-----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, GYAtVW8D1OYbXXZxnoh/LU92PyNyqtFE1N8r6gFj+1SVa9k0QuA8owO+Wf6VKV/+ sUyppa6upwbhnHpfNLAxWg== 0000891618-98-004858.txt : 19981113 0000891618-98-004858.hdr.sgml : 19981113 ACCESSION NUMBER: 0000891618-98-004858 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 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: 98744984 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 09/27/98 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 September 27, 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 November 4, 1998 was 13,925,867. 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 3 three months ended September 27, 1998 and September 28, 1997 Condensed Consolidated Balance Sheets at 4 September 27, 1998 and June 28, 1998 Condensed Consolidated Statements of Cash Flows for 5 the three months ended September 27, 1998 and September 28, 1997 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21
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 September 27, September 28, ------------- ------------- 1998 1997 -------- -------- Sales $ 17,078 $ 10,013 Cost of sales 8,308 5,008 -------- -------- Gross profit 8,770 5,005 -------- -------- Operating expenses: Research and development 3,290 2,863 Selling, general and administrative 4,928 3,714 -------- -------- Total operating expenses 8,218 6,577 -------- -------- Income (loss) from operations 552 (1,572) Interest and other income, net 559 574 -------- -------- Income (loss) before taxes 1,111 (998) Provision for (benefit from) income taxes 389 (369) -------- -------- Net income (loss) $ 722 $ (629) ======== ======== Net income (loss) per share - Basic $ 0.05 $ (0.05) ======== ======== Net income (loss) per share - Diluted $ 0.05 $ (0.05) ======== ======== Shares used in per share computations - Basic 13,908 13,655 ======== ======== Shares used in per share computations - Diluted 14,244 13,655 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 VERILINK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 27, June 28, 1998 1998 ------------- -------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 12,741 $ 16,304 Short-term investments 29,145 26,111 Accounts receivable, net 7,752 5,992 Inventories 4,864 4,900 Deferred tax assets 1,532 1,532 Other current assets 257 342 -------- -------- Total current assets 56,291 55,181 Property and equipment, net 7,116 7,047 Deferred tax assets 436 436 Other assets 1,419 1,164 -------- -------- Total assets $ 65,262 $ 63,828 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,970 $ 2,527 Accrued expenses 7,516 6,747 Income taxes payable 1,117 744 -------- -------- Total liabilities 10,603 10,018 Stockholders' equity 54,659 53,810 -------- -------- Total liabilities and stockholders' equity $ 65,262 $ 63,828 ======== ========
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, unaudited)
Three months ended September 27, September 28, ------------- ------------- 1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) $ 722 $ (629) Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Depreciation and amortization 471 537 Deferred compensation related to stock options 14 36 Changes in assets and liabilities: Accounts receivable (1,760) 1,753 Inventories 36 (118) Other assets (170) (278) Accounts payable (557) 105 Accrued expenses 769 (645) Income taxes payable 373 72 -------- -------- Net cash provided by (used in) operating activities (102) 833 -------- -------- Cash flows from investing activities: Purchases of property and equipment (540) (673) Purchases of short-term investments (3,034) (7,119) Purchases of other assets -- (293) -------- -------- Net cash used in investing activities (3,574) (8,085) -------- -------- Cash flows from financing activities: Proceeds from issuance of Common Stock, net 113 379 -------- -------- Net decrease in cash and cash equivalents (3,563) (6,873) Cash and cash equivalents at beginning of period 16,304 36,596 -------- -------- Cash and cash equivalents at end of period $ 12,741 29,723 ======== ======== Supplemental disclosures: Cash paid (refund) for income taxes $ -- (455) ======== ========
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 three months ended September 27, 1998 are not necessarily indicative of results which may be achieved for the entire fiscal year ending June 27, 1999. 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 28, 1998 as filed with the Securities and Exchange Commission. NOTE 2. Inventories (in thousands)
September 27, June 28, 1998 1998 ------------- -------- Raw materials $ 1,938 $ 2,313 Work in process 1,133 926 Finished goods 1,793 1,661 ------- ------- $ 4,864 $ 4,900 ======= =======
6 7 NOTE 3. Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") during fiscal 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. SFAS 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 periods presented have been restated to conform to the SFAS 128 requirements. The 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 ---------------------- Sept 27 Sept 28 1998 1997 -------- -------- Net income (loss) [numerator] $ 722 $ (629) ======== ======== Shares Calculation [denominator]: Weighted shares outstanding - Basic 13,908 13,655 Effect of Dilutive Securities: Potential common stock relating to stock options(a) 336 -- -------- -------- Weighted shares outstanding - Diluted 14,244 13,655 ======== ======== Net income (loss) per share - Basic $ 0.05 (0.05) ======== ======== Net income (loss) per share - Diluted $ 0.05 (0.05) ======== ========
(a) Potential common stock relating to stock options has been excluded for the three month period ended September 28, 1997 since its inclusion would be antidilutive. 7 8 NOTE 4. Recent Accounting Pronouncements In June, 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. No comprehensive income information has been presented as the impact of the disclosure required by SFAS 130 is immaterial to the financial statements of the Company. In June, 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS 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 disclosures prescribed by SFAS 131 are effective for the fiscal year ending June 27, 1999 but are not required for interim financial statements in 1999. NOTE 5. Related Party Transactions In September 1998, the Company began occupying an additional 16,000 square feet of space at 161 Nortech Drive from Baytech Associates ("Baytech") in accordance with an agreement currently under negotiation. Baytech is owned by two stockholders who are Officers and Directors of the Company. The Company has agreed to loan Baytech funds for leasehold improvements and rent obligations at 161 Nortech Drive in consideration of certain lease concessions made by Baytech to the Company. The loan to Baytech will be evidenced by a promissory note bearing interest at 8% and will be payable out of the net lease proceeds received by Baytech from leasing the space not occupied by the Company. In September 1998, the Company provided one if its officers with a loan facility not to exceed $1,000,000 at an interest rate of 6% per annum. As of November 4, 1998, $535,000 was borrowed against that facility. All loans made pursuant to the facility are due on or before December 31, 1998. In October 1998, the Company guaranteed $500,000 in borrowings made by one of its officers by pledging as collateral $500,000 on deposit with the lending institution (CivicBank of Commerce) and agreed to provide that officer with a loan facility not to exceed $3,000,000, including the guaranty. All loans made pursuant to this loan facility will be due on or before December 31, 1999. This loan facility will be secured by a pledge of Verilink common stock having a fair market value equal to at least twice the principal amount of the borrowings under this loan facility. 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 beliefs, expectations, intentions, hopes, plans and goals regarding the future and statements regarding the Company's future capital requirements and Year 2000 assessment and remediation efforts. Actual results could differ from those projected in any forward-looking statements for the reasons detailed below and in the Sections entitled "Factors Affecting Future Results" and other sections of this Report on Form 10-Q. The forward-looking statements included on this Form 10-Q are based on information available to the Company as of 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 integrated access products for telecommunications network service providers and corporate end users. Verilink's integrated network access products are used by network service providers such as inter-exchange and local exchange carriers, and providers of Internet, personal communications and cellular services to provide seamless connectivity and interconnect for multiple traffic types on wide area networks ("WANs"). Verilink designed the Access System 2000 with modular hardware and software to enable its customers to access increased network capacity and to adopt new communications services in a cost-effective manner. The Access System 2000 provides integrated access to low speed services, fractional T1/E1 services, and T1, E1, T3, and frame relay services. Currently under development is the Access System 3000 product which is expected to include an increase in switching capacity, support for voice signals and broad-band multiplexing up to T3 rates. 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. The following table presents the percentages of total sales represented by certain line items from the Condensed Consolidated Statements of Operations for the periods indicated.
Three months ended September 27, September 28, ------------- ------------- 1998 1997 ---- ---- Sales 100.0% 100.0% Cost of sales 48.6% 50.0% ----- ----- Gross margin 51.4% 50.0% ----- ----- Operating expenses: Research and development 19.3% 28.6% Selling, general and administrative 28.9% 37.1% ----- ----- Total operating expenses 48.2% 65.7% ----- ----- Income (loss) from operations 3.2% (15.7%)
9 10
Three months ended September 27, September 28, ------------- ------------- 1998 1997 ---- ---- Interest and other income, net 3.3% 5.7% ----- ----- Income (loss) before taxes 6.5% (10.0%) Provision for (benefit from) income taxes 2.3% (3.7%) ----- ----- Net income (loss) 4.2% (6.3%) ===== =====
10 11 Periods Ended September 27, 1998 and September 28, 1997 Sales. Net sales for the three months ended September 27, 1998 increased 70.6% compared to the comparable period in the prior year, and decreased by 1.3% compared to the fourth fiscal quarter of 1998. The increase from the corresponding period in the prior year resulted primarily from higher demand for the AS 2000 product line. Net sales to the Company's five largest customers during the three months ended September 27, 1998 were approximately 75% of total net sales as compared to approximately 53% during the related period ended September 28, 1997. Net sales to the Company's wireless and carrier customers accounted for 63% of sales during the three months ended September 27, 1998 compared to 43% during the comparable period in the prior year. Gross Margin. Gross margin increased to 51.4% of net sales in the three months ended September 27, 1998 from 50% of net sales during the comparable period in the prior year primarily due to fixed manufacturing costs being spread over increased revenue and reduced direct material costs. Research and Development. Research and development expenditures increased $0.4 million to $3.3 million during the three months ended September 27, 1998 compared to the comparable period in the prior year, and decreased as a percentage of sales from 28.6% to 19.3%, reflecting increased engineering material expenses at higher 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 1999 and will vary over time as a percentage of sales. Selling, general and administrative. Selling, general and administrative expense increased $1.2 million during the three months ended September 27, 1998 compared to the corresponding period in the prior year, and decreased as a percentage of sales from 37.1% to 28.9%. The increase in spending is primarily due to an increase in headcount and selling expenses to support the increase in sales. The Company expects selling, general and administrative expense to increase in the future as a result of increased expenses associated with a larger sales and marketing and support staff, as well as increased administrative expenses for 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 was relatively unchanged during the three month period ended September 27, 1998 over the comparable period in the prior year. Provision for Income Taxes. The combined estimated Federal and State fiscal 1999 effective tax rate is 35%. Accordingly, the provision for income taxes of $389,000 for the quarter ended September 27, 1998 reflects 35% of taxable income. LIQUIDITY AND CAPITAL RESOURCES On September 27, 1998, the Company's principal sources of liquidity included $41.9 million of cash and cash equivalents, and short-term investments. During the three-month period ended September 27, 1998, the Company used $102,000 for operating activities, down from the $833,000 generated for the three-month period ended September 28, 1997. Accounts receivable were $1.8 million higher at September 27, 1998 than at June 28, 1998, reflecting significantly higher sales levels in the third month of the current quarter. Cash used in investing activities was $3.6 million for the three-month period ended September 27, 1998, as compared to $8.1 million for the three-month period ended September 28, 1997. The decrease is primarily a result of lower net purchases of short-term investments. Verilink invested $540,000 in property and equipment during the first three months of fiscal 1999, down slightly from the corresponding prior year period. The Company estimates that total capital expenditures for fiscal 1999 could approximate $5.0 million, which are anticipated to be used for enterprise resource planning (ERP) software applications and implementation, test equipment, design tools, and new manufacturing capability, although no assurance can be given that additional expenditures will not be needed. In mid-September, the 11 12 Company began occupying an additional 16,000 square feet of office space. The Company expects these facilities to be adequate through fiscal 1999. 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 continue to account for a majority of the Company's sales. In the quarter ended September 27, 1998, MCI, Nortel and Compuserve accounted for 33%, 21% and 10% of the Company's sales, respectively, and sales to the Company's top five customers accounted for 75% of the Company's sales. In fiscal 1998, Nortel, MCI, Qualcomm and CompuServe accounted for 20%, 16%, 12% and 11% of the Company's sales, respectively, and sales to the Company's top five customers accounted for 64% of the Company's sales. In fiscal 1997, Nortel, MCI, Qualcomm and CompuServe accounted for 22%, 20%, 9% and 11% of the Company's sales, respectively, and the Company's top five customers accounted for 67% of the Company's sales. In fiscal 1996, MCI and CompuServe accounted for 29% and 18% of the Company's sales, respectively and the Company's top five customers accounted for 64% of sales. Other than Nortel, MCI, Qualcomm and CompuServe, no customer accounted for more than 10% of the Company's sales in fiscal years 1998, 1997, or 1996. 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 has in the past experienced significant declines in sales it believes were in part related to orders being delayed or cancelled as a result of pending acquisitions relating to its customers. There can be no assurance future merger and acquisition activity among the customers will not have a similar adverse affect on the Company's sales and results of operations. The Company's customers are typically not contractually obligated to purchase any quantity of products in any particular period. Product sales to major customers have varied widely from period to period. In some cases, major customers have abruptly terminated purchases of the Company's products. Loss of, or a material reduction in orders by, one or more of the Company's major customers would materially adversely affect the Company's business, financial condition and results of operations. See "Competition" and "Fluctuations in Quarterly Operating Results". Fluctuations in Quarterly Operating Results. The Company's sales are subject to quarterly and annual fluctuations due to a number of factors resulting in more variability and less predictability in the Company's quarter-to-quarter sales and operating results. For example, sales to MCI, Nortel, Qualcomm and CompuServe have varied between quarters by as much as $4.0 million and were the major contributor to the variability of quarterly sales in 1998. Most of the Company's sales are in the form of large orders with short delivery times. The Company's ability to affect and judge the timing of individual customer orders is limited. The Company has experienced large fluctuations in sales from quarter-to-quarter due to a wide variety of factors, such as delay, cancellation or acceleration of customer projects, and other factors discussed below. The Company's sales for a given quarter may depend to a significant degree upon planned product shipments to a single customer, often related to specific equipment deployment projects. The Company has experienced both acceleration and slowdown in orders related to such projects, causing changes in the sales level of a given quarter relative to both the preceding and subsequent quarters. Delays or lost sales can be caused by other factors beyond the Company's control, including late deliveries by 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 12 13 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". 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. Also see "Year 2000 Compliance". Potential Volatility of Stock Price. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, developments with respect to patents or proprietary rights, general conditions in the telecommunication network access and equipment industries, changes in earnings estimates by analysts, or other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many technology companies and which have often been unrelated to the operating performance of such companies. Company-specific factors or broad market fluctuations may materially adversely affect the market price of the Company's Common Stock. The Company has experienced significant fluctuations in its stock price and share trading volume since its initial public offering in June 1996. There is no assurance that such fluctuations will not continue. 13 14 Dependence on Recently Introduced Products and Products Under Development. The Company's future results of operations are highly dependent on market acceptance of existing and future applications for both the Company's Access System 2000 and the Access System 3000 product lines. The Access System 2000 product line represented approximately 86% of sales in fiscal 1998 and 80% of sales in fiscal 1997. Market acceptance of both the Company's current and future product lines is dependent on a number of factors, not all of which are in the Company's control, including the continued growth in the use of bandwidth intensive applications, continued deployment of new telecommunications services, market acceptance of integrated access devices in general, the availability and price of competing products and technologies, and the success of the Company's sales efforts. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. Failure to introduce new products in a timely manner could cause companies to purchase products from competitors and have a material adverse effect on the Company's business, financial condition and results of operations. Due to a variety of factors, the Company may experience delays in developing its planned products. New products may require additional development work, enhancement, testing or further refinement before the Company can make them commercially available. The Company has in the past experienced delays in the introduction of new products, product applications and enhancements due to a variety of internal factors, such as reallocation of priorities, difficulty in hiring sufficient qualified personnel and unforeseen technical obstacles, as well as changes in customer requirements. 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 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 and Marketing Organizations 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 and market 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 and marketing personnel with the requisite experience and knowledge, or attract additional qualified distributors. Availability of qualified sales and product marketing personnel is limited, and competition for experienced personnel in the network access and telecommunications equipment industries is intense. The failure to timely expand the Company's sales force, expand its channels of distribution and product marketing organization 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 or limited 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. See "Year 2000 Compliance". Purchase orders from the Company's customers frequently require delivery quickly after placement of the order. As the Company does not maintain significant component inventories, delay in shipment by a supplier could lead to lost sales. The Company uses internal forecasts to determine its general materials and components requirements. Lead times for materials and components may vary significantly, and depend on factors such as specific supplier performance, contract terms and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components. 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 telecommunications network access equipment is highly competitive, and the Company expects competition to increase in the future. This market is subject to rapid technological change, regulatory developments, and new entrants. The market for integrated access devices such as the Company's Access System 14 15 product line is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of new product features, price and performance, support for multiple types of communications services, network management, reliability, and quality of customer support. There can be no assurance that the Company's current products and future products under development will be able to compete successfully with respect to these or other factors. The Company's principal competition to date for its current Access System 2000 products has been from Digital Link Corporation, Kentrox, a division of ADC Telecommunications and Larscom, Inc., a subsidiary of Axel Johnson. In addition, the Company expects substantial competition from companies in the computer networking market and other related markets such as Newbridge Networks Corporation, Telco Systems, Inc., Visual Networks Inc., and Adtran, Inc. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to the Company's products and planned products, the Company's business, financial condition and results of operations could be materially adversely affected. The Company believes that the market for basic network termination products is mature and that the principal competitive factors in this market are price, installed base and quality of customer support. In this market, the Company primarily competes with Adtran, Digital Link, Kentrox, Paradyne and Larscom. There can be no assurance that such companies or other competitors will not introduce new products that provide greater functionality and/or at a lower price than the Company's like products. In addition, advanced termination products are emerging which represent both new market opportunities as well as a threat to current products. Furthermore, basic line termination functions are increasingly being integrated by competitors into other equipment such as routers and switches, which include direct WAN interfaces in certain products, eroding the addressable market for separate network termination products. Many of the Company's current and potential competitors have substantially greater technical, financial, manufacturing and marketing resources than the Company. In addition, many of the Company's competitors have long-established relationships with network service providers. There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future. Rapid Technological Change. The network access and telecommunications equipment markets are characterized by rapidly changing technologies and frequent new product introductions. The rapid development of new technologies increases the risk that current or new competitors could develop products that would reduce the competitiveness of the Company's products. The Company's success will depend to a substantial degree upon its ability to respond to changes in technology and customer requirements. This will require the timely selection, development and marketing of new products and enhancements on a cost-effective basis. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation. The development of new products for the WAN access market requires competence in the general areas of telephony, data networking, network management and wireless telephony as well as specific technologies such as DSL, ISDN, Frame Relay, ATM and IP. Furthermore, the communications industry is characterized by the need to design products which meet industry standards for safety, emissions and network interconnection. With new and emerging technologies and service offerings from network service providers, such standards are often changing or unavailable. As a result, there is a potential for product development delays due to the need for compliance with new or modified standards. The introduction of new and enhanced products also requires that the Company manage transitions from older products in order to minimize disruptions in customer orders, avoid excess inventory of old products and ensure that adequate supplies of new products can be delivered to meet customer orders. There can be no assurance that the Company will be successful in developing, introducing or managing the transition to new or enhanced products, or that any such products will be responsive to technological changes or will gain market acceptance. The Company's business, financial condition and results of operations would be materially adversely affected if the Company were to be unsuccessful, or to incur significant delays in developing and introducing such new products or enhancements. See "Dependence on Recently Introduced Products and Products under Development". Year 2000 Compliance. The year 2000 problem is widespread and complex. If computer, information or telecommunication systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company is evaluating its year 2000 risk as it exists in four areas: Information Technology infrastructure, including reviewing what actions are necessary to bring all software tools used internally to year 2000 compliance, information systems used by the Company's suppliers, potential warranty and year 2000 claims from the Company's customers, and the potential impact of reduced spending by customers or potential 15 16 customers on telecommunication network solutions as a result of devoting a substantial portion of their information system spending to resolve year 2000 compliance issues. The Company is in the process of evaluating its information technology infrastructure for year 2000 compliance, which include reviewing what actions are required to make all software systems used internally year 2000 compliant. The Company has purchased an enterprise resource planning (ERP) solution which has been determined to be year 2000 compliant. The implementation of this ERP solution will require a material investment by the Company in internal and external resources. Significant delays by the Company in implementing this ERP solution could have a material adverse impact on the business, operating results and financial condition of the Company. It is the Company's intent for all software systems and tools that are identified as non-compliant to be either upgraded or replaced. For the non-compliant systems identified to date, the cost to bring the systems to year 2000 compliance is not expected to be material to the Company's operating results. However, if implementation of replacement systems and tools is delayed, or if significant new non-compliance issues are identified, the Company's results of operations, business and financial condition could be materially affected. The Company is in the process of contacting its key suppliers to determine that the suppliers operations and the products and services they provide are year 2000 compliant. In the event that any of the Company's key suppliers does not successfully and timely achieve year 2000 compliance, the Company's business, financial condition and results of operations could be adversely affected. All of the Company's products are currently being reviewed for compliance to year 2000 guidelines. This process includes complete and thorough testing of current products as well as inclusion of year 2000 requirements in specifications for future product releases. Based on a preliminary review, the Company believes its current product shipments are year 2000 compliant and that neither performance nor functionality are affected by dates prior to, during, and after the year 2000 and that the year 2000 is recognized as a leap year. However, as all customer events cannot be anticipated, the Company may see an increase in product warranty and other claims. In the event that any of the Company's products ultimately are not year 2000 compliant, or there are customer claims made against the Company, the Company's business, financial condition and results of operations could be adversely affected. The Company has not developed a contingency plan to address every potential year 2000 non-compliance situation that may be present when the year changes to 2000. However, it is the Company's intention to formulate contingency plans in those areas where year 2000 non-compliance could have an adverse effect on the Company's business, financial condition and results of operation. See "Enterprise Resource Planning". 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, engineering and product marketing organizations. 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 personnel is quite limited, and competition among companies for such personnel is intense. The Company is currently attempting to hire a number of sales, product marketing and engineering personnel and has experienced delays in filling such positions and expects to experience continued difficulty in filling its needs for qualified personnel. There can be no assurance that the Company will be able to effectively achieve or manage any such growth, and failure to do so could delay product development and introduction cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Need to Expand Sales and Marketing Organizations and Channels of Distribution" and "Dependence on Key Personnel". Risks Associated With Potential Acquisitions. An important element of the Company's strategy is to review acquisition prospects that would compliment its existing product offerings, augment its market coverage, enhance its technological capabilities or offer growth opportunities. Future acquisitions by the Company could result in potentially dilutive issuance of equity securities, use of cash and/or the incurring of debt and the assumption of contingent liabilities, any of which could have a material adverse effect on the Company's business and operating results and/or the price of the Company's Common Stock. Acquisitions entail numerous risks, including difficulties in the assimilation of 16 17 acquired operations, technologies and products, diversion of management's attention from other business concerns, risks of entering markets in which the Company has limited or no prior experience and potential loss of key employees of acquired organizations. The Company's management has limited prior experience in assimilating acquired organizations. No assurance can be given as to the ability of the Company to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future, and the failure of the Company to do so could have a material adverse effect on the Company's business and operating results. Enterprise Resource Planning. The Company is currently engaged in a major project to upgrade its enterprise-wide database and information management systems, based principally on software from Oracle. The Company anticipates the project completion date to be in the third quarter of the current fiscal year. However, there can be no assurance that the Company will not experience significant disruption as a result of unexpected delays in the implementation process, or that the Company will not complete the project within the planned time frame or budget. Significant delays may have a material adverse impact on the Company's business, financial condition and results of operations. See "Year 2000 Compliance". Compliance with Regulations and Evolving Industry Standards. The market for the Company's products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. For some public carrier services, installed equipment does not fully comply with current industry standards, and this noncompliance must be addressed in the design of the Company's products. Standards for new services such as frame relay, performance monitoring services and ATM are still evolving. As these standards evolve, the Company will be required to modify its products or develop and support new versions of its products. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of the Company's products, which could have a material adverse effect on the Company's business, financial condition and results of operations. Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network services and therefore are expected to affect demand for such services and the telecommunications products that support such services. Tariff rates, whether determined by network service providers or in response to regulatory directives, may affect the cost effectiveness of deploying communication services. Such policies also affect demand for telecommunications equipment, including the Company's products. Risks Associated With Entry into International Markets. The Company to date has had minimal direct sales to customers outside of North America. The Company has little experience in Europe and Far East markets, but intends to expand sales of its products outside of North America and to enter certain international markets, which will require significant management attention and financial resources. Conducting business outside of North America is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. To the extent any Company sales are denominated in foreign currency, the Company's sales and results of operations may also be directly affected by fluctuations in foreign currency exchange rates. In order to sell its products internationally, the Company must meet standards established by telecommunications authorities in various countries, as well as recommendations of the Consultative Committee on International Telegraph and Telephony. A delay in obtaining, or the failure to obtain, certification of its products in countries outside the United States could delay or preclude the Company's marketing and sales efforts in such countries, which could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Third Party Claims of Infringement. The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the United States are not publicly disclosed until the related patent is issued and foreign patent applications generally are not publicly disclosed for at least a portion of the time that they are pending, applications may have been filed which, if issued as patents, could relate to the Company's products. Software comprises 17 18 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. Limited Protection of Intellectual Property. The Company relies upon a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S. and Canadian patents with respect to limited aspects of its single purpose network access technology. The Company has not obtained significant patent protection for its Access System technology. There can be no assurance that third parties have not or will not develop equivalent technologies or products without infringing the Company's patents or that the Company's patents would be held valid and enforceable by a court having jurisdiction over a dispute involving such patents. The Company has also entered into confidentiality and invention assignment agreements with its employees and independent contractors, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of the Company's technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company's business, financial condition and results of operations 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 18 19 interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. Furthermore, certain provisions of the Company's Amended and Restated Certificate of Incorporation, including provisions that provide for the Board of Directors to be divided into three classes to serve for staggered three-year terms, may have the effect of delaying or preventing a change of control of the Company, which could adversely affect the market price of the Company's Common Stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 19 20 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 September 27, 1998. 20 21 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 November 12, 1998 By: /s/ John C. Batty ---------------------------- John C. Batty, Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 21 22 EXHIBIT INDEX
Exhibit Number Description of Exhibit - -------------- ---------------------- 27.1 Financial Data Schedule
22 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 FIRST FISCAL QUARTER ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-27-1999 JUL-29-1998 SEP-27-1998 12,741 29,145 7,814 62 4,864 56,291 16,629 9,513 65,262 10,603 0 0 0 139 54,520 65,262 17,078 17,078 8,308 8,308 8,218 0 0 1,111 389 722 0 0 0 722 0.05 0.05
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