Electrohome Announces Second Quarter Results
May 26, 2003

Highlights

• Electrohome Limited - Revenues for the second quarter of $3.7 million were $0.8 million lower than the same quarter last year. Breakeven earnings or 0 cents per share for the quarter was better than the loss of $1.1 million or 12 cents per share last year. Year-to-date revenues of $8.7 million were $0.5 million lower than last year, while a loss of $0.7 million or 9 cents per share was $1.4 million better than the loss of $2.2 million or 25 cents per share last year.
  
  Fakespace Systems Inc. - Subsequent to the quarter end, Fakespace completed its merger with Mechdyne Corporation effective April 1, 2003 to become the largest international company exclusively in the advanced visualization marketplace. We anticipate that the merged company should be profitable on an ongoing basis. Deal costs of $0.8 million were expensed and had a major negative impact on second quarter results.
  
  
• Robotel - Sales continued at a much slower pace than last year despite the introduction of its new "Plug and Play" product during the quarter. Robotel also received a "Best in Show" award for its Smart Contact Center (call center) product from CMP Call Center Magazine in the US. With the ongoing revenue shortfall, however, losses have continued.

Management Discussion and Analysis

Second Quarter Results from Operations

Revenues of $3.7 million for the second quarter decreased $0.8 million or 19% from the same quarter last year with the decline entirely attributable to Robotel. Gross profit for the quarter was $1.7 million or 45% of revenues which compares to $1.9 million or 42% of revenues last year as the volume shortfall was partially offset by an increase in gross margin percentage at Fakespace. Selling and general and administrative expenses increased $0.1 million over the same quarter last year as $0.8 million in Fakespace merger deal costs were booked in the quarter, which more than offset the effects of cost reduction measures taken in fiscal 2002 at both Fakespace and Robotel. Research and development expenses as well as amortization expense were both about equal to last year's level. An operating loss of $2.0 million compares to a loss last year of $1.6 million. Interest expense increased slightly from last year due to higher overall debt levels. Other income was down slightly from last year due to lower royalty receipts and a vacancy in a portion of our facility, which is generally leased to outside tenants. A $0.9 million gain on settlement of a lawsuit was booked during the quarter, which resulted from an award of damages associated with a previously owned parcel of land in Edmonton. Also during the quarter, a further income tax recovery of $0.7 million related to previously discontinued operations was booked as new information caused a favourable change to a previous estimate. As a result of the above, a breakeven position for the quarter compares to a loss of $1.1 million last year.

Year-To-Date Results from Operations

 Revenues for the six months of $8.7 million decreased $0.5 million from the $9.3 million posted last year. Gross profit of $3.7 million or 43% of revenues compares to $3.4 million or 37% last year. The increase in margin percentage is primarily due to a large low margin strategic sale by Fakespace in the first quarter of 2002. Selling, general and administrative expenses were $0.2 million favourable to last year as the effects of cost reduction measures more than offset the $0.8 million in Fakespace merger deal costs that were booked in the current quarter. Research and development expenses increased $0.5 million due to a grant in fiscal 2002 received by Fakespace, which when excluded would result in expenditures equal to this year. Amortization of capital assets decreased $0.1 million from last year primarily due to the sale of the Robotel facility in mid-fiscal 2002. An operating loss of $3.1 million compares to a loss last year of $3.3 million. Interest expense increased $0.1 million from last year due to higher overall debt levels. Other income was also down $0.1 million from last year due to lower royalty receipts and a vacancy in a portion of our facility. An income tax recovery was $0.2 million lower than last year while minority interest decreased $0.1 million due to the reduced losses at Fakespace. As a result of the above, a loss of $0.8 million for the six months compares to a loss of $2.2 million last year.

Fakespace Systems Inc.

Revenues at Fakespace Systems of $2.8 million were equal to the same quarter last year. Gross profit, however, increased $0.2 million over last year due to increased margins resulting from efficiencies. Expense levels for the quarter were $0.8 million higher than last year with the entire increase being directly attributable to the costs associated with the merger. As a result an operating loss for the quarter of $1.2 million was $0.6 million worse than last year.

On a year-to-date basis, revenues of $6.5 million were $1.1 million better than last year. A gross profit for the six months of $2.8 million was $1.3 million better than last year, again primarily due to increased efficiencies and also due to a large low margin strategic sale by Fakespace in the first quarter of 2002. Expenses for the six months were $1.3 million worse than last year, which included $0.8 million in merger costs and a $0.7 million R&D grant in last year's figures. As a result, an operating loss of $1.6 million was equal to last year.

Robotel Electronique Inc.

Robotel's revenue of $0.9 million for the quarter was $0.9 million lower than last year resulting in a gross profit shortfall of $0.5 million. The decline in sales was primarily due to continued softness in the US military and educational markets and the fact that it was known in the market that new versions of current product would be available in the spring and late summer of 2003. Despite the revenue shortfall, an operating loss of $0.5 million was $0.2 million better than last year as operating expenses were significantly lower due to cost reduction actions taken in 2002 and early 2003. 

On a year-to-date basis, revenues of $2.2 million were $1.7 million below last year with shortfalls in the US military and educational markets, and in Canada and Asia, which were only partially offset by a revenue increase in the European market. Compared to last year, a gross profit shortfall of $1.0 million was more than offset by favourable expense levels, with an operating loss of $0.8 million being $0.3 million better than last year.

Liquidity and Capital Resources

Cash decreased $2.3 million during the second quarter of fiscal 2003. Cash was used by operations ($1.0 million), to repay a debenture ($1.0 million) and to reduce long-term debt ($0.3 million). 

Cash increased $0.7 million during the second quarter of fiscal 2002. Cash was provided from the sale of capital assets in Robotel ($1.5 million), from an increase in long-term debt ($0.5 million), from operations ($0.1 million) and the issue of shares ($0.1 million). Cash was used to reduce long-term debt ($1.3 million), to reduce other liabilities ($0.1 million) and for other items ($0.1 million). 

For the six months ended March 31, 2003, cash decreased $0.1 million. Cash was provided from operations ($1.4 million) and was used to repay a debenture ($1.0 million), to reduce long-term debt ($0.4 million) and reduce other liabilities ($0.1 million). 

For the six months ended March 31, 2002, cash decreased $1.5 million. Cash was provided from the sale of capital assets in Robotel ($1.5 million), from an increase in long-term debt ($1.7 million), and the issue of shares ($0.1 million). Cash was used to fund operations ($2.9 million), to reduce long-term debt ($1.5 million), to purchase fixed assets ($0.3 million), and to reduce other liabilities ($0.1 million). 

Through its subsidiary, Robotel, the Company has a line of credit providing up to $1.7 million based on receivable and inventory levels of which $1.1 million was being utilized at March 31, 2003.

Subsequent Events

Fakespace completed its merger with Mechdyne Corporation effective April 1, 2003. Electrohome is the second largest shareholder in the merged company with a 26% equity position. As a result of the transaction, Electrohome will book a one-time dilution gain of approximately $0.6 million, which will be booked in the third quarter.

On April 30, 2003 Electrohome completed a $2.0 million subordinated mortgage financing, with the funds being provided by Electrohome's Chairman, CEO and controlling shareholder, Mr. John A. Pollock, and another member of his family. The loans are secured by a subordinated mortgage on the Electrohome's facility in Kitchener, Ontario and bear interest at prime plus 5.25% per annum, payable monthly, with the principal amount repayable on April 30, 2006. Electrohome applied $600,000 of the proceeds to pay down a portion of its first mortgage with a financial institution, and the remaining $1,400,000 will be used to assist funding some of Electrohome's cash requirements.
 

Outlook

Current results from Robotel continue to be a disappointment and a concern. While we are encouraged by the cost reductions and other changes that have been made at Robotel, increased revenue is key to their success. 

With the completion of the Fakespace/Mechdyne merger on April 1, 2003, Electrohome will now account for this investment on an equity basis (ie: investment in Fakespace on the balance sheet and investment income on the operating statement) rather than consolidating results as had been the case for the Corporation's investment in Fakespace. As a result, Electrohome's annual consolidated revenues will decrease by approximately $17 million. Electrohome anticipates that the merged company should be profitable on an ongoing basis with Electrohome benefiting from its prorata share of results. 

A pro forma balance sheet as at April 1, 2003 has been included in the notes to the financial statements in order to provide a snapshot of how the company will look with the effect of the merger and the new loan.

Electrohome owns a 90% interest in Robotel, which develops and markets computer-based training and call center management systems. It also has a 26% interest in the newly merged Fakespace Systems Inc., which is the largest international company exclusively in the advanced visualization marketplace. Through a minority investment in Immersion Studios Inc., Electrohome also participates in digital interactive cinema. Electrohome's shares are traded on the TSX under the symbols ELL.X (voting) and ELL.Y (non-voting).

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