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Delphax Q4 Results, Loss of $5.7 mil on sales of $11.8 mil

Friday, December 22, 2006

Press release from the issuing company

Dec 21, 2006 -- Delphax Technologies Inc. today reported net sales of $11.8 million for its fourth fiscal quarter ended September 30, 2006, down from $12.7 million for the fourth quarter of fiscal 2005. While the revenue decline was in line with earlier guidance, a larger-than-expected inventory revaluation resulted in a loss in excess of the guidance provided before the close of the quarter. The net loss for the quarter was $5.7 million, or $0.89 per share, compared with net income of $275,000, or $0.04 per diluted share, for the fourth quarter of fiscal 2005. The company also announced that it has successfully negotiated new financial covenants and an extension through October 2007 of its senior credit facilities agreement with LaSalle Business Credit. The agreement had been scheduled to expire in April 2007. In addition, the company has shipped a CR Series printer that it expects to install at the end of its first fiscal quarter or early in its second fiscal quarter. For the fiscal year ended September 30, 2006, net sales were $48.7 million, compared with $51.6 million in fiscal 2005. The net loss for fiscal 2006 was $9.6 million, or $1.51 per share, compared with net income of $306,000, or $0.05 per diluted share, for the prior fiscal year. An inventory revaluation at the end of the fourth quarter resulted in a charge of $1.7 million, or $0.27 per share. The downward adjustment involved primarily parts and supplies held in support of an installed base of older legacy equipment in Europe. In addition, a previously announced workforce reduction resulted in a fourth-quarter charge of $2.1 million, or $0.33 per share. "During the second half of fiscal 2006, we experienced a dry spell in major equipment sales, accompanied by a large increase in operating costs -- both planned and unplanned," said Dieter Schilling, president and chief executive officer. "We believe the surge in operating costs is behind us, and we have moved into fiscal 2007 with the overriding objective of regaining our sales momentum. The unevenness of our major equipment sales in fiscal 2006 -- four in the first half and none in the second -- reflects our need for sales process and sales coverage improvements. We are confident that we are putting the right systems and plans in place to realize the necessary improvements. Prospective customers and existing customers worldwide continue to respond positively to our industry-leading digital printing solutions that offer the highest productivity in combination with the lowest running costs. "Our sales shortfall is primarily a reflection of the vacancy in our sales and marketing leadership that we had throughout most of fiscal 2005 and fiscal 2006. One of my first actions after being appointed CEO was to hire George Carranza as our vice president of sales and marketing. Mr. Carranza is bringing a disciplined approach to our sales effort and helping us focus our resources on opportunities where our technology gives us a competitive advantage. We are pleased to report that the dry spell with respect to CR Series placements is over, with the shipment of a system in December." The shortfall in equipment sales is also delaying the anticipated growth in service-related revenues and forced a production cutback and related layoffs of some manufacturing employees. Service-related revenues were $11.2 million for the quarter ended September 30, 2006, compared with $11.7 million for the same quarter in fiscal 2005. For fiscal 2006, service-related revenues were $43.5 million compared with $46.8 million for fiscal 2005. As a result of the lower sales, along with the charges for the inventory revaluation and workforce reduction, the company's gross margin fell to $0.9 million, or 7 percent of total sales, for the fourth quarter of fiscal 2006 versus $4.4 million, or 35 percent of total sales, for the same period in fiscal 2005. Total gross margin for fiscal 2006 was $11.4 million, or 23 percent of total sales, as compared with $17.3, or 34 percent of total sales, for fiscal 2005. Operating expenses for the fourth quarter of fiscal 2006 increased to $6.0 million from $3.9 million for the same quarter in fiscal 2005. The increase was due primarily to severance costs resulting from the workforce reduction during the quarter. For fiscal 2006, operating expenses were $19.4 million compared with $15.8 million for fiscal 2005. The increase in operating expenses from fiscal 2005 to fiscal 2006 was due to the costs of workforce reductions in June and September 2006, severance costs relating to the departure of the company's former chief executive officer, the costs of two major trade shows and increases in the company's reserve for bad debts. During the fourth quarter of fiscal 2006, the company determined that certain customer support costs previously classified as selling, general and administrative expenses are more accurately reported as cost of sales. These costs are directly related to customer support activities and, therefore, are better reported as a cost of generating related maintenance, spares and supplies sales. This change has no effect on the company's previously reported net sales, operating income (loss), net income (loss) or earnings (loss) per share. The information set forth below gives effect to this change. As noted above, the company has successfully renegotiated the financial covenants of its senior credit facilities agreement, which concern tangible net worth; earnings before interest, taxes, depreciation and amortization, and maximum capital expenditures among others. In addition, the agreement has been extended through October 2007. As a result of its fiscal fourth quarter loss, the company was out of compliance with the previous financial covenants of the loan agreement, which was scheduled to expire in April 2007. The company is in discussions with potential lenders, including its current lender, to structure a new long-term financing arrangement. "Fiscal 2006 was a difficult year for Delphax," Schilling said. "We struggled with sales momentum and large, sometimes unplanned costs. However, we haven't lost sight of several good things that we accomplished during the year: -- Placed an additional four CR Series printers with three major customers in the financial, legal and book printing segments of the market in both the United States and Europe; -- Announced the CR2200, the world's fastest roll-fed digital printer, which will debut at Hunkeler Innovation Days.2007 in Lucerne, Switzerland, in February 2007; -- Added several new members to our senior management team, bringing along significant new experience and talent; and -- Sharpened our market focus to invest in those areas where our technology gives us a competitive advantage. "We believe we are well positioned for recovery in fiscal 2007 and expect to show much improved operating results, led by an increase in equipment sales while at the same time significantly reducing our operating costs."




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