Verilink Reports Fourth Quarter and Fiscal 2004 Financial Results

Verilink Reports Fourth Quarter and Fiscal 2004 Financial Results
Q4 Revenues increase 79% year over year; XEL integration complete; Larscom
merger complete tonight 


MADISON, Ala., July 28  /PRNewswire-FirstCall/ -- Verilink Corporation
(NASDAQ:VRLK) -- a market leader in broadband access solutions -- today
reported its financial results for the fourth quarter and fiscal year ended
July 2, 2004.

Net sales for the quarter increased 79% year over year to $13.9 million from
$7.8 million in the same period of fiscal 2003. Net loss computed in accordance
with generally accepted accounting principles (GAAP) for the fourth quarter of
fiscal 2004 was $500,000, or $(0.03) per share, compared to net income of
$917,000, or $0.06 per diluted share in the fourth quarter of fiscal 2003. For
full-year fiscal 2004, revenues were $46.3 million and GAAP net income was
$12,000, or $0.00 per share, compared to full-year fiscal 2003 revenues of
$28.1 million and GAAP net income of $1.5 million or $0.10 per share.

Fourth quarter GAAP results included acquisition-related and other items of
$743,000, consisting of $314,000 of intangible amortization and compensation
expense of $439,000 related to restricted stock awards, net of a reduction in
the restructuring charge of $10,000. Excluding the effects of these items,
non-GAAP income was $243,000 or $0.02 per diluted share, compared to non-GAAP
income for the fourth quarter of fiscal 2003 of $1.1 million or $0.07 per
diluted share. For the year-ago quarter, the net adjustment to reconcile to
GAAP income was intangible amortization, which totaled $185,000 (see "Use of
Non-GAAP Financial Measures" below).

On an annual basis, GAAP results for fiscal 2004 included acquisition- related
and other items totaling $3.3 million, consisting of $1 million of intangible
amortization, compensation expense of $1.85 million related to expenses
associated with the XEL acquisition, and restructuring charges of $390,000
related to the consolidation of certain XEL functions into Madison, Alabama.
Excluding the effects of these items, non-GAAP income was $3.3 million or $0.20
per diluted share, compared to non-GAAP income for fiscal 2003 of $3.6 million
or $0.23 per diluted share. For fiscal 2003, net adjustments to reconcile to
GAAP income totaled $2 million, including intangible amortization of $484,000,
in process research & development of $316,000 and the cumulative effect of a
change in accounting principle (relating to goodwill) of $1.2 million.

"This was a productive quarter for Verilink, as we saw an increase in our
quarter-over-quarter revenues and experienced growth from the international
market and through our channel partnerships," stated Leigh S. Belden, President
and CEO of Verilink.  "From an operational standpoint, we have made progress on
the execution of our strategic plan, particularly with the integration of XEL
and the merger of Larscom. As a result, we have gained operational leverage,
expanded our customer base and have broadened our product offering to better
position Verilink in the Voice over TDM, VoIP, and Optical Ethernet Access
markets.  We also noted a shift in our product mix during the quarter as a
certain large customer, whose orders have historically fluctuated
significantly, reduced orders for legacy products last quarter.  As a result of
our diversification and acquisition program, our fourth quarter results
benefited from increased sales across product lines other than legacy
products."

Recent Merger with Larscom and Acquisition of XEL Communications

As announced today in a separate press release, Verilink completed the merger
with Larscom Incorporated (NASDAQ:LARS), a leading provider of WAN access
equipment, effective as of 9:00 pm Eastern Time tonight.

"This merger with Larscom represents a major milestone in Verilink's strategy
to become a leading provider of next-generation broadband access solutions,"
said Mr. Belden.  "The Larscom merger increases our customer base, expands our
channel partnerships, strengthens our cash position, adds to our overall
revenue base and broadens our product offering to better serve our customers. 
This includes strengthening our offering in the integrated access space as well
as taking us into the high-growth Optical Ethernet Access market, an important
new segment for Verilink."

As an update to its acquisition of XEL Communications announced February 5,
2004, Verilink today announced the completion of its integration of XEL, a
provider of access solutions and services to large telecommunications carriers
such as ILECs, IXCs, and IOCs.  The XEL acquisition significantly expands
Verilink's presence in the TDM market, with both IAD CPE and Central Office
product/service offerings, and positions the company to assist major carriers
in the migration from circuit to packet- switched architectures as they look to
upgrade existing networks to offer new services in the future.

  Verilink Fourth Quarter 2004 Summary:

   - Revenues were $13.9 million for Q4 2004, a 79% increase over the same
     period in 2003
   - Non-GAAP income was $243,000 for Q4 2004
   - Signed a definitive merger agreement with Larscom Incorporated
   - Introduced VIPER product line, an Integrated Access Device (IAD)
     products targeting the SOHO and SMB markets
   - Introduced 8000 Series product line, a VoIP-enabled Integrated Access
     Device (IAD), which was selected as a "Top 10 Hottest Technologies for
     2004" by Telecommunications Magazine.

  Conference Call Information


A live Webcast of the conference call discussing Verilink's fourth quarter and
fiscal year 2004 financial results is scheduled for July 28, 2004 at 4:00 p.m.
CDT/5:00 p.m. EDT and can be accessed as follows:

  Live Webcast:
  http://phx.corporate-ir.net/playerlink.zhtml?c=96086&s=wm&e=916426

  Use of Non-GAAP Financial Measures


Non-GAAP income excludes intangible amortization, other acquisition- related
expenses and restructuring charges, and is not a measure of financial
performance under GAAP and should not be considered a substitute for or
superior to GAAP net income. Verilink's management uses non-GAAP income as a
financial measure to evaluate performance. Management believes this measure
presents the Company's results on a more comparable operational basis by
excluding non-cash amortization expenses, non-operational expenses associated
with mergers and acquisitions, and significant and unusual non-recurring items.
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 to non-GAAP income is set forth
below.

About Verilink Corporation

Verilink provides customer premises voice and data access solutions to service
providers, strategic partners and enterprise customers on a worldwide basis.
Verilink is a market leader in voice over packet and voice over TDM IAD
solutions including VoIP, VoDSL and VoATM. Data only offerings include access
routers, probes, CSU/DSUs, DACS and network monitoring solutions. Verilink
turnkey service solutions empower carriers with the flexibility to provide
integrated services regardless of network technology. The Company's
headquarters are located at 127 Jetplex Circle, Madison, AL 35758. Verilink
stock trades on the NASDAQ National Market under the symbol VRLK. To learn more
about Verilink, visit the 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 the expected benefits
of acquisitions, future product offerings, expected synergies 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 ability to
successfully integrate acquisitions and achieve expected synergies, the ability
of the combined company to develop and market successfully and in a timely
manner new products, the impact of competitive products and pricing and of
alternative technological advances, the ability to increase sales of acquired
product lines, 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 the joint proxy statement/prospectus included in Verilink's
Form S-4 Registration Statement filed with the Securities and Exchange
Commission, as well as Verilink's Annual Report on Form 10-K for the fiscal
year ended June 27, 2003 and quarterly report on Form 10-Q for the quarter
ended April 2, 2004, and Larscom's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, as amended, and quarterly report on Form 10-Q for
the quarter ended March 31, 2004. 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, the Verilink logo, and NetEngine are registered trademarks of
Verilink Corporation.  Larscom is a registered trademark of Larscom
Incorporated.  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     Year Ended
                                        July 2,  June 27,  July 2,  June 27,
                                         2004      2003     2004      2003

  Net sales                            $13,930    $7,799   $46,260  $28,104
  Cost of sales(1)                       8,714     3,679    26,512   13,939
    Gross profit                         5,216     4,120    19,748   14,165
  Operating expenses:
    Research and development(2)          1,895     1,402     6,876    3,985
    Selling, general and
     administrative(3)                   4,091     1,937    13,144    7,586
    In-process research and development     --        --        --      316
    Restructuring charge                   (10)       --       390       --
  Income (loss) from operations           (760)      781      (662)   2,278
  Interest and other income, net(4)        292       175       927      656
  Interest expense                         (32)      (39)     (253)    (181)
    Income (loss) before provision
     for income taxes                     (500)      917        12    2,753
  Provision for income taxes                --        --        --       --
    Net income (loss) before
     accounting change                    (500)      917        12    2,753
  Cumulative effect of change in
   accounting principle, relating
   to goodwill                              --        --        --   (1,233)
    Net income (loss)                    $(500)     $917       $12   $1,520

  Earnings (loss) per share, basic
   and diluted:
    Net income (loss) before
     accounting change                  $(0.03)    $0.06     $0.00    $0.18
    Cumulative effect of change in
     accounting principle, relating
     to goodwill                            --        --        --    (0.08)
    Net income (loss)                   $(0.03)    $0.06     $0.00    $0.10

  Weighted average shares
   outstanding:
    Basic                               16,131    14,666    15,170   14,871
    Diluted                             16,131    15,166    16,562   15,294

  Notes:
  (1) Cost of sales includes the
       following:
        Cash bonuses                       $--       $--       $50      $--
        Retention bonuses
         accrued                            12        --        20       --
        Compensation expense on
         stock awards                       20        --       178       --
                                           $32       $--      $248      $--
  (2) Research and development
       expenses includes the following:
        Cash bonuses                       $--       $--       $50      $--
        Retention bonuses
         accrued                            13        --        21       --
        Compensation expense on
         stock awards                       12        --       170       --
                                           $25       $--      $241      $--

  (3) Selling, general and
       administrative expenses includes
       the following:
        Cash bonuses                       $--       $--      $250      $--
        Retention bonuses
         accrued                           146        --       188       --
        Compensation expense on
         stock awards                      407        --     1,147       --
        Amortization of acquired
         intangible assets                 314       185       579      484
                                          $867      $185    $2,164     $484

  (4) Interest and other income,
       net includes the following:
        Income from reduction in
         convertible note due to
         accrual of retention
         bonuses noted above              $171       $--      $229      $--


                           VERILINK CORPORATION
  Reconciliation of GAAP Net Income (Loss) to Pro Forma Non-GAAP Income
                        (Unaudited, in thousands)

                                       Three Months Ended     Year Ended
                                        July 2,  June 27,  July 2,  June 27,
                                         2004      2003     2004      2003

  GAAP net income (loss)                $(500)    $917        $12    $1,520
  Acquisition-related and other
   items:
  Cash bonuses paid in connection
   with XEL acquisition                    --       --        350        --
  Retention bonuses accrued in
   connection with XEL acquisition,
   net of impact from reduction in
   convertible notes                       --       --         --        --
  Compensation expense related to
   stock and restricted stock awards      439       --      1,495        --
  Amortization of acquired intangible
   assets                                 314      185      1,026       484
  Restructuring charge                    (10)      --        390        --
  In process research & development        --       --         --       316
  Cumulative effect of change in
   accounting principle, relating
   to goodwill                             --       --         --     1,233
  Pro forma non-GAAP income              $243   $1,102     $3,273    $3,553




Pro forma non-GAAP adjustments: The above pro forma non-GAAP adjustments are
based upon our unaudited consolidated statements of operations for the periods
shown. These adjustments relate to other intangible assets recorded as the
result of the acquisition of TxPort, Inc. in November 1998, the acquisition of
the NetEngine product line in January 2003, the acquisition of the Miniplex
product line in July 2003 and the acquisition of XEL in February 2004,
compensation expense recorded from stock grants and restricted stock grants
awarded following the XEL acquisition, compensation expense related to bonuses
paid or to be paid to certain XEL employees after the acquisition, net of
impact on convertible notes payable, and restructuring charges related to the
consolidation of certain XEL operations and administrative functions. 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)

                                                    July 2,       June 27,
                                                     2004           2003

                                  ASSETS
  Current assets:
   Cash and cash equivalents                         $3,447         $8,503
   Short-term investments                                --            101
   Accounts receivable, net                           7,968          3,621
   Inventories, net                                   5,917          2,296
   Other current assets                                 942            319

    Total current assets                             18,274         14,840
  Property held for lease, net                        6,269          6,462
  Property, plant and equipment, net                  1,381          1,350
  Restricted cash                                        --          1,000
  Goodwill                                            9,887             --
  Other intangible assets, net                        9,182          2,132
  Other assets                                          811            525
    Total assets                                    $45,804        $26,309

                   LIABILITIES AND STOCKHOLDERS' EQUITY

  Current liabilities                               $15,130         $8,461
  Long-term debt and capital lease obligations        6,262          3,749
  Stockholders' equity                               24,412         14,099

    Total liabilities and stockholders' equity      $45,804        $26,309


DATASOURCE: Verilink Corporation



CONTACT:  Bill Smith, [phone], or , or Gary W.

Gray, [phone], or , both of Verilink

Corporation



Web site:  http://www.verilink.com/ 

Copyright