRED COMPENSATION RELATED TO STOCK RETAINED OPTIONS EARNINGS TOTAL - -------------------------------------------------------------------------------------- (in thousands, except share data) Balance at June 30, 1993 $ -- $ 8,907 $ 4,737 Issuance of Common Stock -- -- -- Issuance of Common Stock under stock option plans -- -- 1 Repurchase of 12,612 shares of Common Stock for treasury -- -- (6) Repurchase and retirement of shares of Common Stock -- (1) (7) Net income -- 2,263 2,263 ------------------------------------- Balance at June 30, 1994 -- 11,169 6,988 Issuance of Common Stock under stock option plans -- -- 5 Repurchase and retirement of shares of Common Stock -- (3) (8) Net income -- 448 448 ------------------------------------- Balance at June 30, 1995 -- 11,614 7,433 Issuance of Common Stock in initial public offering, net -- -- 36,767 Issuance of Common Stock under stock option plans -- -- 105 Repurchase and retirement of shares of Common Stock -- (78) (183) Deferred compensation related to stock options (1,173) -- -- Amortization of deferred compensation 357 -- 357 Accrued interest on notes receivable from stockholders -- -- (18) Tax benefit of stock options -- -- 57 Net income -- 2,716 2,716 ------------------------------------- Balance at June 30, 1996 $ (816) $ 14,252 $ 47,234 =====================================
The accompanying notes are an integral part of these consolidated financial statements. 17 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES The Company Verilink Corporation (the "Company"), a Delaware Corporation, was incorporated in 1982 to manufacture and market equipment for use by telecommunication network service providers and their corporate customers. Certain equity transactions In April 1996, the Company's Board of Directors approved a two-for-one stock split of the Company's Common Stock. All applicable share and per share amounts of Common Stock have been retroactively adjusted to reflect the stock split. Management estimates and assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary in the United Kingdom. All significant intercompany accounts and transactions have been eliminated. The Company's fiscal year ends on the Sunday nearest June 30. For purposes of financial statement presentation, each fiscal year is considered to have ended on June 30. Fiscal 1996 and 1995 comprised 52 weeks and fiscal 1994 comprised 53 weeks. Foreign currency The functional currency of the Company's foreign subsidiary is the local currency. The balance sheet accounts are translated into United States dollars at the exchange rate prevailing at the balance sheet date. Revenues, costs and expenses are translated into United States dollars at average rates for the period. Gains and losses resulting from translation are accumulated as a component of stockholders' equity and to date have not been material. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during any of the periods presented. Cash and cash equivalents The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally two to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the remaining lease term. 18 21 Revenue recognition Revenues from the sale of products are recognized upon shipment to customers. The following table summarizes the percentage of total sales for customers accounting for more than 10% of the Company's sales:
YEAR ENDED JUNE 30, -------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------- MCI Communications Corporation 29% 14% 20% CompuServe Corporation 18% 14% -- AT&T Paradyne Corporation -- -- 11%
Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The Company places its cash and cash equivalents primarily in market rate accounts, treasury bills and commercial paper. The Company's trade accounts receivable are derived from sales to customers primarily in the United States. The Company performs credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains reserves for potential credit losses and historically such losses have been immaterial. Research and development costs Research and development costs are expensed as incurred. Software development costs Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 requires the capitalization of certain software development costs incurred subsequent to the date technological feasibility is established, which the Company defines as the completion of a working model, and prior to the date the product is generally available for sale. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current sales to total projected product sales, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Warranty The estimated costs of fulfilling product warranties are accrued at the time the related sale is recorded. Income taxes A deferred income tax liability or asset, net of valuation allowance, is established for the expected future tax consequences resulting from the differences between the financial reporting and income tax bases of the Company's assets and liabilities and from tax credit carryforwards. 19 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net income per share Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is antidilutive, except that, pursuant to the requirements of the Securities and Exchange Commission, common equivalent shares (using the treasury stock method and the initial public offering price) issued subsequent to March 31, 1995 through June 10, 1996 have been included in the computation as if they were outstanding for all periods through the effective date of the Company's initial public offering. Recently issued accounting pronouncement In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." The Company's adoption of SFAS 123 in fiscal 1997 will not have any effect on the Company's financial position or results of operations, as the Company intends to continue to measure compensation cost of stock option plans using the intrinsic value based method. NOTE 2 INITIAL PUBLIC OFFERING In June 1996, the Company completed an initial public offering and issued 2,555,000 shares of its Common Stock to the public at a price of $16.00 per share. The Company realized proceeds of approximately $36.8 million, net of underwriting discounts, commissions and other offering costs. NOTE 3 DETAILS OF BALANCE SHEET COMPONENTS
JUNE 30, ------------------- 1996 1995 ------------------------------------------------------------------ (in thousands) Inventories: Raw materials $ 2,999 $ 2,015 Work-in-process 831 385 Finished goods 1,780 1,139 ------------------- 5,610 3,539 Less inventory reserves (658) (819) ------------------- $ 4,952 $ 2,720 ===================
20 23
JUNE 30, ------------------- 1996 1995 --------------------------------------------------------------------- (in thousands) Property and equipment: Furniture, fixtures and office equipment $ 5,179 $ 4,813 Machinery and equipment 2,513 2,036 Leasehold improvements 533 517 ------------------- 8,225 7,366 Less accumulated depreciation and amortization (6,695) (5,948) ------------------- $ 1,530 $ 1,418 =================== Accrued expenses: Compensation and related benefits $ 1,673 $ 1,225 Warranty 743 598 Commissions 435 148 Other 2,094 1,469 ------------------- $ 4,945 $ 3,440 ===================
NOTE 4 LINE OF CREDIT In April 1996, the Company entered into a line-of-credit agreement with a bank which provides for borrowings of up to $2,000,000. Borrowings under the agreement are limited to a specified percentage of eligible accounts receivable. Interest on borrowings is set at the bank's prime rate (8.25% at June 30, 1996). Borrowings under the line of credit are secured by substantially all of the Company's assets. Among other provisions, the Company is required to maintain certain financial covenants and annual profitability. In addition, payment of cash dividends is prohibited without the bank's consent. The line-of-credit agreement expires in April 1997. At June 30, 1996, no borrowings were outstanding under the line-of-credit agreement. NOTE 5 LONG-TERM DEBT In connection with the June 30, 1991 repurchase of Common Stock from a stockholder, the Company issued a five-year subordinated note payable for $730,000, bearing interest at 8.5%, with principal and interest due in sixty equal monthly installments beginning in July 1991 through June 1996. The note was repaid as of June 30, 1996. NOTE 6 COMMON STOCK During fiscal 1996, 1995 and 1994, the Company repurchased 210,390, 9,602 and 26,688 shares of Common Stock, respectively, at prices ranging from $0.50 to $2.17 per share. Of the shares repurchased, 42,612 shares are held in treasury at cost and the remaining shares were retired. 21 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In September 1993, the Company issued 1,600,000 shares of Common Stock to one of the Company's principal stockholders and 100,000 shares to one of its officers in exchange for notes totaling $850,000. These notes bear interest at 5% per annum and are due in September 1998, and $800,000 of these notes is secured by 80,000 shares of the Company's Common Stock and $50,000 is secured by a deed of trust. During the period of November 1995 through February 1996, the Company made loans totaling $577,000 to certain executives, employees and directors pursuant to the Company's 1993 Stock Option Plan. The loans are secured by 1,046,500 shares of the Company's Common Stock, have a five-year term and bear interest at 5% per annum. Principal plus accrued interest is repayable at maturity. In connection with a stock purchase agreement in June 1985, as amended in 1990, certain rights were ascribed to an investor. These rights included, among other things, the right to acquire a proportionate share of any future issuances of Common Stock or its equivalent. This right expired on the effective date of the initial public offering of the Company's Common Stock. The provision for income taxes consists of the following (in thousands): NOTE 7 INCOME TAXES
YEAR ENDED JUNE 30, ----------------------------------- 1996 1995 1994 ---------------------------------------------------------------------- Current: Federal $ 1,350 $ -- $ 1,172 State 82 40 117 ----------------------------------- 1,432 40 1,289 ----------------------------------- Deferred: Federal (240) -- (659) State (529) -- -- ----------------------------------- (769) -- (659) ----------------------------------- $ 663 $ 40 $ 630 ===================================
22 25 The tax provision reconciles to the amount computed by multiplying income before tax by the U.S. federal statutory rate of 34% as follows:
YEAR ENDED JUNE 30, ----------------------------- 1996 1995 1994 -------------------------------------------------------------------------------------- Provision at statutory rate 34.0% 34.0% 34.0% State taxes, net of federal benefit 5.8 5.3 6.1 Change in valuation allowance (30.8) (22.5) (25.4) Disallowance of research and development credits 5.4 -- -- Permanent differences 4.6 4.5 0.3 Other 0.6 (13.1) 6.8 ----------------------------- 19.6% 8.2% 21.8% =============================
Deferred tax assets comprise the following (in thousands):
JUNE 30, ------------------ 1996 1995 Research and development credit carryforwards $ 179 $ 295 Inventory reserves 282 350 Warranty 190 255 Other reserves and accruals 210 230 Depreciation 424 398 Other 143 173 ------------------ Total deferred tax assets 1,428 1,701 Valuation allowance -- (1,042) ------------------ Net deferred tax assets $ 1,428 $ 659 ==================
At June 30, 1996, the Company had credit carryforwards of $179,000 available to offset future income; such carryforwards expire from 2003 to 2011. Net deferred tax assets as of June 30, 1996 were based on the Company's carryback capacity and, to a lesser extent, expected future income in the next twelve months. 23 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 EMPLOYEE BENEFIT PLANS The 1993 Stock Option Plan (the "1993 Plan") was approved by the Board of Directors in March 1993. During fiscal 1996, the 1989 Directors Stock Option Plan (the "1989 Plan") was terminated and all options outstanding and available for grant under the 1989 Plan were incorporated into the 1993 Plan. As of June 30, 1996, a total of 3,300,000 shares of Common Stock had been reserved for issuance under the 1993 Plan to eligible employees, officers, directors, independent contractors and consultants upon the exercise of incentive stock options (ISOs) and nonqualified stock options (NSOs). Options granted under the 1993 Plan are for periods not to exceed ten years and must be issued at prices not less than 100% and 85% for ISOs and NSOs, respectively, of the fair market value of the stock on the date of grant. Options granted under the 1993 Plan are exercisable immediately and generally vest 25% after one year and 1/48th of the total grant monthly thereafter, provided that the optionee remains continuously employed by the Company. Upon cessation of employment for any reason, the Company has the option to repurchase all unvested shares of Common Stock issued upon exercise of an option at a repurchase price equal to the exercise price of such shares. Options granted to stockholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant as determined by the Board. Options to purchase 214,421 shares were vested as of June 30, 1996. Activity under the 1993 Plan is as follows:
SHARES AVAILABLE OPTIONS FOR GRANT OUTSTANDING PRICE PER SHARE ---------------------------------------------------------------------------------- Balance at June 30, 1993 1,614,044 1,185,956 $1.00-$2.18 Granted (2,576,000) 2,576,000 $0.50 Exercised -- (1,500) $0.50 Canceled 2,214,456 (2,214,456) $0.50-$2.18 -------------------------- Balance at June 30, 1994 1,252,500 1,546,000 $0.50 Granted (279,000) 279,000 $0.50-$0.80 Exercised -- (10,162) $0.50 Canceled 137,854 (137,854) $0.50-$0.80 -------------------------- Balance at June 30, 1995 1,111,354 1,676,984 $0.50-$0.80 Approved 500,000 -- -- Granted (1,057,600) 1,057,600 $0.80-$7.50 Exercised -- (1,258,711) $0.50-$0.88 Canceled 147,997 (147,997) $0.50-$5.00 -------------------------- Balance at June 30, 1996 701,751 1,327,876 $0.50-$7.50 ==========================
24 27 The Company has recorded compensation expense for the difference between the grant price and deemed fair market value of the Company's Common Stock for options granted in January and February 1996. Such compensation expense was approximately $357,000 for fiscal 1996 and will aggregate approximately $1,173,000 over the vesting period of four years. In April 1996, the Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") under which 300,000 shares of Common Stock have been reserved for issuance. The Purchase Plan permits eligible employees to purchase Common Stock through periodic payroll deductions of up to 10% of their annual compensation. The Purchase Plan provides for two six-month offering periods during each calender year with the first offering period beginning on January 1 and ending on June 30, 1996 and the second offering period beginning on July 1 and ending on December 31. The initial offering period commenced upon the effectiveness of the Company's initial public offering. The price at which Common Stock is purchased under the Purchase Plan is equal to 85% of the lower of the fair value of the Common Stock at the beginning or end of each offering period. Awards under the Company's Profit Sharing Plan are at the discretion of the Board of Directors and are based on achieving targeted levels of profitability. The Company provided for awards of $517,000 and $2,800,000 for fiscal 1996 and 1994, respectively. No expense under the plan was incurred in fiscal 1995. NOTE 9 RELATED PARTY TRANSACTIONS The Company leases its principal facility from Baytech Associates (Baytech) under an operating lease which expires in April 2001. Baytech is owned by two stockholders who hold an aggregate of 42% of the Company's Common Stock and who are also officers and directors of the Company. During fiscal 1996, 1995 and 1994, rent expense totaled $826,000, $816,000, and $792,000, respectively. Included in other current assets as of June 30, 1996 and 1995, are advances of $325,000 and $462,000, respectively, due from certain officers of the Company. These advances are non-interest bearing and are due on demand. The Company paid approximately $120,000 for consulting services to an outside director during fiscal 1996 and $149,000 and $105,000 for such services to two of its outside directors during fiscal 1995 and 1994, respectively. 25 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 COMMITMENTS The Company leases its facilities under noncancelable operating lease agreements which expire through April 2001. The Company's principal facility lease (see Note 9) provides for lease payments based on the fair market value of comparable facilities, commencing in May 1999 through expiration of the lease in April 2001. The future minimum lease payments set forth below assume that the monthly lease payment for the Company's principal facility from May 1999 through April 2001 will not vary significantly from the present monthly lease payment. Future minimum lease payments under all noncancelable operating leases with terms in excess of one year are as follows (in thousands): Year ending June 30, 1997 $ 428 1998 428 1999 428 2000 428 2001 357 ------- Total minimum lease payments $ 2,069 =======
Rent expense under all noncancelable operating leases totaled $906,000, $897,000 and $867,000 for fiscal 1996, 1995 and 1994, respectively. 26 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Verilink Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Verilink Corporation and its subsidiary at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California July 19, 1996 27 30 SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) Consolidated Statement of Operations Data:
YEAR ENDED JUNE 30, --------------------------------------------------------- 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------- Sales $ 41,608 $ 31,447 $ 36,533 $ 28,007 $ 30,696 Gross profit 21,174 14,620 17,647 11,887 13,049 Income (loss) from operations 3,232 347 2,869 (955) 137 Net income (loss) 2,716 448 2,263 (1,390) 33 Net income (loss) per share $ 0.24 $ 0.04 $ 0.23 $ (0.16) $ 0.00 Shares used to compute net income (loss) per share 11,367 10,676 9,900 8,579 8,649
Consolidated Balance Sheet Data:
JUNE 30, --------------------------------------------------- 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------- Cash and cash equivalents $40,542 $ 3,243 $ 6,161 $ 931 $ 358 Working capital 45,015 5,695 5,358 3,082 3,711 Total assets 55,218 12,617 15,029 10,891 10,989 Long-term debt, net of current portion -- -- 172 329 488 Total stockholders' equity 47,234 7,433 6,988 4,737 6,195
QUARTERLY FINANCIAL DATA
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, 1996 1996 1995 1995 1995 1995 1994 1994 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Sales $12,931 $10,533 $ 8,640 $ 9,505 $ 8,694 $ 7,554 $ 7,293 $ 7,906 Gross profit 6,567 5,427 4,284 4,897 4,228 3,310 3,401 3,681 Income from operations 1,479 711 293 750 202 45 55 45 Net income 952 1,105 196 463 241 66 68 73 Net income per share $ 0.08 $ 0.10 $ 0.02 $ 0.04 $ 0.02 $ 0.01 $ 0.01 $ 0.01 Shares used to compute net income per share 12,122 11,496 11,011 10,837 10,807 10,832 10,831 10,232
COMMON STOCK PROFILE The Company's common stock is traded on the NASDAQ National Market under the symbol VRLK. The high and low prices during the fourth quarter of fiscal 1996, beginning June 11, 1996 (the effective date of the Company's initial public offering) were $27.50 and $18.00, respectively. 28 31 CORPORATE INFORMATION
OFFICERS DIRECTORS TRANSFER AGENT Leigh S. Belden Howard Oringer(1) The First National Bank of Boston President and Chief Executive Officer Chairman of the Board of Directors c/o Boston EquiServe, L.P. Managing Director, Shareholder Services Steven C. Taylor Communications Capital Group Mail Stop: 45-02-64 Chief Technical Officer P.O. Box 644 Leigh S. Belden Canton, MA 02102-0644 Thomas E. Clark President and Chief Executive Officer, Tel: (617) 575-3120 Vice President, Engineering Verilink Corporation Web site address: http://www.EquiServe.com Timothy G. Conley David L. Lyon(1) Vice President, Finance President, Chief Financial Officer Pacific Communications Services, Inc., STOCKHOLDERS' MEETING a subsidiary of Cirrus Logic, Inc. Grace T. Griffin The annual meeting will be Vice President, Human Resources Steven C. Taylor held at 10:00 AM on Thursday, Chief Technical Officer, November 7, 1996 at Verilink Robert F. Griffith Verilink Corporation headquarters, 145 Baytech Drive, Vice President, Sales San Jose, CA. (1) Member of Compensation and Audit Edward C. Y. Ip Committees Vice President, Advanced Development INVESTOR RELATIONS James G. Regel LEGAL COUNSEL For a copy of the Company's Form 10-K, Vice President, Marketing additional copies of this report or other Morrison and Foerster LLP financial information, contact: Henry L. Tinker Palo Alto, CA Vice President, Operations Verilink Corporation Investor Relations INDEPENDENT ACCOUNTANTS 145 Baytech Drive San Jose, CA 95134 Price Waterhouse LLP Tel: (408) 945-1199 San Jose, CA Other corporate information is available on Verilink's Internet web site at HEADQUARTERS http://www.verilink.com Verilink Corporation 145 Baytech Drive San Jose, CA 95134 Tel: (408) 945-1199 Fax: (408) 945-3823
32 [VERILINK LOGO] 145 Baytech Drive San Jose California 95134 -----END PRIVACY-ENHANCED MESSAGE-----