HCO Hyperspace Comm

Adjusted EBITDA Improves for Second Sequential Quarter NAMPA, Idaho, Nov. 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 third quarter of fiscal 2006 ended September 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 $76.6 million, with a net loss of $40.5 million, which included non-cash charges totaling $35.4 million related to a private placement financing during the quarter. The non-cash charges consisted of the recording of derivative financial instruments at fair market value and debt extinguishment totaling $24.9 million and $10.5 million, respectively. The significant size of the charges was primarily the result of the value of the conversion features of the securities issued at below-market prices and the mandatory put option available to the investors. The securities consisted of convertible debentures and warrants to purchase common stock of the company. On a pro-forma basis (assuming the companies were combined during all of 2005), revenue decreased by $45.7 million compared to the third quarter of 2005, while the net loss increased by $32.9 million compared to the third quarter of 2005. The Adjusted EBITDA loss for the quarter was $1.5 million, compared to the Adjusted EBITDA loss of $1.0 million during the third quarter of 2005. However, the Adjusted EBITDA loss improved on a sequential basis compared to Q2 2006's Adjusted EBITDA loss of $1.8 million. The quarter's performance marks the second sequential quarter of Adjusted EBITDA improvement, driven by stabilizing gross margins and lower operating expenses (excluding depreciation and amortization) as compared to previous periods. Gross margins for the quarter were 11.5%, compared to gross margins of 11.0% in the third quarter of 2005. On a sequential basis, gross margins declined from 12.4% in Q2 2006. Gross margins for the company are typically seasonally lower in Q3 compared to Q2 because of the relatively higher mix of lower-gross-margin sales to the federal government. As previously announced, HyperSpace successfully completed a private placement financing of $4.55 million on September 6, 2006. Subsequently, the company completed a second round of private placement funding of $4.94 million, the majority of which closed and will be accounted for in Q4. The proceeds from these offerings have been used for general corporate purposes including working capital and the reduction of debt. We anticipate a charge of $12.2 million in Q4 for the initial recognition of the fair value of the second private placement funding as derivative financial instruments. "We continue to make progress bringing the company closer to break-even on an Adjusted EBITDA basis," said John P. Yeros, Chairman and CEO of HyperSpace Communications, Inc. "In addition, the private placement financing we recently completed is helping to re-capitalize the business." 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. 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. There can be no assurance that the company will reach break-even on an Adjusted EBITDA or other basis. The company faces significant liquidity constraints, and the private placement financings described herein do not fully address the company's need for additional liquidity. It is possible that the initial recognition of the fair value of the second private placement funding will be different than currently anticipated. 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. The company uses EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin as financial measures of operating performance that are used in the calculation of some of the financial covenants of our credit facility. EBITDA represents net income (loss) before net interest expense, income tax expense, depreciation and amortization including impairment of intangibles. Adjusted EBITDA excludes from EBITDA the change in the estimated fair value of derivative financial instruments, loss on debt extinguishment and merger related stock compensation expense. Adjusted EBITDA margin is calculated by dividing adjusted by total revenue. Management believes EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are important supplemental measures of financial performance of our operating performance because they eliminate items that have less bearing on our operating performance and so highlight trends in our core business that may not otherwise be apparent when relying solely on generally accepted accounting principles, or GAAP, financial measures. Management also believes that investors and other interested parties may use EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin to evaluate our operating results. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not presentations made in accordance with GAAP. When evaluating our results, you should not consider EBITDA, Adjusted EBITDA and Adjusted EBITDA margin in isolation of, or as a substitute for, measures of our financial performance as determined in accordance with GAAP, such as net income (loss). EBITDA, Adjusted EBITDA and Adjusted EBITDA margin have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations. Because other companies may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA margin differently than we do, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures reported by other companies. Unaudited Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2006 and 2005 September 30, Three months Ended Nine Months Ended 2006 2005(1) 2006 2005(1) Net Sales $76,647 $100,924 $211,640 $101,089 Cost of Good Sold 67,826 88,165 186,264 88,252 Gross Margin 8,821 12,759 25,376 12,837 Operating Expenses Research & Development 769 1,100 2,904 1,280 Selling, General & Administrative 10,310 10,267 31,408 11,713 Depreciation & Amortization 1,416 1,270 5,456 1,301 Impairment of Acquired Intangibles -- -- 13,235 -- Total Operating Expenses 12,495 12,637 53,003 14,294 Operating Loss (3,674) 122 (27,627) (1,457) Other (Income) Expense Interest Expense, net 901 802 3,545 804 Gain on Vendor Settlements (734) -- (1,577) -- Change in Estimated Fair Value of Derivative Financial Instruments 24,931 -- 25,840 -- Loss on Debt Extinguishment 10,511 -- 10,511 -- Merger Related Stock Compensation Expense 1,261 4,183 1,261 4,183 Other Expense (4) -- (53) -- Total Other Expense 36,866 4,985 39,527 4,987 Net Loss $(40,540) $(4,863) $(67,154) $(6,444) Basic and diluted weighted average Common Shares outstanding 12,103,583 6,485,728 11,833,338 4,661,011 Basic and diluted loss per Common Share $(3.35) $(0.75) $(5.67) $(1.38) (1) The results of MPC have been consolidated effective July 25, 2005, the date the merger with HyperSpace Communications, Inc. became effective. Therefore, the results of MPC prior to July 25, 2005 are not included in the results for the three and nine months ended September 30, 2005. HyperSpace Communications, Inc. Condensed Consolidated Balance Sheet (in thousands) September 30, December 31, 2006 2005 (Unaudited) ASSETS Current Assets Cash and Cash Equivalents $2,077 $3,897 Accounts Receivable, net 44,073 42,938 Inventories, net 19,909 21,158 Prepaid Maintenance & Warranty Costs 7,223 17,625 Other Current Assets 754 1,234 Total Current Assets 74,036 86,852 Non-Current Assets Property & Equipment, net 5,641 7,813 Goodwill 22,197 23,427 Acquired Intangibles, Net 16,571 33,018 Long-Term Portion of Prepaid Maintenance & Warranty Costs 845 1,106 Other Assets 2,163 1,027 Total Non-Current Assets 47,417 66,391 TOTAL ASSETS $121,453 $153,243 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable $39,799 $40,749 Accrued Expenses 4,919 11,217 Accrued Licenses & Royalties 978 1,606 Current Portion of Accrued Warranties 2,355 2,402 Current Portion of Deferred Revenue 15,161 24,598 Current Portion of Notes Payable & Debt 20,575 23,822 Total Current Liabilities 83,787 104,394 Long Term Liabilities Long term Portion of Notes Payable and Debt -- 21 Derivative warrant liabilities 12,701 -- Convertible debentures, at fair value 32,616 -- Non-Current Portion of Accrued Warranties 1,959 2,373 Non-Current Portion of Deferred Revenue 22,769 19,011 Total Long Term Liabilities 70,047 21,405 TOTAL LIABILITIES 153,832 125,799 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; 12,147,438 and 10,859,575 shares issued and outstanding at 2006 and 2005, respectively 58,635 51,305 Accumulated Deficit (91,014) (23,861) Total Shareholders' Equity (Deficit) (32,379) 27,444 TOTAL LIABILITIES AND EQUITY $121,453 $153,243 Pro-Forma Comparison of the Three Months and Nine Months ended September 30, 2006 and 2005 (Unaudited, Assumes the Merger Took Place on January 1, 2005) (in thousands) September 30, Three months Ended Nine Months Ended % % 2006 2005(1) Change 2006 2005(1) Change Net Sales $76,647 $122,311 -37% $211,640 $280,197 -24% Cost of Good Sold 67,826 108,876 -38% 186,264 247,929 -25% Gross Margin 8,821 13,435 -34% 25,376 32,268 -21% Gross Margin % 11.5% 11.0% 12.0% 11.5% Operating Expenses Research & Development 769 1,363 -44% 2,904 3,897 -25% Selling, General & Administrative 10,310 13,123 -21% 31,408 37,805 -17% Depreciation & Amortization 1,416 1,376 3% 5,456 2,493 119% Impairment of Intangibles -- -- -- 13,235 -- -- Total Operating Expenses 12,495 15,861 -21% 53,003 44,195 20% Operating expenses as a % of Revenue 16.3% 13.0% 25.0% 15.8% Operating Loss $(3,674) $(2,426) 51% $(27,627) $(11,927) 132% Operating loss as a % of Revenue -4.8% -2.0% -13.1% -4.3% Other (Income)/Expense Interest Expense, net 901 1,023 3,545 2,091 Gain on Vendor Settlements (734) -- (1,577) -- Change in Estimated Fair Value of Derivative Financial Instruments 24,931 -- 25,840 -- Loss on Debt Extinguishment 10,511 -- 10,511 -- Merger Related Stock Compensation Expense 1,261 4,183 1,261 4,183 Other Expense (4) -- (53) -- Total Other (Income)/Expense 36,866 5,206 39,527 6,274 Net Loss $(40,540) $(7,632) $(67,154) $(18,201) EBITDA $(38,224) $(5,233) $(44,918) $(13,616) Adjusted EBITDA (1,521) (1,050) (7,307) (9,433) Adjusted EBITDA Margin -2.0% -0.9% -3.5% -3.4% Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA: Net Income (Loss) $(40,540) $(7,632) $(67,154) $(18,201) Interest (Income)/Expense 901 1,023 3,545 2,091 Depreciation, Amortization & Impairment 1,416 1,376 18,691 2,493 EBITDA $(38,223) $(5,233) $(44,918) $(13,617) Change in Estimated Fair Value of Derivative Financial Instruments 24,931 -- 25,840 -- Loss on Debt Extinguishment 10,511 -- 10,511 -- Merger Related Stock Compensation Expense 1,261 4,183 1,261 4,183 Adjusted EBITDA $(1,520) $(1,050) $(7,306) $(9,434) (1) Because management believes that it provides a more meaningful discussion and analysis, all results are presented on a pro-forma basis, which combines our results with those of MPC for all of 2005. 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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