Verilink Reports Fourth Quarter and Fiscal Year 2005 Financial Results

Verilink Reports Fourth Quarter and Fiscal Year 2005 Financial
Results
Company Reports Q4 2005 Revenues of $13.9 Million; Annual Revenues Up 15% Year
over Year to $53 Million 


CENTENNIAL, Colo., July 27  /PRNewswire-FirstCall/ -- Verilink Corporation
(NASDAQ:VRLK), a leading provider of broadband access solutions, today reported
its financial results for the fourth quarter and fiscal year ended July 1, 2005.

Net sales for the quarter were $13.9 million as compared to $13.8 million in
the previous quarter and $13.9 million in the year ago quarter. Net loss
computed in accordance with generally accepted accounting principles (GAAP) for
the fourth quarter of fiscal 2005 was $8.2 million, or $(0.36) per share,
compared to a net loss of $2.6 million or $(0.11) per share for the previous
quarter and a net loss of $538,000, or $(0.03) per share in the same quarter of
fiscal 2004. For full-year fiscal 2005, revenues were $53.3 million and GAAP net
loss was $37.5 million, or $(1.68) per share, compared to full year fiscal 2004
revenues of $46.2 million and GAAP net loss of $26,000 or nil per share.

Fourth quarter GAAP results included acquisition-related and other items
totaling $6.7 million, which includes impairment charges related to goodwill
and intangible assets of $6.5 million, intangible assets amortization of
$645,000, credit to restructuring charges of $(417,000), and change in
valuation of warrants liability issued in connection with the March 2005 senior
convertible notes of $(15,000). Excluding the effects of these items, non-GAAP
loss was $1.5 million or $(0.07) per share, compared to a non-GAAP loss for the
previous quarter of $2.3 million or $(0.10) per share. For the previous quarter,
the net adjustments to reconcile to the GAAP loss were intangible assets
amortization of $645,000, credit to restructuring charges of $(42,000),
compensation expense related to restricted stock awards of $207,000, and change
in valuation of warrants liability issued in connection with the March 2005
senior convertible notes of $(528,000). Fourth quarter fiscal 2004 non-GAAP
income was $205,000 or $0.01 per share. For the year-ago quarter, the net
adjustment to reconcile to GAAP net loss consisted of $314,000 of intangible
assets amortization and compensation expense related to restricted stock awards
of $439,000, net of a reduction in restructuring charges of $10,000 (see "Use of
Non-GAAP Financial Measures" below).

On an annual basis, GAAP results for fiscal 2005 included acquisition- related
and other items totaling $29.5 million, which includes impairment charges
related to goodwill and intangible assets of $26.5 million, intangible assets
amortization of $2.5 million, compensation expense related to restricted stock
awards of $476,000, change in valuation of warrants liability issued in
connection with the March 2005 senior convertible notes of $(543,000), direct
acquisition costs paid and expensed of $287,000, and restructuring charges of
$275,000. Excluding the effects of these items, non-GAAP loss was $7.9 million
or $(0.36) per share, compared to non-GAAP income for fiscal 2004 of $3.2
million or $0.21 per share. For fiscal 2004, net adjustments to reconcile to
the GAAP loss totaled $3.3 million, including $1 million of intangible assets
amortization, compensation expense related to expenses associated with the XEL
acquisition of $1.85 million, and restructuring charges of $390,000 related to
the consolidation of certain XEL functions into Madison, Alabama.

"Our fiscal year ended with revenues up 15% to $53.3 million, the third
consecutive year of increased revenues," said Leigh S. Belden, President and
CEO of Verilink. "For the fourth quarter, revenues were $13.9 million. During
the quarter, we continued to streamline our business following acquisitions
completed during calendar 2004 and continued to position the company for growth
as our carrier customers deploy the next generation of converged services.
During the quarter, we announced a wireless access device, strengthening our
position in the anticipated high-growth segments of the broadband access
market."

  Verilink Fourth Quarter 2005 Summary:

   *    Reported revenues of $13.9 million, up slightly from the prior
        quarter's revenues of $13.8 million
   *    Launched the NetPath 2000 wireless access device for delivery of
        high-speed data services over cellular networks
   *    Expanded the Optical Ethernet portfolio with the introduction of the
        Orion 7450 Ethernet Over SDH Multiservice Access Platform
   *    8000 Series VoIP IAD recognized as one of the "10 Hottest
        Technologies for 2005" by Telecommunications Magazine for advanced
        SIP technology
   *    Introduced enhanced eLink-300(TM) IAD with dual T-1 capacity and
        advanced fail-safe technology
   *    Reduced inventory from the prior quarter by $1.6 million, excluding
        changes in inventory reserves

  Verilink Fiscal Year 2005 Highlights:

   *    Achieved revenues of $53.3 million for the fiscal year, an increase
        of 15% year-over-year and the third consecutive year of revenue
        growth
   *    Completed the acquisition of Larscom, broadening product lines and
        expanding the customer base
   *    Revenue growth and market expansion internationally within Asia
        Pacific and Europe
   *    Achieved record shipments of SHARK IADs and increased Professional
        Services business related to a large RBOC customer
   *    Engaged with over fifty carrier customers in evaluations and/or
        trials for the VoIP-enabled IADs
   *    Significant interoperability certification activities with
        Broadsoft, General Bandwidth, Metaswitch, Nortel, Sylantro, and
        VocalData (Tekelec) and others
   *    8000 Series IAD awarded "Product of the Year" for 2004 by Internet
        Telephony Magazine; "Hot Products for 2005" by Xchange Magazine

  Conference Call Information


Verilink will hold its regularly scheduled fourth quarter conference call today
at 5:00 p.m. ET/3:00 p.m. MT, which will be available via webcast and can be
accessed as follows:

Live Webcast: http://phx.corporate-ir.net/phoenix.zhtml?p=irol-
eventDetails&c=96086&eventID=1101924

A webcast replay of the conference call will be available approximately two
hours following the end of the live call and can be accessed via the "Investor"
section of the Company's website at http://www.verilink.com/.

Use of Non-GAAP Financial Measures

Non-GAAP income excludes intangible asset amortization, other acquisition-
related expenses, impairment charges, restructuring charges, change in
valuation of warrants liability 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. 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 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
(loss) to non-GAAP income (loss) is set forth below.

About Verilink Corporation

Verilink Corporation 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
cost-effectively deliver 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,
wire-speed routers, 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., Europe and Asia. To
learn more about Verilink, visit the company's website at
http://www.verilink.com/ .

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995

Except for the historical information contained herein, the matters set forth
in this press release, including statements as to the pursuit of market
opportunities, development and expansion of distribution and channel partnering
relationships, continuation of certifications in the VoIP access space,
expansion of international distribution and customer base, improvement and
fluctuations in gross margins, anticipated decline in inventories, continued
growth as a result of greater liquidity and working capital from issuance of
senior convertible notes, ability to repay interest and note principal in cash,
implementation of operating expense controls, expected benefits of acquisitions,
future product offerings, expected synergies, cost savings, 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 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 ability to increase
sales of acquired product lines; the impact of cost-saving activities; the
sufficiency of cash flow to fund operations; risks associated with the
Company's low level of liquidity and "going concern" paragraph in the report of
independent registered public accounting firm for the audited fiscal 2004
financial statements; possible negative effects on our customer base, employees
and our ability to obtain additional financing; fluctuations in operating
results and general industry and economic conditions; costs associated with
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 discussion of 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 Annual Report
on Form 10-K and Quarterly Reports on 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.

NOTE:  Verilink, the Verilink logo are registered trademarks of Verilink
Corporation. All other trademarks or registered trademarks are the property of
the respective owners.

                           VERILINK CORPORATION
             Condensed Consolidated Statements of Operations
           (Unaudited, in thousands, except per share amounts)

                           Three Months Ended            Year Ended
                          July 1,      July 2,       July 1,      July 2,
                           2005         2004          2005         2004
  Net sales              $13,911      $13,853      $53,292      $46,183
  Cost of sales(1)         9,113        8,668       35,976       26,466
   Gross profit            4,798        5,185       17,316       19,717

  Operating expenses:
   Research and
    development(2)         1,662        1,895        7,454        6,876
   Selling, general and
    administrative(3)      4,120        3,784       18,040       12,124
   Amortization of acquired
    intangible assets        645          314        2,546        1,027
   Impairment charges      6,500           --       26,484           --
   Restructuring charges   (417)         (10)          275          390

  Income (loss) from
   operations            (7,712)        (798)     (37,483)        (700)
  Interest and other
   income, net(4)            169          292        1,164          927
  Interest expense         (705)         (32)      (1,133)        (253)
   Income (loss) before
    provision for income
    taxes                (8,248)        (538)     (37,452)         (26)
  Provision for income
   taxes                      --           --           --           --

   Net income (loss)    $(8,248)       $(538)    $(37,452)        $(26)

  Earnings (loss) per share:
   Basic                 $(0.36)      $(0.03)      $(1.68)      $(0.00)
   Diluted               $(0.36)      $(0.03)      $(1.68)      $(0.00)

  Weighted average shares
   outstanding:
   Basic                  23,011       16,131       22,316       15,170
   Diluted                23,011       16,131       22,316       15,170

  Notes:
  (1) Cost of sales includes
   the following:
    Cash bonuses             $--          $--          $--          $50
    Retention bonuses
     accrued                  --           12           28           20
    Compensation expense
     on stock awards          --           20          120          178
                             $--          $32         $148         $248


  (2) Research and
   development expenses
   includes the following:
    Cash bonuses             $--          $--          $--          $50
    Retention bonuses
     accrued                  --           13           29           21
    Compensation expense
     on stock awards          --           12          110          170
                             $--          $25         $139         $241

  (3) Selling, general and
   administrative expenses
   includes the following:
    Cash bonuses             $--          $--          $--         $250
    Retention bonuses
     accrued                  --          146           61          188
    Compensation expense
     on stock awards          --          407          246        1,147
    Direct acquisition costs
     paid and expensed        --          314          287          579
                             $--         $867         $594       $2,164

  (4) Interest and other
   income, net includes
   the following
    Income from reduction
     in convertible note
     due to accrual of
     retention bonuses
     noted above             $--         $171         $118         $229
    Change in valuation of
     warrants liability       15           --          543           --
                             $15         $171         $661         $229


                           VERILINK CORPORATION


Reconciliation of GAAP Net Income (Loss) to Pro Forma Non-GAAP Income (Loss)

                        (Unaudited, in thousands)

                          Three Months Ended             Year Ended
                         July 1,       July 2,     July 1,       July 2,
                          2005          2004        2005          2004
  GAAP net income
   (loss)               $(8,248)       $(538)    $(37,452)        $(26)
  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          476        1,495
   Amortization of
    acquired intangible
    assets                   645          314        2,546        1,026
   Impairment charges      6,500           --       26,484           --
   Restructuring charges   (417)         (10)          275          390
   Change in valuation of
    warrants liability      (15)           --        (543)           --
   Direct acquisition costs
    paid and expensed         --           --          287           --
  Pro forma non-GAAP
   income (loss)        $(1,535)         $205     $(7,927)       $3,235

  Pro forma non-GAAP adjustments: The pro forma non-GAAP adjustments above
  are based on 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 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, and the acquisition of
  Larscom Incorporated in July 2004; compensation expense recorded from
  stock grants and restricted stock grants awarded following the XEL
  acquisition; compensation expense related to bonuses to be paid to certain
  XEL employees after the acquisition, net of impact on convertible notes
  payable; impairment charges related to goodwill and intangible assets;
  restructuring charges related to the consolidation of certain operations,
  administrative, and engineering functions; direct acquisition costs paid
  and expensed related to the Larscom acquisition; and change in valuation
  of warrants liability issued in connection with the private placement in
  March 2005. 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 1,        July 2,
                                                    2005           2004
                                    ASSETS

  Current assets:
   Cash and cash equivalents                        $3,504         $3,448
   Restricted cash                                     333             --
   Accounts receivable, net                         10,068          7,881
   Inventories, net                                  5,256          6,010
   Other current assets                                744            941

     Total current assets                           19,905         18,280

  Property held for lease, net                       6,076          6,269
  Property, plant and equipment, net                 1,697          1,381
  Goodwill                                           1,114          9,887
  Other intangible assets, net                      13,253          9,182
  Other assets                                         283          1,139

     Total assets                                  $42,328        $46,138

                     LIABILITIES AND STOCKHOLDERS' EQUITY

  Current liabilities                              $20,792        $15,502
  Long-term liabilities                              5,764          6,262
  Stockholders' equity                              15,772         24,374

     Total liabilities and stockholders' equity    $42,328        $46,138


                           VERILINK CORPORATION
                          Tested Working Capital
          (as defined in the Company's Senior Convertible Notes)



The terms of the Company's senior 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
July 1, 2005, tested working capital was $8.88 million, which was greater than
the $8 million target level under the terms of the notes. Tested working
capital 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. A reconciliation of non-GAAP tested working
capital to GAAP working capital as of July 1, 2005 is set forth below.

  Tested Working Capital:
   Cash and cash equivalents                                       $3,504
   Accounts receivable, net                                        10,068
   Other receivables, included in other current assets                254
   Less: Accounts payable                                         (4,944)
     Tested Working Capital                                         8,882
  Other components of GAAP working capital:
   Restricted cash                                                    333
   Inventories, net                                                 5,256
   Other current assets, excluding other receivables above            490
   Less: Current liabilities other than accounts payable         (15,848)

  GAAP working capital (deficit)                                   $(887)


DATASOURCE: Verilink Corporation



CONTACT:  Gary W. Gray of Verilink Corporation, [phone], or





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

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