Verilink Reports Second Quarter 2006 Financial Results

Verilink Reports Second Quarter 2006 Financial Results 
Company Reports Revenues of $10.8 Million 
CENTENNIAL, CO -- (MARKET WIRE) -- 01/30/06 --  Verilink Corporation
(NASDAQ: VRLK), a leading provider of broadband access solutions,
today reported its financial results for the second fiscal quarter
ended December 30, 2005. 
Net sales were $10.8 million, a decrease of 2% over the previous
quarter and 19% year over year from $13.3 million in the same period
of fiscal 2005. Net loss computed in accordance with generally
accepted accounting principles (GAAP) for the second quarter of
fiscal 2006 was $1.6 million, or $(0.06) per share, compared to net
loss of $1.8 million, or $(0.08) per share for the previous quarter
and net loss of $2.2 million, or $(0.09) per share in the second
quarter of fiscal 2005. 
Second quarter GAAP results included acquisition-related and other
items totaling $1.4 million, which includes stock based compensation
required by SFAS No. 123R, Share Based Payment of $249,000,
amortization of loan discount and costs related to the senior secured
convertible notes of $573,000, and intangible assets amortization of
$576,000. Excluding the effects of these items, non-GAAP loss for the
second quarter of fiscal 2006 was $201,000 or $(0.01) per share,
compared to a non-GAAP loss for the previous quarter of $375,000 or
$(0.02) per share. For the previous quarter, the net adjustments to
reconcile to the GAAP loss was stock based compensation of $392,000,
amortization of loan discount and costs related to the senior secured
convertible notes of $440,000, and intangible assets amortization of
$564,000. Non-GAAP loss for the second quarter of fiscal 2005 was
$1.1 million, or $(0.05) per share. For the year-ago quarter, the net
adjustment to reconcile to the GAAP net loss totaled $1 million,
which included intangible assets amortization of $684,000,
restructuring charges of $291,000, and compensation expense of
$36,000 related to restricted stock awards. (see "Use of Non-GAAP
Financial Measures" below). 
"Revenues were slightly down this quarter primarily due to a
reduction in professional services revenues from a large carrier
customer," stated Leigh S. Belden, President and CEO of Verilink.
"Despite the lower revenues, we were able to improve gross margins
from 38.1% to 40.6% and reduce our non-GAAP loss on a sequential
basis. 
"From a product and market development standpoint, we successfully
completed the integration of the ArcaDACS(TM) 100 digital cross
connect and Sechtor(R) 300 multi-service edge concentrator product
lines acquired from Zhone Technologies last quarter. This acquisition
followed a successful three-year OEM relationship with Zhone under
which we marketed, sold and supported the sale of ArcaDACS to our
largest customer as part of their fully managed voice and data
bundled T1 service. Since our acquisition of these product lines, we
have found interest from both existing and new customers for
applications including backhaul of wireless networks, GR303
aggregation with our IADs, and TDM transport. The Sechtor product is
a very price and feature competitive digital cross connect device.
Having it in our product portfolio helps to solidify our CLEC product
offerings, enhances our existing RBOC business, and enables us to
re-enter the wireless backhaul market segment. In the next generation
converged services arena, we continue to engage existing and
potential new carrier customers with our award-winning 8000 Series
IADs, which allows carriers to migrate to VoIP from today's legacy
networks. Given our products support multiple service access
protocols, they obviate the need for carriers to have to invest in
new customer premise IADs to support their service migration. In the
wireless market, our NetPath(TM) 2000, a high-speed wireless access
device introduced last summer, continues to develop opportunities
throughout the country. Accomplishments during the quarter with
NetPath include certification by Cingular Wireless for compatibility
and interoperability with its wireless data networks, and
approximately 20 ongoing field trials that have lead to two recent
commercial customer deployments." 
Second Quarter 2006 Summary: 


--  Revenues of $10.8 million, a 2% decrease from Q1 2006
--  Improved gross margin to 40.6%, up 250 basis points sequentially
--  Reduction in non-GAAP loss to $201,000 from a non-GAAP loss of
    $375,000 in Q1 2006
--  Continued progress in the Company's wireless business with the release
    of a new version of the NetPath 2000 compatible with Verizon Wireless and
    Sprint/Nextel wireless networks: first deployment of the NetPath 2000 into
    customer networks and applications
--  Acquired the ArcaDACS 100 and Sechtor 300 product lines from Zhone
    Technologies, Inc. providing continuity with the Company's largest
    customer, gaining new customers, and improving product line gross margin in
    future periods
--  After the end of the second quarter, the Company closed the sale of
    the 950 Explorer Blvd. property, allowing the repayment of $1.7 million on
    its senior secured convertible notes

Tested Working Capital Under Senior Secured Convertible Notes 
The terms of the Company's senior secured convertible notes require
the Company to include the amount of its "tested working capital," as
defined in the senior convertible notes, in the quarterly announcement
of its operating results. At December 30, 2005, "tested working
capital" was $4.54 million, which is less than the $6.8 million
target under the terms of the notes as amended. Each holder has the
right to provide us with a notice within seven business days
requiring us to pay such holder's pro rata portion of $2.61 million
(representing the difference between the amounts outstanding under
the notes and 60% of the Company's tested working capital, as
determined in accordance with the terms of the notes), or such lesser
amount as determined by the note holder. The $2.61 million that the
holders may elect to require the Company to pay as a special
installment and the $1.7 million paid to the holders in connection
with the sale of the 950 Explorer Blvd. property are included in
current liabilities in the accompanying balance sheet as of December
30, 2005, in addition to the remaining regular quarterly
installments. The principal amount outstanding under the senior
secured convertible notes is $5.3 million as of today. The Company
currently does not have the right to elect to make special
installment payment in stock rather than cash because the Company was
notified on January 9, 2006 that it was not in compliance with
Nasdaq's $1.00 minimum bid price requirement. The Company is currently
in discussion with the note holders on this matter. 
The closing of the sale of the 950 Explorer Blvd. property,
originally scheduled for December, was delayed to January and
inventories increased to provide for a smooth transition of
manufacturing operations from the Company's Newark, California
facility to the Madison, Alabama facility, thereby adversely
affecting tested working capital at December 30, 2005. On a pro forma
basis giving effect to the property sale and use of proceeds as if
they had occurred December 30, the Company would have met the tested
working capital target. 
Tested working capital under the senior secured convertible notes is
a non-GAAP financial measure and is not provided as a measure of the
company's operating performance or liquidity and is not used by the
company as a measure of performance or liquidity. Tested working
capital is provided herein solely as supplemental information with
respect to the special installment payment requirements under the
notes. For a description of the tested working capital requirements
under the notes, see the company's Current Report on Form 8-K/A,
dated April 19, 2005 and Form 8-K filed October 31, 2005. A
reconciliation of non-GAAP tested working capital to GAAP working
capital as of December 30, 2005 is attached at the end of this
release. 
Conference Call Information 
Verilink will hold its second quarter conference call on Monday,
January 30th at 5:00 p.m. ET/3:00 p.m. MT. Investors are invited to
listen to a live audio web cast of the conference call by accessing
the Investor section of the Company's web site at
http://www.verilink.com. The web cast replay will be available
on-line following the conference call at approximately 7:00 p.m.
Eastern Time. 
Use of Non-GAAP Financial Measures 
Non-GAAP income excludes stock based compensation, amortization of
loan discount and costs, intangible asset amortization, other
acquisition-related expenses, impairment charges, restructuring
charges, and other items and is not a measure of financial performance
under GAAP and should not be considered a substitute for or superior
to GAAP net income or loss. Previously disclosed non-GAAP loss for
the first quarter of 2006 did not include adjustments for
amortization of loan discount and costs, and have been revised to
reflect the presentation set forth herein. Verilink's management uses
non-GAAP income as a financial measure to evaluate operating
performance. Management believes this measure presents the Company's
results on a more comparable operational basis by excluding certain
non-cash expenses and amortization expense, non-operational expenses
associated with mergers and acquisitions, and significant and unusual
non-recurring items as well as stock-based compensation charges under
newly implemented accounting standards. Other companies may calculate
non-GAAP income in a different manner, so this measure may not be
comparable to similar measures presented by other companies. A
reconciliation of Verilink's GAAP net income (loss) to non-GAAP
income (loss) is set forth below. 
About Verilink Corporation 
Verilink Corporation (NASDAQ: VRLK) is a leading provider of
next-generation broadband access solutions for today's and tomorrow's
networks. The company develops, manufactures and markets a broad
suite of products that enable carriers (ILECs, CLECs, IXCs, and IOCs)
and enterprises to build converged access networks to deliver
cost-effective next-generation communications services to their end
customers. The company's products include a complete line of VoIP,
VoATM, VoDSL and TDM-based integrated access devices (IADs), optical
access products, wireless access devices, and bandwidth aggregation
solutions including CSU/DSUs, multiplexers and DACS. The company also
provides turnkey professional services to help carriers plan, manage
and accelerate the deployment of new services. Verilink is
headquartered in Centennial, CO (metro Denver area) with operations
in Madison, AL and Newark, CA and sales offices in the U.S. and
Europe. To learn more about Verilink, visit the company's website at
http://www.verilink.com. 
Note: Except for the historical information contained herein, the
matters set forth in this press release, including statements as to
future product offerings, cost savings, discussions with lenders
seeking relief, and margins, are forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to
differ materially, including, but not limited to, the potential
impact on the Company's liquidity and operations in the event of
default of the Company's debt; the ability of the Company to develop
and market successfully and in a timely manner new products and to
predict market demand for particular products; the impact of
competitive products and pricing and of alternative technological
advances; the sufficiency of cost-saving activities; sufficient cash
flow to fund operations and lower than expected cash flows from
operations; risks associated with the Company's working capital
deficiency and "going concern" paragraph in the report of independent
registered public 
accounting firm for the audited fiscal 2005 financial statements;
possible negative effects on the Company's customer base, employees
and its ability to obtain additional financing; fluctuations in
operating results and general industry, economic and internal
controls; the impact of price and product competition; the impact of
customer concentration and the financial strength of customers; and
changes in demand for the Company's products. A detailed discussion
of these and other risks and uncertainties that could cause actual
results and events to differ materially from such forward-looking
statements are included in Verilink's most recent Form 10-K and Form
10-Q. These forward-looking statements speak only as of the date
hereof. Verilink disclaims any intention or obligation to update or
revise any forward-looking statements. 
Verilink and the Verilink logo are registered trademarks of Verilink
Corporation. All other trademarks or registered trademarks are the
property of the respective owners. 


                       VERILINK CORPORATION
      GAAP Condensed Consolidated Statements Of Operations
       (Unaudited, in thousands, except per share amounts)
 
                                 Three Months Ended      Six Months Ended
                                 -------------------   -------------------
                                  Dec 30,    Dec 31,    Dec 30,    Dec 31,
                                   2005       2004       2005       2004
                                 --------   --------   --------   --------
Net sales:
  Product                        $  8,608   $ 10,316   $ 17,019   $ 20,034
  Service                           2,161      2,950      4,718      5,516
                                 --------   --------   --------   --------
    Total net sales                10,769     13,266     21,737     25,550
                                 --------   --------   --------   --------
Cost of sales:
  Product                           5,442      7,241     11,072     14,772
  Service                             951      1,277      2,108      2,241
                                 --------   --------   --------   --------
    Total cost of sales(1)          6,393      8,518     13,180     17,013
                                 --------   --------   --------   --------
Gross profit                        4,376      4,748      8,557      8,537
Operating expenses:
  Research and development(2)       1,556      1,744      3,013      3,996
  Selling, general and
   administrative(3)                3,217      4,221      6,612      9,328
  Amortization of intangible
   assets                             576        684      1,140      1,256
  Impairment charge related to
   goodwill                            --         --         --     19,984
  Restructuring charges                --        291         --        734
                                 --------   --------   --------   --------
Loss from operations                 (973)    (2,192)    (2,208)   (26,761)
Interest and other income, net(4)     150        158        316        371
Interest expense(5)                  (786)      (125)    (1,488)      (240)
                                 --------   --------   --------   --------
  Loss before provision for
   income taxes                    (1,609)    (2,159)    (3,380)   (26,630)
Benefit for income taxes              (10)        --        (10)        --
                                 --------   --------   --------   --------
  Net loss                       $ (1,599)  $ (2,159)  $ (3,370)  $(26,630)
                                 ========   ========   ========   ========
Net loss per share - basic
 and diluted                     $  (0.06)  $  (0.09)  $  (0.14)  $  (1.23)
                                 ========   ========   ========   ========
Shares used in per share
 calculation - basic and
 diluted                           25,174     22,754     24,159     21,681
                                 ========   ========   ========   ========
Notes:
(1) Cost of sales includes the
     following:
      Stock based compensation   $     38   $     12   $    109   $     27
      Retention bonuses accrued        --         12         --         24
                                 --------   --------   --------   --------
                                 $     38   $     24   $    109   $     51
                                 ========   ========   ========   ========
 
(2) Research and development
     expenses include the
     following:
      Stock based compensation   $     36   $     12   $     91   $    110
      Retention bonuses accrued        --         --         --         29
                                 --------   --------   --------   --------
                                 $     36   $     12   $     91   $    139
                                 ========   ========   ========   ========
 
(3) Selling, general and
     administrative expenses
     include the following:
      Stock based compensation   $    175   $     12   $    441   $    132
      Retention bonuses accrued        --         12         --         57
      Direct acquisition related
       expenses                        --         --         --        287
                                 --------   --------   --------   --------
                                 $    175   $     24   $    441   $    476
                                 ========   ========   ========   ========
 
(4) Interest and other income,
     net includes the following:
      Income from reduction in
       convertible note due to
       accrual of retention
       bonuses noted above
                                 $    --    $     24   $     --   $    110
                                 ========   ========   ========   ========
 
(5) Interest expense includes
     the following:
      Amortization of loan
       discount and costs        $    573   $     --   $  1,013   $     --
                                 ========   ========   ========   ========
 
                             VERILINK CORPORATION
          Reconciliation of GAAP Net Loss to Pro Forma Non-GAAP Loss
                           (Unaudited, in thousands)
 
                                 Three Months Ended      Six Months Ended
                                 -------------------   -------------------
                                  Dec 30,    Dec 31,    Dec 30,    Dec 31,
                                   2005       2004       2005       2004
                                 --------   --------   --------   --------
 
GAAP net loss                    $ (1,599)  $ (2,159)  $ (3,370)  $(26,630)
Acquisition-related and other
 items:
  Stock based compensation            249         36        641        269
  Amortization of acquired
   intangible assets                  576        684      1,140      1,256
  Amortization of loan discount
   and costs related to senior
   secured convertible notes          573         --      1,013         --
  Impairment charge related to
   goodwill                            --         --         --     19,984
  Restructuring charges                --        291         --        734
  Direct acquisition related
   expenses                            --         --         --        287
  Retention bonuses accrued in
   connection with XEL
   acquisition, net of impact
   from reduction in  convertible
   notes                               --         --         --         --
                                 --------   --------   --------   --------
Pro forma non-GAAP loss          $   (201)  $ (1,148)  $   (576)  $ (4,100)
                                 ========   ========   ========   ========
 
Pro forma non-GAAP adjustments: The pro forma non-GAAP adjustments above
are based on the Company's unaudited consolidated statements of
operations for the periods shown. These adjustments relate to stock
based compensation recorded as a result of the Company's adoption of SFAS
No. 123R, Share Based Payment, as of July 2, 2005; compensation expense
recorded from stock and restricted stock grants awarded following the XEL
acquisition; compensation expense related to bonuses paid to certain XEL
employees after the acquisition, net of impact on convertible notes
payable; other intangible assets recorded as the result of the acquisition
of TxPort, Inc. in November 1998, the acquisition of the 6000/8000 IAD
product line in January 2003, the acquisition of the Miniplex product line
in July 2003, the acquisition of XEL Communications, Inc. in
February 2004, the acquisition of Larscom Incorporated in July 2004, and
the acquisition of the ArcaDACS/Sechtor product line in October 2005;
amortization of loan discount and costs related to the senior secured
convertible notes issued in March 2005; impairment charges related to
goodwill; restructuring charges related to the consolidation of certain
operations, administrative, and engineering functions; and direct
acquisition costs paid and expensed related to the Larscom acquisition.
Verilink has chosen to provide this supplemental information to investors
to enable them to perform additional comparisons of operating results and
to illustrate the results of on-going operations. Please see previous
discussion regarding the use of non-GAAP measures.
 
                         VERILINK CORPORATION
              GAAP Condensed Consolidated Balance Sheets
                     (Unaudited, in thousands)
 
                                                   December 30,    July 1,
                                                      2005          2005
                                                    --------      --------
 
ASSETS
Current assets:
        Cash and cash equivalents                   $  1,031      $  3,504
        Restricted cash                                  333           333
        Accounts receivable, net                       8,101        10,068
        Inventories, net                               8,243         5,256
        Other current assets                             371           744
                                                    --------      --------
                Total current assets                  18,079        19,905
Property held for lease, net                           5,979         6,076
Property, plant and equipment, net                     1,483         1,697
Goodwill                                               1,114         1,114
Other intangible assets, net                          12,251        13,253
Other assets                                             300           283
                                                    --------      --------
                Total assets                        $ 39,206      $ 42,328
                                                    ========      ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities                                 $ 23,521      $ 20,792
Long-term liabilities                                    392         5,764
Stockholders' equity                                  15,293        15,772
                                                    --------      --------
                Total liabilities and
                 stockholders' equity               $ 39,206      $ 42,328
                                                    ========      ========
 
                             VERILINK CORPORATION
                 Tested Working Capital as of December 30, 2005
         (as defined in the Company's Senior Secured Convertible Notes)
 
Tested working capital:
        Cash and cash equivalents                                 $  1,031
        Accounts receivable, net                                     8,101
        Other receivables, included in other current assets             60
        Less: accounts payable                                      (4,653)
                                                                  --------
                Tested working capital (Non-GAAP)                    4,539
 
Other components of GAAP working capital:
        Restricted cash                                                333
        Inventories, net                                             8,243
        Other current assets, excluding other receivables above        311
        Less: current liabilities other than accounts payable      (18,868)
                                                                  --------
GAAP working capital (deficit)                                    $ (5,442)
                                                                  ========

  
Contact: 
Investor Relations
Verilink Corporation
510.771.3354 
Provider ID: 06107913
 
 
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