HyperSpace Communications, Inc. Reports Unaudited First Quarter 2006 Financial Results

17 May 2006

HyperSpace Communications, Inc. (Amex: HCO), a provider of enterprise IT hardware solutions through its subsidiary MPC Computers, today announced financial results for the first quarter of fiscal 2006 ended March 31, 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 $66.5 million, with a net loss of $7.5 million. On a pro-forma basis (assuming the companies were combined during all of 2005), revenue decreased by 5.0%, or $3.5 million, compared to the first quarter of 2005. The net loss increased by 26.2%, or $1.6 million, compared to the first quarter of 2005. However, the EBITDA loss for the quarter was $4.0 million, a 20.4% improvement compared to the EBITDA loss of $5.0 million during the first quarter of 2005.

Gross margins for the quarter were 12.2%, an improvement compared to the first quarter of 2005, during which gross margins were 11.7%. Gross margins for the quarter also improved sequentially from 10.9% in the fourth quarter of 2005, despite the expected seasonal decline in revenue of approximately $20 million.

On a product basis, revenue from the company's server and storage products was $6.5 million, an increase of 91% compared to the first quarter of 2005, while revenue from PC notebook products was $11.0 million, an increase of 42% compared to the first quarter of 2005. Revenue from the company's desktop products was $32.9 million, a decrease of 2% compared to the first quarter of 2005, while revenue from third-party products (such as monitors, printers and other accessories) was $16.1 million, a decrease of 37% compared to the first quarter of 2005.

"We made good progress this quarter with our gross margin improvement initiatives, particularly during the seasonally slow Q1 period," said John P. Yeros, Chairman and CEO of HyperSpace Communications, Inc. "We were also pleased with the strong increase in sales of our strategic server and storage products. While we are not satisfied with our overall earnings performance, we do feel that the company made some significant steps forward during the quarter."

During the quarter, the company launched its new DirectCM division, which intends to provide PC contract manufacturing and distribution services to smaller PC vendors referred to as system builders. The company believes it can leverage its manufacturing capacity and supply chain management expertise to become an important supplier to this system builder community.

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. Forward-looking statements include the statements regarding our ability to leverage manufacturing and supply chain management expertise to become an important supplier to the system builder community. There can be no assurance that the company will return to profitability or that our DirectCM division will be successful. 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.

HYPERSPACE COMMUNICATIONS, INC.

Unaudited Condensed Consolidated Statements of Operations for the

Three Months Ended March 31, 2006 and 2005.

(In Thousands except for share data)

Three Months Three Months

Ended Ended

3/31/2006 3/31/2005

Net Sales $66,464 $89

Cost of Good Sold $58,373 $57

Gross Margin $8,091 $32

Operating Expenses

Research & Development $1,150 $97

Selling, General & Administrative 10,909 837

Depreciation & Amortization 2,019 15

Total Operating Expenses $14,078 $949

Operating Loss $(5,987) $(917)

Other Expense

Interest Expense, net $1,478 $4

Other Expense 37 --

Total Other Expense $1,515 $4

Net Loss $(7,502) $(921)

Basic and diluted weighted average Common

Shares outstanding 11,347,200 3,732,429

Basic and diluted loss per Common Share $(0.66) $(0.25)

The results of MPC have been consolidated effective July 25, 2005, the date the merger with HyperSpace Communications, Inc. became effective, and are not included in the results for the three months ended March 31, 2005.

HYPERSPACE COMMUNICATIONS, INC.

Condensed Consolidated Balance Sheet

(In thousands)

March 31, December 31,

2006 2005

(Unaudited)

ASSETS

Current Assets

Cash and Cash Equivalents $1,046 $3,897

Accounts Receivable, net 32,706 42,938

Inventories, net 20,352 21,158

Prepaid Maintenance & Warranty Costs 13,379 17,625

Other Current Assets 853 1,234

Total Current Assets $68,336 $86,852

Non-Current Assets

Property & Equipment, net $7,099 $7,813

Goodwill 23,807 23,427

Acquired Intangibles, net 31,753 33,018

Long-Term Portion of Prepaid Maintenance &

Warranty Costs 1,083 1,106

Other Assets 1,069 1,027

Total Non-Current Assets $64,811 $66,391

TOTAL ASSETS $133,147 $153,243

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Accounts Payable $38,324 $40,749

Accrued Expenses 7,068 11,217

Accrued Licenses & Royalties 3,207 1,606

Current Portion of Accrued Warranties 2,427 2,402

Current Portion of Deferred Revenue 19,665 24,598

Current Portion of Notes Payable & Debt 16,208 23,822

Total Current Liabilities $86,899 $104,394

Long Term Liabilities

Long term Portion of Notes Payable $10 $21

Non-Current Portion of Accrued Warranties $2,373 2,373

Non-Current Portion of Deferred Revenue $20,097 19,011

Total Long Term Liabilities $22,480 $21,405

TOTAL LIABILITIES $ 109,379 $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; 11,958,139 and

10,859,575 shares issued and outstanding

at 2006 and 2005, respectively 55,131 51,305

Accumulated Deficit (31,363) (23,861)

Total Shareholders' Equity $23,768 $27,444

TOTAL LIABILITIES AND EQUITY $ 133,147 $153,243

HYPERSPACE COMMUNICATIONS, INC.

Pro-Forma Comparison of the Three Months ended March 31, 2006 to 2005

(Unaudited, Assumes the Merger Took Place on January 1, 2005)

(In thousands)

2006 2005 % Change

Net Sales $66,464 $69,970 -5.0%

Cost of Good Sold $58,373 $61,808 -5.6%

Gross Margin $8,091 $8,162 -0.9%

Gross Margin % 12.2% 11.7%

Operating Expenses

Research & Development $1,150 $1,342 -14.3%

Selling, General &

Administrative $10,909 $11,805 -7.6%

Depreciation & Amortization $2,019 $548 268.4%

Total Operating Expenses $14,078 $13,695 2.8%

Operating expenses as a % of

Revenue 21.2% 19.6%

Operating Loss $(5,987) $(5,533) 8.2%

Other (Income)/Expense

Interest Expense, net $1,478 $413 257.9%

Merger related Stock

Compensation $-- $-- --

Other Expense $37 $-- --

Total Other (Income)/Expense $1,515 $413 266.8%

Net Loss $(7,502) $(5,946) 26.2%

EBITDA $(3,968) $(4,985) -20.4%

EBITDA % of sales -6.0% -7.1%

Reconciliation of Net Income

(Loss) to EBITDA:

Net Income (Loss) $(7,502) $(5,946)

Interest (Income)/Expense $1,478 $413

Merger Related Stock Comp Exp $-- $--

Other (Income)/Expense $37 $--

Depreciation & Amortization $2,019 $548

EBITDA $(3,968) $(4,985)

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.

Source: prnewswire

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