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Verilink Reports First Quarter 2006 Financial Results2 November 2005
Verilink Corporation (NASDAQ: VRLK), a
leading provider of broadband access solutions, today reported its
financial results for the first fiscal quarter ended September 30, 2005.
Net sales were $11.0 million, a decrease of 11% year over year from $12.3
million in the same period of fiscal 2005. Net loss computed in accordance
with generally accepted accounting principles (GAAP) for the first quarter
of fiscal 2006 was $1.9 million, or $(0.08) per share, compared to net loss
of $24.5 million, or $(1.19) per share in the first quarter of fiscal 2005.
First quarter GAAP results included acquisition-related and other items
totaling $1.1 million, which includes stock based compensation of $552,000
due to our adoption of SFAS No. 123R, Share Based Payment, as of July 2,
2005 and intangible assets amortization of $564,000. Excluding the effects
of these items, non-GAAP loss was $815,000 or $(0.04) per share, compared
to a non-GAAP loss for the first quarter of fiscal 2005 of $3 million or
$(0.14) per share. For the year-ago quarter, the net adjustment to
reconcile to the GAAP net loss totaled $21.5 million, which included a $20
million charge for impairment of goodwill, intangible assets amortization
of $572,000, restructuring charges of $443,000, compensation expense of
$233,000 related to restricted stock awards, and direct acquisition costs
paid and expensed of $287,000 (see "Use of Non-GAAP Financial Measures"
below).
"Revenues were down sequentially due to various factors, primarily the
timing of orders from a large carrier customer and our focus to improve
gross margins, which resulted in our decision to forego lower-margin
business," stated Leigh S. Belden, President and CEO of Verilink. "Despite
the lower revenues, we were able to improve gross margins by 350 basis
points, reduce non-GAAP operating expenses by $1.3 million and
substantially narrow our non-GAAP operating loss on a sequential basis as a
result of actions we took to accelerate our return to profitability. From a
business development standpoint, we acquired the ArcaDACSTM Digital Cross
Connect and SechtorTM 300 Multiservice Edge Concentrator product lines from
Zhone to ensure continuity and expansion of our footprint with our largest
customer, as well as to extend our offering across the "last mile" from the
customer premise to the network edge."
First Quarter 2006 Summary:
-- Revenues of $11.0 million, an 11% decrease from Q1 2005
-- Improved gross margin to 38%, up 350 basis points sequentially
-- Reduction in operating expenses of $1.3 million, net of amortization
and stock based compensation
-- Significant progress made in the Company's wireless business with the
qualification of the NetPath™ 2000 with major wireless carriers;
expansion of distribution channel with several major partners added during
the quarter
-- Acquired the ArcaDACS 100 and Sechtor 300 product lines from Zhone
Technologies, Inc. effective as of October 1, 2005, providing continuity
with the Company's largest customer, gaining new customers, and improving
product line gross margin in future periods
Amendment of Senior Convertible Notes and Related Documents
Verilink and the holders of its senior secured convertible notes issued
March 21, 2005 have agreed to reduce the "target working capital" amounts
under the terms of the notes to $6.5 million for the quarter ended
September 30, 2005, and for subsequent quarters, to $6.8 million less 80%
of the principal amount of any notes redeemed or converted subsequent to
the date of the amendment plus 80% of the principal amount of any newly
issued notes from the exercise of the holders' right to purchase additional
notes. Under the terms of the notes, if the Company's tested working
capital as of the end of a fiscal quarter does not meet the target working
capital amount, the holders of the notes may require the Company to make
certain additional principal payments on the notes.
Verilink has also agreed to apply 50% of the net proceeds (after
satisfaction of the first mortgage commissions, and closing costs) from a
sale of its Explorer Boulevard property in Huntsville, Alabama to reduce
the outstanding principal amount of the notes. Verilink has agreed to
reduce the exercise price of the warrants for 830,563 shares of common
stock issued in connection with the initial issuance of the notes to $.93
per share of common stock.
As part of the initial purchase of these notes and warrants in March 2005,
the holders acquired additional investment rights to purchase up to an
aggregate of $5 million in principal amount of additional notes. The
Company has agreed to reduce the conversion price of the additional notes
that would be issued if the holders exercise their additional investment
rights to $1.00 per share of common stock, and to extend the expiration of
the holders' right to exercise their additional investment rights to June
29, 2006. The conversion price of the currently outstanding $8 million
principal amount of notes is $3.01 per share and has not been amended.
The amendments also include revisions to the default and restricted payment
provisions of the notes and certain other changes to the transaction
documents, which will be reported in a Current Report on Form 8-K.
Conference Call Information
Verilink will hold its first quarter conference call on Thursday, November
3rd 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, 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. 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 the expected
benefits of acquisitions, future product offerings, expected synergies,
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 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 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
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 our customer base, employees and our 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 Annual Report on Form
10-K for the fiscal year ended July 1, 2005. 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 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
September 30, October 1,
2005 2004
-------- --------
Net sales:
Product $ 8,411 $ 9,718
Service 2,557 2,566
-------- --------
Total net sales 10,968 12,284
-------- --------
Cost of sales:
Product 5,643 7,531
Service 1,158 964
-------- --------
Total cost of sales(1) 6,801 8,495
-------- --------
Gross profit 4,167 3,789
Operating expenses:
Research and development(2) 1,467 2,252
Selling, general and administrative(3) 3,530 5,107
Amortization of intangible assets 564 572
Impairment charge related to goodwill -- 19,984
Restructuring charges -- 443
-------- --------
Loss from operations (1,394) (24,569)
Interest and other income, net(4) 165 213
Interest expense (702) (115)
-------- --------
Loss before provision for income taxes (1,931) (24,471)
Provision for income taxes -- --
-------- --------
Net loss $ (1,931) $(24,471)
======== ========
Net loss per share - basic and diluted $ (0.08) $ (1.19)
======== ========
Shares used in per share calculation - basic and
diluted 23,145 20,608
======== ========
Notes:
(1) Cost of sales includes the following:
Stock based compensation $ 85 $ 15
Retention bonuses accrued -- 12
-------- --------
$ 85 $ 27
======== ========
(2) Research and development expenses include
the following:
Stock based compensation $ 66 $ 98
Retention bonuses accrued -- 29
-------- --------
$ 66 $ 127
======== ========
(3) Selling, general and administrative expenses
include the following:
Stock based compensation $ 401 $ 120
Retention bonuses accrued -- 45
Direct acquisition related expenses expensed -- 287
-------- --------
$ 401 $ 452
======== ========
(4) Interest and other income, net includes the
following:
Income from reduction in convertible note
due to accrual of retention bonuses noted
above $ -- $ 86
======== ========
VERILINK CORPORATION
Reconciliation of GAAP Net Income (Loss) to
Pro Forma Non-GAAP Income (Loss)
(Unaudited, in thousands)
Three Months Ended
September 30, October 1,
2005 2004
---- ----
GAAP net income (loss) $ (1,931) $ (24,471)
Acquisition-related and other items:
Stock based compensation 552 233
Amortization of acquired intangible assets 564 572
Impairment charge related to goodwill -- 19,984
Restructuring charges -- 443
Direct acquisition costs paid and expensed -- 287
Retention bonuses accrued in connection
with XEL acquisition, net of impact from
reduction in convertible notes -- --
--------- ---------
Pro forma non-GAAP income (loss) $ (815) $ (2,952)
========= =========
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 stock based compensation
recorded as a result of our 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, and
the acquisition of Larscom Incorporated in July 2004; 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)
September 30, July 1,
2005 2005
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2,502 $ 3,504
Restricted cash 333 333
Accounts receivable, net 7,914 10,068
Inventories, net 5,145 5,256
Other current assets 786 744
-------- --------
Total current assets 16,680 19,905
Property held for lease, net 6,027 6,076
Property, plant and equipment, net 1,462 1,697
Goodwill 1,114 1,114
Other intangible assets, net 12,689 13,253
Other assets 283 283
-------- --------
Total assets $ 38,255 $ 42,328
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 18,856 $ 20,792
Long-term liabilities 4,937 5,764
Stockholders' equity 14,462 15,772
-------- --------
Total liabilities and stockholders' equity $ 38,255 $ 42,328
======== ========
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 September 30, 2005, tested working capital was $6.77 million,
which exceeds the $6.5 million target under the terms of the notes as
amended. 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 September 30, 2005 is set
forth below.
Tested working capital:
Cash and cash equivalents $ 2,502
Accounts receivable, net 7,914
Other receivables, included in other current assets 370
Less: accounts payable (4,014)
--------
Tested working capital 6,772
Other components of GAAP working capital:
Restricted cash 333
Inventories, net 5,145
Other current assets, excluding other receivables above 416
Less: current liabilities other than accounts payable (14,842)
--------
GAAP working capital (deficit) $ (2,176)
========
Gary W. Gray
Verilink Corporation
510.771.3354
Email Contact
SOURCE: Verilink Corporation
Source: Marketwire
All trademarks and copyrighted information contained herein are the property of their respective owners.
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