Inscape Corporation
TSX : INQ.SV

Inscape Corporation

June 27, 2005 16:30 ET

Inscape Corporation Announces Annual Results

HOLLAND LANDING, ONTARIO--(CCNMatthews - June 27, 2005) - Peter Brunelle, President and Chief Executive Officer of Inscape (TSX:INQ.SV), a leading designer, manufacturer and distributor of office furniture solutions, announced the following financial results for the year and quarter ended April 30, 2005:



INSCAPE
Summary of Financial Results
(millions, except EPS and number of shares)

3-Months Ended 3-Months Ended
April 30, 2005 April 30, 2004
(Q4, Fiscal 2005) (Q4, Fiscal 2004) Change
-------------------------------------------

Revenue $23.8 $ 24.1 -1.1%
Gross Margin 5.7 5.9 -3.4%
Selling, General & Administrative
expenses 7.5 7.8 -3.8%
Net Income, prior to restructuring
costs and revaluation of future
income taxes -1.5 -1.1
Restructuring costs (after-tax) -1.6 -0.9
Net income -3.1 -2.0
Earnings Per Share (EPS) $-0.21(1) $-0.13(2)

Weighted average number of shares 15,097 15,097
(in thousands)
Year Ended Year Ended
April 30, 2005 April 30, 2004
(FY 2005) (FY 2004) Change
-------------------------------------------

Revenue $100.2 $115.6 -13.2%
Gross Margin 25.1 36.4 -31.1%
Selling, General & Administrative
expenses 30.1 32.6 -7.8%
Net Income, prior to restructuring
costs and revaluation of future
income taxes -3.3 3.4
Restructuring costs (after-tax) -10.4 -2.4
Revaluation of future income taxes - -0.7
Net Income -13.7 0.3
Earnings Per Share (EPS) $ -0.90(3) $ 0.02(2)(4)

Weighted average number of shares 15,097 15,097
(in thousands)

(1) Reflects the impact of restructuring costs of $0.11 per share
(pre-tax restructuring costs were $2.4 million).

(2) Reflects the impact of restructuring costs of $0.06 per share.

(3) Reflects the impact of restructuring costs of $0.69 per share
(pre-tax restructuring costs were $12.3 million).

(4) Reflects the impact of revaluation of future income taxes of
$0.05 per share.


Commentary and Outlook

"Since joining Inscape in February, I have focused on positioning us for the future and while it is still early, I believe there is a renewed sense of optimism throughout our organization. Emphasis on product development saw the launch of numerous enhancements to our flagship furniture system, Platform which we debuted at Neocon, the industry's World Trade Fair in Chicago this June. We also launched an innovative new system, Freeform that is designed to capitalize on the trend towards raised floor environments, wireless technology and the more open, collaborative work culture found in a growing number of organizations", commented Peter Brunelle, President and CEO. "We were pleased by the reaction from our sales channel to these introductions and by the recognition and award garnered at the trade fair from the panel of show judges."

Regarding near term outlook, the Business and Institutional Furniture Manufacturer's Association ("BIFMA") anticipates that shipments in the second calendar quarter of 2005 will grow by 10.6% over the same period last year. Based on current order levels, Inscape anticipates that its revenues for the first quarter of fiscal 2006 will be higher than the same quarter of fiscal 2005.

Restructuring initiative

As announced in September 2004, Inscape's management has been conducting a strategic review of all aspects of its business. In this regard, during fiscal 2005, the Company has recorded total pre-tax costs of $12.3 million.

The most significant component of this charge is $8.1 million with respect to the Company's architectural products business. The Company has concluded that this business is unlikely to generate the levels of income required to support the book value of the underlying assets. Consequently, the Company has recorded an impairment of $2.6 million with respect to goodwill that has originated with its acquisition of Dowcraft Corporation. The Company also recorded an impairment of $4.2 million in the value of capital assets and of $1.3 million in the value of related intangible assets.

The Company has also recorded an aggregate of $3.3 million with respect to its decision to discontinue its seating product line ($1.8 million) and change its business model in New York, which involved vacating its existing showroom ($1.5 million). In September 2003, the Company announced that it was discontinuing manufacturing at its metal filing plant in Scarborough, Ontario but that it would continue using a portion of that facility as a showroom and field sales office. During the fourth quarter of fiscal 2005, the Company concluded that it was unlikely to continue using this as a showroom and therefore has recorded a charge of $0.9 million with respect to unamortized leasehold improvements.

Other than the amount relating to the New York showroom which will be paid out over the remaining lease term, all of the above impairments are non-cash items.

Operating Performance

While revenues in the fourth quarter of fiscal 2005 were similar to the same quarter of last year, on an annual basis they were 13.2% lower than fiscal 2004. Almost this entire decline is attributable to the lower exchange rate used to translate U.S. revenues in fiscal 2005. This was also the primary reason for the decline in annual gross margin as a percentage of revenue, which fell from 31.5% in fiscal 2004 to 25.0% in fiscal 2005. During the fourth quarter of fiscal 2005, gross margin as a percentage of revenue of 24.0% was only slightly lower than the same quarter of the previous year when it was 24.6%. The Company has been aggressively reducing costs and adapting its business to the realities of a weaker U.S. dollar.

Selling, general and administrative ("S,G&A") expenses during fiscal 2005 were significantly lower than fiscal 2004, both for the fourth quarter and on an annual basis. This is despite higher levels of S,G&A incurred in fiscal 2005 due to increased amortization related to the Company's New York showroom. Fiscal 2005 S,G&A benefited from the weaker U.S. dollar, however this was not apparent when compared with fiscal 2004, as fiscal 2004 S,G&A included currency hedging gains. On an overall basis, the reductions in fiscal 2005 S,G&A was primarily a result of the cost reduction initiatives implemented by the Company and the favourable effect of the weaker U.S. dollar on U.S. dollar denominated selling costs.

Net income, prior to income tax and restructuring costs during the fourth quarter of fiscal 2005 showed a slight improvement over the same quarter of fiscal 2004, due to lower levels of S,G&A in fiscal 2005. On an annual basis, net income in fiscal 2005 was significantly lower than fiscal 2004 primarily due to lower gross margins as described above. Despite the loss incurred during fiscal 2005, the Company generated $4.2 million of cash flow from operations prior to non-cash operating working capital. Inscape's balance sheet with no debt and cash balances of approximately $20 million remains strong.

Quarterly Dividend

Simultaneous with the announcement of the Company's quarterly results, the Board of Directors declared an 11 cent dividend payable on July 14, 2005 to all shareholders of record as of July 8, 2005. As disclosed in September 2004, the Company's dividend policy is under ongoing review.

Conference Call

Inscape will host a conference call at 8:30 a.m. on Tuesday, June 28, 2005, to discuss the Company's annual results and to provide additional outlook on the next quarter. To participate, please call 1-888-338-2139. A replay of the conference call will also be available from Tuesday, June 28, 2005 after 10:15 a.m. until midnight on Tuesday, July 5, 2005. To access the rebroadcast, please dial 1-800-558-5253 (Reservation Number 21248409).

Forward-Looking Statements

Certain of the above statements are forward-looking statements that involve risks and uncertainties. Actual results, particularly those achieved during the next fiscal year, could differ materially as a result of many factors including, but not limited to, further changes in market conditions and changes or delays in anticipated product demand during the next fiscal year. In addition, future results may also differ materially as a result of many factors, including: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in North America; length of sales cycles; significant fluctuations in international exchange rates, particularly the U.S.$ exchange rate; restrictions in access to the U.S. market; changes in the Company's markets, including technology changes and competitive new product introductions; pricing pressures; dependence on key personnel; and other factors set forth in the Company's Ontario Securities Commission reports and filings.

About INSCAPE

Inscape Corporation is a leading designer, manufacturer and distributor of high quality office furniture headquartered in Holland Landing, Ontario, Canada. The Company offers innovative and integrated product solutions that effectively and efficiently landscape modern office interiors, including moveable walls, systems and storage products. Company operations are based across two manufacturing facilities totalling approximately 485,000 square feet.



Consolidated Balance Sheets
(all amounts in thousands of dollars)

April 30,2005 April 30,2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(as restated)
Assets
Current
Cash and cash equivalents $19,978 $24,174
Accounts receivable 11,443 10,763
Inventory 6,432 6,884
Prepaid expenses 860 946
Income taxes receivable 296 2,004
---------------------------------
39,009 44,771

Capital assets 34,775 47,387
Other assets 1,398 4,745
Future income tax asset 5,971 3,927
---------------------------------

$81,153 $100,830
---------------------------------
---------------------------------

Liabilities
Current
Accounts payable and accrued
liabilities $13,117 $12,767
Income taxes payable 699 1,119
---------------------------------
13,816 13,886

Asset retirement obligation 335 325
Other long-term obligation 1,209 -
Future income tax liability 5,529 6,040
---------------------------------
20,889 20,251

Shareholders' Equity
Share capital 57,059 57,059
Contributed surplus 86 -
Retained earnings 3,119 23,520
---------------------------------
$81,153 $100,830
---------------------------------
---------------------------------


Consolidated Statements of Income and Retained Earnings
(all amounts in thousands of dollars, except per share amounts)

Three months ended Years ended
April 30, April 30,
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(as (as
restated) restated)

Sales $23,833 $24,096 $100,237 $115,532

Cost of goods sold 18,116 18,186 75,148 79,155
-----------------------------------------
Gross margin 5,717 5,910 25,089 36,377

Expenses

Selling, general
and administrative 7,545 7,840 30,075 32,626
Restructuring costs 2,371 1,393 12,271 3,564
Net interest income (118) (184) (635) (789)
-----------------------------------------
9,798 9,049 41,711 35,401
-----------------------------------------
Income before taxes (4,081) (3,139) (16,622) 976

Income taxes (942) (1,133) (2,967) 663
-----------------------------------------
Net income ($3,139) ($2,006)($13,655) $313
-----------------------------------------
-----------------------------------------

Retained earnings,
beginning of period
As originally stated 7,918 27,323 23,520 29,987
Impact of changes in
accounting policies:
Asset retirement obligations - (137) - (137)
-----------------------------------------

Retained earnings as restated 7,918 27,186 23,520 29,850
Stock options - - (103) -
Dividends (1,660) (1,660) (6,643) (6,643)
-----------------------------------------
Retained earnings,
end of period $3,119 $23,520 $3,119 $23,520
-----------------------------------------
-----------------------------------------

Consolidated Statements of Cash Flow
(all amounts in thousands of dollars)

Three months ended Years ended
April 30, April 30,
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(as (as
restated) restated)

Net inflow (outflow) of cash
related to the following
activities:

OPERATING
Net income ($3,139) ($2,006) ($13,655) $313
Items not affecting cash:
Amortization 1,909 2,094 7,694 8,019
Restructuring costs and
asset impairment 2,371 1,490 12,271 1,490
Future income taxes (2,010) (1,415) (2,555) 314
Deferred expenses (21) 10 386 346
Stock based compensation 33 - 6 -
Gain on sale of capital
assets - (13) 20 (13)
----------------------------------------
(857) 160 4,167 10,469

Changes in non-cash
operating working capital
items 1,492 2,985 594 (1,046)
----------------------------------------
635 3,145 4,761 9,423
----------------------------------------
FINANCING
Dividends paid (1,660) (1,660) (6,643) (6,643)
----------------------------------------

INVESTING
Additions to capital assets (734) (806) (2,294) (3,685)
Proceeds from sale of
capital assets - 13 (20) 13
----------------------------------------
(734) (793) (2,314) (3,672)
----------------------------------------

Net cash inflow (outflow) (1,759) 692 (4,196) (892)

Cash and cash equivalents,
beginning of period 21,737 23,482 24,174 25,066
----------------------------------------

Cash and cash equivalents,
end of period $19,978 $24,174 $19,978 $24,174
----------------------------------------
----------------------------------------

SUPPLEMENTAL INFORMATION
Interest paid $0 $0 $0 $0
Income taxes paid $434 ($379) $1,034 $3,500



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