TIR Systems Ltd.
TSX : TIR

TIR Systems Ltd.

December 22, 2006 09:00 ET

TIR Systems Reports Fiscal Fourth Quarter and 2006 Year End Financial Results

Performance highlights for TIR Systems for fiscal 2006:

- Established new OEM business model to focus on the development and commercialization of our market leading Solid State Lighting 'SSL' technology, the Lexel®

    - Engaged eight of the leading lighting manufacturers in North America, Europe and Asia as OEM partners

    - Received first purchase orders for Lexel

    - Began shipping commercial Lexel products to our OEM partners in December

- Increased patent filings by over 100% relative to 2005; SSL IP portfolio now includes seven patents and more than 130 patent filings

- Continued to sell and support our established lighting products including the Destiny® series.

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Dec. 22, 2006) - TIR Systems Ltd. (TSX:TIR), the developer of the first and currently only integrated solid state lighting (SSL) source for general lighting, the Lexel®, today announced its unaudited financial results for the fourth quarter (Q4 2006) and its audited financial results for the full fiscal year ending September 30th, 2006.

Leonard Hordyk, President and CEO, TIR Systems Ltd. said: "At the beginning of the year, we established five milestones we felt were critical to the company's future - commercialize Lexel, establish a strong consortium of development partners, expand and protect our intellectual property (IP) position, maximize our return from established lighting products and raise additional capital. I am pleased to report that we have delivered on each one, and in the process, have established what I believe is a strong foundation for growth and value creation in 2007."

"TIR enters 2007 with a global network of partners that includes many of the industry's largest and most respected lighting manufacturers, a leading intellectual property portfolio for SSL, and the Lexel, the industry's first fully integrated, plug-and-play SSL system for white light."

"Together with our OEM partners, we are now positioned to lead the early adoption of SSL products in 2007 and drive the larger global transition from conventional lighting to the quality, controllability and efficiency of Lexel," added Hordyk.

Financial Highlights for Fiscal 2006

Results of operations - Year ended September 30, 2006 compared to year ended September 30, 2005



2006 2005 % Inc
($000's), except margin & per share data (Dec)
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Revenue 15,477 17,089 (9.4)%
Gross profit 2,313 2,451 (5.6)%
Gross margin 14.9% 14.3% 0.6%
Net loss (20,211) (13,042) (55.0)%
Net loss per share - basic and diluted (0.88) (0.58) (51.7)%


For the year ending September 30, 2006 ("FY 2006"), the net loss was $20.2 million compared to a net loss for the same period of the prior year ("FY 2005") of $13.0 million. The increased net loss for the year reflects the following factors: (i) $3.7 million of charges arising from the restructuring announced on April 13, 2006 comprised of $1.6 million relating to inventory impairment and $2.1 million relating to severances, asset impairment charges and facility restructuring charges, (ii) an increase in the net interest expense of $3.2 million, relating to the outstanding debentures, (iii) a $2.9 million increase in net research and development expenses due to the heightened activity associated with the Lexel commercialization and the exhaustion of funding available under the Technologies Partnership Canada ("TPC") program, (iv) increased legal costs of $2.0 million, due primarily to ongoing litigation, with such factors being partially offset by (v) a $2.5 million reduction in sales, marketing and customer support costs, (vi) $1.4 million of additional gross profit (excluding the effect of the inventory impairment charges related to restructuring), and (vii) a $1.0 million reduction in tax expenses. As at September 30, 2006 the Company had $18.6 million of cash and cash equivalents.

Financial Highlights for Q4 2006

Overall, the net loss for the fourth quarter of fiscal 2006 ("Q4 2006") was $4.5 million consistent with the comparable quarter of the prior year ("Q4 2005"). Revenue for Q4 2006 was $5.2 million representing a 14.7% increase from Q4 2005 with significant increases in revenue from both Architectural market segments, partially offset by a decrease in Corporate Identity revenues. Gross profit for Q4 2006 was $1.6 million or 29.9% of revenue compared to a loss of $188,600 reported in Q4 2005. This difference is due to (i) a significant decrease in inventory obsolescence charges and (ii) an increase in gross margins across all product lines due to (a) lower material costs and (b) a higher utilization of the manufacturing facilities during the quarter. Both sales and marketing and customer service and support costs were significantly lower in Q4 2006 due primarily to the restructuring that occurred in April 2006. General and administrative expenses were $2.1 million in Q4 2006 representing an increase of $204,000 from Q4 2005. The increase is due primarily to an increase in legal costs associated with the Company's ongoing litigation partially offset by lower bad debt charges. Research and development costs were $2.2 million in Q4 2006 compared to $1.0 million in Q4 2005 with the increase due primarily to the increased development costs, including the costs associated with the manufacturing of pre-commercial units, associated with the Lexel. Government assistance decreased by $1.1 million in Q4 2006 compared to Q4 2005, reflecting the exhaustion of funding available under the TPC program in prior quarters. A restructuring charge of $442,500 was recorded in Q4 2006 comprised of (i) a facilities restructuring charge of $357,600 relating to the vacating of approximately 50% of the Company's leased office space and (ii) $84,900 in severance costs.

2006 Business Highlights

New OEM Business Model

On April 13th, TIR initiated a fundamental restructuring of its business to focus on the commercialization of its market leading SSL Lexel technology. TIR's manufacturing partners are now leading the development of new, finished lighting products, and in 2007 are distributing these products under their brands and through their global distribution networks.

"In less then eight months, we have transformed TIR from a company manufacturing excellent commercial products to a key technology provider for a growing consortium of lighting manufacturers leading the way in the global SSL industry," added Hordyk.

OEM Manufacturing Partners

In 2006, we successfully established partnerships with eight of the leading lighting manufacturers from North America, Europe and Asia, all of which are committed to the development and marketing of Lexel-based products. The Company's manufacturing consortium now includes The Genlyte Group, Lighting Services Inc (LSI), Zumtobel AG, Spectral GmbH, Lucifer Lighting Company, Daiko Electric, Ardee Lighting and Semperlux AG.

Commercialization of Lexel®

Spectral, LSI and Zumtobel each unveiled Lexel-based products in 2006 to strong customer reviews, and all three expect to ship those products in 2007. TIR has received the first purchase orders for Lexel products and the Company is now shipping commercial units to its OEM partners.

At Lightfair International in May, TIR received a 'best in category' award for Lexel technology, while LSI received a 'best in category' award for their Lexel-based product, LumeLEX™. TIR was also awarded the 'most promising pre-commercial technology' award for Lexel from the British Columbia Technologies Industry Association (BCTIA) in June.

TIR expects early adoption of Lexel for high-value lighting applications in 2007 and, based on an independent market study conducted for TIR by LEK Consulting, it estimates the total near-term addressable market for Lexel products to be approximately US$5 billion worldwide.

Intellectual Property

In 2006, TIR continued to build on what has become one of the fastest growing and highest quality SSL IP portfolios in the lighting industry. The Company's IP portfolio now includes seven patents and more than 130 patents pending, an increase of over 100% in patent filings relative to 2005. It is a portfolio that supports more than 80 separate inventions covering the range of technologies required to successfully commercialize SSL systems for lighting and other potential markets. TIR strongly believes in the defense and protection of its IP portfolio and it will continue to aggressively defend its technology and IP.

Destiny®, ColorTrace™, LightMark™ and Light Pipe™

Following the April restructuring, TIR has continued to manufacture, sell and support its established lighting products, such as the Destiny series, ColorTrace, Light Pipe and LightMark.

In July 2006, TIR secured a $2.9 million contract to supply Destiny series and ColorTrace products to Dubai Festival City, the Middle East's largest, privately funded mixed-use real estate development project. On the strength of this and other orders, TIR achieved $15.5 million in revenue from its existing lighting fixture products and realized an improvement in its gross margin for the year.

In all, the continued demand for the Company's established products has provided cash flow, strength to its balance sheet and additional support for the development of the Company's Lexel-focused OEM business.

Update on Ongoing Strategic Review

In September, TIR announced that it had retained Montgomery & Co. to explore a range of strategic opportunities for the Company, and appointed a strategic review committee of independent directors to oversee the process. TIR will continue the process of evaluating these potential opportunities in 2007.

Outlook for 2007

Over the next 12 months, the Company will focus on:

- Shipping Lexel in commercial volumes;

- Expanding our global Lexel consortium of development partners and supporting their launch of new Lexel-based products;

- Beginning the development of the next generation of Lexel-based products;

- Strengthening our IP position by advancing our technology and filing additional patent applications;

- Continuing to defend our IP in the current litigation which still represents material risk; and

- Completing the evaluation of strategic opportunities for the company and continuing to build momentum and shareholder value.

"Our goal is to establish the Lexel as a key driver of early-stage adoption of solid state lighting and, in the process, establish TIR as the investment vehicle of choice within the emerging SSL industry," added Hordyk.

Teleconference Call

TIR Systems will be holding a conference call for the investment community on Friday, December 22nd, 2006 at 8am Pacific Time, 11am Eastern Time, to discuss the Company's financial results for the fourth quarter and the end of fiscal 2006. To participate, please dial 1 (877) 871-9526.

A playback will be available from 4pm (Pacific Time) on Friday, December 22nd, 2006 until Friday, January 5th, 2007. To access the replay, please call 1 (416) 626-4100 or 1 (800) 558-5253 and quote reference number: 21314214. A recording of the call is also available at our website at www.tirsys.com from Saturday, December 23rd, 2006.

About Lexel®

The Lexel® is a perfectly controllable new solid state light source incorporating light emitting diodes (LEDs) that has the potential to use up to 80% less energy to produce the same amount of light as a conventional light source and does not degrade its output or color temperature over its 50,000 hour life. The Lexel combines breakthroughs in thermal design, optics, and feedback to provide precise color temperature control and dimming in a cost effective design, resulting in a truly intelligent light source for illumination.

About TIR Systems Ltd.

TIR Systems Ltd., a world leader in light enabling technology, is building the foundations for tomorrow's lighting. TIR developed the Lexel®, which is the first, fully integrated, Light Emitting Diode (LED) based light source, designed specifically to produce high quality white light essential for general lighting applications. The benefits of the Lexel technology will encourage a more rapid adoption of Solid State Lighting and the Lexel is positioned to become a new standard in the global lighting market.

To find out more about TIR Systems Ltd. (TSX:TIR), visit http://www.tirsys.com.

This News Release contains forward-looking statements or information within the meaning of applicable Canadian securities legislation regarding our strategy, future operations, future financial position prospects and plans and objectives of management. Forward-looking statements or information are statements about the future and are inherently uncertain, and will be impacted by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Forward-looking statements or information include, but are not limited to, those with respect to the anticipated value of orders for our product or the launch of our new products. Factors that could cause such actual events or results expressed or implied by such forward-looking statements or information to differ materially from any future results, performance or achievements, expressed or implied by such statements include, but are not limited to; the risk that we are dependent on a single customer for a significant portion of our sales revenue; future sales of our existing products and our new products may be less than expected; our ability to maintain and expand our intellectual property portfolio, the successful development or acquisition of complementary or supplementary products for our Light Pipe or Solid State Lighting product lines, our ability to develop our customer base, and our ability to manufacture products at attractive gross margins, our ability to introduce commercially viable Lexel®-based products in a reasonable time frame, our future operating results are uncertain and likely to fluctuate; and the patent litigation initiated by Color Kinetics may be unfavourable and have an adverse impact on our financial results; manufacturing risks; product liability risks; the effect of competition may have an adverse impact on our sales and profitability; the Company's need for additional future capital, which may not be available in a timely manner or at all; exchange rate fluctuations between the US and Canadian currencies, which may decrease revenues reported in Canadian dollars; as well as a description of other risks and uncertainties affecting the Company and its business, as contained in the Company's most recent Annual Information Form and other subsequent news releases and filings with the Canadian Securities Regulatory Authorities, any of which could cause actual revenues to vary materially from the Company's anticipated future results. Forward-looking statements or information are based on the beliefs, opinions and expectations of the Company's management at the time they are made, and the Company does not assume any obligation to update its forward-looking statement or information if those beliefs, opinions or expectations change, or there is new information or other circumstances should change.



Incorporated under the laws of British Columbia

BALANCE SHEETS

As at September 30, September 30,
2006 2005
ASSETS $ $
CURRENT
Cash and cash equivalents 18,614,300 2,650,300
Accounts receivable 5,076,900 3,054,900
Government grants receivable 883,000
Other receivable - 216,600
Inventory 724,400 2,984,600
Prepaid expenses 266,900 363,700
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TOTAL CURRENT ASSETS 24,682,500 10,153,100
Capital assets 2,941,300 4,454,600
Patents and acquired intellectual property 1,379,700 794,600
Deferred charges - 180,300
Deferred financing charges 523,600 240,000
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TOTAL ASSETS 29,527,100 15,822,600
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable 2,406,900 1,974,900
Accrued liabilities 5,573,400 3,843,000
Customer deposits and deferred revenue 524,800 723,300
Current portion of long term debt 256,600 241,500
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TOTAL CURRENT LIABILITIES 8,761,700 6,782,700

Long term debt 1,144,100 1,400,200
Other long term liabilities 258,300 -
Convertible debentures 14,110,500 -
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TOTAL LIABILITIES 24,274,600 8,182,900
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Commitments and contingencies

SHAREHOLDERS' EQUITY
Share capital 22,746,900 22,454,000
Contributed surplus 19,305,700 1,774,400
Deficit (36,800,100) (16,588,700)
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TOTAL SHAREHOLDERS' EQUITY 5,252,500 7,639,700
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 29,527,100 15,822,600
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STATEMENTS OF LOSS AND DEFICIT

Three months ended
(Unaudited) Twelve months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2006 2005 2006 2005
$ $ $ $
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REVENUE 5,222,400 4,553,300 15,477,000 17,088,700
Cost of Sales 3,658,400 4,741,900 13,164,400 14,637,400
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Gross Profit (Loss) 1,564,000 (188,600) 2,312,600 2,451,300
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EXPENSES
Sales and marketing 304,900 1,237,700 3,266,600 5,241,500
Customer service and
support 124,700 370,800 1,012,300 1,549,500
General and
administrative 2,057,000 1,853,000 7,666,000 5,106,800
Research and
development 2,164,200 1,039,900 6,062,000 3,793,600
Less government
assistance 36,800 (1,043,700) (777,200) (1,373,000)
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4,687,600 3,457,700 17,229,700 14,318,400
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Restructuring costs 442,500 - 2,102,700 -
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LOSS FROM OPERATIONS (3,566,100) (3,646,300) (17,019,800) (11,867,100)

Interest and other
income 185,600 32,200 817,400 122,600
Interest expense and
financing charges (1,177,600) (33,300) (4,011,200) (141,600)
Foreign exchange gain
(loss) 56,700 (130,600) 2,200 (143,700)
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LOSS BEFORE INCOME
TAXES (4,501,400) (3,778,000) (20,211,400) (12,029,800)

Provision for income
taxes - 735,000 - 1,012,000

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NET LOSS (4,501,400) (4,513,000) (20,211,400) (13,041,800)

Deficit, beginning of
period (32,298,700) (12,075,700) (16,588,700) (3,546,900)
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Deficit, end of
period (36,800,100) (16,588,700) (36,800,100) (16,588,700)
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Loss per share
Basic and diluted (0.20) (0.20) (0.88) (0.58)
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STATEMENT OF CASH FLOWS

Three months ended
(Unaudited) Twelve months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2006 2005 2006 2005
$ $ $ $
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Operating Activities
Net loss (4,501,400) (4,513,000) (20,211,400) (13,041,800)
Adjustments for non-cash
items:
Future income tax
expense - - - 277,000
Reduction in investment
tax credits - 38,000 - 752,000
Depreciation and
amortization 392,900 359,100 1,351,200 1,310,100
Impairment of capital
assets and patents - - 1,175,800 -
Facilities restructuring
charge 357,600 - 357,600 -
Amortization of deferred
charges - 65,300 180,300 267,500
Amortization of deferred
financing charges 32,200 - 109,800 -
Accretion of unamortized
discount 595,000 - 1,957,400 -
Stock-based compensation 220,900 246,200 780,900 951,200
(Gain) loss on disposal
of capital assets (300) (400) 12,600 (12,400)
Changes in non-cash
working capital
balances:
Accounts receivable (2,019,700) (301,500) (2,022,000) 1,619,200
Government grants
receivable 1,645,700 21,100 883,000 634,500
Other receivable - 372,000 216,600 372,000
Inventory 885,700 1,690,300 2,260,200 2,098,600
Prepaid expenses 145,300 (41,600) 96,800 (4,900)
Accounts payable 717,500 480,800 224,000 (1,230,600)
Accrued liabilities 882,600 1,059,100 1,631,100 23,400
Customer deposits (144,200) 180,100 (198,500) (261,900)
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Cash used in operating
activities (790,200) (344,500) (11,194,600) (6,246,100)
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FINANCING ACTIVITIES
Issue of common shares,
net 96,900 1,100 163,100 9,067,500
Issue of convertible
debentures, net - - 28,622,200 -
(Repayment) of leasehold
improvement loan (17,100) (15,600) (66,500) (60,600)
(Repayment) of capital
lease obligations (43,900) (42,500) (174,500) (167,000)
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Cash provided by (used in)
financing activities 35,900 (57,000) 28,544,300 8,839,900
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INVESTING ACTIVITIES
Acquisition of capital
assets, net (179,300) (92,300) (882,700) (829,100)
Proceeds from disposal
of capital assets 400 300 6,400 23,200
Acquisition of patents
and intellectual
property, net (169,800) (34,600) (509,400) (365,500)
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Cash used in investing
activities (348,700) (126,600) (1,385,700) (1,171,400)
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(Decrease) increase in
cash and cash
equivalents (1,103,000) (528,100) 15,964,000 1,422,400
Cash and cash
equivalents, beginning
of period 19,717,300 3,178,400 2,650,300 1,227,900
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Cash and cash
equivalents, end
of period 18,614,300 2,650,300 18,614,300 2,650,300
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Supplemental disclosures
of cash flow
information
Cash paid for interest 27,400 33,300 116,100 141,600
Warrants issued as
compensation - - 215,700 -
Debentures converted
into common shares - - 349,000 -

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of the content of this News Release.

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