MINNEAPOLIS, Aug. 10 -- Delphax Technologies Inc., today reported net sales of $11.4 million for its third fiscal quarter ended June 30, 2006, down from $13.2 million for the third quarter of fiscal 2005. Coupled with an unusual combination of operating costs, the revenue shortfall resulted in a third-quarter loss of $3.4 million, or $0.53 per share, compared with net income of $288,000, or $0.05 per diluted share, in the same period of fiscal 2005. For the first nine months of fiscal 2006, net sales were $36.9 million, compared with $39.0 million in the same period of the previous year. The net loss was $3.9 million, or $0.61 per share, versus net income of $31,000, or $0.00 per diluted share, in the first nine months of 2005. "In our recent history, Delphax has sold on average one or two CR Series digital presses per quarter," said Dieter Schilling, president and chief executive officer. "At our price point, the sale of one or two units makes a significant revenue and margin contribution. But an average of one or two units can mean a quarter where no sale is booked and that's exactly what happened during the third quarter. "Slower-than-expected equipment sales also delayed projected growth in service-related revenues and made it necessary to cut back our operations and lay off some of our manufacturing employees. The growing volume of supplies and consumables used by the CR Series presses in service has not yet attained a revenue level to offset the attrition of older legacy supplies and consumables. We continue to forecast a leveling of our service-related revenues and, eventually, an increase in these revenues as additional CR Series presses go on line." As a result of the lower sales volumes and higher manufacturing costs, along with a write-down of inventory to estimated market value, the company's gross margin for the quarter fell to $4.9 million, or 44 percent of total sales, in the third quarter of fiscal 2006 versus $7.4 million, or 56 percent of total sales, for the same quarter in fiscal 2005. Year-to-date for fiscal 2006, gross margin was $18.7 million, or 51 percent of total sales, as compared with $21.3 million, or 55 percent of total sales, for the first nine months of fiscal 2005. Operating expenses increased from $6.7 million for the quarter ended June 30, 2005 to $8.1 million for the quarter ended June 30, 2006. The increase was due to severance costs relating to the departure of the company's former chief executive officer, the costs associated with two major trade shows during the quarter and an increase in the company's reserve for bad debts. "The fact that all of these events occurred in the same quarter was an anomaly," Schilling said. "We do not expect another quarter with significantly lower sales and dramatically increased costs anytime in the foreseeable future. However, until we are able to sustain a solid stream of revenue growth from our equipment, consumables and supplies business, management is taking additional measures to aggressively manage costs and cash flow. "As we put this quarter behind us and move forward, I am encouraged by what we have accomplished in the first few weeks since I became CEO. We have recently filled the critically important position of vice president, sales and marketing with the appointment of George Carranza. His professional background includes more than 20 years of sales, marketing and general management experience in the printing-equipment industry. We have already begun to intensify the focus of our sales and technical resources into those segments of the market where our technology gives us intrinsic competitive advantages or can be adapted to customer needs to create a competitive advantage. "The relationship between Muller Martini and Delphax continues to move forward. We have very recently reconfirmed the partnership and have agreed that both parties will involve more personnel at different levels in their respective organizations to generate opportunities for growth." During the third quarter of fiscal 2006, Muller Martini completed the trial it was conducting with a North American prospect. The trial was ended when the prospect and Muller Martini mutually agreed that the production line for this particular application was not achieving the required throughput levels in the prescribed timeframe. Although this trial ended without a sale, both companies continue to believe in the potential of automated book manufacturing and will be applying more resources to increase the chances for success. "We continue to advance the capability of our electron beam imaging technology and increase our market exposure," said Schilling. "We completed the third quarter on track to introduce a major advance in the speed and productivity of the CR Series presses scheduled for next year. And our participation in two international trade shows was a great opportunity to showcase our CR Series presses to prospective customers within the market segments we are targeting."