HCO Hyperspace Comm

EBITDA Improves for Second Consecutive Quarter; Revenue From Servers & Storage Products Increases 31% Year-over-Year DENVER, Aug. 14 /PRNewswire-FirstCall/ -- HyperSpace Communications, Inc. (AMEX:HCO), a provider of enterprise IT hardware solutions through its subsidiary MPC Computers, today announced financial results for the second quarter of fiscal 2006 ended June 30, 2006. These results include the operations of MPC Computers, which was acquired as a wholly-owned subsidiary of HyperSpace in July 2005. Net revenue for the quarter was $68.5 million, with a net loss of $19.1 million, which includes a non-cash charge for impairment of intangible assets. On a pro-forma basis (assuming the companies were combined during all of 2005), revenue decreased by 22%, or $19.3 million, compared to the second quarter of 2005. The net loss increased by 313%, or $14.5 million, compared to the second quarter of 2005. The net loss includes a non-cash charge of $13.2 million for impairment of intangible assets related to HyperSpace's 2005 acquisition of MPC Computers. On a product basis, revenue from the company's server and storage products was $5.6 million, an increase of 31% compared to Q2 2005. Servers and storage represent a strategic product category for MPC with historically higher gross margins compared to the company's other product segments. Revenue from the company's desktop products in Q2 2006 was $37.4 million, a decrease of 25% compared to the same period in 2005, while revenue from PC notebook products was $10.1 million, a decrease of 29% compared to 2005. Revenue from third-party products and services (such as monitors, printers and other accessories) was $15.3 million, a decrease of 21% compared to 2005. The decline in third-party product sales is primarily related to the decrease in revenues from federal government sales. Gross margins for the quarter were 12.4%, compared to gross margins of 12.1% in both Q2 2005 and Q1 2006. Gross margin for Q2 2006 includes the benefit of a reduction in warranty reserve of $0.4 million. Without this reduction in warranty reserve, gross margin for Q2 2006 would have been 11.8%. The EBITDA loss for the quarter was $1.9 million, a 45% improvement compared to the EBITDA loss of $3.4 million during the second quarter of 2005. The EBITDA loss also improved on a sequential basis, with a 53% improvement compared to Q1 2006's EBITDA loss of $4.0 million. The quarter's performance marks the second consecutive quarter of significant EBITDA improvement, driven by higher gross margins and lower operating expenses (excluding depreciation and amortization) as compared to previous periods. In addition, HyperSpace announced restructuring actions on July 5, 2006 that included a reduction in approximately 50 positions, further cuts to non-headcount expenses and several changes to executive management. These reductions are intended to bring the company's expenses more closely in line with its revenue and margin. These expense cuts are expected to result in savings of approximately $1 million in Q4 2006 and $7 million during FY2007. "We continue to make progress bringing the company closer to cash-flow break-even," said John P. Yeros, Chairman and CEO of HyperSpace Communications, Inc. "We are accomplishing this progress by stabilizing gross margins and continually reducing our operating expenses. In addition, we see momentum with both our mid-size enterprise customers and our strategic server and storage products." About HyperSpace Communications: HyperSpace Communications, Inc. (AMEX:HCO), through its subsidiary MPC Computers, provides enterprise IT hardware solutions to mid-sized businesses, government agencies and education organizations. MPC offers standards-based server and storage products, along with PC products and computer peripherals, all of which are backed by an industry-leading level of service and support. Additionally, the company provides contract manufacturing and distribution services to partners in the PC industry through its DirectCM division. For more information, visit HyperSpace online at http://www.ehyperspace.com/ Cautionary Statement Certain statements in this press release are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve a number of risks, uncertainties and other factors that could cause actual results, performance or achievements of HyperSpace Communications to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Other factors, which could materially affect such forward-looking statements, can be found in HyperSpace Communications' filings with the Securities and Exchange Commission, including risk factors at http://www.sec.gov/. Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this press release and HyperSpace Communications undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2006 and 2005 June 30, Three months Ended Six Months Ended 2006 2005 2006 2005 Net Sales $68,529 $76 $134,993 $165 Cost of Good Sold $60,065 $31 $118,438 $87 Gross Margin $8,464 $46 $16,555 $78 Operating Expenses Research & Development $985 $83 $2,135 $180 Selling, General & Administrative 10,189 609 21,098 1,446 Depreciation & Amortization 2,020 15 4,040 31 Impairment of Intangibles 13,235 -- 13,235 -- Total Operating Expenses $26,429 $708 $40,508 $1,657 Operating Loss $(17,965) $(663) $(23,953) $(1,580) Other (Income)/Expense Interest Expense, net $1,166 $(2) $2,644 $2 Gain on Vendor Settlements (843) -- (843) -- Change in Estimated Fair Value of Derivative Financial Instruments 909 -- 909 -- Other Expense (85) -- (49) -- Total Other (Income)/Expense $1,147 $(2) $2,661 $2 Net Loss $(19,112) $(661) $(26,614) $(1,581) Basic and diluted weighted average Common Shares outstanding 12,040,918 3,734,621 11,695,975 3,733,531 Basic and diluted loss per Common Share $(1.59) $(0.18) $(2.28) $(0.42) HyperSpace Communications, Inc. Condensed Consolidated Balance Sheet (in thousands) June 30, December 31, 2006 2005 (Unaudited) ASSETS Current Assets Cash and Cash Equivalents $993 $3,897 Accounts Receivable, net 30,154 42,938 Inventories, net 22,123 21,158 Prepaid Maintenance & Warranty Costs 10,035 17,625 Other Current Assets 731 1,234 Total Current Assets $64,036 $86,852 Non-Current Assets Property & Equipment, net $6,373 $7,813 Goodwill 22,197 23,427 Acquired Intangibles, Net 17,253 33,018 Long-Term Portion of Prepaid Maintenance & Warranty Costs 954 1,106 Other Assets 821 1,027 Total Non-Current Assets $47,599 $66,391 TOTAL ASSETS $111,635 $153,243 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable $37,393 $40,749 Accrued Expenses 4,233 11,217 Accrued Licenses & Royalties 4,706 1,606 Current Portion of Accrued Warranties 2,306 2,402 Current Portion of Deferred Revenue 16,340 24,598 Derivative Financial Instruments at Estimated Fair Value 5,075 -- Current Portion of Notes Payable & Debt 11,923 23,822 Total Current Liabilities $81,976 $104,394 Long Term Liabilities Long term Portion of Notes Payable $4 $21 Non-Current Portion of Accrued Warranties 2,161 2,373 Non-Current Portion of Deferred Revenue 21,665 19,011 Total Long Term Liabilities $23,830 $21,405 TOTAL LIABILITIES $105,806 $125,799 COMMITMENTS AND CONTINGENCIES Shareholders' Equity Preferred Stock, no par value; 1,000,000 shares authorized; no shares issued and outstanding at 2006 and 2005 $-- $-- Common Stock, no par value, 50,000,000 shares authorized; 12,085,184 and 10,859,575 shares issued and outstanding at 2006 and 2005, respectively 56,304 51,305 Accumulated Deficit (50,475) (23,861) Total Shareholders' Equity $5,829 $27,444 TOTAL LIABILITIES AND EQUITY $111,635 $153,243 Pro-Forma Comparison of the Three Months and Six Months ended June 30, 2006 and 2005 (Unaudited, Assumes the Merger Took Place on January 1, 2005) (in thousands) June 30, Three months Ended Six Months Ended 2006 2005 % Change 2006 2005 % Change Net Sales $68,529 $87,916 -22.10% $134,993 $157,886 -14.50% Cost of Good Sold $60,065 $77,245 -22.20% $118,438 $139,052 -14.80% Gross Margin $8,464 $10,671 -20.70% $16,555 $18,834 -12.10% Gross Margin % 12.40% 12.10% 2.5% 12.30% 11.90% 3.4% Operating Expenses Research & Development $985 $1,192 -17.40% $2,135 $2,534 -15.80% Selling, General & Administrative 10,189 12,857 -20.80% 21,098 24,683 -14.50% Depreciation & Amortization 2,020 590 242.60% 4,040 1,117 261.60% Impairment of Intangibles 13,235 -- -- 13,235 -- -- Total Operating Expenses $26,429 $14,639 80.50% $40,508 $28,334 43.00% Operating Loss $(17,965) $(3,968) 352.70% $(23,953) $(9,500) 152.10% Other (Income)/ Expense Interest Expense, net $1,166 $655 78.00% $2,644 $1,068 147.50% Gain on Vendor Settlements (843) -- -- (843) -- -- Change in Estimated Fair Value of Derivative Financial Instruments 909 -- -- 909 -- -- Other Expense (85) -- -- (49) -- -- Total Other (Income)/Expense $1,147 $655 75.10% $2,661 $1,068 149.10% Net Loss $(19,112) $(4,623) 313.40% $(26,614) $(10,569) 151.80% EBITDA $(1,867) $(3,378) 44.70% $(5,834) $(8,384) 30.40% EBITDA % of sales -2.70% -3.80% -4.30% -5.30% Reconciliation of Net Income (Loss) to EBITDA: Net Income (Loss) $(19,112) $(4,623) $(26,614) $(10,569) Interest (Income)/Expense 1,166 655 2,644 1,068 Change in Estimated Fair Value of Derivative Financial Instruments 909 -- 909 -- Other (Income)/ Expense (85) -- (49) -- Depreciation, Amortization & Impairment 15,255 590 17,275 1,117 EBITDA $(1,867) $(3,378) $(5,835) $(8,384) The Company uses "EBITDA", earnings before interest, taxes, depreciation and amortization, after adjusting for non-cash stock awards issued pursuant to the merger, as a financial measurement. This is not a GAAP measurement. EBITDA after adjusting for non-cash stock awards issued pursuant to the merger is derived by adding back the following to GAAP net loss: Net Interest expenses, Depreciation and Amortization, Impairment of Intangibles and the non-cash expense of stock awards issued pursuant to the merger. This non-GAAP measurement is provided as supplementary information and is not an alternative to GAAP. Some investors may use EBITDA to supplement their analysis of our results of operations. DATASOURCE: HyperSpace Communications, Inc. CONTACT: Ross Ely of HyperSpace Communications, Inc., +1-208-893-1560, Web site: http://www.ehyperspace.com/

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