-----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, Q2vMdO5FTK2GOv/7PUF3fR77BEXFgbTVy/BC026rpeFMbbGz5001xOZ92DQLedPL saRyuqmVq6SEP/WLgyiWRA== 0000950144-01-501749.txt : 20010510 0000950144-01-501749.hdr.sgml : 20010510 ACCESSION NUMBER: 0000950144-01-501749 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010330 FILED AS OF DATE: 20010509 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: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28562 FILM NUMBER: 1626962 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 g69137e10-q.txt VERILINK CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2001 [ ] 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 0-28562 - -------------------------------------------------------------------------------- VERILINK CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-2857548 (State of incorporation) (I.R.S. Employer Identification No.) 950 EXPLORER BOULEVARD, HUNTSVILLE, ALABAMA 35806-2808 (Address of principal executive offices, including zip code) (256) 327-2001 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. The number of shares outstanding of the issuer's common stock as of April 27, 2001 was 15,566,209. 1 2 INDEX VERILINK CORPORATION FORM 10-Q
PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements (unaudited): Condensed Consolidated Statements of Operations for the 3 three months and nine months ended March 30, 2001 and March 31, 2000 Condensed Consolidated Balance Sheets as of 4 March 30, 2001 and June 30, 2000 Condensed Consolidated Statements of Cash Flows for the nine 5 months ended March 30, 2001 and March 31, 2000 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION Item 2. Changes in Securities 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURE 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 Nine Months Ended ------------------------ ------------------------- March 30, March 31, March 30, March 31, 2001 2000 2001 2000 --------- --------- --------- --------- Net sales ........................................... $ 10,290 $17,822 $ 31,155 $ 48,857 Cost of sales ....................................... 6,305 8,569 17,391 25,380 -------- ------- -------- -------- Gross profit ...................................... 3,985 9,253 13,764 23,477 -------- ------- -------- -------- Operating expenses: Research and development .......................... 3,461 1,743 16,551 7,078 Selling, general and administrative ............... 4,239 5,913 14,407 17,009 Restructuring and other non-recurring charges ......................................... -- -- -- 8,300 -------- ------- -------- -------- Total operating expenses ...................... 7,700 7,656 30,958 32,387 -------- ------- -------- -------- Income (loss) from operations ....................... (3,715) 1,597 (17,194) (8,910) Interest and other income, net ...................... 95 203 716 596 -------- ------- -------- -------- Income (loss) before provision for income taxes ..... (3,620) 1,800 (16,478) (8,314) Provision for income taxes .......................... -- -- 6,311 -- -------- ------- -------- -------- Net income (loss) ................................... $ (3,620) $ 1,800 $(22,789) $ (8,314) ======== ======= ======== ======== Net income (loss) per share - Basic ................. $ (0.24) $ 0.13 $ (1.53) $ (0.59) ======== ======= ======== ======== Net income (loss) per share - Diluted ............... $ (0.24) $ 0.11 $ (1.53) $ (0.59) ======== ======= ======== ======== Shares used in per share computations - Basic ....... 15,312 14,301 14,915 14,074 ======== ======= ======== ======== Shares used in per share computations - Diluted ..... 15,312 15,896 14,915 14,074 ======== ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 VERILINK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 30, 2001 June 30, (Unaudited) 2000 ----------- -------- ASSETS Current assets: Cash and cash equivalents .................................. $ 10,603 $ 6,617 Restricted cash ............................................ 500 500 Short-term investments ..................................... 516 4,079 Accounts receivable, net ................................... 4,895 15,233 Inventories ................................................ 4,760 4,840 Notes receivable ........................................... 2,072 1,440 Other receivable ........................................... 223 515 Deferred tax assets ........................................ -- 2,638 Other current assets ....................................... 232 575 -------- -------- Total current assets ................................... 23,801 36,437 Property, plant and equipment, net ........................... 14,063 10,790 Restricted cash, long-term ................................... 500 500 Notes receivable, long-term .................................. 1,518 2,276 Goodwill and other intangible assets, net .................... 3,251 3,203 Deferred tax assets .......................................... -- 4,828 Other assets ................................................. 924 686 -------- -------- Total assets ........................................... $ 44,057 $ 58,720 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .......................... $ 683 $ 600 Accounts payable ........................................... 1,577 3,601 Accrued expenses ........................................... 4,738 5,884 -------- -------- Total current liabilities .............................. 6,998 10,085 Long-term debt, less current portion above ................... 5,397 3,521 Other long-term liabilities .................................. 400 -- -------- -------- Total liabilities ...................................... 12,795 13,606 -------- -------- Stockholders' equity: Common stock, $0.01 par value; 40,000,000 shares authorized; 15,561,959 and 18,307,751 shares issued ...... 156 183 Additional paid-in capital ................................. 51,099 50,696 Treasury stock; 3,662,523 shares of common stock at cost ... -- (8,335) Other stockholders' equity (deficit) ....................... (19,993) 2,570 -------- -------- Total stockholders' equity ............................. 31,262 45,114 -------- -------- Total liabilities and stockholders' equity ............. $ 44,057 $ 58,720 ======== ========
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)
Nine Months Ended --------------------------- March 30, March 31, 2001 2000 --------- --------- Cash flows from operating activities: Net loss ............................................................. $(22,789) $(8,314) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .................................... 2,591 2,983 Deferred income taxes ............................................ 6,311 -- Research and development expenses related to the Beacon Telco warrants and bonus accrual ..................................... 8,735 -- Deferred compensation related to stock options ................... -- 91 Net book value of assets charged against restructuring reserve ... -- 1,461 Accrued interest on notes receivable from stockholders ........... (216) (43) Changes in assets and liabilities: Accounts receivable ............................................ 10,338 (2,736) Other receivable ............................................... 292 (2,135) Inventories .................................................... 80 2,057 Other assets ................................................... 105 867 Accounts payable ............................................... (2,024) 462 Accrued expenses ............................................... (1,146) (768) -------- ------- Net cash provided by (used in) operating activities .......... 2,277 (6,075) -------- ------- Cash flows from investing activities: Purchases of property, plant and equipment ........................... (5,132) (249) Proceeds from sale of short-term investments ......................... 3,563 5,878 Decrease (increase) in goodwill ...................................... 375 (375) Repayments of notes receivable, net of advances ...................... 302 -- -------- ------- Net cash provided by (used in) investing activities .......... (892) 5,254 -------- ------- Cash flows from financing activities: Proceeds from long term debt, net of payments ........................ 1,959 -- Proceeds from issuance of common stock, net .......................... 375 3,093 Repurchase of common stock ........................................... -- (78) Proceeds from repayment of notes receivable from stockholders ........ 309 167 Change in other comprehensive income ................................. (42) (4) -------- ------- Net cash provided by financing activities .................... 2,601 3,178 -------- ------- Net increase in cash and cash equivalents .............................. 3,986 2,357 Cash and cash equivalents at beginning of period ....................... 6,617 6,880 -------- ------- Cash and cash equivalents at end of period ............................. $ 10,603 $ 9,237 ======== ======= Supplemental disclosures: Cash paid for interest ............................................... $ 302 $ -- ======== ======= Refund from income taxes ............................................. $ 23 $ 500 ======== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements of Verilink Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair presentation of the results for the periods presented. The results of operations for the periods presented are not necessarily indicative of results that may be achieved for the entire fiscal year ending June 29, 2001. 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 30, 2000 as filed with the Securities and Exchange Commission. NOTE 2. Comprehensive Income (Loss) The Company records gains or losses on the Company's foreign currency translation adjustments and unrealized gains or losses on the Company's available-for-sale investments as accumulated other comprehensive income and presents it in other stockholders' equity (deficit) in the accompanying condensed consolidated balance sheets. For the three months ended March 30, 2001 and March 31, 2000, comprehensive income (loss) amounted to ($3,632,000) and $1,796,000, respectively. For the nine months ended March 30, 2001 and March 31, 2000, comprehensive loss was ($22,831,000) and ($8,318,000), respectively. NOTE 3. Restructuring and Other Non-recurring Charges During the first quarter of fiscal 2000, the Company announced its plans to consolidate its San Jose operations with its facilities in Huntsville, Alabama, and outsource its San Jose-based manufacturing operations. The Company recorded charges (credits) of $6.9 million, $1.4 million, and ($0.3) million in the first, second and fourth quarters of fiscal 2000, respectively, in connection with the restructuring activities that included 1) severance and other termination benefits for the approximately 135 San Jose-based employees who were involuntarily terminated, 2) the termination of certain facility leases, 3) the write-down of certain impaired assets and 4) the pro-rata portion of the non-recurring retention bonuses offered to the involuntarily terminated employees to support the transition from California to Alabama. All amounts accrued for the restructuring have been paid or charged against the restructuring reserve. NOTE 4. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Inventories consisted of the following (in thousands):
March 30, June 30, 2001 2000 --------- -------- Raw materials $1,383 $1,517 Work in process 126 -- Finished goods 3,251 3,323 ------ ------ $4,760 $4,840 ====== ======
6 7 NOTE 5. Earnings Per Share Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net income (loss) per share, the average price of the Company's Common Stock for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options under the treasury stock method. Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share for the three and nine months ended March 30, 2001 and March 31, 2000, respectively:
(in thousands, except per share amounts) -------------------------------------------------------------- Three Months Ended Nine Months Ended ----------------------------- ------------------------------ Mar. 30, 2001 Mar. 31, 2000 Mar. 30, 2001 Mar. 31, 2000 ------------- ------------- ------------- ------------- Net income (loss) [numerator] $ (3,620) $ 1,800 $(22,789) $ (8,314) ======== ======= ======== ======== Shares calculation [denominator]: Weighted shares outstanding - Basic 15,312 14,301 14,915 14,074 Effect of dilutive securities: Potential common stock relating to stock options and warrants (a) -- 1,595 -- -- -------- ------- -------- -------- Weighted shares outstanding - Diluted 15,312 15,896 14,915 14,074 ======== ======= ======== ======== Net income (loss) per share - Basic $ (0.24) $ 0.13 $ (1.53) $ (0.59) ======== ======= ======== ======== Net income (loss) per share - Diluted $ (0.24) $ 0.11 $ (1.53) $ (0.59) ======== ======= ======== ========
(a) Options to purchase 4,050,068 shares of common stock at prices ranging from $0.50 to $19.75 per share and stock warrants to purchase 1,500,000 shares at $4.75 were outstanding at March 30, 2001, but were not included in the computation of diluted net income (loss) per share for the three months and nine months ended March 30, 2001 because inclusion of such options would have been antidilutive. NOTE 6. Recently Issued Accounting Pronouncements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB No. 133", which deferred the effective date provisions of SFAS No. 133 for the Company until fiscal 2001. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of other comprehensive income, depending on the type of hedging relationship that exists. The Company currently does not hold derivative instruments or engage in hedging activities. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements". This pronouncement summarizes certain of the SEC staff's views on applying generally accepted accounting principles to revenue recognition. The Company has reviewed the requirements of SAB 101 and believes that its existing accounting policies are in accordance with the guidance provided in the SAB. 7 8 NOTE 7. Stock Warrants and Related Agreements In October 2000, the Company entered into agreements with Beacon Telco, L.P. ("Beacon Telco") and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop new optical networking products. As part of the agreements, the Company issued Beacon Telco warrants for 2,249,900 shares of the Company's common stock at an exercise price of $4.75 per share that will become exercisable at various dates, and will expire on October 13, 2003. The exercise dates of the warrants may be accelerated based upon meeting development milestones and certain other events, including the market price of the Company's common stock exceeding a certain price. The agreements provide Beacon Telco the opportunity to receive two bonus payments based in part on meeting certain milestones and the market price of the Company's common stock. The first bonus payment of $3,562,500 was earned on October 13, 2000 and paid on February 9, 2001 in the form of a note that Beacon Telco used in conjunction with the exercise of warrants for 749,900 shares of the Company's common stock. The second bonus payment of up to $7.1 million, if earned, may be paid at the option of the Company in cash, common stock, or a five-year note (payable in either cash, common stock, or used as payment toward the strike price at the time of exercise of the warrants). If the price of the Company's common stock is less than $4.75 per share on the date the second bonus payment is earned, this bonus will be reduced proportionately by the amount the price is below $4.75 per share. The Company recorded a charge to research and development expenses in the second quarter of fiscal 2001 of $8.3 million for the warrants and the first bonus payment that was used in the exercise of the warrants as noted above. The second bonus payment is being accrued and charged to research and development expenses over the period of time the optical networking products are developed. This bonus accrual is adjusted each quarter for changes, either increases or decreases, in the closing market price of the Company's common stock when the price is below $4.75 per share. For the third quarter of fiscal 2001, research and development expenses include a $400,000 accrual for the second bonus payment based upon the closing market price of the Company's common stock on March 30, 2001 of $1.5625 per share. This accrual is shown as other long-term liabilities on the condensed consolidated balance sheet as of March 30, 2001. NOTE 8. Treasury Stock In November 2000, the Company retired all 3,662,523 shares of its treasury stock by charging the original cost against common stock and additional paid in capital. NOTE 9. Income Taxes As a result of losses currently expected to arise from the increased research and development expenses for the optical networking products, the Company established a full valuation allowance against its deferred tax assets at September 29, 2000. Management believes that due to the net loss expected for the current fiscal year and the existing net loss carryforwards from prior years, it is more likely than not that the Company's deferred tax assets will not be realized. The valuation allowance includes $1,155,000 related to the deferred tax assets of an acquired business for which uncertainty now exists surrounding the realization of such assets. This amount was recorded as an increase in costs in excess of net assets of the acquired company (goodwill). The valuation allowance will be used to reduce goodwill in the future when any portion of the related deferred tax assets is recognized. NOTE 10. Related Party Transactions Amounts due from the Company's principal stockholder and director as described in the paragraphs below require quarterly payments totaling $475,000 with the remaining balances due on March 31, 2002. During the third 8 9 quarter of fiscal 2001, the $475,000 payment scheduled for March 31, 2001, plus accrued interest thereon, was rescheduled to March 31, 2002. In September 1993, the Company issued 1,600,000 shares of Common Stock to a principal stockholder and director in exchange for a note totaling $800,000 with the issued shares of Common Stock collateralizing the note. Through subsequent note modifications in February 1998 and September 1999, quarterly payments of $115,000 on the $800,000 note, which bears interest at 5% per annum, commenced in September 2000 with the balance due in March 2002. Principal and interest outstanding under this note was $931,000 and $1,123,000 as of March 30, 2001 and June 30, 2000, respectively, and is included in other stockholders' equity (deficit) on the condensed consolidated balance sheets. This note is currently collateralized by 600,000 shares of Common Stock of the Company per the note modification agreement entered into in September 1999. In February 1999, the Company approved a loan facility of up to $3.0 million to the same principal stockholder and director in return for a note that bears interest at 6% per annum with an original maturity date of March 1, 2000. The September 1999 note modification agreement requires quarterly payments of $360,000 on this note that commenced in September 2000 with the balance due in March 2002. As of March 30, 2001 and June 30, 2000, $2,085,000 and $2,698,000, respectively, of principal and interest were outstanding. This facility is collateralized by an interest in Baytech Associates ("Baytech"). Baytech is owned by two stockholders who held an aggregate of 32% of the Company's Common Stock as of June 30, 2000, and who are also directors of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in this Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements, including, without limitation, statements relating to the Company's revenues, expenses, margins, liquidity and capital needs. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed elsewhere herein under the caption "Factors Affecting Future Results". RESULTS OF OPERATIONS 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 Nine Months Ended ----------------------- ----------------------- Mar. 30, Mar. 31, Mar. 30, Mar. 31, 2001 2000 2001 2000 -------- -------- -------- -------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 61.3 48.1 55.8 51.9 ----- ----- ----- ----- Gross profit 38.7 51.9 44.2 48.1 ----- ----- ----- ----- Operating expenses: Research and development 33.6 9.8 53.1 14.5 Selling, general and administrative 41.2 33.1 46.3 34.8 Restructuring and other non-recurring charges -- -- -- 17.0 ----- ----- ----- ----- Total operating expenses 74.8 42.9 99.4 66.3 ----- ----- ----- ----- Income (loss) from operations (36.1) 9.0 (55.2) (18.2) Interest and other income, net .9 1.1 2.3 1.2 ----- ----- ----- ----- Income (loss) before provision for income taxes (35.2) 10.1 (52.9) (17.0) Provision for income taxes -- -- 20.2 -- ----- ----- ----- ----- Net income (loss) (35.2)% 10.1% (73.1)% (17.0)% ===== ===== ===== =====
9 10 Sales. Net sales decreased approximately 42% to $10.3 million for the three months ended March 30, 2001 from $17.8 million in the comparable period of the prior fiscal year. Net sales decreased 36% to $31.2 million for the nine months ended March 30, 2001 from $48.9 million during the comparable period in the prior year. The decrease in net sales resulted from a decrease in sales volume to most of the Company's product markets. Carrier and carrier access products net sales decreased from $12.8 million in the three months ended March 31, 2000 to $5.7 million in the three months ended March 30, 2001 and decreased from $31.9 million in the nine months ended March 31, 2000 to $18.4 million in the nine months ended March 30, 2001. These decreases were primarily a result of reduced spending by the large telecommunication infrastructure companies, which we believe to be a result of both macro-economic and industry-wide factors, including over-capacity in our customers' markets. In the short term, the Company anticipates that reduced capital spending by our customers may continue to affect sales, although forecasting is challenging in the current environment. These companies have traditionally contributed more than half of the Company's revenue base. Net sales to the Company's top five customers decreased approximately 46% in the three months ended March 30, 2001 to $6.6 million from $12.2 million in the three months ended March 31, 2000, and decreased 34% to $19.9 million for the nine months ended March 30, 2001 from $30.2 million for the nine months ended March 31, 2000. Net sales to all other customers declined by approximately 34% and 40%, respectively, in the three- and nine-month periods ended March 30, 2001 from the comparable periods in the prior fiscal year due in part to the impact of the reorganization of the Company's sales force and the implementation of a two-tier distribution channel. See "Factors Affecting Future Results -- Reorganization of Sales Force". The Company's top five customers did not remain the same over the periods presented. Gross Margin. Gross margin decreased to 38.7% of net sales for the three months ended March 30, 2001 as compared to 51.9% for the three months ended March 31, 2000 and decreased to 44.2 % of net sales for the nine months ended March 30, 2001 from 48.1% for the nine months ended March 31, 2000. These decreases are attributable to several factors, including the mix of product sales and a high level of unabsorbed manufacturing overhead and other costs associated with the lower sales volume during the current year. In addition, a one-time sale of excess inventory at reduced prices contributed to decreased gross margin for the current quarter. Research and Development. Research and development expenditures increased 99% to $3.5 million for the three months ended March 30, 2001 from $1.7 million for the three months ended March 31, 2000 and increased 134% to $16.6 million for the nine months ended March 30, 2001 from $7.1 million for the nine months ended March 31, 2000. As a percentage of sales, research and development expenses increased from 9.8% for the three months ended March 31, 2000 to 33.6% for the three months ended March 30, 2001 and increased from 14.5% for the nine months ended March 31, 2000 to 53.1% for the nine months ended March 30, 2001. These increases were due primarily to the new optical networking development project initiated in October 2000 that is discussed below, as well as an increase in spending for WANsuite(TM) product development. In October 2000, the Company entered into agreements with Beacon Telco, L.P. ("Beacon Telco") and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop new optical networking products. The goal of this project is to accelerate the development of optics-based products to expand the Company's current product offerings and market positioning, and to build in-house R&D expertise in optics technology to support potential future development of a broad variety of optics-based products. The arrangement provides the Company with access to the Photonics Center's state-of-the-art optics laboratories and specialized technical expertise, which, together with the Company's own engineering and strategic marketing resources, may accelerate the development of new optics-based products. As part of the agreements, the Company issued Beacon Telco warrants to purchase up to 2,249,900 shares of the Company's common stock at an exercise price of $4.75 per share. The warrants become exercisable over time, subject to acceleration based upon meeting development milestones and certain other events, including the market price of the Company's common stock exceeding a certain price, and will expire on October 13, 2003. The agreements provide Beacon Telco the opportunity to receive two bonus payments, totaling up to $10.7 million, based in part on meeting certain milestones and the market price of the Company's common stock. The Company recorded a non-cash charge to research and development expenses in the second quarter of fiscal 2001 of $8.3 million for the warrants and the first bonus payment of $3,562,500. The second bonus payment, of up to $7.1 million, is being accrued and charged to research and development expenses over the development period for 10 11 the optical networking products. This bonus accrual is adjusted each quarter for changes, either increases or decreases, in the closing market price of the Company's common stock when the price is below $4.75 per share. Research and development expenses for the three months ended March 30, 2001 included an accrual of $400,000 for the second bonus payment based upon the closing market price of the Company's common stock on March 30, 2001 of $1.5625 per share. Research and development expenses are expected to increase above the current quarter's expenses for the next five quarters in connection with the development of optical networking products. See "Note 7 in the Notes to Condensed Consolidated Financial Statements" and "Factors Affecting Future Results - Optical Networking Product Development". The Company believes that a significant level of investment in product development is required to remain competitive and that such expenses will vary over time as a percentage of net sales. Selling, General and Administrative. Selling, general and administrative expenses decreased 28% to $4.2 million for the three months ended March 30, 2001 from $5.9 million for the three months ended March 31, 2000 and decreased 15% to $14.4 million for the nine months ended March 30, 2001 from $17 million for the nine months ended March 31, 2000. The decrease in absolute dollars over the same periods in the prior year is due to a decrease in variable selling expenses on the lower sales volume, cost reduction programs implemented during the second and third quarters of fiscal 2001, including a headcount reduction in March 2001, and the benefits of the restructuring completed in the second quarter of fiscal 2000. Selling, general and administrative expenses increased as a percentage of sales from 33.2% for the three months ended March 31, 2000 to 41.2% for the three months ended March 30, 2001 and increased from 34.8% for the nine months ended March 31, 2000 to 46.2% for the nine months ended March 30, 2001 due to the Company's lower sales levels. The Company expects the dollar amount of selling, general and administrative expenses to decrease in the future due to the headcount reductions in March 2001 and expects that such expenses will vary over time as a percentage of sales. Restructuring and Other Non-recurring Charges. During the second quarter of fiscal 2000, the Company completed the consolidation of its operations into its existing operations located in Huntsville, Alabama, and outsourced its San Jose based manufacturing activities as announced in July 2000. The Company incurred pretax charges of $8.3 million in the nine-month period ended March 31, 2000 for restructuring and other related non-recurring activities. See "Note 3" in the "Notes to Condensed Consolidated Financial Statements" for further details of the Company's restructuring and other non-recurring charges. Interest and Other Income, Net. Net interest and other income decreased 53% from $203,000 for the three months ended March 31, 2000 to $95,000 for the three months ended March 30, 2001 due to the interest expense on the outstanding debt associated with the acquisition of the new headquarters facility in June 2000. Net interest and other income increased 20% from $596,000 for the nine months ended March 31, 2000 to $716,000 for the nine months ended March 30, 2001 as a result of higher interest-bearing assets and the higher market interest rates during the first two quarters of fiscal 2001. Provision for Income Taxes. With the full valuation allowance established against its deferred tax assets at September 29, 2000, the Company did not record a tax benefit for income taxes for the three months ended March 30, 2001. The Company did not record a tax benefit or provision for income taxes in the three- or nine-month periods ended March 31, 2000. LIQUIDITY AND CAPITAL RESOURCES On March 30, 2001, the Company's principal sources of liquidity included $11.1 million of cash and cash equivalents and short-term investments. During the nine months ended March 30, 2001, cash flow provided by operating activities was approximately $2.3 million compared to $6.1 million used in operating activities during the nine months ended March 31, 2000. Net cash provided by operating activities this quarter was due primarily to better asset management, with accounts receivable decreasing $10.3 million from better collection efforts and lower sales volume, offset by the cash loss from operations of $5.2 million and the decrease in current liabilities of $3.1 million. 11 12 Cash used in investing activities was approximately $900,000 for the nine months ended March 30, 2001, as compared to approximately $5.3 million provided for the nine months ended March 31, 2000. Capital expenditures of $5.1 million for the nine months ended March 30, 2001 were used primarily for renovation to the new headquarters facility acquired by the Company on June 30, 2000 and completion of the Oracle implementation project in July 2000. The maturity of short-term investments provided $3.6 million in cash during the first nine months of fiscal 2001. The renovation to the new headquarters facility was completed during the quarter. Cash provided by financing activities was $2.6 million for the nine months ended March 30, 2001 compared to $3.2 million for the nine months ended March 31, 2000. Proceeds of $2 million, net of payments, were provided during the nine months ended March 30, 2001 from the loan agreements with Regions Bank to borrow up to $6.5 million to finance the acquisition of the new headquarters facility and improvements thereon. As discussed in Note 10 - Related Party Transactions in the Notes to Condensed Consolidated Financial Statements, the $475,000 payment due on March 31, 2001 from a principal stockholder and director was rescheduled to March 2002. Under the terms of the loan agreement with the principal stockholder, payments of $475,000 are required each quarter with the final balance due in March 2002. The Company believes that its cash and investment balances, along with anticipated cash flows from operations based upon our current operating forecast and cost reduction programs, will be adequate to finance current operations, anticipated investments, research and development expenses, and capital expenditures for the next twelve months. The Company's future capital needs will depend on the Company's ability to meet its current operating forecast, the ability to successfully bring new products to market, and market demand for the Company's products. The Company continues to investigate the possibility of generating financial resources through committed credit agreements, technology or manufacturing partnerships, joint ventures, equipment financing, and offerings of debt and equity securities. To the extent that the Company obtains additional financing, the terms of such financing may involve rights, preferences or privileges senior to the Company's common stock and stockholders may experience dilution. FACTORS AFFECTING FUTURE RESULTS As described by the following factors, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "may", "will", "expects", "plans", "anticipates", "estimates", "potential", or "continue", or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements regarding the goal of reducing expenses; expected changes in selling, general and administrative expenses; total budgeted capital expenditures; expected research and development expenses; results and anticipated benefits of the optical networking project; and the adequacy of the Company's cash position for the near-term. These forward-looking statements involve risks and uncertainties, and it is important to note that the Company's actual results could differ materially from those in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed below as well as the other factors set forth in Item 2 hereof. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward-looking statement or risk factor. You should consult the risk factors listed from time to time in the Company's Reports on Forms 10-Q and 10-K. Customer Concentration. A small number of customers continue to account for a majority of the Company's sales, all of whom are in the telecommunications industry. In fiscal 2000, net sales to Nortel, WorldCom, and Ericsson accounted for 30%, 19%, and 3% of the Company's net sales, respectively, and the Company's top five customers accounted for 61% of the Company's net sales. Percentages of total revenue have been restated for prior periods as if Ericsson's May 1999 acquisition of Qualcomm's terrestrial Code Division Multiple Access (CDMA) wireless infrastructure business had been in effect for all periods presented. Through the first three quarters of fiscal 12 13 2001, the Company's top five customers have not remained the same as in previous years. 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. Substantial variations in telecommunications infrastructure spending by the Company's current and target customers, as well as by their customers, can cause material variations in the Company's business, financial condition and results of operations. Reduced telecommunications infrastructure spending in recent quarters has adversely affected the Company's net sales and results of operations. Certain customers of the Company have been or may be acquired by other existing customers. The impact of such acquisitions on net sales to such customers is uncertain, but there can be no assurance that such acquisitions will not result in a reduction in net sales to those customers. In addition, such acquisitions could have in the past, and could in the future, result in further concentration of the Company's customers. The Company has in the past experienced significant declines in net sales it believes were in part related to orders being delayed or cancelled as a result of pending acquisitions relating to its customers. There can be no assurance that future merger and acquisition activity among the Company's customers will not have a similar adverse affect on the Company's net sales and results of operations. The Company's customers are typically not contractually obligated to purchase any quantity of products in any particular period. Product sales to major customers have varied widely from period to period. In some cases, major customers have abruptly terminated purchases of the Company's products. Loss of, or a material reduction in orders by, one or more of the Company's major customers would materially adversely affect the Company's business, financial condition, and results of operations. See "Competition" and "Fluctuations in Quarterly Operating Results". Dependence on Outside Contractors. In September 1999, the Company entered into an agreement with a single outside contractor to outsource substantially all of the manufacturing operations previously located in San Jose, including its procurement, assembly, and system integration operations. The products manufactured by the outside contractor located in California generated a majority of the Company's revenues. There can be no assurance that this contractor will continue to meet the Company's future requirements for manufactured products, or that the contractor will not experience quality problems in manufacturing the Company's products. The inability of the Company's contractor to provide the Company with adequate supplies of high quality products could have a material adverse effect on the Company's business, financial condition, and results of operations. The loss of any of the Company's outside contractors could cause a delay in the Company's ability to fulfill orders while the Company identifies a replacement contractor. Because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, cost of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, the Company is unable to predict whether such relationships would be on terms that the Company regards as satisfactory. Any significant disruption in the Company's relationships with its manufacturing sources would have a material adverse effect on the Company's business, financial condition, and results of operations. Dependence on Key Personnel. The Company's future success will depend to a large extent on the continued contributions of its executive officers and key management, sales, and technical personnel. The Company is a party to agreements with certain of its executive officers to help ensure the officers' continued 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, the inability of the management team to work effectively together, or the inability to continue to attract qualified personnel would delay product development cycles or otherwise would have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth. To manage potential future growth effectively, the Company must improve its operational, financial and management information systems and must hire, train, motivate and manage its employees. The future success of the Company also will depend on its ability to increase its customer support capability and to attract and retain qualified technical, marketing and management personnel, for whom competition is intense. In particular, the current availability of qualified personnel may be limited and competition among companies for such personnel is intense. In March 2001, the Company reduced the size of its workforce as part of its cost reduction 13 14 programs. This recent reduction may make it more difficult to attract and retain qualified personnel. The Company is currently attempting to hire a number of engineering personnel and has experienced some delays in filling such positions. There can be no assurance that the Company will be able to effectively achieve or manage any such growth, and failure to do so could delay product development and introduction cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Dependence on Key Personnel". Dependence on Component Availability and Key Suppliers. The Company generally relies upon a contract manufacturer to buy component parts that are incorporated into board assemblies used in its products. On-time delivery of the Company's products depends upon the availability of components and subsystems used in its products. Currently, the Company and third party sub-contractors depend upon suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. The Company has historically obtained several components and licenses for certain embedded software from single or limited sources. There can be no assurance that these suppliers will continue to be able and willing to meet the Company's and third party sub-contractors' requirements for any such components. The Company and third party sub-contractors generally do not have any long-term contracts with such suppliers, other than software vendors. Any significant interruption in the supply of, or degradation in the quality of, any such item could have a material adverse effect on the Company's results of operations. Any loss in a key supplier, increase in required lead times, increase in prices of component parts, interruption in the supply of any of these components, or the inability of the Company or its third party sub-contractor to procure these components from alternative sources at acceptable prices and within a reasonable time, could have a material adverse effect upon the Company's business, financial condition and results of operations. Purchase orders from the Company's customers frequently require delivery quickly after placement of the order. As the Company does not maintain significant component inventories, delay in shipment by a supplier could lead to lost sales. The Company uses internal forecasts to determine its general materials and components requirements. Lead times for materials and components may vary significantly, and depend on factors such as specific supplier performance, contract terms, and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components, and suppliers may demand longer lead times, higher prices, or termination of contracts. From time to time, the Company has experienced shortages and allocations of certain components, resulting in delays in fulfillment of customer orders. Such shortages and allocations may occur in the future, and could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Fluctuations in Quarterly Operating Results". Fluctuations in Quarterly Operating Results. The Company's sales are subject to quarterly and annual fluctuations due to a number of factors resulting in more variability and less predictability in the Company's quarter-to-quarter sales and operating results. For example, sales to Nortel, WorldCom, and Ericsson have varied between quarters by as much as $4.0 million, and orders delayed by these customers had a significant negative impact on the Company's results of operations for the first three quarters of fiscal 2001. Most of the Company's sales are in the form of large orders with short delivery times. The Company's ability to affect and judge the timing of individual customer orders is limited. The Company has experienced large fluctuations in sales from quarter-to-quarter due to a wide variety of factors, such as delay, cancellation or acceleration of customer projects, and other factors discussed below. The Company's sales for a given quarter may depend to a significant degree upon planned product shipments to a single customer, often related to specific equipment deployment projects. The Company has experienced both acceleration and slowdown in orders related to such projects, causing changes in the sales level of a given quarter relative to both the preceding and subsequent quarters. Delays or lost sales can be caused by other factors beyond the Company's control, including late deliveries by the third party subcontractors the Company is using to outsource its manufacturing operations as well as by other vendors of components used in a customer's system, changes in implementation priorities, slower than anticipated growth in demand for the services that the Company's products support and delays in obtaining regulatory approvals for new services and products. Delays and lost sales have occurred in the past and may occur in the future. Operating results in recent periods have been adversely affected by delays in receipt of significant purchase orders from customers. The Company believes that sales in prior periods have been adversely impacted by merger activities by some of its top customers. In addition, the Company has in the past experienced delays as a result of the need to modify its products to comply with unique customer specifications. These and similar delays or lost sales 14 15 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 a variety of factors, particularly: - 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; - changes in the level of research and development expenses; - competitive pricing pressures; - the gain or loss of significant customers; - increased research and development and sales and marketing expenses associated with new product introductions; and - general economic conditions. All of the above factors are difficult for the Company to forecast, and these or other factors can materially and adversely affect the Company's business, financial condition and results of operations for one quarter or a series of quarters. The Company's expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a large extent. Therefore, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to the Company's expectations or any material delay of customer orders could have a material adverse effect on the Company's business, financial condition, and results of operations. There can be no assurance that the Company will be profitable 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 could likely be materially and adversely affected. See "Potential Volatility of Stock Price". The Company's products are covered by warranties and the Company is subject to contractual commitments concerning its products. If unexpected circumstances arise such that the product does not perform as intended and the Company is not successful in resolving product quality or performance issues, there could be an adverse effect on the Company's business, financial condition, and results of operations. For example, during the fourth quarter of fiscal 1999, the Company was notified by one of its major customers of an intermittent problem involving one of the Company's products installed in the field. Although the Company identified a firmware fix for this problem and negotiated an agreement with the customer to share in the expense associated with the upgrade, this or similar problems in the future could increase expenses or reduce product acceptance. 15 16 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 in the past and may continue to do so. Dependence on Recently Introduced Products and New Product Development. The Company's future results of operations are highly dependent on market acceptance of existing and future applications for both the Company's AS2000 product line, and the WANsuite(TM) family of integrated access devices introduced during the third quarter of fiscal 2000. The AS2000 product line represented approximately 58% of net sales in fiscal 2000, 67% of net sales in fiscal 1999 and 86% of net sales in fiscal 1998. Sales of WANsuite(TM) products began during the last quarter of fiscal 2000. Market acceptance of both the Company's current and future product lines is dependent on a number of factors, not all of which are in the Company's control, including the continued growth in the use of bandwidth intensive applications, continued deployment of new telecommunications services, market acceptance of integrated access devices in general, the availability and price of competing products and technologies, and the success of the Company's sales efforts. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition, and results of operations. The market for the Company's products are characterized by rapidly changing technology, evolving industry standards, continuing improvements in telecommunication service offerings, and changing demands of the Company's customer base. Failure to introduce new products in a timely manner could cause companies to purchase products from competitors and have a material adverse effect on the Company's business, financial condition and results of operations. Due to a variety of factors, the Company may experience delays in developing its planned products. New products may require additional development work, enhancement, and testing or further refinement before the Company can make them commercially available. The Company has in the past experienced delays in the introduction of new products, product applications and enhancements due to a variety of internal factors, such as reallocation of priorities, difficulty in hiring sufficient qualified personnel and unforeseen technical obstacles, as well as changes in customer requirements. Such delays have deferred the receipt of revenue from the products involved. If the Company's products have performance, reliability or quality shortcomings, then the Company may experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable and additional warranty and service expenses. See "Optical Networking Product Development". Optical Networking Product Development. The Company's future results and operations are highly dependent on the success of the Company's optical product development project, the Company's cooperative research agreement with Beacon Telco (the "Cooperative Research Agreement"), and its related Premises Access and Services Agreement with the Boston University Photonics Center (the "Facility Access Agreement"). The Cooperative Research Agreement and the Facility Access Agreement are hereinafter collectively referred to as the "Research Agreements". The Company has committed to pay the expenses related to the Research Agreements and therefore anticipates significant increases in research and development expenses in addition to increases in the ongoing development and marketing costs necessary to bring a potential optical networking product to market. Either of these expenses may exceed the budget that the Company has established and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has also agreed both to license from Beacon Telco and/or the Boston University Photonics Center or their affiliates, for additional license fees yet to be determined, any background intellectual property necessary to commercialize the optical networking product and to certain limitations on the Company's ownership and use of intellectual property generated in the course of the performance of the Research Agreements. The parties may be unable to agree on the proper fees to be charged for such license of background intellectual property necessary to commercialize the optical networking product, or, if 16 17 agreed, the costs of licensing background or other intellectual property could be substantial and may limit the ability of the Company to develop and market the optical networking product on a profitable basis. The success of the project may depend on the ability of the Company to effectively utilize certain resources of the Photonics Center, which are to be provided on an as-available basis at the discretion of the Trustees of Boston University. If critical resources are not made available to the Company on a timely basis, the project may be unsuccessful or may require significantly higher costs than expected. The Company's ongoing effort to develop and market an optical networking product will require high levels of innovation and may not be successful. Even if the Company does succeed in developing an optical networking product, it may have difficulty marketing and selling the product. Moreover, there can be no assurance that any product developed by the Company will gain and hold market acceptance in the rapidly growing optical networking market that is characterized by rapid innovation, numerous competing products and technologies, as well as strong competition. Failure of the Company to develop an optical networking product or to gain market acceptance for such a product would have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the development of an optical networking product may take longer or be less successful than anticipated, which, in either event, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Rapid Technological Change", "Dependence on Recently Introduced Products and New Product Development", and "Risks Associated with Potential Acquisitions and Joint Ventures". 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 Access System product line and WANSuite(TM), and for enterprise devices such as the PRISM, FrameStart(TM), and Lite product lines is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of new product features, price and performance, support for multiple types of communications services, network management, reliability, and quality of customer support. There can be no assurance that the Company's current products and future products under development will be able to compete successfully with respect to these or other factors. The Company's principal competition to date for its current AS2000 and AS4000 products has been from Quick Eagle Networks (formerly Digital Link Corporation), ADC Kentrox, a division of ADC Telecommunications, and Larscom, Inc., a subsidiary of Axel Johnson. In addition, the Company experiences substantial competition with its enterprise access and network termination products from companies in the computer networking market and other related markets. These competitors include Premisys Communications, Inc. (now a part of Zhone Technologies), Newbridge Networks Corporation, Visual Networks, Adtran, Inc., and Paradyne 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, but that the market for feature-enhanced network termination and network access products continues to grow and expand, as more "capability" and "intelligence" moves outward from the central office to the enterprise. The Company believes that the principal competitive factors in this market are price, feature sets, installed base, and quality of customer support. In this market, the Company primarily competes with Adtran, Quick Eagle Networks, ADC Kentrox, Paradyne, Visual Networks, 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 the Company's current products. Furthermore, basic line termination functions are increasingly being integrated by competitors, such as Cisco and Nortel Networks, into other equipment such as routers and switches. These include direct WAN interfaces in certain products, which may erode 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 17 18 have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future. See "Competition". Reorganization of Sales Force. In the third quarter of fiscal 2001, the Company further refined its sales force reorganization that began in the first fiscal quarter. These changes are intended to emphasize both a geographic and product focus, and to better position the sales force for available sales opportunities. Previously in July 2000, the Company had restructured its sales force from a sales force organized by geographical region to one focused on sales to particular markets and through particular distribution channels. This reorganization appeared to be disruptive in the first half of fiscal 2001 and the Company's recent efforts to return to a more geographic focus may continue to be disruptive to the Company's sales in future quarters. As a result, the Company expects that the reorganization may continue to have a short-term negative impact on the Company's sales and results of operations. These changes during this fiscal year may take longer or be less successful than anticipated, which, in either event, could have a material adverse effect on the Company's business, financial condition, and results of operations. 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 Company may need to supplement its internal expertise and resources with specialized expertise or intellectual property from third parties to develop new products. The development of new products for the WAN access market requires competence in the general areas of telephony, data networking, network management and wireless telephony as well as specific technologies such as Digital Subscriber Lines (DSL), Integrated Services Digital Networks (ISDN), Frame Relay, Asynchronous Transfer Mode (ATM), and Internet Protocols (IP). Furthermore, the communications industry is characterized by the need to design products that meet industry standards for safety, emissions, and network interconnection. With new and emerging technologies and service offerings from network service providers, such standards are often changing or unavailable. As a result, there is a potential for product development delays due to the need for compliance with new or modified standards. The introduction of new and enhanced products also requires that the Company manage transitions from older products in order to minimize disruptions in customer orders, avoid excess inventory of old products, and ensure that adequate supplies of new products can be delivered to meet customer orders. There can be no assurance that the Company will be successful in developing, introducing or managing the transition to new or enhanced products, or that any such products will be responsive to technological changes or will gain market acceptance. The Company's business, financial condition and results of operations would be materially adversely affected if the Company were to be unsuccessful, or to incur significant delays in developing and introducing such new products or enhancements. See "Dependence on Recently Introduced Products and New Product Development" and "Optical Networking Product Development". Compliance with Regulations and Evolving Industry Standards. The market for the Company's products is characterized by the need to meet a significant number of communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories and Bell Communications Research. For some public carrier services, installed equipment does not fully comply with current industry standards, and this noncompliance must be addressed in the design of the Company's products. Standards for new services such as frame relay, performance monitoring services and Digital Subscriber Lines (DSL) 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 18 19 providers or in response to regulatory directives, may affect the cost effectiveness of deploying communication services. Such policies also affect demand for telecommunications equipment, including the Company's products. Risks Associated With Potential Acquisitions and Joint Ventures. An important element of the Company's strategy is to review acquisition prospects and joint venture opportunities that would compliment its existing product offerings, augment its market coverage, enhance its technological capabilities or offer growth opportunities. Transactions of this nature by the Company could result in potentially dilutive issuance of equity securities, use of cash and/or the incurring of debt and the assumption of contingent liabilities, any of which could have a material adverse effect on the Company's business and operating results and/or the price of the Company's common stock. Acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention from other business concerns, risks of entering markets in which the Company has limited or no prior experience and potential loss of key employees of acquired organizations. Joint ventures entail risks such as potential conflicts of interest and disputes among the participants, difficulties in integrating technologies and personnel, and risks of entering new markets. The Company's management has limited prior experience in assimilating such transactions. 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 or to successfully develop any products or technologies that might be contemplated by any future joint venture or similar arrangement, and the failure of the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Optical Networking Product Development". Risks Associated With Entry into International Markets. The Company to date has had minimal direct sales to customers outside of North America. The Company has little experience in the European and Far Eastern markets, but intends to expand sales of its products outside of North America and to enter certain international markets, which will require significant management attention and financial resources. Conducting business outside of North America is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. To the extent any Company sales are denominated in foreign currency, the Company's sales and results of operations may also be directly affected by fluctuations in foreign currency exchange rates. In order to sell its products internationally, the Company must meet standards established by telecommunications authorities in various countries, as well as recommendations of the Consultative Committee on International Telegraph and Telephony. A delay in obtaining, or the failure to obtain, certification of its products in countries outside the United States could delay or preclude the Company's marketing and sales efforts in such countries, which could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Third Party Claims of Infringement. The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark, and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. In addition, since patent applications in the United States are not publicly disclosed until the related patent is issued and foreign patent applications generally are not publicly disclosed for at least a portion of the time that they are pending, applications may have been filed which, if issued as patents, could relate to the Company's products. Software comprises a substantial portion of the technology in the Company's products. The scope of protection accorded to patents covering software-related inventions is evolving and is subject to a degree of uncertainty which may increase the risk and cost to the Company if the Company discovers third party patents related to its software products or if such patents are asserted against the Company in the future. Patents have been granted recently on fundamental technologies in software, and patents may be issued which relate to fundamental technologies incorporated into the Company's products. The Company may receive communications from third parties asserting that the Company's products infringe or may infringe the proprietary rights of third parties. In its distribution agreements, the Company typically agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company 19 20 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 could be materially adversely affected. Limited Protection of Intellectual Property. The Company relies upon a combination of patent, trade secret, copyright, and trademark laws and contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S. and Canadian patents with respect to limited aspects of its single purpose network access technology. The Company has not obtained significant patent protection for its Access System technology. There can be no assurance that third parties have not or will not develop equivalent technologies or products without infringing the Company's patents or that a court having jurisdiction over a dispute involving such patents would hold the Company's patents valid and enforceable. The Company has also entered into confidentiality and invention assignment agreements with its employees and independent contractors, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will deter misappropriation of the Company's technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company's business, financial condition and results of operations could be materially adversely affected. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus, make the possibility of misappropriation of the Company's technology and products more likely. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. At March 30, 2001, the Company's investment portfolio consisted of fixed income securities of $516,000. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 30, 2001, the decline in the fair value of the portfolio would not be material. Additionally, the Company has the ability to hold its fixed income investments until maturity and therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. The Company is subject to interest rate risks on its long-term debt. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 30, 2001, the additional interest expense would not be material. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations and cash flows would not be material. 20 21 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES As of February 9, 2001, Beacon Telco used a $3,562,500 bonus note issued by the Company to pay the exercise price in connection with the exercise of warrants for 749,900 shares of the Company's Common Stock. See Note 7 in the Notes to Condensed Consolidated Financial Statements. The shares were issued without registration under the Securities Act of 1933 pursuant to the exemption provided by Section 3(a)(9) thereof. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index:
Exhibit Number Description of Exhibit -------------- ---------------------- 10.57 Executive Deferred Compensation Plan adopted by Registrant for certain of its executive employees and members of its Board of Directors effective as of January 1, 2001 10.58 Separation Agreement between Registrant and Steven E. Turner dated March 2, 2001 10.59 Separation Agreement between Registrant and Edward A. Etzel dated March 1, 2001
(b) No reports on Form 8-K were filed during the quarter ended March 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VERILINK CORPORATION May 9, 2001 By: /s/ Ronald G. Sibold --------------------------------------------------- Ronald G. Sibold, Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 21 EX-10.57 2 g69137ex10-57.txt COMPENSATION PLAN 1 EXHIBIT 10.57 VERILINK CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN Effective as of January 1, 2001 2 VERILINK CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN Effective as of January 1, 2001 TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS 1.1 ACCOUNT...............................................................1 1.2 BENEFICIARY...........................................................1 1.3 CODE..................................................................1 1.4 COMPENSATION..........................................................1 1.5 COMPENSATION DEFERRALS................................................1 1.6 DESIGNATION DATE......................................................1 1.7 EFFECTIVE DATE........................................................1 1.8 ELIGIBLE PERSON.......................................................1 1.9 EMPLOYER..............................................................1 1.10 ENTRY DATE............................................................2 1.11 PARTICIPANT...........................................................2 1.12 PARTICIPANT ENROLLMENT AND ELECTION FORM..............................2 1.13 PLAN..................................................................2 1.14 PLAN YEAR.............................................................2 1.15 TOTAL AND PERMANENT DISABILITY........................................2 1.16 TRUST.................................................................2 1.17 TRUSTEE...............................................................2 1.18 VALUATION DATE........................................................2 ARTICLE 2 ELIGIBILITY AND PARTICIPATION 2.1 REQUIREMENTS..........................................................2 2.2 RE-EMPLOYMENT.........................................................2 2.3 CHANGE OF EMPLOYMENT CATEGORY.........................................2 ARTICLE 3 CONTRIBUTIONS AND CREDITS 3.1 PARTICIPANT CONTRIBUTIONS AND CREDITS.................................3 3.2 EMPLOYER CONTRIBUTIONS................................................3 3.3 CONTRIBUTIONS TO THE TRUST............................................3 ARTICLE 4 ALLOCATION OF FUNDS 4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS...................4 4.2 ACCOUNTING FOR DISTRIBUTIONS..........................................4 4.3 SEPARATE ACCOUNTS.....................................................4 4.4 INTERIM VALUATIONS....................................................4 4.5 DEEMED INVESTMENT DIRECTIONS OF PARTICIPANTS..........................4 4.6 EXPENSES AND TAXES....................................................5 ARTICLE 5 ENTITLEMENT TO BENEFITS 5.1 FIXED PAYMENT DATES; TERMINATION OF EMPLOYMENT........................5 5.2 HARDSHIP DISTRIBUTIONS................................................6 5.3 OTHER IN-SERVICE WITHDRAWALS..........................................6 5.4 RE-EMPLOYMENT OF RECIPIENT............................................6 5.5 WITHDRAWAL PAYMENTS...................................................6
i 3
ARTICLE 6 DISTRIBUTION OF BENEFITS 6.1 AMOUNT................................................................6 6.2 METHOD OF PAYMENT.....................................................6 6.3 DEATH OR DISABILITY BENEFITS..........................................7 ARTICLE 7 BENEFICIARIES; PARTICIPANT DATA 7.1 DESIGNATION OF BENEFICIARIES..........................................7 7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES; INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES.....................7 ARTICLE 8 ADMINISTRATION 8.1 ADMINISTRATIVE AUTHORITY..............................................8 8.2 LITIGATION............................................................8 8.3 CLAIMS PROCEDURE......................................................8 ARTICLE 9 AMENDMENT 9.1 RIGHT TO AMEND........................................................9 9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN..................9 ARTICLE 10 TERMINATION 10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN........................10 10.2 AUTOMATIC TERMINATION OF PLAN........................................10 10.3 SUSPENSION OF DEFERRALS..............................................10 10.4 ALLOCATION AND DISTRIBUTION..........................................10 10.5 SUCCESSOR TO EMPLOYER................................................10 ARTICLE 11 THE TRUST 11.1 ESTABLISHMENT OF TRUST...............................................10 ARTICLE 12 MISCELLANEOUS 12.1 LIMITATIONS ON LIABILITY OF EMPLOYER.................................10 12.2 CONSTRUCTION.........................................................11 12.3 SPENDTHRIFT PROVISION................................................11
ii 4 VERILINK CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN Effective as of January 1, 2001 RECITALS This Verilink Corporation Executive Deferred Compensation Plan (the "Plan") is adopted by Verilink Corporation (the "Employer") for certain of its executive employees and members of its Board of Directors. The purpose of the Plan is to provide deferred compensation to these persons through an unfunded "top hat" arrangement exempt from the fiduciary, funding, vesting and plan termination insurance provisions of Title I and Title IV of the Employee Retirement Income Security Act ("ERISA"). ARTICLE 1 DEFINITIONS 1.1 ACCOUNT means the balance credited to a Participant's or Beneficiary's Plan account, including contribution credits and deemed income, gains and losses (as determined by the Employer, in its discretion) credited thereto. A Participant's or Beneficiary's Account shall be determined as of the date of reference. 1.2 BENEFICIARY means any person or person so designated in accordance with the provisions of Article 7. 1.3 CODE means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. 1.4 COMPENSATION means, with respect to an Eligible Person who is an employee, the Eligible Person's salary, bonuses and commissions paid by the Employer to the Eligible Person for services rendered as an employee to the Employer and, with respect to an Eligible Person who is a director, retainer and meeting fees paid by the Employer to the Eligible Person for services rendered as a member of the Board of Directors of the Employer. Compensation does not include noncash compensation, amounts which receive special tax benefits or cash fringe benefits such as car allowances. Compensation also shall be increased by Compensation Deferrals. Whether a particular category of remuneration is includable as Compensation shall be determined by the Employer in its sole discretion. 1.5 COMPENSATION DEFERRALS is defined in Section 3.1(a). 1.6 DESIGNATION DATE means the date or dates as of which a designation of deemed investment directions by an individual pursuant to Section 4.5, or any change in a prior designation of deemed investment directions by an individual pursuant to Section 4.5, shall become effective. The Designation Dates in any Plan Year shall be designated by the Employer. 1.7 EFFECTIVE DATE means the effective date of the Plan, which shall be January 1, 2001. 1.8 ELIGIBLE PERSON means, for any Plan Year (or applicable portion thereof), a member of the Board of Directors of the Employer or a person employed by the Employer, who is determined by the Employer to be in a management role or above and who is designated by the Employer's Board of Directors to be an Eligible Person under the Plan. By each November 1 (or before the Effective Date for the Plan's first Plan Year), the Employer shall notify those individuals, if any, who will be Eligible Persons for the next Plan Year. If the Employer determines that an individual first becomes an Eligible Person during a Plan Year, the Employer shall notify such individual of its determination and of the date during the Plan Year on which the individual shall first become an Eligible Person. 1.9 EMPLOYER means Verilink Corporation and its successors and assigns unless otherwise herein provided, or any other corporation or business organization which, with the consent of Verilink Corporation, or its 1 5 successors or assigns, assumes the Employer's obligations hereunder, or any other corporation or business organization which agrees, with the consent of Verilink Corporation, to become a party to the Plan. 1.10 ENTRY DATE with respect to an individual means the first day of the pay period following the date on which the individual first becomes an Eligible Person. 1.11 PARTICIPANT means any person so designated in accordance with the provisions of Article 2, including, where appropriate according to the context of the Plan, any former employee or former member of the Board of Directors of the Employer who is or may become (or whose Beneficiaries may become) eligible to receive a benefit under the Plan. 1.12 PARTICIPANT ENROLLMENT AND ELECTION FORM means the form or forms on which a Participant elects to defer Compensation hereunder and on which the Participant makes certain other designations as required thereon. 1.13 PLAN means this Verilink Corporation Executive Deferred Compensation Plan, as amended from time to time. 1.14 PLAN YEAR means the twelve (12) month period ending on the December 31 of each year during which the Plan is in effect. 1.15 TOTAL AND PERMANENT DISABILITY means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that may be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The permanence and degree of such impairment shall be supported by medical evidence. Disability will be deemed to exist if the Participant is receiving disability benefits under the Social Security Act or Railroad Retirement Act. 1.16 TRUST means the Trust described in Article 11. 1.17 TRUSTEE means the trustee of the Trust described in Article 11. 1.18 VALUATION DATE means the last day of each Plan Year and any other date that the Employer, in its sole discretion, designates as a Valuation Date. ARTICLE 2 ELIGIBILITY AND PARTICIPATION 2.1 REQUIREMENTS. Every Eligible Person on the Effective Date shall be eligible to become a Participant on the Effective Date. Every other Eligible Person shall be eligible to become a Participant on the first Entry Date occurring on or after the date on which he or she becomes an Eligible Person. No individual shall become a Participant, however, if he or she is not an Eligible Person on the date his or her participation is to begin. Participation in the Plan is voluntary. In order to participate in the Plan, an otherwise Eligible Person must make written application in such manner as may be required by Section 3.2 and by the Employer and must agree to make Compensation Deferrals as provided in Article 3. 2.2 RE-EMPLOYMENT. If a Participant whose employment or services with the Employer are terminated subsequently returns to service, he or she shall become a Participant in accordance with the provisions of Section 2.1. 2.3 CHANGE OF EMPLOYMENT CATEGORY. During any period in which a Participant remains in the service of the Employer, but ceases to be an Eligible Person, he or she shall not be eligible to make Compensation Deferrals hereunder. 2 6 ARTICLE 3 CONTRIBUTIONS AND CREDITS 3.1 PARTICIPANT CONTRIBUTIONS AND CREDITS. (a) Compensation Deferrals. In accordance with rules established by the Employer, Participants who are employees may elect to defer up to 50% of their salary and up to 100% of their annual bonuses (net of any and all legal withholdings). Participants who are directors may defer up to 100% of their retainer and meeting fees. Amounts so deferred will be considered a Participant's "Compensation Deferrals." Ordinarily, a Participant shall make such an election with respect to the coming twelve (12) month Plan Year during the period beginning on November 1 and ending on the November 30 of the prior calendar year, or during such other period as might be established by the Employer. Compensation Deferrals shall be made through regular payroll deductions or through an election by the Participant to defer the payment of a commission or bonus not yet payable to him or her at the time of the election. The Participant may change his or her regular payroll deduction Compensation Deferral amount as of, and by written notice delivered to the Employer prior to, the first day of a calendar year, or such other date as may be permitted by the Employer in its sole discretion. In the case of commission or bonus payment deferrals, the Participant may reduce his or her commission or bonus due to be paid by the Employer by delivering written notice to the Employer of the commission or bonus Compensation deferral amount prior to the date the applicable commission or bonus amount is determined, or such other date as may be permitted by the Employer in its sole discretion. Compensation Deferral elections shall continue in force only for the Plan Year for which the election is first effective. Compensation Deferrals shall be deducted by the Employer from the pay of a deferring Participant and shall be credited to the Account of the deferring Participant. If a Participant receives an in-service hardship withdrawal under any Employer-sponsored, tax-qualified cash or deferred arrangement, then any suspension of deferrals required by such arrangement shall include the making of Compensation Deferrals hereunder. (b) The Participant's Account. There shall be established and maintained by the Employer a separate Account in the name of each Participant to which shall be credited or debited: (a) amounts equal to the Participant's Compensation Deferrals; (b) amounts equal to any deemed earnings and losses (to the extent realized, based upon deemed fair market value of the Account's deemed assets, as determined by the Employer, in its discretion) attributable or allocable thereto; and (c) any charges against the Account. A Participant shall at all times be 100% vested in Compensation Deferrals credited to his or her Account. 3.2 EMPLOYER CONTRIBUTIONS. (a) Employer Discretionary Contributions Apart from Compensation Deferrals, the Employer shall retain the right to make discretionary Employer contributions for any Participant under this Plan. (b) Vesting in Employer Contributions. Subject to the provisions of Section 3.3 below, a participant shall vest immediately in Employer contributions allocated to his or her Account. (c) Forfeitures for Misconduct. Notwithstanding any other provision of the Plan to the contrary, if a Participant separates from service with the Employer as a result of the Participant's gross misconduct, within the meaning of Part 6 of Title I of ERISA, regarding group health continuation coverage, or if the Participant engages in unlawful business competition with the Employer, the Participant shall forfeit all amounts allocated to his or her Accounts under Section 3.2(a) above. Such forfeitures shall be recovered by the Employer. 3.3 CONTRIBUTIONS TO THE TRUST. An amount shall be contributed by the Employer to the Trust maintained under Section 11.1 equal to the amount(s) required to be credited to the Participant's Account 3 7 under Section 3.1. The Employer shall make a good faith effort to contribute these amounts to the Trust as soon as practicable following the date on which the Compensation Deferrals are determined. ARTICLE 4 ALLOCATION OF FUNDS 4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS. Subject to such limitations as may from time to time be required by law, imposed by the Employer or the Trustee or contained elsewhere in the Plan, and subject to such operating rules and procedures as may be imposed from time to time by the Employer, prior to the date on which a direction will become effective, the Participant shall have the right to direct the Employer as to how amounts in his or her Account shall be deemed to be invested. The Employer shall direct the Trustee to invest the account maintained in the Trust on behalf of the Participant pursuant to the deemed investment directions the Employer properly has received from the Participant. The value of the Participant's Account shall be equal to the value of the account maintained under the Trust on behalf of the Participant. As of each Valuation Date, the Participant's Account will be credited or debited to reflect the Participant's deemed investments of the Trust. The Participant's Plan Account will be credited or debited with the increase or decrease in the realizable net asset value or credited interest, as applicable, of the designated deemed investments, as follows. As of each Valuation Date, an amount equal to the net increase or decrease in realizable net asset value or credited interest, as applicable (as determined by the Trustee), of each deemed investment option within the Account since the preceding Valuation Date shall be allocated among all Participants' Accounts deemed to be invested in that investment option in accordance with the ratio which the portion of the Account of each Participant which is deemed to be invested within that investment option, determined as provided herein, bears to the aggregate of all amounts deemed to be invested within that investment option. 4.2 ACCOUNTING FOR DISTRIBUTIONS. As of the date of any distribution hereunder, the distribution made hereunder to the Participant or his or her Beneficiary or Beneficiaries shall be charged to such Participant's Account. Such amounts shall be charged on a pro rata basis against the investments of the Trust in which the Participant's Account is deemed to be invested. 4.3 SEPARATE ACCOUNTS. The Employer shall establish an Account for each Participant reflecting Compensation Deferrals and Employer contributions made for the Participant's benefit together with any adjustments for income, gain or loss and any payments from the Account. The Employer may cause the Trustee to maintain and invest separate asset accounts corresponding to each Participant's Account. The Employer shall establish sub-accounts for each Participant as are necessary for the proper administration of the Plan. 4.4 INTERIM VALUATIONS. If it is determined by the Employer that the value of a Participant's Account as of any date on which distributions are to be made differs materially from the value of the Participant's Account on the prior Valuation Date upon which the distribution is to be based, the Employer, in its discretion, shall have the right to designate any date in the interim as a Valuation Date for the purpose of revaluing the Participant's Account so that the Account will, prior to the distribution, reflect its share of such material difference in value. 4.5 DEEMED INVESTMENT DIRECTIONS OF PARTICIPANTS. Subject to such limitations as may from time to time be required by law, imposed by the Employer or the Trustee or contained elsewhere in the Plan, and subject to such operating rules and procedures as may be imposed from time to time by the Employer, prior to and effective for each Designation Date, each Participant may communicate to the Employer a direction (in accordance with (a), below) as to how his or her Plan Account should be deemed to be invested among such categories of deemed investments as may be made available by the Employer hereunder. Such direction shall designate the percentage (in any whole percent multiples) of each portion of the Participant's Plan Account which is requested to be deemed to be invested in such categories of deemed investments, and shall be subject to the following rules: (a) Any initial or subsequent deemed investment direction shall be in writing, on a form supplied by and filed with the Employer, and/or, as required or permitted by the Employer, shall be by written designation and/or electronic transmission designation. A designation shall be effective as of the Designation Date 4 8 next following the date the direction is received and accepted by the Employer on which it would be reasonably practicable for the Employer to effect the designation. (b) All amounts credited to the Participant's Account shall be deemed to be invested in accordance with the then effective deemed investment direction, and as of the Designation Date with respect to any new deemed investment direction, all or a portion of the Participant's Account at that date shall be reallocated among the designated deemed investment funds according to the percentages specified in the new deemed investment direction unless and until a subsequent deemed investment direction shall be filed and become effective. An election concerning deemed investment choices shall continue indefinitely as provided in the Participant's most recent Participant Enrollment and Election Form, or other form specified by the Employer. (c) If the Employer receives an initial or revised deemed investment direction which it deems to be incomplete, unclear or improper, the Participant's investment direction then in effect shall remain in effect (or, in the case of a deficiency in an initial deemed investment direction, the Participant shall be deemed to have filed no deemed investment direction) until the next Designation Date, unless the Employer provides for, and permits the application of, corrective action prior thereto. (d) If the Employer possesses (or is deemed to possess as provided in (c), above) at any time directions as to the deemed investment of less than all of a Participant's Account, the Participant shall be deemed to have directed that the undesignated portion of the Account be deemed to be invested in a money market, fixed income or similar fund made available under the Plan as determined by the Employer in its discretion. (e) Each Participant hereunder, as a condition to his or her participation hereunder, agrees to indemnify and hold harmless the Employer and its agents and representatives from any losses or damages of any kind relating to the deemed investment of the Participant's Account hereunder. (f) Each reference in this Section to a Participant shall be deemed to include, where applicable, a reference to a Beneficiary. 4.6 EXPENSES AND TAXES. Expenses, including Trustee fees, associated with the administration or operation of the Plan shall be charged against Accounts except to the extent paid by the Employer from its general assets. Any taxes assessable against the Employer respecting earnings on the Trust, as determined by the Employer, shall be paid by the Employer. ARTICLE 5 ENTITLEMENT TO BENEFITS 5.1 FIXED PAYMENT DATES; TERMINATION OF EMPLOYMENT. On his or her Participant Enrollment and Election Form, a Participant may select a fixed payment date for the payment or commencement of payment of his or her Account (or the Participant may select fixed payment dates for the payment or commencement of payment of portions of his or her Account), which will be valued and payable according to the provisions of Article 6. Such payment dates may be extended to later dates so long as elections to so extend the dates are made by the Participant at least six (6) months prior to the date on which the distribution is to be made or commence. Such payment dates may not be accelerated. A Participant who selects payment or commencement of payment of his or her Account (or portions thereof) on a fixed date or dates shall receive payment of his or her Account at the earlier of such fixed payment date or dates (as extended, if applicable) or his or her termination of service with the Employer. Any fixed payment date elected by a Participant as provided above must be a date no earlier than January 1 of the third calendar year after the calendar year in which the election is made. Compensation Deferrals may not be credited to an Account, or applicable portion thereof, which is in pay status. 5 9 If a Participant does not make an election as provided above for any particular amounts hereunder, and the Participant terminates employment with the Employer for any reason, the Participant's vested Account at the date of such termination shall be valued and payable at or commencing at such termination according to the provisions of Article 6. 5.2 HARDSHIP DISTRIBUTIONS. In the event of financial hardship of the Participant, as hereinafter defined, the Participant may apply to the Employer for the distribution of all or any part of his or her vested Account. The Employer shall consider the circumstances of each such case, and the best interests of the Participant and his or her family, and shall have the right, in its sole discretion, if applicable, to allow such distribution, or, if applicable, to direct a distribution of part of the amount requested, or to refuse to allow any distribution. Upon a finding of financial hardship, the Employer shall make the appropriate distribution to the Participant from amounts held by the Employer in respect of the Participant's vested Account. In no event shall the aggregate amount of the distribution exceed either the full value of the Participant's vested Account or the amount determined by the Employer to be necessary to alleviate the Participant's financial hardship (which financial hardship may be considered to include any taxes due because of the distribution occurring because of this Section), and which is not reasonably available from other resources of the Participant. For purposes of this Section, the value of the Participant's vested Account shall be determined as of the date of the distribution. "Financial hardship" means (a) a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code section 152(a)) of the Participant, (b) loss of the Participant's property due to casualty, or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, each as determined to exist by the Employer. A distribution may be made under this Section only with the consent of the Employer. 5.3 OTHER IN-SERVICE WITHDRAWALS. If a Participant experiences a financial need that does not qualify as a hardship under Section 5.2, the Participant may nevertheless petition the Employer for an in-service withdrawal of all or a portion of his or her vested Account setting forth his or her reasons for the request. The granting of any such petition shall be completely within the discretion of the Employer. 5.4 RE-EMPLOYMENT OF RECIPIENT. If a Participant receiving installment distributions pursuant to Section 6.2 returns to service with the Employer, the remaining distributions due to the Participant shall be suspended until such time as the Participant (or his or her Beneficiary) once again becomes eligible for benefits under this Section 5, at which time such distribution shall commence, subject to the limitations and conditions contained in this Plan. 5.5 WITHDRAWAL PAYMENTS. All in-service withdrawals, whether approved pursuant to Section 5.2 or 5.3 above, shall be made as soon as practicable following their approval and shall be distributed from a Participant's Account in a lump sum in cash or in-kind, as permitted by the Employer in its sole and absolute discretion and subject to applicable restrictions on transfer as may be applicable legally or contractually. ARTICLE 6 DISTRIBUTION OF BENEFITS 6.1 AMOUNT. A Participant (or his or her Beneficiary) shall become entitled to receive, as soon as practicable following the earlier of the Participant's termination of service with the Employer or the date or dates selected by the Participant on his or her Participant Enrollment and Election Form (or, if no such selection is made, as soon as practicable following the date of the Participant's termination of service with the Employer) (or earlier as provided in Article 5), a distribution in an aggregate amount equal to the Participant's vested Account. Any payment due hereunder from the Trust which is not paid by the Trust for any reason will be paid by the Employer from its general assets. 6.2 METHOD OF PAYMENT. (a) Cash Or In-Kind Payments. Payments under the Plan shall be made in cash or in-kind, as elected by the Participant, as permitted by the Employer in its sole and absolute discretion and subject to applicable restrictions on transfer as may be applicable legally or contractually. 6 10 (b) Manner of Payment. In the case of distributions to a Participant or his or her Beneficiary by virtue of an entitlement pursuant to Sections 5.1, an aggregate amount equal to the Participant's vested Account (or designated portion thereof) will be paid by the Trust or the Employer, in a lump sum or in up to ten (10) substantially equal annual installments (adjusted for gains and losses), under such procedures as may be established by the Employer from time to time. If a Participant fails to designate properly the manner of payment of the Participant's benefit under the Plan, such payment will be in a lump sum. If the whole or any part of a payment hereunder is to be in installments, the total to be so paid shall continue to be deemed to be invested pursuant to Sections 4.1 and 4.5 under such procedures as the Employer may establish, in which case any deemed income, gain, loss or expense or tax allocable thereto (as determined by the Trustee, in its discretion) shall be reflected in the installment payments, in such equitable manner as the Trustee shall determine. 6.3 DEATH OR DISABILITY BENEFITS. If a Participant dies or experiences a Total and Permanent Disability before terminating his or her service with the Employer and before the commencement of payments to the Participant hereunder, the entire value of the Participant's Account shall be paid, at the time(s) selected by the Participant under Article 5 and in the manner provided in Section 6.2, to the person or persons designated in accordance with Section 7.1. Upon the death of a Participant after payments hereunder have begun but before he or she has received all payments to which he or she is entitled under the Plan, the remaining benefit payments shall be paid to the person or persons designated in accordance with Section 7.1, in the manner in which such benefits were payable to the Participant. ARTICLE 7 BENEFICIARIES; PARTICIPANT DATA 7.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to time may designate any person or persons (who may be named contingently or successively) to receive such benefits as may be payable under the Plan upon or after the Participant's death, and such designation may be changed from time to time by the Participant by filing a new designation. However, a married Participant shall obtain the consent of his or her spouse to the naming of any other person as a primary beneficiary. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Employer, and will be effective only when filed in writing with the Employer during the Participant's lifetime. In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Participant, the Employer shall pay any such benefit payment to the Participant's spouse, if then living, but otherwise to the Participant's estate. In determining the existence or identity of anyone entitled to a benefit payment, the Employer may rely conclusively upon information supplied by the Participant's personal representative, executor or administrator. If a question arises as to the existence or identity of anyone entitled to receive a benefit payment as aforesaid, or if a dispute arises with respect to any such payment, then, notwithstanding the foregoing, the Employer, in its sole discretion, may distribute such payment to the Participant's estate without liability for any tax or other consequences which might flow therefrom, or may take such other action as the Employer deems to be appropriate. 7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES; INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES. Any communication, statement or notice addressed to a Participant or to a Beneficiary at his or her last post office address as shown on the Employer's records shall be binding on the Participant or Beneficiary for all purposes of the Plan. The Employer shall not be obliged to search for any Participant or Beneficiary beyond the sending of a registered letter to such last known address. If the Employer notifies any Participant or Beneficiary that he or she is entitled to an amount under the Plan and the Participant or Beneficiary fails to claim such amount or make his or her location known to the Employer within three (3) years thereafter, then, except as otherwise required by law, if the location of one or more of the next of kin of the Participant is known to the Employer, the Employer may direct distribution of such amount to any one or more or all of such next of kin, and in such proportions as the Employer determines. If the location of 7 11 none of the foregoing persons can be determined, the Employer shall have the right to direct that the amount payable shall be deemed to be a forfeiture, except that the dollar amount of the forfeiture, unadjusted for deemed gains or losses in the interim, shall be paid by the Employer if a claim for the benefit subsequently is made by the Participant or the Beneficiary to whom it was payable. If a benefit payable to an unlocated Participant or Beneficiary is subject to escheat pursuant to applicable state law, the Employer shall not be liable to any person for any payment made in accordance with such law. ARTICLE 8 ADMINISTRATION 8.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically provided herein, the Employer shall have the sole responsibility for and the sole control of the operation and administration of the Plan, and shall have the power and authority to take all action and to make all decisions and interpretations which may be necessary or appropriate in order to administer and operate the Plan, which decisions and interpretations shall be final and binding upon all parties. Without limiting the generality of the foregoing, the Employer shall have the power, duty and responsibility to: (a) Resolve and determine all disputes or questions arising under the Plan, and to remedy any ambiguities, inconsistencies or omissions in the Plan. (b) Adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan. (c) Implement the Plan in accordance with its terms and the rules and regulations adopted as above. (d) Make determinations with respect to the eligibility of any Eligible Person as a Participant and make determinations concerning the crediting of Plan Accounts. (e) Appoint any persons or firms, or otherwise act to secure specialized advice or assistance, as it deems necessary or desirable in connection with the administration and operation of the Plan, and the Employer shall be entitled to rely conclusively upon, and shall be fully protected in any action or omission taken by it in good faith reliance upon, the advice or opinion of such firms or persons. The Employer shall have the power and authority to delegate from time to time by written instrument all or any part of its duties, powers or responsibilities under the Plan, both ministerial and discretionary, as it deems appropriate, to any person or committee, and in the same manner to revoke any such delegation of duties, powers or responsibilities. Any action of such person or committee in the exercise of such delegated duties, powers or responsibilities shall have the same force and effect for all purposes hereunder as if such action had been taken by the Employer. Further, the Employer may authorize one or more persons to execute any certificate or document on behalf of the Employer, in which event any person notified by the Employer of such authorization shall be entitled to accept and conclusively rely upon any such certificate or document executed by such person as representing action by the Employer until such notified person shall have been notified of the revocation of such authority. 8.2 LITIGATION. Except as may be otherwise required by law, in any action or judicial proceeding affecting the Plan, no Participant or Beneficiary shall be entitled to any notice or service of process, and any final judgment entered in such action shall be binding on all persons interested in, or claiming under, the Plan. 8.3 CLAIMS PROCEDURE. Any person claiming a benefit under the Plan (a "Claimant") shall present the claim, in writing, to the Employer, and the Employer shall respond in writing. If the claim is denied, the written notice of denial shall state, in a manner calculated to be understood by the Claimant: (a) The specific reason or reasons for the denial, with specific references to the Plan provisions on which the denial is based; 8 12 (b) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or information is necessary; and (c) An explanation of the Plan's claims review procedure. The written notice denying or granting the Claimant's claim shall be provided to the Claimant within ninety (90) days after the Employer's receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice of the extension shall be furnished by the Employer to the Claimant within the initial ninety (90) day period and in no event shall such an extension exceed a period of ninety (90) days from the end of the initial ninety (90) day period. Any extension notice shall indicate the special circumstances requiring the extension and the date on which the Employer expects to render a decision on the claim. Any claim not granted or denied within the period noted above shall be deemed to have been denied. Any Claimant whose claim is denied, or deemed to have been denied under the preceding sentence (or such Claimant's authorized representative), may, within sixty (60) days after the Claimant's receipt of notice of the denial, or after the date of the deemed denial, request a review of the denial by notice given, in writing, to the Employer. Upon such a request for review, the claim shall be reviewed by the Employer (or its designated representative) which may, but shall not be required to, grant the Claimant a hearing. In connection with the review, the Claimant may have representation, may examine pertinent documents, and may submit issues and comments in writing. The decision on review normally shall be made within sixty (60) days of the Employer's receipt of the request for review. If an extension of time is required due to special circumstances, the Claimant shall be notified, in writing, by the Employer, and the time limit for the decision on review shall be extended to one hundred twenty (120) days. The decision on review shall be in writing and shall state, in a manner calculated to be understood by the Claimant, the specific reasons for the decision and shall include references to the relevant Plan provisions on which the decision is based. The written decision on review shall be given to the Claimant within the sixty (60) day (or, if applicable, the one hundred twenty (120) day) time limit discussed above. If the decision on review is not communicated to the Claimant within the sixty (60) day (or, if applicable, the one hundred twenty (120) day) period discussed above, the claim shall be deemed to have been denied upon review. All decisions on review shall be final and binding with respect to all concerned parties. ARTICLE 9 AMENDMENT 9.1 RIGHT TO AMEND. The Employer, by action of its Board of Directors, shall have the right to amend the Plan, at any time and with respect to any provisions hereof, and all parties hereto or claiming any interest hereunder shall be bound by such amendment; provided, however, that no such amendment shall deprive a Participant or a Beneficiary of a right accrued hereunder prior to the date of the amendment. 9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN. Notwithstanding the provisions of Section 9.1, the Plan may be amended by the Employer, by action of its Board of Directors, at any time, retroactively if required, if found necessary, in the opinion of the Employer, in order to ensure that the Plan is characterized as "top-hat" plan of deferred compensation maintained for a select group of management or highly compensated employees as described under ERISA sections 201(2), 301(a)(3), and 401(a)(1), and to conform the Plan to the provisions and requirements of any applicable law (including ERISA and the Internal Revenue Code). No such amendment shall be considered prejudicial to any interest of a Participant or a Beneficiary hereunder. 9 13 ARTICLE 10 TERMINATION 10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN. The Employer reserves the right to terminate the Plan and/or its obligation to make further credits to Plan Accounts, by action of its Board of Directors. The Employer also reserves the right to suspend the operation of the Plan for a fixed or indeterminate period of time, by action of its Board of Directors. 10.2 AUTOMATIC TERMINATION OF PLAN. The Plan automatically shall terminate upon the dissolution of the Employer, or upon its merger into or consolidation with any other corporation or business organization if there is a failure by the surviving corporation or business organization to adopt specifically and agree to continue the Plan. 10.3 SUSPENSION OF DEFERRALS. In the event of a suspension of the Plan, the Employer shall continue all aspects of the Plan, other than Compensation Deferrals, during the period of the suspension, in which event payments hereunder will continue to be made during the period of the suspension in accordance with Articles 5 and 6. 10.4 ALLOCATION AND DISTRIBUTION. This Section shall become operative on a complete termination of the Plan. The provisions of this Section also shall become operative in the event of a partial termination of the Plan, as determined by the Employer, but only with respect to that portion of the Plan attributable to the Participants to whom the partial termination is applicable. Upon the effective date of any such event, notwithstanding any other provisions of the Plan, no persons who were not theretofore Participants shall be eligible to become Participants, the value of the interest of all Participants and Beneficiaries shall be determined and, paid to them as soon as is practicable after such termination. 10.5 SUCCESSOR TO EMPLOYER. Any corporation or other business organization which is a successor to the Employer by reason of a consolidation, merger or purchase of substantially all of the assets of the Employer shall have the right to become a party to the Plan by adopting the same by resolution of the entity's board of directors or other appropriate governing body. If, within ninety (90) days from the effective date of such consolidation, merger or sale of assets, such new entity does not become a party hereto, as above provided, the Plan automatically shall be terminated, and the provisions of Section 10.4 shall become operative. ARTICLE 11 THE TRUST 11.1 ESTABLISHMENT OF TRUST. The Employer shall establish the Trust with the Trustee pursuant to such terms and conditions as are set forth in the Trust agreement to be entered into between the Employer and the Trustee or the Employer shall cause to be maintained one or more separate subaccounts in an existing Trust maintained with the Trustee with respect to one or more other plans of the Employer, which subaccount or subaccounts represent Participants' interests in the Plan. Any such Trust shall be intended to be treated as a "grantor trust" under the Internal Revenue Code and the establishment of the Trust or the utilization of any existing Trust for Plan benefits, as applicable, shall not be intended to cause any Participant to realize current income on amounts contributed thereto, and the Trust shall be so interpreted. ARTICLE 12 MISCELLANEOUS 12.1 LIMITATIONS ON LIABILITY OF EMPLOYER. Neither the establishment of the Plan nor any modification thereof, nor the creation of any account under the Plan, nor the payment of any benefits under the Plan shall be construed as giving to any Participant or other person any legal or equitable right against the Employer, or any officer or employer thereof except as provided by law or by any Plan provision. The Employer does not in any way guarantee any Participant's Account from loss or depreciation, whether caused by poor investment performance of a deemed investment or the inability to realize upon an investment due to an insolvency affecting an investment 10 14 vehicle or any other reason. In no event shall the Employer, or any successor, employee, officer, director or stockholder of the Employer, be liable to any person on account of any claim arising by reason of the provisions of the Plan or of any instrument or instruments implementing its provisions, or for the failure of any Participant, Beneficiary or other person to be entitled to any particular tax consequences with respect to the Plan, or any credit or distribution hereunder. 12.2 CONSTRUCTION. If any provision of the Plan is held to be illegal or void, such illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. For all purposes of the Plan, where the context admits, the singular shall include the plural, and the plural shall include the singular. Headings of Articles and Sections herein are inserted only for convenience of reference and are not to be considered in the construction of the Plan. The laws of the State of Delaware shall govern, control and determine all questions of law arising with respect to the Plan and the interpretation and validity of its respective provisions, except where those laws are preempted by the laws of the United States. Participation under the Plan will not give any Participant the right to be retained in the service of the Employer nor any right or claim to any benefit under the Plan unless such right or claim has specifically accrued hereunder. The Plan is intended to be and at all times shall be interpreted and administered so as to qualify as an unfunded deferred compensation plan, and no provision of the Plan shall be interpreted so as to give any individual any right in any assets of the Employer which right is greater than the rights of a general unsecured creditor of the Employer. 12.3 SPENDTHRIFT PROVISION. No amount payable to a Participant or a Beneficiary under the Plan will, except as otherwise specifically provided by law, be subject in any manner to anticipation, alienation, attachment, garnishment, sale, transfer, assignment (either at law or in equity), levy, execution, pledge, encumbrance, charge or any other legal or equitable process, and any attempt to do so will be void; nor will any benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled thereto. Further, (i) the withholding of taxes from Plan benefit payments, (ii) the recovery under the Plan of overpayments of benefits previously made to a Participant or Beneficiary, (iii) if applicable, the transfer of benefit rights from the Plan to another plan, or (iv) the direct deposit of benefit payments to an account in a banking institution (if not actually part of an arrangement constituting an assignment or alienation) shall not be construed as an assignment or alienation. In the event that any Participant's or Beneficiary's benefits hereunder are garnished or attached by order of any court, the Employer or Trustee may bring an action or a declaratory judgment in a court of competent jurisdiction to determine the proper recipient of the benefits to be paid under the Plan. During the pendency of said action, any benefits that become payable shall be held as credits to the Participant's or Beneficiary's Account or, if the Employer or Trustee prefers, paid into the court as they become payable, to be distributed by the court to the recipient as the court deems proper at the close of said action. IN WITNESS WHEREOF, the Employer has caused the Plan to be executed and its seal to be affixed hereto, effective as of the 1st Day of January, 2001. ATTEST/WITNESS: VERILINK CORPORATION /s/ C. W. Smith By: /s/ Betsy Mosgrove (SEAL) - ----------------------------- --------------------------------- Print: C. W. Smith Print Name: Betsy Mosgrove ---------------------- ------------------------- Date: March 29, 2001 ------------------------------- 11 EX-10.58 3 g69137ex10-58.txt SEPARATION AGREEMENT DATED 3/2/01 1 EXHIBIT 10.58 SETTLEMENT AGREEMENT AND FULL AND FINAL RELEASE OF CLAIMS This Settlement Agreement and Full and Final Release of Claims ("Agreement") is made and entered into between Steven E. Turner ("Mr. Turner") and Verilink Corporation ("Verilink"). 1. SEVERANCE. Mr. Turner and Verilink have agreed to end their employment relationship in a manner such that Mr. Turner's employment with Verilink will end effective March 2, 2001 ("Effective Separation Date"). 2. CONSIDERATION. In consideration of his decision to enter into this Agreement, Verilink will provide Mr. Turner with the following: (a) The continuation of his current salary for a period of six (6) months from Mr. Turner's Effective Separation Date. In the alternative, Verilink may at any time choose to pay Mr. Turner a lump sum payment equal to the outstanding balance of his remaining salary. All such payments are subject to the applicable legal withholdings. (b) The continuation of the coverage currently in effect for Mr. Turner and Mr. Turner's covered dependents under the medical, dental and vision plans for a period of six (6) months from his Effective Separation Date. (c) The right to exercise any vested stock options for a period of ninety (90) days following Mr. Turner's Effective Separation Date, pursuant to Verilink's current Stock Option Plan. (d) Whether or not Mr Turner executes this Agreement, the payment of any accrued, but unused, paid-time-off, as soon as administratively feasible after his Effective Separation Date or within a reasonable period after this Agreement becomes binding and effective, whichever is later. All such payments are subject to the applicable legal withholdings. Paid Time Off will not accrue following Mr. Turner's effective separation date. 3. NO OBLIGATION. Mr. Turner agrees and understands that the consideration described in Paragraph 2 above is not required by Verilink's policies and procedures or by any prior agreement between Verilink and Mr. Turner. 4. FULL AND FINAL RELEASE. In consideration of the payments being provided to him above, Mr. Turner, for himself, his attorneys, heirs, executors, administrators, successors and assigns, fully, finally and forever releases and discharges Verilink, all subsidiary and/or affiliated companies, as well as its and their successors, assigns, officers, owners, directors, agents, representatives, attorneys, and employees (all of whom are referred to throughout this Agreement as "Verilink"), of and from all claims, demands, actions, causes of action, suits, damages, losses, and expenses, of any and every nature whatsoever, as a result of actions or omissions occurring through the effective date of this Agreement. Specifically 2 included in this waiver and release are, among other things, any and all claims for severance pay benefits under the Employee Retirement Income Security Act of 1974 (ERISA), any and all claims of alleged employment discrimination, either as a result of the separation of Mr. Turner's employment, or otherwise, under the Age Discrimination in Employment Act, the Older Workers' Benefit Protection Act; Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, any other federal, state or local statute, rule, ordinance, or regulation, as well as any claims for alleged wrongful discharge, negligent or intentional infliction of emotional distress, breach of contract, fraud, or any other unlawful behavior, the existence of which is specifically denied by Verilink. Nothing in this Agreement and Release, however, is intended to waive Mr. Turner's entitlement to vested benefits under any pension or 401(k) plan or other benefit plan provided by Verilink. Finally, the above release does not waive claims that Mr. Turner could make, if available, for unemployment or workers' compensation. 5. NO OTHER CLAIMS. Mr. Turner represents that he has not filed, nor assigned to others the right to file, nor are there pending, any complaints, charges or lawsuits against Verilink with any governmental agency or any court, and that he will not file, nor assign to others the right to file, or make any further claims against Verilink at any time for actions or omissions covered by the release in Paragraph 4 above. 6. OWNERSHIP AND PROTECTION OF PROPRIETARY INFORMATION. (a) Confidentiality. All Confidential Information and Trade Secrets, as defined below, and all physical embodiments thereof received or developed by Mr. Turner while employed by Verilink are confidential to and are and will remain the sole and exclusive property of Verilink. Such Confidential Information and/or Trade Secrets includes, but is not limited to, those developed in conjunction with the Boston initiative and with the Boston University Photonics Center and Beacon Telco project(s). Mr. Turner will hold such Confidential Information and Trade Secrets in trust and strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Confidential Information and Trade Secrets or any physical embodiments thereof and may in no event take any action causing or fail to take the action necessary in order to prevent, any Confidential Information and Trade Secrets disclosed to or developed by Mr. Turner to lose its character or cease to qualify as Confidential Information or Trade Secrets. This provision is in addition to and is not intended to supercede the Employee Proprietary Information and Inventions Agreement ("Proprietary Information Agreement"), executed by Mr. Turner on December 14, 1998, which is incorporated herein and attached as Exhibit A. Nothing in this Agreement, including Paragraph 13, is intended to modify that Proprietary Information Agreement. (i) "Confidential Information" means data and information relating to the Business of the Company (which does not rise to the status of a Trade Secret) which is or has been disclosed to Mr. Turner or of which Mr. Turner became aware as a consequence of or through his employment relationship with Verilink and which has value to Verilink and is not generally known to its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by Verilink (except where such 2 3 public disclosure has been made by Mr. Turner without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means. (ii) "Trade Secrets" means information including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (c) Return of Company Property. Mr. Turner will promptly deliver to Verilink all property belonging to Verilink, including, without limitation, all Confidential Information and Trade Secrets (and all embodiments thereof) then in Mr. Turner's custody, control or possession. (d) Survival. The covenants of confidentiality set forth in this Paragraph will apply as of the date Mr. Turner executes this Agreement to any Confidential Information and Trade Secrets previously disclosed by Verilink or developed by Mr. Turner during the course of his employment with Verilink. The covenants restricting the use of Confidential Information will continue and be maintained by Mr. Turner for a period of two (2) years following the date of execution of this Agreement. The covenants restricting the use of Trade Secrets will continue and be maintained by Mr.Turner following execution of this Agreement for so long as permitted by the Alabama law. 7. AGREEMENT NOT TO SOLICIT CUSTOMERS OR EMPLOYEES. (a) Agreement Not to Solicit Customers or Consultants. Mr. Turner agrees that beginning immediately and continuing for a period of one year from his Effective Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, (1) solicit, divert, or appropriate or attempt to solicit, divert, or appropriate to any third party, any individual or entity which was an actual or actively sought prospective client, customer, or consultant of Verilink (determined at the date Mr. Turner was last employed by Verilink and continuing for a period of one year from his Effective Separation Date ) and with whom Mr. Turner had material contact during Mr. Turner's last two (2) years of employment with Verilink; or (2) interfere in any way with Verilink's business relationship with any person or entity. (b) Agreement Not to Solicit Employees. Mr. Turner agrees that beginning immediately, and continuing for a period of one year from his Effective Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, solicit, divert or hire, or attempt to solicit, divert or hire, any person employed by Verilink, and 3 4 whom Mr. Turner supervised or hired on behalf of Verilink, whether or not such employee is a full-time employee or a temporary employee of Verilink and whether or not such employment is pursuant to written agreement and whether or not such employment is for a determined period or is at will. This provision is not intended to prohibit Mr. Turner from employing a former Verilink employee so long as he did not in any way solicit, encourage or otherwise cause that employee to leave Verilink. 8. NON-DISPARAGEMENT. Mr. Turner agrees that he has not and will not make statements to clients, customers and suppliers of Verilink or to other members of the public that are in any way disparaging or negative towards Verilink, Verilink's products or services, or Verilink's representatives or employees. 9. NON-ADMISSION OF LIABILITY OR WRONGFUL CONDUCT. This Agreement shall not be construed as an admission by Verilink of any liability or acts of wrongdoing or discrimination, nor shall it be considered to be evidence of such liability, wrongdoing, or discrimination. 10. COMPLETE TERMINATION OF EMPLOYMENT RELATIONSHIP. Except as set forth above, Mr. Turner and Verilink agree as a matter of intent that, except for vested pension benefits, if any, this Agreement terminates all aspects of the relationship between them for all time and that Mr. Turner will not represent himself as an officer or employee of Verilink after the Effective Separation Date. Mr. Turner therefore acknowledges that he does not and will not seek reinstatement, future employment, or return to active employee status with Verilink or any subsidiary or affiliated company. Mr. Turner further acknowledges that neither Verilink nor any subsidiary or affiliated company shall be under any obligation whatsoever to consider him for reinstatement, employment, re-employment, consulting or other similar status at any time. This provision will not preclude Mr. Turner from contracting with Verilink on behalf of another company that has employed him. It also will not preclude Verilink in the future from considering Mr. Turner for a position, either upon request or otherwise, although Verilink cannot be compelled to consider Mr. Turner for or to provide Mr. Turner with any position at any time. 11. CONFIDENTIALITY. The nature and terms of this Agreement are strictly confidential and they have not been and shall not be disclosed by Mr. Turner at any time to any person other than his lawyer, his accountant, or his immediate family without the prior written consent of an officer of Verilink, except as necessary in any legal proceedings directly related to the provisions and terms of this Agreement, to prepare and file income tax forms, or pursuant to court order after reasonable notice to Verilink. 12. GOVERNING LAW. This Agreement shall be interpreted under the laws of the State of Alabama. 13. SEVERABILITY. The provisions of this Agreement are severable, and if any part of this Agreement except Paragraph 4 is found by a court of law to be unenforceable, the remainder of the Agreement will continue to be valid and effective. If Paragraph 4 is found by a 4 5 court of competent jurisdiction to be unenforceable, the parties agree to seek a determination by the court as to the rights of the parties, including whether Mr. Turner is entitled under those circumstances and the relevant law to retain the benefits paid to him under the Agreement. 14. SOLE AND ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the parties. Any prior agreements between or directly involving the parties to the Agreement are superseded by the terms of this Agreement and thus are rendered null and void. However, any noncompete agreements or prior agreements between the parties related to inventions, business ideas, and confidentiality of corporate information remain intact. 15. NO OTHER PROMISES. Mr. Turner affirms that the only consideration for him signing this Agreement is that set forth in Paragraph 2, that no other promise or agreement of any kind has been made to or with him by any person or entity to cause him to execute this document, and that he fully understands the meaning and intent of this Agreement, including, but not limited to, its final and binding effect. 16. REMEDIES. Mr. Turner agrees that the covenants and agreements contained in Sections 6 and 7 hereof are of the essence of this Agreement; that each such covenant is reasonable and necessary to protect and preserve the interests and properties of Verilink; that Mr. Turner has access to and knowledge of Verilink's business and financial plans; that irreparable loss and damage will be suffered by Verilink should Mr. Turner breach any such covenant and agreement; that each such covenant and agreement is separate, distinct and severable not only from the other of such covenants and agreements but also from the other and remaining provisions of this Agreement; that the unenforceability of any such covenant or agreement shall not affect the validity or enforceability of any other such covenant or agreement or any other provision or provisions of this Agreement; and that, in addition to other remedies available to it, Verilink shall be entitled to specific performance of this Agreement and to both temporary and permanent injunctions to prevent a breach or contemplated breach by Mr. Turner of any of the covenants or agreements. 17. ADVICE OF COUNSEL. Mr. Turner acknowledges that he has been advised by Verilink to consult with an attorney in regard to this matter. He further acknowledges that he has been given twenty-one (21) days from the time that he receives this Agreement to consider whether to sign it. If Mr. Turner has signed this Agreement before the end of this twenty-one (21) day period, it is because he freely chose to do so after carefully considering its terms. Finally, Mr. Turner shall have seven (7) days from the date he signs this Agreement to change his mind and revoke the Agreement. If Mr. Turner does not revoke this Agreement within seven days of his signing, this Agreement will become final and binding on the day following such seven-day period. 18. SIGNATURE. The Agreement may be signed in counterpart and/or through the use of facsimile signatures without effecting its binding nature or effectiveness. 5 6 19. LEGALLY BINDING AGREEMENT. Mr. Turner understands and acknowledges that (a) that this is a legally binding release; (b) that by signing this Agreement, he is hereafter barred from instituting claims against Verilink in the manner and to the extent set forth in Paragraph 4 and Paragraph 5 above; and (c) that this Agreement is final and binding. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. Date: 03/02/01 /s/ Steven E. Turner -------------------- ----------------------------------- Steven E. Turner FOR: VERILINK CORPORATION Date: 03/02/01 By: /s/ Betsy D. Mosgrove -------------------- ----------------------------------- Full Name VP, HR ----------------------------------- Title 6 EX-10.59 4 g69137ex10-59.txt SEPARATION AGREEMENT DATED 3/1/01 1 EXHIBIT 10.59 SETTLEMENT AGREEMENT AND FULL AND FINAL RELEASE OF CLAIMS This Settlement Agreement and Full and Final Release of Claims ("Agreement") is made and entered into between Edward A. Etzel ("Mr. Etzel") and Verilink Corporation ("Verilink"). 1. SEVERANCE. Mr. Etzel and Verilink have agreed to end their employment relationship in a manner such that Mr. Etzel's employment with Verilink will end effective March 2, 2001 ("Effective Separation Date"). 2. CONSIDERATION. In consideration of his decision to enter into this Agreement, Verilink will provide Mr. Etzel with the following: (a) The continuation of his current salary for a period of six (6) months from Mr. Etzel's Effective Separation Date. In the alternative, Verilink may at any time choose to pay Mr. Etzel a lump sum payment equal to the outstanding balance of his remaining salary. All such payments are subject to the applicable legal withholdings. (b) The Company will assume all further monetary obligations regarding Mr. Etzel's property currently under construction at The Ledges, and will relieve him of the obligation to repay all amounts currently outstanding and advanced under the Housing Assistance Loan as described in his offer letter dated March 27, 2000. In return for this Mr. Etzel agrees to assign or otherwise convey in total to Verilink his interest in the property. He further agrees to cooperate with Verilink and its legal representatives in completing or amending any documentation necessary to effect this conveyance of the property to Verilink now and in the future (c) The continuation of the coverage currently in effect for Mr. Etzel and Mr. Etzel's covered dependents under the medical, dental and vision plans for a period of six months from his Effective Separation Date. (d) The right to exercise any vested stock options for a period of ninety (90) days following Mr. Etzel's Effective Separation Date, pursuant to Verilink's current Stock Option Plan. (e) Whether or not Mr Etzel executes this Agreement, the payment of any accrued, but unused, paid-time-off for the year 2001, as soon as administratively feasible after his Effective Separation Date or within a reasonable period after this Agreement becomes binding and effective, whichever is later. All such payments are subject to the applicable legal withholdings. 3. NO OBLIGATION. Mr. Etzel agrees and understands that the consideration described in Paragraph 2 above is not required by Verilink's policies and procedures or by any prior agreement between Verilink and Mr. Etzel. 2 4. FULL AND FINAL RELEASE. In consideration of the payments being provided to him above, Mr. Etzel, for himself, his attorneys, heirs, executors, administrators, successors and assigns, fully, finally and forever releases and discharges Verilink, all subsidiary and/or affiliated companies, as well as its and their successors, assigns, officers, owners, directors, agents, representatives, attorneys, and employees (all of whom are referred to throughout this Agreement as "Verilink"), of and from all claims, demands, actions, causes of action, suits, damages, losses, and expenses, of any and every nature whatsoever, as a result of actions or omissions occurring through the effective date of this Agreement. Specifically included in this waiver and release are, among other things, any and all claims for severance pay benefits under the Employee Retirement Income Security Act of 1974 (ERISA), any and all claims of alleged employment discrimination, either as a result of the separation of Mr. Etzel's employment, or otherwise, under the Age Discrimination in Employment Act, the Older Workers' Benefit Protection Act; Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, any other federal, state or local statute, rule, ordinance, or regulation, as well as any claims for alleged wrongful discharge, negligent or intentional infliction of emotional distress, breach of contract, fraud, or any other unlawful behavior, the existence of which is specifically denied by Verilink. Nothing in this Agreement and Release, however, is intended to waive Mr. Etzel's entitlement to vested benefits under any pension or 401(k) plan or other benefit plan provided by Verilink. Finally, the above release does not waive claims that Mr. Etzel could make, if available, for unemployment or workers' compensation. 5. NO OTHER CLAIMS. Mr. Etzel represents that he has not filed, nor assigned to others the right to file, nor are there pending, any complaints, charges or lawsuits against Verilink with any governmental agency or any court, and that he will not file, nor assign to others the right to file, or make any further claims against Verilink at any time for actions or omissions covered by the release in Paragraph 4 above. 6. OWNERSHIP AND PROTECTION OF PROPRIETARY INFORMATION. (a) Confidentiality. All Confidential Information and Trade Secrets, as defined below, and all physical embodiments thereof received or developed by Mr. Etzel while employed by Verilink are confidential to and are and will remain the sole and exclusive property of Verilink. Such Confidential Information and/or Trade Secrets includes, but is not limited to, those developed in conjunction with the Boston initiative and with the Boston University Photonics Center and Beacon Telco project(s). Mr. Etzel will hold such Confidential Information and Trade Secrets in trust and strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Confidential Information and Trade Secrets or any physical embodiments thereof and may in no event take any action causing or fail to take the action necessary in order to prevent, any Confidential Information and Trade Secrets disclosed to or developed by Mr. Etzel to lose its character or cease to qualify as Confidential Information or Trade Secrets. (i) "Confidential Information" means data and information relating to the Business of the Company (which does not rise to the status of a Trade Secret) which is or has 2 3 been disclosed to Mr. Etzel or of which Mr. Etzel became aware as a consequence of or through his employment relationship with Verilink and which has value to Verilink and is not generally known to its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by Verilink (except where such public disclosure has been made by Mr. Etzel without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means. (ii) "Trade Secrets" means information including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (b) Return of Company Property. Mr. Etzel will promptly deliver to Verilink all property belonging to Verilink, including, without limitation, all Confidential Information and Trade Secrets (and all embodiments thereof) then in Mr. Etzel's custody, control or possession. (c) Survival. The covenants of confidentiality set forth in this Paragraph will apply as of the date Mr. Etzel executes this Agreement to any Confidential Information and Trade Secrets previously disclosed by Verilink or developed by Mr. Etzel during the course of his employment with Verilink. The covenants restricting the use of Confidential Information will continue and be maintained by Mr. Etzel for a period of two (2) years following the date of execution of this Agreement. The covenants restricting the use of Trade Secrets will continue and be maintained by Etzel following execution of this Agreement for so long as permitted by the Alabama law. 7. AGREEMENT NOT TO SOLICIT CUSTOMERS OR EMPLOYEES. (a) Agreement Not to Solicit Customers or Consultants. Mr. Etzel agrees that beginning immediately and continuing for a period of one year from his Effective Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, (1) solicit, divert, or appropriate or attempt to solicit, divert, or appropriate to any third party, any individual or entity which was an actual or actively sought prospective client, customer, or consultant of Verilink (determined at the date Mr. Etzel was last employed by Verilink and continuing for a period of one year from his Effective Separation Date ) and with whom Mr. Etzel had material contact during Mr. Etzel's term of employment with Verilink; or (2) interfere in any way with Verilink's business relationship with any person or entity. (b) Agreement Not to Solicit Employees. Mr. Etzel agrees that beginning immediately, and continuing for a period of one year from his Effective Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others, 3 4 solicit, divert or hire, or attempt to solicit, divert or hire, any person employed by Verilink, and whom Mr. Etzel supervised or hired on behalf of Verilink, whether or not such employee is a full-time employee or a temporary employee of Verilink and whether or not such employment is pursuant to written agreement and whether or not such employment is for a determined period or is at will. 8. NON-DISPARAGEMENT. Mr. Etzel agrees that he has not and will not make statements to clients, customers and suppliers of Verilink or to other members of the public that are in any way disparaging or negative towards Verilink, Verilink's products or services, or Verilink's representatives or employees. 9. NON-ADMISSION OF LIABILITY OR WRONGFUL CONDUCT. This Agreement shall not be construed as an admission by Verilink of any liability or acts of wrongdoing or discrimination, nor shall it be considered to be evidence of such liability, wrongdoing, or discrimination. 10. COMPLETE TERMINATION OF EMPLOYMENT RELATIONSHIP. Except as set forth above, Mr. Etzel and Verilink agree as a matter of intent that, except for vested pension benefits, if any, this Agreement terminates all aspects of the relationship between them for all time and that Mr. Etzel will not represent himself as an officer or employee of Verilink after the Effective Separation Date. Mr. Etzel therefore acknowledges that he does not and will not seek reinstatement, future employment, or return to active employee status with Verilink or any subsidiary or affiliated company. Mr. Etzel further acknowledges that neither Verilink nor any subsidiary or affiliated company shall be under any obligation whatsoever to consider him for reinstatement, employment, re-employment, consulting or other similar status at any time. This provision will not preclude Mr. Etzel from contracting with Verilink on behalf of another company that has employed him. It also will not preclude Verilink in the future from considering Mr. Etzel for a position, either upon request or otherwise, although Verilink cannot be compelled to consider Mr. Etzel for or to provide Mr. Etzel with any position at any time. 11. CONFIDENTIALITY. The nature and terms of this Agreement are strictly confidential and they have not been and shall not be disclosed by Mr. Etzel at any time to any person other than his lawyer, his accountant, or his immediate family without the prior written consent of an officer of Verilink, except as necessary in any legal proceedings directly related to the provisions and terms of this Agreement, to prepare and file income tax forms, or pursuant to court order after reasonable notice to Verilink. 12. GOVERNING LAW. This Agreement shall be interpreted under the laws of the State of Alabama. 13. SEVERABILITY. The provisions of this Agreement are severable, and if any part of this Agreement except Paragraph 4 is found by a court of law to be unenforceable, the remainder of the Agreement will continue to be valid and effective. If Paragraph 4 is found by a court of competent jurisdiction to be unenforceable, the parties agree to seek a determination by 4 5 the court as to the rights of the parties, including whether Mr. Etzel is entitled under those circumstances and the relevant law to retain the benefits paid to him under the Agreement. 14. SOLE AND ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the parties. Any prior agreements between or directly involving the parties to the Agreement are superseded by the terms of this Agreement and thus are rendered null and void. However, any noncompete agreements or prior agreements between the parties related to inventions, business ideas, and confidentiality of corporate information remain intact. 15. NO OTHER PROMISES. Mr. Etzel affirms that the only consideration for him signing this Agreement is that set forth in Paragraph 2, that no other promise or agreement of any kind has been made to or with him by any person or entity to cause him to execute this document, and that he fully understands the meaning and intent of this Agreement, including, but not limited to, its final and binding effect. 16. REMEDIES. Mr. Etzel agrees that the covenants and agreements contained in Sections 6 and 7 hereof are of the essence of this Agreement; that each such covenant is reasonable and necessary to protect and preserve the interests and properties of Verilink; that Mr. Etzel has access to and knowledge of Verilink's business and financial plans; that irreparable loss and damage will be suffered by Verilink should Mr. Etzel breach any such covenant and agreement; that each such covenant and agreement is separate, distinct and severable not only from the other of such covenants and agreements but also from the other and remaining provisions of this Agreement; that the unenforceability of any such covenant or agreement shall not affect the validity or enforceability of any other such covenant or agreement or any other provision or provisions of this Agreement; and that, in addition to other remedies available to it, Verilink shall be entitled to specific performance of this Agreement and to both temporary and permanent injunctions to prevent a breach or contemplated breach by Mr. Etzel of any of the covenants or agreements. 17. ADVICE OF COUNSEL. Mr. Etzel acknowledges that he has been advised by Verilink to consult with an attorney in regard to this matter. He further acknowledges that he has been given twenty-one (21) days from the time that he receives this Agreement to consider whether to sign it. If Mr. Etzel has signed this Agreement before the end of this twenty-one (21) day period, it is because he freely chose to do so after carefully considering its terms. Finally, Mr. Etzel shall have seven (7) days from the date he signs this Agreement to change his mind and revoke the Agreement. If Mr. Etzel does not revoke this Agreement within seven days of his signing, this Agreement will become final and binding on the day following such seven-day period. 18. SIGNATURE. The Agreement may be signed in counterpart and/or through the use of facsimile signatures without effecting its binding nature or effectiveness. 5 6 19. LEGALLY BINDING AGREEMENT. Mr. Etzel understands and acknowledges that (a) that this is a legally binding release; (b) that by signing this Agreement, he is hereafter barred from instituting claims against Verilink in the manner and to the extent set forth in Paragraph 4 and Paragraph 5 above; and (c) that this Agreement is final and binding. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. Date: 03/01/01 /s/ Edward A. Etzel -------------------- ---------------------------------- Edward A. Etzel FOR: VERILINK CORPORATION Date: 03/01/01 By: /s/ Betsy D. Mosgrove -------------------- ---------------------------------- Full Name VP, HR ---------------------------------- Title 6 -----END PRIVACY-ENHANCED MESSAGE-----