commercially successful new technology and products in the future, and those efforts may be affected by other factors as noted below. See “Factors Affecting Future Results — Dependence on Recently Introduced Products and Products Under Development”.
The Company’s selling, general and administrative (“SG&A”) expenses decreased to $14,581,000, or 62.2% of sales in fiscal 2002 from $18,042,000, or 40.1% of sales in fiscal 2001. The decrease in absolute dollars in fiscal 2002 compared to fiscal 2001 was due primarily to reduced headcount between the two periods, lower variable sales compensation on lower sales volume and other cost reduction programs implemented during the current and prior fiscal years, offset by a charge for bad debts related to amounts outstanding from WorldCom of approximately $368,000. The increase in SG&A as a percentage of sales in fiscal 2002 was due entirely to lower sales volume. SG&A decreased in fiscal 2001 to $18,042,000 from $22,616,000 in fiscal 2000 due to lower variable sales compensation on lower sales volume, cost reduction programs implemented during fiscal 2001 that included a headcount reduction in March 2001, and the impact of the plan that consolidated the Company in Huntsville which was completed in fiscal 2000. The increase in SG&A spending as a percentage of sales in fiscal 2001 compared to fiscal 2000 is due to the decrease in dollar spending at lower sales levels. The Company expects that SG&A expenses will decrease in fiscal 2003 and decrease as a percentage of sales.
During fiscal 2002, the Company completed a review of certain long-lived assets, including goodwill and other intangible assets, due to uncertainty in the general business environment, particularly the telecommunication markets. As a result of this review, the Company recorded charges of $5,379,000 for impairment of certain long-lived assets. This impairment included charges related to the Company’s headquarters facility, furniture and equipment of $3,898,000, an investment in a software development company of $750,000, intangible assets of $568,000 and software licenses of $163,000. See Note 2 of “Notes to Consolidated Financial Statements” for further details of the impairment charges.
During fiscal 2000, the Company announced and completed the consolidation of its operations into its existing operations located in Huntsville, Alabama, and outsourced its San Jose based manufacturing activities announced in July 1999. The Company incurred a net restructuring charge during fiscal 2000 of $7,891,000. See Note 3 of “Notes to Consolidated Financial Statements” for further details of this restructuring charge. Approximately $6,522,000 of the restructuring charge was cash in nature and paid out of the Company’s working capital.
Interest and other income, net, declined to $503,000 in fiscal 2002 from $974,000 and $1,075,000 in fiscal 2001 and 2000, respectively, as a result of lower average invested cash and short-term investment balances, an increase in early payment discounts taken by customers, and lower interest rates. With the completion of renovations to the headquarters facility in January 2001, the Company began charging interest payments on long-term debt to interest expense that totaled $294,000 and $235,000 during fiscal 2002 and the last half of fiscal 2001, respectively.
No tax benefit was provided in fiscal 2002 due to the valuation allowance provided against the net change in deferred tax assets. During fiscal 2001, the Company established a full valuation allowance against its
deferred tax assets due to the net operating loss carry forwards from prior years and the operating losses incurred in fiscal 2001. The operating losses in fiscal 2001, while not expected at the beginning of the year, were driven by the development costs associated with the optical network access project announced in October 2000, as well as the downturn in the telecommunication market that the Company serves. Therefore, the provision for income taxes of $6,311,000 established a full valuation allowance at September 29, 2000 against the Company’s deferred tax assets.
In fiscal 2000 with a return to profitability during the last two quarters of that fiscal year and the expectation of profits in fiscal 2001, the Company reversed the deferred tax asset valuation allowance that had been established in fiscal 1999 and recorded a net benefit from income taxes of $4,709,000. The effective tax rate in fiscal 2000 without the impact of the change in the deferred tax asset valuation allowance was a benefit of approximately (31)%, compared to a combined federal and state statutory rate of about 39%. The effective tax rate in fiscal 2000 without the impact of the deferred tax asset valuation allowance is less than the combined federal and state rates primarily due to the non-deductibility of the amortization of goodwill and other intangible assets associated with the TxPort acquisition.
Liquidity and Capital Resources
At June 28, 2002, the Company’s principal source of liquidity included $6,228,000 of unrestricted cash, cash equivalents and short-term investments.
During fiscal 2002, the Company used $8,269,000 of net cash in operating activities, compared to net cash generated by operating activities in fiscal 2001of $6,534,000 and net cash used in operating activities in fiscal 2000 of $7,358,000. Accounts receivable increased $557,000 to $4,045,000 at June 28, 2002 from the prior year balance due to the timing of shipments during the fourth quarter of each year and the change in the payment terms used by our largest customer. In fiscal 2001, our largest customer paid invoices early and took advantage of the early payment discounts, while in fiscal 2002 this customer began paying within normal payment terms. Accounts receivable decreased $11,745,000 to $3,488,000 at June 29, 2001, over the balance at June 30, 2000 due to timing of shipments and the early payment discount plan utilized by our largest customer in fiscal 2001. Inventories decreased $2,155,000 to $1,246,00 0 at June 28, 2002 and decreased $1,439,000 to $3,401,000 at June 29, 2001 as a result of better control of inventory levels in both years and the additional inventory reserves provided in fiscal 2002 of $1,570,000. In fiscal 2002, accounts payable and accrued expenses decreased a total of $1,560,000 due to the impact of lower sales volume and lower salary and benefit accruals associated with the lower headcount at June 28, 2002. In fiscal 2001, accounts payable and accrued expenses decreased in total by $2,901,000 due to the lower sales volume and cost reduction efforts implemented during fiscal 2001.
Net cash used in investing activities of $272,000 in fiscal 2002 compares to net cash used in investing activities of $793,000 in fiscal 2001 and net cash provided by investing activities of $158,000 in fiscal 2000. The cash used in fiscal 2002 was due to equipment purchases of $340,000 and purchase of short-term investments of $82,000, reduced by repayment of notes receivable of $150,000. The funds used in fiscal 2001 were due to capital expenditures of $5,304,000 for renovations to the facility at 950 Explorer Boulevard, completion of the Oracle implementation project in July 2000 and other equipment purchases, offset by the maturity of short-term investments of $3,563,000. The increase in funds provided by investing activities in fiscal 2000 is primarily a result of the maturity of $7,517,000 in short-term investments reduced by $7,333,000 in purchases of property, plant and equipment that included the purch ase of the facility at 950 Explorer Boulevard for $6,350,000. Notes receivable decreased in fiscal 2001 and 2000 by $573,000 and $542,000, respectively.
Net cash used in financing activities was $1,048,000 in fiscal 2002 compared to net cash provided by financing activities of $2,861,000 in fiscal 2001 and $7,452,000 in fiscal 2000. Payments against long-term debt and capital lease obligations of $719,000 and purchase of common stock of $332,000 accounted for the use of funds in fiscal 2002. Proceeds of $2,431,000, less payments of $645,000 from loan agreements to borrow up to $6,500,000 to finance the acquisition of the facility at 950 Explorer Boulevard and improvements thereon and $808,000 from the issuance of Common Stock under employee stock plans were the primary sources of cash in fiscal 2001 from financing activities. During fiscal 2000, proceeds of $4,121,000 from long-term debt used to finance the purchase of the facility at 950 Explorer Boulevard was the largest source of cash from financing activities along with proceeds of $3,201,000 from the issuance of Common Stock under employee stock plans. The Company received $309,000 and $157,000 in fiscal 2001 and 2000, respectively from repayment of notes receivable from stockholders.
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As discussed in Note 11 – “Related Party Transactions” in “Notes to Consolidated Financial Statements”, the Company modified the payment terms of the outstanding notes to the Company’s President and CEO. Under the terms of the note modification agreements, the outstanding balance of one of the notes, with an outstanding balance of $991,000 at June 28, 2002, was extended from March 2002 to March 2003. The note modification agreements provide that the outstanding balance of the second note with an outstanding balance of $2,239,000 as of June 28, 2002 be extended to March 2006. However, the Company may accelerate the due date of this loan on 90 days notice if the Company’s aggregate amount of unrestricted cash, cash equivalents or short-term investments is less than $2,000,000 or if the President’s employment is terminated.
The Company believes that its cash and investment balances, along with anticipated cash flows from operations based upon current operating plans and the cost reduction measures implemented by the Company in fiscal 2002 will be adequate to finance current operations and capital expenditures for the next fiscal year. 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, market demand for the Company’s products, and the overall economic strength of our customers in the telecommunication sector. In the event that results of operations do not substantially meet the Company’s current operating forecast, the Company may evaluate further cost containment, further reduce investments or delay R&D, which could adversely affect the Company’s ability to bring new products to market .. The Company from time to time investigates 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.
Critical Accounting Policies
The Company’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods might be based upon amounts that differ from those estimates. The following represent what the Company believes are among the critical accounting policies most affected by significant management estimates and judgments:
Impairment of Long-Lived Assets and Goodwill. The Company assesses the impairment of long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable under the guidance prescribed by SFAS No. 121. The Company’s long-lived assets include, but are not limited to, the headquarters facility, related furniture and equipment, software licenses, and goodwill and intangible assets related to a previous acquisition.
In assessing the recoverability of the Company’s long-lived assets, goodwill and other intangible assets during fiscal 2002, the Company obtained a third-party appraisal for the headquarters facility, and made assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.
Inventories. The Company values inventory at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess and obsolete inventory is recorded based primarily on our estimated forecast of product demand for the next twelve months. Management’s estimates of future product demand may prove to be inaccurate, in which case the Company may increase or decrease the provision required for excess and obsolete inventory in future periods.
Revenue Recognition. The Company recognizes a sale when the product has been shipped, no material vendor or post-contract support obligations remain outstanding, except as provided by a separate service agreement and collection of the resulting receivable is probable. A reserve for future product returns is established at the time of the sale based on historical return rates and return policies, including stock rotation for sales to distributors that stock the Company’s products.
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Warranty Provision. The Company records a warranty provision at the time of the sale based on our best estimate of the amounts necessary to settle future claims on products sold. While we believe that our warranty reserve is adequate and that the judgment applied is appropriate, actual product failure rates, material usage or other rework costs could differ from our estimates, which could result in revisions to our warranty liability.
Allowance for Doubtful Accounts. The Company estimates losses resulted from the inability of our customers to make payments for amounts billed. The collectability of outstanding invoices is continually assessed. Assumptions are made regarding the customer’s ability and intent to pay, and are based on historical trends, general economic conditions and current customer data. Should our actual experience with respect to collections differ from these assessments, there could be adjustments to our allowance for doubtful accounts.
Valuation of Notes Receivable. The Company continually assesses the collectability of assets classified as outstanding notes receivable. Assumptions are made regarding the counter party’s ability and intent to pay and are based on historical trends and general economic conditions, and current data. Should our actual experience with respect to collections differ from our initial assessment, adjustments in the reserves may be needed.
Deferred Tax Assets. The Company has provided a full valuation reserve related to its deferred tax assets. In the future, if sufficient evidence of the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce its valuation allowances, resulting in income tax benefits in the Company’s consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and assesses the need for the valuation allowance each quarter.
Effects of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets , which has an effective date starting with fiscal years beginning after December 15, 2001. This statement, which supersedes APB Opinion No. 17, Intangible Assets , addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Accordingly, goodwill will cease to be amortized upon the implementation of the statement and companies will test goodwill at least annually for impairment. The Company adopted SFAS No. 142 effective June 29, 2002, and ceased amortizing goodwill of $1,232,900 (including $117,800 of goodwill previ ously classified as other intangible assets). The Company has completed the transitional impairment analysis of all goodwill and intangible assets that is required by the new statement. As a result of this analysis, the Company will record a charge of $1,232,900 during the first quarter of fiscal 2003 to reflect the impairment of the Company’s goodwill. Amortization of goodwill (including goodwill previously classified as other intangible assets) was $369,600 during fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No.143, Accounting for Asset Retirement Obligations (“ARO”), which has an effective date for financial statements for fiscal years beginning after June 15, 2002. This statement addresses the diversity in practice for recognizing asset retirement obligations and requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an ARO, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability , an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The impact of SFAS No. 143 is not expected to be material to the Company’s financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which has an effective date for financial statements for fiscal years beginning after December 15, 2001. This statement, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, this statement expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company did not elect to early adopt SFAS No. 144, and is in the process of assessing its impact on the Company’s financial statements.
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In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections , which has an effective date for transactions occurring after May 15, 2002. This statement rescinds or amends several existing statements related to the extinguishment of debt, intangible assets of motor carriers, certain lease transactions and several other technical corrections to existing pronouncements. The impact of SFAS No. 145 is not expected to be material to the Company’s financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , which has an effective date for exit or disposal activities that are initiated after December 31, 2002. This statement provides that cost associated with an exit or disposal activity must be recognized when the liability is incurred. The impact of SFAS No. 146 is not expected to be material to the Company’s financial statements.
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-K 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 in (i) Item 1 regarding the decline of the market for communications services; the recovery of the telecommunication industry; consolidation of equipment manufacturers and service providers; the incremental investment in both equipment and infrastructure; the introduction of new telecommunications services; the growing po pularity and use of the Internet; the need for virtual private networking capabilities; the requirement for better security, encryption, traffic prioritization and network management; the increase in bandwidth and addition of productivity-enhancing applications; the employment of new telecommunications equipment, technology and facilities; the beneficiaries of the trend toward higher bandwidth; the trend toward bundled service offerings; the creation of new revenue opportunities; developing nations increasingly looking to wireless technology; future growth in the wireless communications industry, particularly in terms of number of subscribers, minutes used, implementation of new systems and the emergence of broadband access; research and development expenditures; and (ii) Item 7 regarding product features under development; selling, general and administrative expenses; research and development expenditures; total budgeted capital expenditures; and the adequacy of the Company’s cash position for the next fiscal year. 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 1 and Item 7 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 Form 10-Q and the Company’s Annual Report to Stockholders.
Dependence on Legacy Products, 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 WANsuite family of integrated access devices and new integrated access system products in development. The majority of sales continue to be provided by the Company’s legacy products, primarily the AS2000 product line which represented approximately 53% of net sales in fiscal 2002, 61% of net sales in fiscal 2001 and 58% of net sales in fiscal 2000. Sales of WANsuite products represented approximately 8% and 2% of net sales in fiscal 2002 and 2001, respectively. The Company anticipates that net sales of its legacy products will continue to shrink as newly introduced products by the Company and its competitors capture market share.
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
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integrated access devices and systems in general, the availability and price of competing products and technologies, and the success of the Company’s sales and marketing 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.
Continued Listing Requirements and Deficiency Notification. The Company’s common stock is currently traded on the Nasdaq SmallCap Market. For continued listing, the Nasdaq SmallCap Market requires, among other things, that listed securities maintain a minimum bid price of not less than $1.00 per share. Nasdaq has notified the Company that it has failed to maintain this continued listing requirement, and will commence procedures to delist its securities from the Nasdaq SmallCap Market unless the Company has regained compliance with this listing requirement by February 10, 2003. If, at anytime before February 10, 2003, the bid price of the company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, the Company will regain compliance with the continued listing requirements. If delisted from the Nasdaq SmallCap Market, the Company’s common stock may be eligible for trading on the OTC Bulletin Board or on other over-the-counter markets, although there can be no assurance that the Company’s common stock will be eligible for trading on any alternative exchanges or markets. Among other consequences, moving from the Nasdaq SmallCap Market, or delisting from the Nasdaq SmallCap Market may cause a decline in the stock price, reduced liquidity in the trading market for the common stock, and difficulty in obtaining future financing.
Customer Concentration. A small number of customers continue to account for a majority of the Company’s sales. In fiscal 2002, net sales to Nortel Networks and Interlink Communications Systems accounted for 36% and 15% of the Company’s net sales, respectively, and the Company’s top five customers accounted for 71% of the Company’s net sales. In fiscal 2001, net sales to Nortel Networks accounted for 37% of the Company’s net sales, and net sales to the Company’s top five customers accounted for 66% of the Company’s net sales. In fiscal 2000, net sales to Nortel Networks and WorldCom accounted for 30% and 19% of the Company’s net sales, respectively, and net sales to the Company’s top five customers accounted for 61% of the Company’s net sales. Other than Nortel Networks, Interlink Communications Systems and WorldCom, no customer accounted for more than 1 0% of the Company’s net sales in fiscal years 2002, 2001 or 2000. On a quarterly basis in fiscal 2002, net sales to Nortel Networks of legacy products has accounted for as much as 64% of the Company’s net sales that quarter. 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. The economic climate and conditions in the telecommunication equipment industry are expected to remain unpredictable in fiscal 2003 and 2004. WorldCom filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in July 2002. A bankruptcy filing by one or more of the Company’s other major customers would materially adversely affect the Company’s business, financial condition 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
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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 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 its executive officers to help ensure the officer’s continual service to the Company in the event of a change-in-control. Each of the Company’s executive officers, and key management, sales and technical personnel would be difficult to replace. The Company implemented significant cost and staff reductions during fiscal 2002, which may make it more difficult to attract and retain key personnel. The loss of the services of one or more of the Company’s executive officers or key personnel, or the inability to attract qualified personnel could delay product development cycles or otherwise could have a material adverse effect on the Company’s busine ss, financial condition and results of operations.
Dependence on Key Suppliers and Component Availability. The Company generally relies upon contract manufacturers to buy finished goods for certain product families and component parts that are incorporated into board assemblies used in its products. On-time delivery of the Company’s products depends upon the availability of components and subsystems used in its products. Currently, the Company and third party sub-contractors depend upon suppliers to manufacture, assemble and deliver components in a timely and satisfactory manner. The Company has historically obtained several components and licenses for certain embedded software from single or limited sources. There can be no assurance that these suppliers will continue to be able and willing to meet the Company and third party sub-contractors requirements for any such components. The Company and third party sub-contractors generally do not have an y 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.
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.
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 manage 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 occ ur 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 Networks during the last two fiscal years have varied between quarters by as much as $6.2 million, and order volatility by this customer had a significant impact on the Company in fiscal 2002. Most of the Company’s sales are in the form of large orders
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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. The Company believes that sales in the past have been adversely impacted by merger activities by some of its top customers. In addition, the Company has experienced delays as a result of the need to modify its products to comply with unique customer specifications. These and similar delays or lost sales could materially adversely affect the Com pany’s business, financial condition and results of operations. See “Customer Concentration” and “Dependence on Key Suppliers and Component Availability”.
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 certain of 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 in certain periods. These reductions, in turn, could cause fluctuations in the Comp any’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;
- 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 certain 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
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will be able to sustain profitability on a quarterly or annual basis. In addition, the Company has had, and in some future quarter may have operating results below the expectations of public market analysts and investors. In such event, the price of the Company’s Common Stock would likely be materially and adversely affected. See “Potential Volatility of Stock Price”.
The Company’s products are covered by warranties and the Company is subject to contractual commitments concerning its products. If unexpected circumstances arise such that the product does not perform as intended and the Company is not successful in resolving product quality or performance issues, there could be an adverse effect on the Company’s business, financial condition and results of operations.
Potential Volatility of Stock Price. The trading price of the Company’s Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, developments with respect to patents or proprietary rights, general conditions in the telecommunication network access and equipment industries, changes in earnings estimates by analysts, or other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many technology companies and which have often been unrelated to the operating performance of such companies. Company-specific factors or broad market fluctuations may materially adversely affect the market price of the Company’s Common Stock. The Company has experi enced significant fluctuations in its stock price and share trading volume in the past and may continue to do so.
Competition. The market for telecommunications network access equipment is characterized as highly competitive with price erosions on aging technologies. This market, in the past, has been subject to rapid technological change, regulatory developments and new entrants. The market for integrated access devices, such as the Access System 2000 and WANsuite product lines, and for enterprise termination devices, such as the PRISM product line, is subject to rapid change. The Company believes that the primary competitive factors in this market are the development and rapid introduction of products based on new technologies, high product value in price versus performance comparisons, support for multiple types of communication services, increased network monitoring and control, product reliability, and quality of customer support. There can be no assurance that the Company’s current products and future p roducts will be able to compete successfully with respect to these or other factors.
The Company’s principal competition for its current product offerings are Adtran, Inc., Paradyne Inc., Kentrox (owned by Platinum Equity Holdings), Vina Technologies, Inc., Quick Eagle Networks, Larscom, Inc. and Cisco Systems, Inc. for access routing with integrated WAN interface cards (WIC’s). Industry consolidation could lead to competition with fewer, but stronger competitors. 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, Lucent Technologies, Inc. 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. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to the Company’s products and planned products, the Company’s business, financial condition and results of operations could be materially adversely affected.
The Company believes that the market for basic network termination products is mature and that margins are eroding, but the market for feature-enhanced network termination and high bandwidth network access products may continue to grow and expand, as more “capability” and “intelligence” moves outward from the central office to the enterprise. The Company expects emerging broadband standards and technologies like G.SHDSL, ATM, Ethernet and IP Services to start the next wave of spending in this market as carriers and enterprises update services to the network edge.
Many of the Company’s current and potential competitors have substantially greater technical, financial, manufacturing and marketing resources than the Company. In addition, many of the Company’s competitors have long-established relationships with network service providers. There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future. See “Factors Affecting Future Results — Competition”.
Rapid Technological Change. The network access and telecommunications equipment markets are characterized by rapidly changing technologies and frequent new product introductions. The rapid development
- 23 -
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 DSL, ISDN, Frame Relay, ATM and 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 responsiv e 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”.
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 DSL have evolved, such as the G.SHDSL standard. As standards continue to evolve, the Company will be required to modify its products or develo p and support new versions of its products. The failure of the Company’s products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of the Company’s products, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Government regulatory policies are likely to continue to have a major impact on the pricing of existing as well as new public network services and therefore are expected to affect demand for such services and the telecommunications products that support such services. Tariff rates, whether determined by network service providers or in response to regulatory directives, may affect the cost effectiveness of deploying communication services. Such policies also affect demand for telecommunications equipment, including the Company’s products.
Risks Associated With Potential Acquisitions and Joint Ventures. An important element of the Company’s historical strategy has been to review acquisition prospects and joint venture opportunities that would complement 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,
- 24 -
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.
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 e xchange 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 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 or WANsuite technologies. 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, enforceable and infringed. The Company also typically enters into confidentiality and invention assignment agreements with its employees and inde pendent contractors, and non-disclosure agreements with its suppliers,
- 25 -
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 7A. Quantitative and Qualitative Disclosures About Market Risk
At June 28, 2002, the Company’s investment portfolio consisted of fixed income securities of $598,000. 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 June 28, 2002, 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 June 28, 2002, 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.
Item 8. Financial Statements and Supplementary Data
The chart entitled “Financial Information by Quarter (Unaudited)” contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this form 10-K.
- 26 -
VERILINK CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements Included in Item 8:
| Page |
| | |
| Report of Independent Accountants | 28 |
| | |
| Consolidated Balance Sheets as of June 28, 2002 and June 29, 2001 | 29 |
| | |
| Consolidated Statements of Operations for each of the three fiscal years in the period ended June 28, 2002 | 30 |
| | |
| Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended June 28, 2002 | 31 |
| | |
| Consolidated Statements of Stockholders’ Equity for each of the three fiscal years in the period ended June 28, 2002 | 32 |
| | |
| Notes to Consolidated Financial Statements | 33 |
| | |
| Schedule for each of the fiscal three years in the period ended June 28, 2002 included in Item 14(a): | |
| | |
| Schedule II — Valuation and Qualifying Accounts and Reserves | 52 |
Schedules other than those listed above have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
- 27 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Verilink Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Verilink Corporation and its subsidiaries at June 28, 2002 and June 29, 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 28, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
| |
|
| /s/ PricewaterhouseCoopers LLP | | |
| PricewaterhouseCoopers LLP | | |
| | | |
Birmingham, Alabama
July 24, 2002, except for
Note 14, as to which the
date is September 3, 2002
- 28 -
VERILINK CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | June 28,
2002 | | June 29,
2001 | |
| |
| |
| |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 5,630 | | $ | 15,219 | |
| Short-term investments | | | 598 | | | 516 | |
| Restricted cash | | | — | | | 500 | |
Accounts receivable, net of allowance for doubtful accounts of $560 and $275,
respectively | | | 4,045 | | | 3,488 | |
| Inventories, net | | | 1,246 | | | 3,401 | |
| Other current assets | | | 354 | | | 408 | |
| |
| |
| |
| Total current assets | | | 11,873 | | | 23,532 | |
| Property, plant and equipment, net | | | 7,288 | | | 13,611 | |
| Restricted cash, long-term | | | 1,000 | | | 500 | |
| Notes receivable, long-term, net of allowances of $840 and $799, respectively | | | — | | | 1,026 | |
| Goodwill and other intangible assets, net | | | 1,659 | | | 2,999 | |
| Other assets | | | 360 | | | 1,273 | |
| |
| |
| |
| | $ | 22,180 | | $ | 42,941 | |
| |
| |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Current portion of long-term debt and capital lease obligations | | $ | 711 | | $ | 697 | |
| Accounts payable | | | 1,445 | | | 2,311 | |
| Accrued expenses | | | 3,427 | | | 4,273 | |
| |
| |
| |
| Total current liabilities | | | 5,583 | | | 7,281 | |
| Long-term debt and capital lease obligations | | | 4,480 | | | 5,210 | |
| Other long-term liabilities | | | — | | | 850 | |
| |
| |
| |
| Total liabilities | | | 10,063 | | | 13,341 | |
| |
| |
| |
| Commitments and contingencies (Note 12) | | | | | | | |
| Stockholders’ equity: | | | | | | | |
Preferred Stock, $0.01 par value, 1,000,000 shares authorized; no shares issued and
outstanding | | | — | | | — | |
Common Stock, $0.01 par value; 40,000,000 shares authorized; 14,996,534 and
15,740,209 shares issued and outstanding in 2002 and 2001, respectively | | | 150 | | | 157 | |
| Additional paid-in capital | | | 51,483 | | | 51,530 | |
| Notes receivable from stockholder | | | (3,230 | ) | | (3,060 | ) |
| Accumulated other comprehensive loss | | | (25 | ) | | (6 | ) |
| Retained deficit | | | (36,261 | ) | | (19,021 | ) |
| |
| |
| |
| Total stockholders’ equity | | | 12,117 | | | 29,600 | |
| |
| |
| |
| | $ | 22,180 | | $ | 42,941 | |
| |
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
- 29 -
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | Fiscal Year Ended | |
| |
| |
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Net sales | | $ | 23,413 | | $ | 44,956 | | $ | 67,661 | |
| Cost of sales | | | 15,397 | | | 24,415 | | | 33,963 | |
| |
| |
| |
| |
| Gross profit | | | 8,016 | | | 20,541 | | | 33,698 | |
| |
| |
| |
| |
| Operating expenses: | | | | | | | | | | |
| Research and development | | | 5,505 | | | 19,682 | | | 8,950 | |
| Selling, general and administrative | | | 14,581 | | | 18,042 | | | 22,616 | |
| Impairment of long-lived assets | | | 5,379 | | | — | | | — | |
| Restructuring charges | | | — | | | — | | | 7,891 | |
| |
| |
| |
| |
| Total operating expenses | | | 25,465 | | | 37,724 | | | 39,457 | |
| |
| |
| |
| |
| Loss from operations | | | (17,449 | ) | | (17,183 | ) | | (5,759 | ) |
| Interest and other income, net | | | 503 | | | 974 | | | 1,075 | |
| Interest expense | | | (294 | ) | | (235 | ) | | — | |
| |
| |
| |
| |
| Loss before provision for (benefit from) income taxes | | | (17,240 | ) | | (16,444 | ) | | (4,684 | ) |
| Provision for (benefit from) income taxes | | | — | | | 6,311 | | | (4,709 | ) |
| |
| |
| |
| |
| Net income (loss) | | $ | (17,240 | ) | $ | (22,755 | ) | $ | 25 | |
| |
| |
| |
| |
| | | | | | | | | | |
| Net income (loss) per share: | | | | | | | | | | |
| Basic | | $ | (1.09 | ) | $ | (1.51 | ) | $ | 0.00 | |
| |
| |
| |
| |
| Diluted | | $ | (1.09 | ) | $ | (1.51 | ) | $ | 0.00 | |
| |
| |
| |
| |
| | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | | | 15,816 | | | 15,095 | | | 14,238 | |
| |
| |
| |
| |
| Diluted | | | 15,816 | | | 15,095 | | | 15,192 | |
| |
| |
| |
| |
The accompanying notes are an integral part of these consolidated financial statements.
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VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Fiscal Year Ended | |
| |
| |
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income (loss) | | $ | (17,240 | ) | $ | (22,755 | ) | $ | 25 | |
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 3,363 | | | 3,461 | | | 3,876 | |
| Impairment of long-lived assets | | | 5,379 | | | — | | | — | |
| Deferred income taxes | | | — | | | 6,311 | | | (6,311 | ) |
Research and development expenses related to Beacon Telco
agreements | | | (583 | ) | | 9,185 | | | — | |
| Tax benefit from exercise of stock options | | | — | | | — | | | 1,602 | |
| Loss on retirement of property, plant, and equipment | | | 10 | | | 6 | | | — | |
| Deferred compensation related to stock options | | | — | | | — | | | 86 | |
| Net book value of assets charged to restructuring reserve | | | — | | | — | | | 1,435 | |
| Accrued interest on notes receivable from stockholders | | | 315 | | | (52 | ) | | (69 | ) |
| Changes in assets and liabilities: | | | | | | | | | | |
| Accounts receivable, net | | | (557 | ) | | 11,745 | | | (6,072 | ) |
| Inventories, net | | | 2,155 | | | 1,439 | | | 2,024 | |
| Other assets | | | 449 | | | 95 | | | 703 | |
| Accounts payable | | | (866 | ) | | (1,290 | ) | | 783 | |
| Accrued expenses | | | (694 | ) | | (1,611 | ) | | (5,440 | ) |
| |
| |
| |
| |
| Net cash provided by (used in) operating activities | | | (8,269 | ) | | 6,534 | | | (7,358 | ) |
| |
| |
| |
| |
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of property, plant, and equipment | | | (340 | ) | | (5,304 | ) | | (7,333 | ) |
| Sale (purchase) of short-term investments | | | (82 | ) | | 3,563 | | | 7,517 | |
| Increase in restricted cash | | | — | | | — | | | (485 | ) |
| Decrease in notes receivable | | | 150 | | | 573 | | | 542 | |
| Acquisition purchase adjustments | | | — | | | 375 | | | (83 | ) |
| |
| |
| |
| |
| Net cash provided by (used in) investing activities | | | (272 | ) | | (793 | ) | | 158 | |
| |
| |
| |
| |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from long-term debt | | | — | | | 2,431 | | | 4,121 | |
| Payments on long-term debt and capital lease obligations | | | (719 | ) | | (645 | ) | | — | |
| Proceeds from issuance of Common Stock under stock plans | | | 11 | | | 808 | | | 3,201 | |
| Repurchase of Common Stock | | | (332 | ) | | — | | | (78 | ) |
| Proceeds from repayment of notes receivable from stockholders | | | 9 | | | 309 | | | 157 | |
| Change in other comprehensive income (loss) | | | (17 | ) | | (42 | ) | | 51 | |
| |
| |
| |
| |
| Net cash provided by (used in) financing activities | | | (1,048 | ) | | 2,861 | | | 7,452 | |
| |
| |
| |
| |
| Net increase (decrease) in cash and cash equivalents | | | (9,589 | ) | | 8,602 | | | 252 | |
| Cash and cash equivalents at beginning of year | | | 15,219 | | | 6,617 | | | 6,365 | |
| |
| |
| |
| |
| Cash and cash equivalents at end of year | | $ | 5,630 | | $ | 15,219 | | $ | 6,617 | |
| |
| |
| |
| |
| Supplemental disclosures: | | | | | | | | | | |
| Cash paid for interest, net of capitalized interest of $189 in 2001 | | $ | 272 | | $ | 213 | | $ | — | |
| Cash paid for income taxes | | $ | 7 | | $ | 14 | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
- 31 -
VERILINK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | Common Stock | | Additional
Paid-in | | Notes
Receivable
From | | Treasury | | Accumulated
Other
Comprehensive
Income | | Deferred
Compensation
Related
to Stock | | Retained
Earnings | | | |
| |
| | | | | | | | | | | | | | | |
| | Shares | | Amount | | Capital | | Stockholders | | Stock | | (Loss) | | Options | | (Deficit) | | Total | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance at June 27, 1999 | | | 17,466,108 | | $ | 174 | | $ | 45,902 | | $ | (1,288 | ) | $ | (8,257 | ) | $ | (15 | ) | $ | (86 | ) | $ | 3,709 | | $ | 40,139 | |
| Issuance of Common Stock under stock plans | | | 841,643 | | | 9 | | | 3,192 | | | — | | | — | | | — | | | — | | | — | | | 3,201 | |
| Purchase of treasury stock | | | — | | | — | | | — | | | — | | | (78 | ) | | — | | | — | | | — | | | (78 | ) |
| Amortization of deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | 86 | | | — | | | 86 | |
Accrued interest on notes receivable from
stockholders | | | — | | | — | | | — | | | (69 | ) | | — | | | — | | | — | | | — | | | (69 | ) |
Repayment of notes receivable from
stockholders | | | — | | | — | | | — | | | 157 | | | — | | | — | | | — | | | — | | | 157 | |
| Tax benefit of stock options | | | — | | | — | | | 1,602 | | | — | | | — | | | — | | | — | | | — | | | 1,602 | |
| Unrealized loss on marketable equity securities | | | — | | | — | | | — | | | — | | | — | | | 51 | | | — | | | — | | | 51 | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 25 | | | 25 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance at June 30, 2000 | | | 18,307,751 | | | 183 | | | 50,696 | | | (1,200 | ) | | (8,335 | ) | | 36 | | | — | | | 3,734 | | | 45,114 | |
| Issuance of Common Stock under stock plans | | | 345,081 | | | 4 | | | 804 | | | — | | | — | | | — | | | — | | | — | | | 808 | |
Issuance of Common Stock under Warrant
agreement | | | 749,900 | | | 7 | | | 8,328 | | | — | | | — | | | — | | | — | | | — | | | 8,335 | |
| Retirement of treasury stock | | | (3,662,523 | ) | | (37 | ) | | (8,298 | ) | | — | | | 8,335 | | | — | | | — | | | — | | | — | |
Accrued interest on notes receivable from
stockholders | | | — | | | — | | | — | | | (52 | ) | | — | | | — | | | — | | | — | | | (52 | ) |
| Reclass of notes receivable from stockholders | | | — | | | — | | | — | | | (2,117 | ) | | — | | | — | | | — | | | — | | | (2,117 | ) |
Repayment of notes receivable from
stockholders | | | — | | | — | | | — | | | 309 | | | — | | | — | | | — | | | — | | | 309 | |
| Unrealized loss on marketable equity securities | | | — | | | — | | | — | | | — | | | — | | | (37 | ) | | — | | | — | | | (37 | ) |
| Foreign currency translation adjustment | | | — | | | — | | | — | | | — | | | — | | | (5 | ) | | — | | | — | | | (5 | ) |
| Net loss | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (22,755 | ) | | (22,755 | ) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance at June 29, 2001 | | | 15,740,209 | | | 157 | | | 51,530 | | | (3,060 | ) | | — | | | (6 | ) | | — | | | (19,021 | ) | | 29,600 | |
| Issuance of Common Stock under stock plans | | | 4,625 | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | 11 | |
Issuance of Common Stock under warrant
agreement | | | 200,000 | | | 2 | | | 265 | | | — | | | — | | | — | | | — | | | — | | | 267 | |
| Purchase and retirement of treasury stock | | | (948,300 | ) | | (9 | ) | | (323 | ) | | — | | | — | | | — | | | — | | | — | | | (332 | ) |
Accrued interest on notes receivable from
stockholders | | | — | | | — | | | — | | | (179 | ) | | — | | | — | | | — | | | — | | | (179 | ) |
Repayment of notes receivable from
stockholders | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | — | | | 9 | |
| Unrealized loss on marketable equity securities | | | — | | | — | | | — | | | — | | | — | | | (7 | ) | | — | | | — | | | (7 | ) |
| Foreign currency translation adjustment | | | — | | | — | | | — | | | — | | | — | | | (12 | ) | | — | | | — | | | (12 | ) |
| Net loss | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (17,240 | ) | | (17,240 | ) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| Balance at June 28, 2002 | | | 14,996,534 | | $ | 150 | | $ | 51,483 | | $ | (3,230 | ) | $ | — | | $ | (25 | ) | $ | — | | $ | (36,261 | ) | $ | 12,117 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
For fiscal 2002, comprehensive loss of $(17,259) consists of $(7) unrealized loss on marketable equity securities, $(12) foreign currency translation adjustment and net loss of $(17,240). Comprehensive loss for fiscal 2001 of $(22,797) consists of $(37) unrealized loss on marketable equity securities, $(5) foreign currency translation adjustment and net loss of $(22,755). Comprehensive income for fiscal 2000 of $76 consist of $51 unrealized gain on marketable equity securities and net income of $25.
The accompanying notes are an integral part of these consolidated financial statements.
- 32 -
VERILINK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — The Company and a Summary of Significant Accounting Policies
The Company
Verilink Corporation (the “Company”), a Delaware Corporation, was incorporated in 1982. The Company develops, manufactures, and markets integrated access products and customer premise equipment products (“CPE”) for use by telecommunications network service providers (“NSPs”) and corporate end users on wide area networks (“WANs”). The Company’s integrated network access and CPE products are used by NSPs such as interexchange and local exchange carriers, and providers of Internet, personal communications, and cellular services to provide seamless connectivity and interconnect for multiple traffic types on wide area networks.
Basis of presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in Canada, Mexico and Barbados. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company’s fiscal year is the 52- or 53-week period ending on the Friday nearest to June 30.
Management estimates and assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign currency
The functional currency of the Company’s foreign subsidiaries is the local currency. The balance sheet accounts are translated into United States dollars at the exchange rate prevailing at the balance sheet date. Revenues, costs and expenses are translated into United States dollars at average rates for the period. Gains and losses resulting from translation are accumulated as a component of stockholders’ equity and to date have not been material. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during any of the periods presented.
Cash and cash equivalents
The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.
Short-term investments
The Company considers highly liquid instruments with a maturity greater than three months when purchased and its investment securities classified as available for sale to be short-term investments. Realized gains or losses are determined on the specific identification method and are reflected in income. Net unrealized gains or losses are recorded directly in stockholders’ equity except those unrealized losses that are deemed to be other than temporary which are reflected in the statements of operations. No such losses were recorded during any of the periods presented.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis.
- 33 -
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are 25 years for the building and generally two to five years for all other assets. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the remaining lease term. Maintenance and repairs are charged to operations as incurred. Upon sale, retirement or other disposition of these assets, the cost and related accumulated depreciation are removed from the respective accounts. The Company performs reviews of estimated future cash flows expected to result from the use of property, plant and equipment to determine the impairment of such assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 2 below.
Revenue recognition
The Company recognizes a sale when the product has been shipped, no material vendor or post-contract support obligations remain outstanding, except as provided by a separate service agreement, and collection of the resulting receivable is probable. Revenue from separately priced extended warranty and service programs is deferred and recognized over the respective service or extended warranty period when the Company is the obligor. The Company accrues related product return reserves and warranty costs at the time of sale. The Company warrants its products for a five-year period.
The following table summarizes the percentage of total sales for customers accounting for more than 10% of the Company’s sales:
| | Fiscal Year Ended | |
| |
| |
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Nortel Networks | | | 36% | | | 37% | | | 30% | |
| Interlink Communication Systems, Inc | | | 15% | | | — | | | — | |
| WorldCom | | | — | | | — | | | 19% | |
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company limits the amount of investment exposure to any one financial institution and financial instrument. The Company’s trade accounts receivables are derived from sales to customers primarily in North America. The Company performs credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains reserves for potential credit losses based upon the expected collectability of the accounts receivable.
The following table summarizes accounts receivable from customers comprising 10% or more of the gross accounts receivable balance as of the dates indicated:
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Nortel Networks | | | 69% | | | 11% | | | 42% | |
| Ericsson | | | — | | | 33% | | | — | |
| WorldCom | | | — | | | — | | | 18% | |
Research and development costs
Research and development costs are expensed as incurred. Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires the capitalization of certain software development costs incurred subsequent to the date technological feasibility is established, which the Company defines as the completion of a working model, and prior to the date the product
- 34 -
is generally available for sale. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.
Income taxes
A deferred income tax liability or asset, net of valuation allowance, is established for the expected future tax consequences resulting from the differences between the financial reporting and income tax bases of the Company’s assets and liabilities and from tax credit carryforwards.
Stock-based compensation
The Company accounts for stock-based awards to employees using the intrinsic value method. Accordingly, no compensation expense has been recognized for options granted with an exercise price equal to market value at the date of grant or in connection with the employee stock purchase plan.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted earnings (loss) per share, the average price of the Company’s Common Stock for the period is used in determining the number of shares assumed to be purchased from exercise of stock options and stock warrants. The following table sets forth the computation of basic and diluted earnings (loss) per share for each of the past three fiscal years:
| | Fiscal Year Ended | |
| |
| |
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Net income (loss) | | $ | (17,240 | ) | $ | (22,755 | ) | $ | 25 | |
| |
| |
| |
| |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | | | 15,816 | | | 15,095 | | | 14,238 | |
Effect of potential common stock from the exercise of stock
options and stock warrants | | | — | | | — | | | 954 | |
| |
| |
| |
| |
| Diluted | | | 15,816 | | | 15,095 | | | 15,192 | |
| |
| |
| |
| |
| | | | | | | | | | |
| Basic earnings (loss) per share | | $ | (1.09 | ) | $ | (1.51 | ) | $ | 0.00 | |
| |
| |
| |
| |
| Diluted earnings (loss) per share | | $ | (1.09 | ) | $ | (1.51 | ) | $ | 0.00 | |
| |
| |
| |
| |
Options to purchase 4,265,723, 3,862,043 and 906,083 shares of Common Stock were outstanding at June 28, 2002, June 29, 2001, and June 30, 2000, respectively, and stock warrants to purchase 1,500,000 shares were outstanding at June 29, 2001, but were not included in the computation of diluted earnings (loss) per share because inclusion of such options and warrants would have been antidilutive.
Comprehensive income (loss)
Comprehensive income (loss) consists of net income (loss), unrealized gains/losses on available-for-sale securities, and gains or losses on the Company’s foreign currency translation adjustments, and is presented in the Consolidated Statement of Stockholders’ Equity.
Recently issued accounting pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets , which has an effective date starting with fiscal years beginning after December 15, 2001. This statement, which supersedes APB Opinion No. 17, Intangible Assets , addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their
- 35 -
acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Accordingly, goodwill will cease to be amortized upon the implementation of the statement and companies will test goodwill at least annually for impairment. The Company adopted SFAS No. 142 effective June 29, 2002, and ceased amortizing goodwill of $1,232,900 (including $117,800 of goodwill previously classified as other intangible assets). The Company has completed the transitional impairment analysis of all goodwill and intangible assets that is required by the new statement. As a result of this analysis, the Company will record a charge of $1,232,900 during the first quarter of fiscal 2003 to reflect the impairment of the Company’s goodwill. Amortization of goodwill (including goodwill previously classified as other intangible assets) was $369,600 during fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No.143, Accounting for Asset Retirement Obligations (“ARO”), which has an effective date for financial statements for fiscal years beginning after June 15, 2002. This statement addresses the diversity in practice for recognizing asset retirement obligations and requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an ARO, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability , an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The impact of SFAS No. 143 is not expected to be material to the Company’s financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which has an effective date for financial statements for fiscal years beginning after December 15, 2001. This statement, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, this statement expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company did not elect to early adopt SFAS No. 144, and is in the process of assessing its impact on the Company’s financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections , which has an effective date for transactions occurring after May 15, 2002. This statement rescinds or amends several existing statements related to the extinguishment of debt, intangible assets of motor carriers, certain lease transactions and several other technical corrections to existing pronouncements. The impact of SFAS No. 145 is not expected to be material to the Company’s financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , which has an effective date for exit or disposal activities that are initiated after December 31, 2002. This statement provides that cost associated with an exit or disposal activity must be recognized when the liability is incurred. The impact of SFAS No. 146 is not expected to be material to the Company’s financial statements.
Fair value of financial instruments
The carrying amounts of cash, cash equivalents, short-term investments and other current assets and liabilities such as accounts receivable, accounts payable, and accrued expenses, as presented in the financial statements, approximate fair value based on the short-term nature of these instruments. The fair value of the Company’s long-term debt is determined based on the borrowing rates currently available to the Company for loans with similar terms and maturities.
Goodwill and other purchased intangible assets
Goodwill, representing the excess of purchase price and acquisition costs over the fair value of net assets of businesses acquired, and other purchased intangible assets are amortized on a straight-line basis over the estimated economic lives, which range from three to ten years. Amortization expense relating to goodwill and other purchased intangible assets was $772,000, $984,000 and $1,062,000 for fiscal years 2002, 2001 and 2000,
- 36 -
respectively. Goodwill and other purchased intangible assets are reviewed for impairment on an undiscounted cash flow basis, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 2 below.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2001 financial statement presentation. These reclassifications had no effect on previously reported net income (loss), cash flows from operations or total stockholders’ equity.
Note 2 — Impairment of Long-lived Assets
During fiscal 2002, the Company completed a review of certain long-lived assets due to uncertainty in the general business environment, particularly the telecommunication markets, and made the decision to sell specific assets and outsource certain administrative support functions to reduce operating expenses. As a result of this review, the Company recorded a charge in fiscal 2002 of $4,811,000 for impairment of certain long-lived assets. This impairment includes charges related to the Company’s headquarters facility, furniture and equipment of $3,898,000, an investment in a software development company of $750,000, and software licenses of $163,000.
The charge for the headquarters facility, furniture and equipment was based upon an independent third-party appraisal of the property completed in April 2002, and estimated selling prices for the furniture and equipment. The charge related to the investment in the software development company was based upon management’s review of the expected cash return from this investment, and the charge for the software licenses was due to the termination of licenses in connection with the Company’s Oracle ERP outsourcing activities.
Also during fiscal 2002, the Company completed a review of its goodwill and other intangible assets acquired in connection with a November 1998 acquisition. In completing this review, goodwill was allocated to the separately identifiable intangible assets, which include developed technology, customer list and assembled work force, on a pro rata basis using the relative fair values of these identifiable intangible assets at the date of acquisition. A cost approach was used to evaluate the assembled work force. Due primarily to staff reductions, the carrying value of the assembled work force, including a pro rata portion of goodwill, exceeded the estimated value by $568,000 and an impairment charge equal to this amount was recorded.
Note 3 — Restructuring Charges
In July 1999, 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 net charges of $7,891,000 in fiscal 2000 in connection with 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) non-recurring retention bonuses offered to involuntarily terminated employees to support the transition from California to Alabama. These restructuring activities were completed during fiscal 2000.
Note 4 — Restricted Cash and Short-Term Investments
As of June 28, 2002 and June 29, 2001, the Company had total restricted cash in the form of certificates of deposit totaling $1,000,000, which is held by the lender as additional collateral on long-term debt as discussed in Note 6 below.
The Company’s short-term investments consist primarily of certificate of deposits and are stated at fair value in the accompanying balance sheets.
- 37 -
Note 5 — Balance Sheet Components
| | June 28,
2002 | | June 29,
2001 | |
| |
| |
| |
| Inventories: | | | | | | | |
| Raw materials | | $ | 2,102 | | $ | 2,041 | |
| Work-in-process | | | 18 | | | | |
| Finished goods | | | 2,336 | | | 3,084 | |
| |
| |
| |
| | | 4,456 | | | 5,125 | |
| Less: Inventory reserves | | | (3,210 | ) | | (1,724 | ) |
| |
| |
| |
| Inventories, net | | $ | 1,246 | | $ | 3,401 | |
| |
| |
| |
| Property, plant and equipment: | | | | | | | |
| Land | | $ | 1,400 | | $ | 1,400 | |
| Building | | | 5,273 | | | 9,060 | |
| Furniture, fixtures, and office equipment | | | 5,972 | | | 9,151 | |
| Machinery and equipment | | | 3,115 | | | 5,852 | |
| Projects in progress | | | 235 | | | — | |
| |
| |
| |
| | | 15,995 | | | 25,463 | |
| Less: Accumulated depreciation and amortization | | | (8,707 | ) | | (11,852 | ) |
| |
| |
| |
| Property, plant and equipment, net | | $ | 7,288 | | $ | 13,611 | |
| |
| |
| |
| Goodwill and other intangible assets: | | | | | | | |
| Developed technology | | $ | 720 | | $ | 720 | |
| Customer relations | | | 1,510 | | | 1,510 | |
| Assembled work force | | | 917 | | | 1,220 | |
| Goodwill | | | 1,953 | | | 2,218 | |
| |
| |
| |
| | | 5,100 | | | 5,668 | |
| Less: Accumulated amortization | | | (3,441 | ) | | (2,669 | ) |
| |
| |
| |
| Goodwill and other intangible assets, net | | $ | 1,659 | | $ | 2,999 | |
| |
| |
| |
| Accrued expenses: | | | | | | | |
| Compensation and related benefits | | $ | 1,026 | | $ | 1,177 | |
| Warranty | | | 920 | | | 995 | |
| Severance accrual | | | 501 | | | 101 | |
| Right of return accrual | | | 283 | | | 548 | |
| Other | | | 697 | | | 1,452 | |
| |
| |
| |
| Accrued expenses | | $ | 3,427 | | $ | 4,273 | |
| |
| |
| |
Note 6 — Long-Term Debt
In connection with the acquisition of the Huntsville, Alabama headquarters facility in June 2000, the Company entered into a loan agreement with Regions Bank to borrow up to $6,000,000 to finance the purchase of the property and to make improvements thereon. In December 2000 the Company entered into a second agreement with Regions Bank to borrow an additional $500,000 to finance the improvements to the facility. The land, building and two $500,000 certificates of deposit (“CDs”) are provided as collateral for amounts outstanding under these agreements.
As required by the first loan agreement, the Company makes monthly payments of $50,000 plus accrued interest with a balloon payment due on July 1, 2005. The interest is at a rate of 225 basis points over the 30 day London inter-bank offered rate, except the interest rate on amounts collateralized by the two CDs is the rate earned on the CDs plus one-half percent (1/2%). The second loan agreement requires a monthly payment of $10,400 that includes interest calculated at 250 basis points over the 30 day London inter-bank offered rate, which was 4.34% at June 28, 2002.
Also included in long-term debt at June 28, 2002 is a capital lease obligation of $38,000, which requires monthly payments of $1,332, including interest at a rate of 10%.
- 38 -
Long-term debt and capital lease obligations are payable as follows:
| Fiscal year, | | | |
| | | |
| 2003 | | $ | 711 | |
| 2004 | | | 729 | |
| 2005 | | | 3,736 | |
| 2006 | | | 15 | |
| |
| |
| Total | | | 5,191 | |
| Less current portion of long-term debt and capital lease obligations | | | 711 | |
| |
| |
| Long-term debt and capital lease obligations | | $ | 4,480 | |
| |
| |
Note 7 — Income Taxes
The provision for (benefit from) income taxes consists of the following (in thousands):
| | Fiscal Year Ended | |
| |
| |
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Current: | | | | | | | | | | |
| Federal | | $ | — | | $ | — | | $ | — | |
| State | | | — | | | — | | | — | |
| |
| |
| |
| |
| | | — | | | — | | | — | |
| |
| |
| |
| |
| Deferred: | | | | | | | | | | |
| Federal | | | (2,621 | ) | | (5,939 | ) | | (1,135 | ) |
| State | | | (520 | ) | | (1,131 | ) | | (150 | ) |
| Change in valuation allowance | | | 3,141 | | | 13,381 | | | (3,424 | ) |
| |
| |
| |
| |
| | $ | — | | $ | 6,311 | | $ | (4,709 | ) |
| |
| |
| |
| |
The tax provision reconciles to the amount computed by multiplying income before tax by the U.S. federal statutory rate of 34% as follows:
| | Fiscal Year Ended | |
| |
| |
| | June 28,
2002 | | June 29,
2001 | | June 30,
2000 | |
| |
| |
| |
| |
| Provision at statutory rate | | | (34.0 | )% | | (34.0 | )% | | (34.0 | )% |
| State taxes, net of federal benefit | | | (3.0 | ) | | (6.9 | ) | | (4.3 | ) |
| Change in valuation allowance | | | 18.2 | | | 81.4 | | | (69.7 | ) |
| Credits | | | — | | | (1.2 | ) | | (2.2 | ) |
| Loss of tax benefit related to stock warrants | | | 14.4 | | | — | | | — | |
| Goodwill amortization | | | 1.5 | | | 2.0 | | | 7.7 | |
| Other | | | 2.9 | | | (2.9 | ) | | 2.0 | |
| |
| |
| |
| |
| | | — | | | 38.4 | % | | (100.5 | )% |
| |
| |
| |
| |
- 39 -
Deferred tax assets comprise the following (in thousands):
| | June 28,
2002 | | June 29,
2001 | |
| |
| |
| |
| Net operating loss | | $ | 13,453 | | $ | 9,444 | |
| Credit carryforwards | | | 59 | | | 781 | |
| Inventory reserves | | | 1,308 | | | 703 | |
| Warranty provisions | | | 302 | | | 406 | |
| Other reserves and accruals | | | 736 | | | 754 | |
| Impairment of long-lived assets | | | 306 | | | — | |
| Stock warrants | | | — | | | 2,613 | |
| Beacon bonus accrual | | | — | | | 346 | |
| Depreciation | | | 944 | | | (656 | ) |
| Other | | | 569 | | | 145 | |
| |
| |
| |
| Total deferred tax assets | | | 17,677 | | | 14,536 | |
| Valuation allowance | | | (17,677 | ) | | (14,536 | ) |
| |
| |
| |
| Net deferred tax assets | | $ | — | | $ | — | |
| |
| |
| |
During fiscal 2001, the Company established a full valuation allowance against its deferred tax assets due to the net operating loss carry forwards from prior years and the operating losses incurred in fiscal 2001. The operating losses in fiscal 2001, while not expected at the beginning of that year, were driven by costs associated with the optical network access project announced in October 2000, as well as the downturn in the overall telecommunications market that the Company serves. During fiscal 2001 and as of June 29, 2001, management believed that due to these factors, it was more likely than not that the deferred tax assets would not be realized. Therefore, the provision for income taxes of $6,311,000 established a full valuation allowance at September 29, 2000 against the Company’s deferred tax assets.
The valuation allowance at June 28, 2002 and June 29, 2001 includes $1,155,000 for deferred tax assets of an acquired business for which uncertainty exists surrounding the realization of such assets. The valuation allowance will be used to reduce costs in excess of net assets of the acquired company when any portion of the related tax assets is recognized.
At June 30, 2000, the Company reversed the deferred tax asset valuation allowance that it had established in fiscal 1999 and recorded a net benefit from income taxes of $4,709,000. At that time, management of the Company believed that due to the available objective evidence, including a return to profitability during the last half of the fiscal year and the expectation of profits in fiscal 2001, it was more likely than not that the deferred tax assets would be realized. Of the amount reversed, $1,155,000 related to the deferred tax assets of an acquired business and was used to reduce costs in excess of net assets of the acquired company.
At June 28, 2002, the Company had net operating loss carryforwards of approximately $34,500,000 for federal income tax purposes, which will begin to expire in the year 2020, and $25,250,000 for state income tax purposes, which expire in 2005 through 2008. The Company also had credit carryforwards of $699,000 available to offset future income, which expire in 2006 through 2021.
The Tax Reform Act of 1996 limits the use of net operating losses in certain situations where changes occur in the stock ownership of a company. The availability and timing of net operating losses carried forward to offset the taxable income may be limited due to the occurrence of certain events, including change of ownership.
Note 8 — Capitalization
Preferred Stock
The Company has 1,000,000 shares of $0.01 par value preferred stock authorized, of which 40,000 shares have been reserved for issuance in connection with our preferred stock rights plan. The right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $22.00. The rights were distributed at the rate of one right for each share of Common Stock as a
- 40 -
non-taxable dividend and will expire December 2011. The rights will be exercisable only in the event that a person or group acquires 20% or more of the Company’s outstanding Common Stock.
Treasury Stock
During fiscal 2002, the Company repurchased 948,300 shares of Common Stock from Beacon Telco, L.P. at $0.35 per share. These shares were retired at the time of purchase. During fiscal 2000, the Company repurchased 25,000 shares of Common Stock on the open market at prices ranging from $2.56 to $3.84 per share.
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.
Stock Warrants and Related Agreements
Effective November 2, 2001, the Company terminated its agreements with Beacon Telco, L.P. and the Trustees of Boston University related to its optical network access project. These agreements included the Warrant and Stockholder’s Agreement (“Warrant Agreement”), Cooperative Research Agreement (“Research Agreement”) and the Premises License and Services Agreement. In October 2001, the Company issued 200,000 shares of its Common Stock in exchange for the cancellation of Beacon’s right to acquire up to an additional 1,300,000 shares underlying the warrant under the Warrant Agreement and the waiver of any rights to the second bonus contemplated under the Research Agreement. The Company recorded a charge to research and development expenses in fiscal 2002 of $267,500 for the stock issued in connection with the cancellation of Beacon’s rights under the Warrant Agreement and Researc h Agreement. Research and development expenses were then credited by $850,000 due to the waiver of the second bonus note, which represented the amount earned as of June 29, 2001.
In October 2000, the Company entered into the agreements with Beacon Telco, L.P. and the Boston University Photonics Center to establish a product development center at the Photonics Center to develop new optical network access 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 were exercisable at various dates, and scheduled to expire on October 13, 2003. Warrants for 200,000 and 749,900 shares were exercised during fiscal 2002 and 2001, respectively. As noted above, the remaining warrants were cancelled.
The agreements provided 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 was waived in connection with the October 2001 termination of these agreements.
The Company recorded a charge to research and development expenses in fiscal 2001 of $8,335,000 for the warrants and the first bonus payment used in the exercise of the warrants for 749,900 shares. The second bonus, of up to $7,125,000, was payable in full upon the completion of the final milestone in the optical network access project, or if the agreements were terminated, a pro-rata portion was payable based on the extent to which the milestones had been completed. The second bonus would be reduced if the price of the Company’s Common Stock were below $4.75 per share at the time the bonus payment was made. The Company accrued the pro-rata portion of the second bonus related to a milestone in the period that the milestone was achieved. The bonus accrual was adjusted for changes, either increases or decreases, in the closing market price of the Company’s Common Stock when the price was below $4.75 per share. For fiscal 2001, research and development expenses include $850,000 for the accrual of the pro-rata portion of the second bonus related to the milestones achieved during the fiscal year and based upon the closing market price of the Company’s Common Stock on June 29, 2001 of $3.40 per share. This accrual is included in other long-term liabilities on the consolidated balance sheet as of June 29, 2001.
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Note 9 — Employee Benefit Plans
1993 Amended and Restated Stock Option Plan
As of June 28, 2002, a total of 8,800,000 shares of Common Stock had been reserved for issuance under the 1993 Amended and Restated Stock Option Plan (the “1993 Plan”) to eligible employees, officers, directors, independent contractors and consultants upon the exercise of incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”). Options granted under the 1993 Plan are for periods not to exceed ten years and must be issued at prices not less than 100% and 85% for ISOs and NSOs, respectively, of the fair market value of the stock on the date of grant. Options granted under the 1993 Plan to employees are generally exercisable immediately and the shares issued upon exercise generally vest over a four-year period, provided that the optionee remains continuously employed by the Company. Upon cessation of employment for any reason, the Company has the option to repurchase all unvested shares of Common Stock issued upon exercise of an option at a repurchase price equal to the exercise price of such shares. ISOs granted to stockholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant.
The following summarizes stock option activity under the 1993 Plan:
| | Shares
Available
for Grant | | Options
Outstanding | | Weighted
Average
Exercise
Price | |
| |
| |
| |
| |
| Balance at June 27, 1999 | | | 1,257,703 | | | 2,855,405 | | $ | 4.83 | |
| Approved | | | 750,000 | | | — | | | — | |
| Granted | | | (2,947,550 | ) | | 2,947,550 | | | 4.69 | |
| Exercised | | | — | | | (665,622 | ) | | 4.15 | |
| Repurchased | | | — | | | 588 | | | .88 | |
| Canceled | | | 1,288,390 | | | (1,288,390 | ) | | 6.11 | |
| |
| |
| |
| |
| Balance at June 30, 2000 | | | 348,543 | | | 3,849,531 | | | 4.42 | |
| Approved | | | 2,000,000 | | | — | | | — | |
| Granted | | | (943,550 | ) | | 943,550 | | | 3.93 | |
| Exercised | | | — | | | (97,351 | ) | | 2.90 | |
| Canceled | | | 833,687 | | | (833,687 | ) | | 5.66 | |
| |
| |
| |
| |
| Balance at June 29, 2001 | | | 2,238,680 | | | 3,862,043 | | | 4.07 | |
| Granted | | | (1,889,050 | ) | | 1,889,050 | | | 0.74 | |
| Exercised | | | — | | | (2,375 | ) | | 2.25 | |
| Canceled | | | 1,482,995 | | | (1,482,995 | ) | | 4.13 | |
| |
| |
| |
| |
| Balance at June 28, 2002 | | | 1,832,625 | | | 4,265,723 | | $ | 2.57 | |
| |
| |
| |
| |
The following table summarizes information concerning outstanding and vested stock options as of June 28, 2002:
| | | | Options Outstanding | | Options Vested | |
| | | |
| |
| |
| | Range of
Exercise Prices | | Number
Outstanding | | Weighted
Average
Remaining
Contractual Life | | Weighted
Average
Exercise
Price | | Number
Vested | | Weighted
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
| |
| | | $0.22—$ 0.50 | | | 699,050 | | | 9.73 | | $ | 0.23 | | | 4,000 | | $ | 0.50 | |
| | | $0.69—$ 0.69 | | | 800,000 | | | 9.60 | | | 0.69 | | | 83,333 | | | 0.69 | |
| | | $0.88—$ 2.00 | | | 845,627 | | | 7.97 | | | 1.65 | | | 494,002 | | | 1.90 | |
| | | $2.13—$ 2.38 | | | 719,752 | | | 7.51 | | | 2.27 | | | 435,466 | | | 2.27 | |
| | | $2.88—$ 4.50 | | | 719,436 | | | 6.83 | | | 3.29 | | | 662,239 | | | 3.26 | |
| | | $5.25—$16.00 | | | 481,858 | | | 5.84 | | | 10.07 | | | 337,234 | | | 9.81 | |
| |
| |
| |
| |
| |
| |
| |
| | | $0.22—$16.00 | | | 4,265,723 | | | 8.05 | | $ | 2.57 | | | 2,016,274 | | $ | 3.70 | |
| |
| |
| |
| |
| |
| |
| |
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1996 Employee Stock Purchase Plan
In April 1996, the Company adopted an Employee Stock Purchase Plan (the “Purchase Plan”) under which a total of 750,000 shares of Common Stock have been reserved for issuance. The Purchase Plan permits eligible employees to purchase Common Stock through periodic payroll deductions of up to 10% of their annual compensation. The Purchase Plan was amended in July 2000 to provide for successive offering and concurrent purchase periods of six months. The price at which Common Stock is purchased under the Purchase Plan is equal to 85% of the fair value of the Common Stock on the first day of the offering period, or the last day of the purchase period, whichever is lower. No shares were issued in fiscal 2002 under the Purchase Plan since all shares reserved had been issued in prior years. During fiscal 2001 and 2000, a total of 249,980 and 175,921 shares of Common Stock were issued under the Purchase Plan at an average purchase price of $2.12 and $2.50, respectively.
Estimated fair value awards under the Company’s stock plans
The weighted average estimated grant date fair value, as defined by SFAS No. 123, of options granted during fiscal 2002, 2001 and 2000 under the Company’s stock option plan was $0.48, $2.56 and $2.71, respectively. The weighted average estimated grant date fair value of Common Stock issued pursuant to the Company’s employee stock purchase plan during fiscal 2002, 2001 and 2000 was none, $1.79, and $1.63, respectively. The estimated grant date fair values disclosed by the Company are calculated using the Black-Scholes model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expecte d time until exercise, which greatly affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated grant date fair value calculations for the Company’s stock option and purchase awards:
| | 2002 | | 2001 | | 2000 | |
| |
| |
| |
| |
| Stock option plan: | | | | | | | | | | |
| Expected dividend yield% | | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| Expected stock price volatility | | | 124 | % | | 120 | % | | 106 | % |
| Risk free interest rate | | | 3.34 | % | | 5.08 | % | | 6.05 | % |
| Expected life (years) | | | 2.56 | | | 2.40 | | | 2.59 | |
| | | | | | | | | | |
| Stock purchase plan: | | | | | | | | | | |
| Expected dividend yield | | | — | | | 0.0 | % | | 0.0 | % |
| Expected stock price volatility | | | — | | | 120 | % | | 106 | % |
| Risk free interest rate | | | — | | | 4.97 | % | | 5.44 | % |
| Expected life (years) | | | — | | | 0.50 | | | 0.50 | |
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Pro forma net income (loss) and net income (loss) per share
Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plan and stock purchase plan, the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts below for the years ended June 28, 2002, June 29, 2001 and June 30, 2000, respectively (in thousands, except per share amounts):
| | 2002 | | 2001 | | 2000 | |
| |
| |
| |
| |
| Net income (loss) as reported | | $ | (17,240 | ) | $ | (22,755 | ) | $ | 25 | |
| Pro forma net income (loss) | | $ | (17,396 | ) | $ | (24,593 | ) | $ | (1,298 | ) |
| | | | | | | | | | |
| Basic net income (loss) per share as reported | | $ | (1.09 | ) | $ | (1.51 | ) | $ | 0.00 | |
| Diluted net income (loss) per share as reported | | $ | (1.09 | ) | $ | (1.51 | ) | $ | 0.00 | |
| | | | | | | | | | |
| Pro forma basic net income (loss) per share | | $ | (1.10 | ) | $ | (1.63 | ) | $ | (0.09 | ) |
| Pro forma diluted net income (loss) per share | | $ | (1.10 | ) | $ | (1.63 | ) | $ | (0.09 | ) |
The pro forma effect on net income (loss) and net income (loss) per share is not representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996.
The Company has recorded compensation expense for the difference between the grant price and deemed fair market value of the Company’s Common Stock for options granted in January and February 1996. Such compensation expense was $86,000 for fiscal 2000 and totaled approximately $968,000 over the vesting period of four years. No compensation expense was recorded in fiscal 2002 or 2001.
Awards under the Company’s profit sharing plan are based on achieving targeted levels of profitability. The Company provided for awards of $29,000 and $92,000 in fiscal 2001 and 2000, respectively. No expense was incurred under the plan in fiscal 2002.
Note 10 — Retirement Plan
The Company has a retirement plan that provides certain employment benefits to all eligible employees and qualifies as a deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. In June 2002, the Company changed its retirement plan to provide for discretionary Company matching contributions. The Company did not match participant’s contributions for the month of June 2002. In the first eleven months of fiscal 2002 and in fiscal 2001, the Company matched 100% of the first three percent and 50% of the next two percent of a participant’s contributions. In fiscal 2000, the Company matched 25% of the participant’s contributions. An employee’s interest in the Company’s contributions becomes 100% vested at the date participation in the retirement plan commences. Charges to operations for the retirement plan amounted to approximately $274,000, $429,000 and $209 ,000, in fiscal 2002, 2001 and 2000, respectively.
Note 11 — Related Party Transactions
In prior fiscal years, the Company provided non-interest bearing housing assistance loans to two executive officers as specified in their offers of employment. In connection with the termination of employment of one of these executive officers in fiscal 2002, the Company acquired the interest in real property in exchange for the $410,000 outstanding note. In connection with the termination of employment of the second executive officer, the outstanding note in the amount of $243,000 is due and payable on January 8, 2003. As of June 28, 2002, the outstanding note is included in notes receivable, net of allowance. The interest in the real property acquired in exchange for the note is included in other assets at a net carrying value of $300,000.
The Company also provided other non-interest bearing loans to the two executive officers totaling $600,000. These loans were made at the time of hire and were to be repaid based on the earlier of termination of employment for any reason or within one year after the value of exercisable stock options exceeded $2,000,000 (defined as the fair market value of stock subject to exercisable options less the total exercise price of such
- 44 -
options). The loans further provided that if the executive’s employment terminated before the exercisable stock options exceeds $2,000,000, a portion of the loan amount would be forgiven for each full year the executive remained employed by the Company. With the termination of the two executives during fiscal 2002, one hundred percent of one loan was forgiven and fifty percent of the second loan was forgiven. The remaining fifty percent of the second loan, or $150,000, was repaid in fiscal 2002.
�� In September 1993, the Company issued 1,600,000 shares of Common Stock to its President and Chief Executive Officer (“President”) in exchange for a non-recourse note totaling $800,000 with the issued shares of Common Stock initially collateralizing the note. From time to time thereafter, the Company released excess collateral based upon then current market prices. Through note modifications in February 1998, September 1999 and February 2002, repayment of this note, which bears interest at 5% per annum, is due in March 2003. During fiscal 2001, payments of $230,000 were made against this note. As of June 28, 2002, $991,000 of principal and interest was outstanding and included in notes receivable from stockholder in the accompanying Statements of Stockholders’ Equity. Shares of Common Stock of the Company collateralize this note and the loan facility discussed below per the note modification agree ments. The February 2002 note modification agreement also includes a negative pledge that requires the net proceeds from the sale of any shares of the Company’s Common Stock owned by the President to be applied against the outstanding balance of this note. In fiscal 2002, the number of shares held by the Company as collateral for this note and the loan facility described below was increased by 97,040 shares to 891,280 shares.
In February 1999, the Company approved a loan facility of up to $3,000,000 to its President in return for a note that bears interest at 6% per annum with an original maturity date of March 1, 2000. All or a portion of this loan facility may be made available through guarantees by the Company of third party loans. The note modification agreements in September 1999, February 2002 and July 2002 now provides for the repayment of this note in March 2006. Under the terms of the July 2002 amendment, the Company may accelerate the due date of this loan on 90 days notice if the Company’s aggregate amount of unrestricted cash, cash equivalents or short-term investments is less than $2,000,000 or if the President’s employment is terminated. During fiscal 2002 and 2001, payments of $9,000 and $720,000, respectively, were made against this note. As of June 28, 2002, $2,239,000 of principal and interest was outstan ding and included in notes receivable from stockholder in the accompanying Statements of Stockholders’ Equity. A total of 891,280 shares of Common stock of the Company was held by the Company as of June 28, 2002 as collateral for this loan facility and the note discussed above.
Included in notes receivable as of June 28, 2002 are cash advances and accrued interest of $597,000, net of allowance of $597,000, due from certain former officers of the Company. These advances bear interest at varying rates up to 7.5%, with various maturities to September 2002. During fiscal 2001, a total of $20,000 of principal and interest on such loans was repaid.
Note 12 — Commitments and Contingencies
The Company leases various sales offices, warehouse space and equipment under operating leases that expire on various dates from October 2002 through May 2006.
Future minimum lease payments under all non-cancelable operating leases with initial terms in excess of one year are as follows (in thousands):
| Fiscal year, | | Operating
Leases | |
| |
| |
| 2003 | | $ | 210 | |
| 2004 | | | 198 | |
| 2005 | | | 167 | |
| 2006 | | | 15 | |
| |
| |
| Total minimum lease payments | | $ | 590 | |
| |
| |
Rent expense under all non-cancelable operating leases totaled $299,000, $769,000 and $1,384,000 for fiscal 2002, 2001, and 2000, respectively.
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As of June 28, 2002, the Company had approximately $1,636,000 of outstanding purchase commitments for inventory and inventory components.
The Company is not currently involved in any legal actions expected to have a material adverse effect on the financial conditions or results of operations of the Company. From time to time, however, the Company may be subject to claims and lawsuits arising in the normal course of business.
Note 13 — Change in Accounting Estimate
The service lives of information technology assets (“IT assets”) were reviewed and decreased as a result of the Company’s decision to outsource certain administrative functions, which impacted depreciation expense and operating results in fiscal 2002. The effect of this change in accounting estimate was to increase the net loss in fiscal 2002 by $586,000, or $.04 per share.
Note 14 — Subsequent Events
On August 2, 2002, the Company signed an agreement with The Boeing Company (“Boeing”) to lease its facility located at 950 Explorer Boulevard through November 2007. The lease allows Boeing the option of terminating the lease at the end of the 40th month, but also provides an option for Boeing to extend the lease term for five additional two-year periods.
On September 3, 2002, the Company approved providing its President with additional relocation benefits of approximately $300,000 in connection with the sale of his California residence. The President has advised the Company that he has committed to make a payment of $675,000 against his outstanding notes receivable to the Company following the sale of his California residence.
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Item 9. Changes In and Disagreements With Accountants on Accounting And Financial Disclosure
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors appearing under the caption “Election of Directors” in the Proxy Statement is hereby incorporated by reference.
Information regarding executive officers is incorporated herein by reference from Part I hereof under the heading “Executive Officers of the Company” immediately following Item 4 in Part I hereof.
Information regarding compliance with Section 16(a) of the Securities Act of 1934, as amended, is hereby incorporated by reference to the Company’s Proxy Statement.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Company’s Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the Company’s Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the Company’s Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statements and Financial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K) are filed within this Annual Report on Form 10-K.
2. Financial Statement Schedule
The financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule (set forth in Item 8 of Part II of this Form 10-K) is filed as part of this Annual Report on Form 10-K.
3. Exhibits
The exhibits listed under Item 14(c) hereof are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 28, 2002.
(c) Exhibits
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| | Exhibit
Number | | Description |
| | | | |
| | 3.1 | | –Registrant’s Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010) |
| | | | |
| | 3.2 | | –Registrant’s Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010) |
| | | | |
| | 4.1 | | –Reference is made to Exhibits 3.1 and 3.2. |
| | | | |
| | 4.2 | | –Rights Agreement dated as of November 29, 2001 by and between Verilink Corporation and EquiServe Trust Company, N.A. (incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562) |
| | | | |
| | 4.2A† | | –Rights Agent Appointment and Amendment No. 1 to Rights Agreement dated as of May 30, 2002 by and between Verilink Corporation and American Stock Transfer and Trust Company |
| | | | |
| | 4.3 | | –Certificate of Designations of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562) |
| | | | |
| | 4.4 | | –Form of Right Certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562) |
| | | | |
| | 4.5 | | –Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A, effective December 6, 2001, Commission File No. 00000-28562) |
| | | | |
| | 10.1 | | –Registrant’s Amended and Restated 1993 Stock Option Plan (incorporated by reference to the Company’s definitive Proxy Statement, filed October 14, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.1A | | –First Amendment to the Verilink Corporation Amended and Restated 1993 Stock Option Plan (incorporated by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.1B | | –Second Amendment to the Verilink Corporation 1993 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.51 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.2 | | –Form of Registrant’s 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010) |
| | | | |
| | 10.2A | | –First Amendment to the Verilink Corporation 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.2B | | –Second Amendment to the Verilink Corporation 1996 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.52 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.3 | | –Form of Indemnification Agreement between the Registrant and each of its executive officers and directors (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010) |
| | | | |
| | 10.4* | | –Change of Control Severance Benefits Agreements (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 1997, Commission File No. 000-28562) |
| | | | |
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| | Exhibit
Number | | Description |
| | | | |
| | 10.5* | | –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 (terminated May 30, 2002) (incorporated by reference to Exhibit 10.57 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.6* | | –Employment Agreement between the Registrant and Graham Pattison dated March 22, 1999 (incorporated by reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.6A* | | –Bonus Agreement between the Registrant and Graham G. Pattison dated September 21, 1999 (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.6B* | | –Letter Agreement between the Registrant and Graham G. Pattison dated October 27, 1999 modifying the March 22, 1999 and September 21, 1999 agreements, including form of promissory notes (incorporated by reference to Exhibit 10.6B to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562) |
| | | | |
| | 10.6C* | | –Promissory Note of Graham G. Pattison in favor of the Registrant dated January 13, 2000 (incorporated by reference to Exhibit 10.6C to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562) |
| | | | |
| | 10.7* | | –Employment Agreement between the Registrant and Michael L. Reiff dated October 25, 1999 (incorporated by reference to Exhibit 10.44 to Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.7A* | | –Promissory Note of Michael L. Reiff in favor of the Registrant dated December 1, 1999 (incorporated by reference to Exhibit 10.7A to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562) |
| | | | |
| | 10.7B* | | –Promissory Note of Michael L. Reiff in favor of the Registrant dated December 18, 2000 (incorporated by reference to Exhibit 10.7B to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562) |
| | | | |
| | 10.7C* | | –Separation Agreement between Registrant and Michael L. Reiff dated November 20, 2001 (incorporated by reference to Exhibit 10.7C to Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2001, Commission File No. 000-28562) |
| | | | |
| | 10.8* | | –Employment Agreement between the Registrant and Todd Westbrook dated February 1, 2000 (incorporated by reference to Exhibit 10.46 to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.9* | | –Employment Agreement between the Registrant and Ronald G. Sibold dated May 3, 2000 (incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.9A* | | –Separation Agreement between Registrant and Ronald G. Sibold dated November 15, 2001 (incorporated by reference to Exhibit 10.9A to Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2001, Commission File No. 000-28562) |
| | | | |
| | 10.10* | | –Employment Agreement between the Registrant and Leigh S. Belden dated January 8, 2002 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, dated as of January 18, 2002, Commission File No. 00000-28562) |
| | | | |
| | 10.11* | | –Promissory Note of Robert F. Griffith in favor of the Registrant dated as of August 27, 1997 (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 1997, Commission File No. 000-28562) |
| | | | |
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| | Exhibit
Number | | Description |
| | | | |
| | 10.12 | | –Common Stock Purchase Agreement and Promissory Note between the Registrant and Leigh S. Belden each dated as of September 16, 1993 (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010) |
| | | | |
| | 10.12A | | –Amended Common Stock Purchase Agreement and Promissory Note between the Registrant and Leigh S. Belden, dated as of February 10, 1998 (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562) |
| | | | |
| | 10.12B | | –Promissory Note Modification Agreement of Leigh S. Belden dated September 22, 1999 (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.12C | | –Second Note Modification Agreement dated as of February 5, 2002 by and between Verilink Corporation and Leigh S. Belden (incorporated by reference to Exhibit 10.1A to Current Report on Form 8-K, dated as of August 14, 2002, Commission File No. 00000-28562) |
| | | | |
| | 10.12D | | –Amended and Restated Security Agreement dated as of February 5, 2002 by Leigh S. Belden and Deborah Tinker Belden, Trustees U/A Dated 12/9/98 for the benefit of Verilink Corporation, Beltech, Inc., Leigh S. Belden and Deborah Tinker Belden (incorporated by reference to Exhibit 10.1B to Current Report on Form 8-K, dated as of August 14, 2002, Commission File No. 00000-28562) |
| | | | |
| | 10.12E | | –Third Note Modification Agreement dated as of July 29, 2002 by and between Verilink Corporation and Leigh S. Belden (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, dated as of August 14, 2002, Commission File No. 00000-28562) |
| | | | |
| | 10.13*† | | –Separation Agreement between Registrant and James B. Garner dated August 27, 2002 |
| | | | |
| | 10.14 | | –Promissory Note of Stephen M. Tennis in favor of the Registrant dated June 30, 1994 (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562) |
| | | | |
| | 10.15 | | –Promissory Note of Stephen M. Tennis in favor of the Registrant dated February 21, 1996 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562) |
| | | | |
| | 10.16 | | –Promissory Note of Stephen M. Tennis in favor of the Registrant dated May 23, 1996 (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 1998, Commission File No. 000-28562) |
| | | | |
| | 10.17 | | –Lease Agreement between the Registrant and Industrial Properties of the South for 129 Jetplex Circle, Madison, Alabama, dated January 19, 1995 (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.17A† | | –Addendum No. 4 to Lease Agreement between the Registrant and Industrial Properties of the South for 129 Jetplex Circle, Madison, Alabama, dated April 18, 2001 |
| | | | |
| | 10.18† | | –Lease Agreement between Registrant and Industrial Properties of the South for 127 Jetplex Circle, Suites A&B, Madison, Alabama, dated April 16, 2002 |
| | | | |
| | 10.18A† | | –Addendum No. 1 to Lease Agreement between Registrant and Industrial Properties of the South for 127 Jetplex Circle, Suites A&B, Madison, Alabama, dated June 19, 2002 |
| | | | |
| | 10.19† | | –Triple Net Lease Agreement between Registrant and The Boeing Company for 950 Explorer Boulevard, Huntsville, Alabama, dated August 2, 2002 |
| | | | |
| | 10.20‡ | | –Software License Agreement between the Registrant and Integrated Systems, Inc. dated January 27, 1993, as amended (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1, effective June 10, 1996, Commission File No. 333-4010) |
| | | | |
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| | Exhibit
Number | | Description |
| | | | |
| | 10.21‡ | | –Purchase Agreement between the Registrant and Wellex Corporation (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 1999, Commission File No. 000-28562) |
| | | | |
| | 10.22† | | –Letter Agreement between the Registrant and Beacon Telco, L.P. dated October 19, 2001 for the “Exchange of Warrants and Future Bonus Payments for Common Stock of Verilink Corporation” |
| | | | |
| | 10.23† | | –Stock Repurchase Agreement between the Registrant and Beacon Telco, L.P. dated June 14, 2002 |
| | | | |
| | 10.24 | | –Cooperative Research Agreement between the Registrant and Beacon Telco, L.P. dated October 13, 2000 (incorporated by reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.25 | | –Warrant and Stockholder’s Agreement between the Registrant and Beacon Telco, L.P. dated October 13, 2000 (incorporated by reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.26 | | –Premises License and Services Agreement between the Registrant, Beacon Telco, L.P., and Trustees of Boston University dated October 16, 2000 (incorporated by reference to Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2000, Commission File No. 000-28562) |
| | | | |
| | 10.26A | | –First Amendment to Premises License and Services Agreement between the Registrant, Beacon Telco, L.P., and Trustees of Boston University dated July 12, 2001 (incorporated by reference to Exhibit 10.24A to the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2001, Commission File No. 000-28562) |
| | | | |
| | 23.1† | | –Consent of PricewaterhouseCoopers LLP |
| | | | |
| | 99.1† | | –Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | |
| | 99.2† | | –Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| * | | Identifies Exhibit that consists of or includes a management contract or compensatory plan or arrangement. |
| ‡ | | Confidential treatment granted as to portions of this exhibit. |
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VERILINK CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
| | Balance at
Beginning
of Year | | Additions
Charged to
Income | | Deductions
from
Reserves | | Balance at
End
of Year | |
| |
| |
| |
| |
| |
| Inventory Reserves: | | | | | | | | | | | | | |
| Year ended June 28, 2002 | | $ | 1,724 | | $ | 1,806 | | $ | (320 | ) | $ | 3,210 | |
| Year ended June 29, 2001 | | $ | 2,871 | | $ | 576 | | $ | (1,723 | ) | $ | 1,724 | |
| Year ended June 30, 2000 | | $ | 3,360 | | $ | 575 | | $ | (1,064 | ) | $ | 2,871 | |
| | | | | | | | | | | | | |
| Allowance for Doubtful Accounts: | | | | | | | | | | | | | |
| Year ended June 28, 2002 | | $ | 275 | | $ | 317 | | $ | (32 | ) | $ | 560 | |
| Year ended June 29, 2001 | | $ | 518 | | $ | (43 | ) | $ | (200 | ) | $ | 275 | |
| Year ended June 30, 2000 | | $ | 205 | | $ | 340 | | $ | (27 | ) | $ | 518 | |
| | | | | | | | | | | | | |
| Allowances for Notes Receivable: | | | | | | | | | | | | | |
| Year ended June 28, 2002 | | $ | 799 | | $ | 454 | | $ | (413 | ) | $ | 840 | |
| Year ended June 29, 2001 | | $ | 611 | | $ | 188 | | $ | — | | $ | 799 | |
| Year ended June 30, 2000 | | $ | 276 | | $ | 335 | | $ | — | | $ | 611 | |
| | | | | | | | | | | | | |
| Warranty Liability: | | | | | | | | | | | | | |
| Year ended June 28, 2002 | | $ | 995 | | $ | 331 | | $ | (406 | ) | $ | 920 | |
| Year ended June 29, 2001 | | $ | 1,125 | | $ | 346 | | $ | (476 | ) | $ | 995 | |
| Year ended June 30, 2000 | | $ | 1,877 | | $ | 761 | | $ | (1,513 | ) | $ | 1,125 | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
| September 26, 2002 | | By: | /s/ LEIGH S. BELDEN |
| | |
|
| | | | Leigh S. Belden
President, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
/s/ LEIGH S. BELDEN
Leigh S. Belden | | President, Chief Executive Officer and Director
(Principal Executive Officer) | | September 26, 2002 |
| | | | | |
/s/ C. W. SMITH
C. W. Smith | | Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) | | September 26, 2002 |
| | | | | |
/s/ HOWARD ORINGER
Howard Oringer | | Chairman of the Board of Directors | | September 26, 2002 |
| | | | | |
/s/ STEVEN C. TAYLOR
Steven C. Taylor | | Vice Chairman of the Board of Directors | | September 26, 2002 |
| | | | | |
/s/ JOHN E. MAJOR
John E. Major | | Director | | September 26, 2002 |
| | | | | |
/s/ JOHN A. MCGUIRE
John A. McGuire | | Director | | September 26, 2002 |
| | | | | |
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CERTIFICATIONS
I, Leigh S. Belden, certify that:
| 1. | | I have reviewed this annual report on Form 10-K of Verilink Corporation; |
| | | |
| 2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and |
| | | |
| 3. | | Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. |
Date: September 26, 2002
| |
|
| | | By: | /s/ LEIGH S. BELDEN |
| | |
|
| | | | Leigh S. Belden
President and Chief Executive Officer
(Principal Executive Officer) |
I, C. W. Smith, certify that:
| 1. | | I have reviewed this annual report on Form 10-K of Verilink Corporation; |
| | | |
| 2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and |
| | | |
| 3. | | Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. |
Date: September 26, 2002
| |
|
| | | By: | /s/ C. W. SMITH |
| | |
|
| | | | C. W. Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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