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

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., [phone],





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

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