Media Sciences Reports Q2 Results

OAKLAND, N.J., Feb. 14 /PRNewswire-FirstCall/ -- Media Sciences International, Inc. (NASDAQ: MSII) , the leading independent manufacturer of color toner cartridges and solid ink sticks for color business printers, today announced its financial results for its second fiscal quarter ended December 31, 2007. The Company will host an investor conference call tomorrow morning at 8:45 a.m. ET to discuss its quarterly results.

Results for the quarter were adversely impacted by weak post-Thanksgiving order activity and the following expense items:

    -- Costs of expedited shipping associated with launch of new toner-based       products and clearing associated backorders totaled about $230,000       (about $138,000 after tax or $0.01 per diluted share), adversely       impacting our margins by about 300 basis points;    -- Litigation costs totaling $352,000 (about $211,000 after tax or about       $0.02 per diluted share);    -- Business start-up costs associated with Asian manufacturing operations       of $196,000 (about $118,000 after tax or $0.01 per diluted share);

Collectively, these expense items reduced the Company's pretax income by $778,000 and reported net income by about $467,000, or about $0.04 per diluted share.

Michael W. Levin, President and CEO of Media Sciences International, Inc. commented on the Company's performance, "We are very disappointed with our performance during the quarter. We have analyzed sales during the weak post- Thanksgiving time period looking for geographic, customer and product trends and found no apparent single significant contributing factor - it appears the weakness during this period was broad-based. The noted weakness in order activity was unexpected and inconsistent with the periods leading up to that time and the order activity we have experienced since then in January and in February to date. "

Revenues

Net revenues for the three months ended December 31, 2007 compared to the same period last year, decreased by $393,000 from $6,078,000, or 6% to $5,685,000. For the three months ended December 31, 2007 as compared to the same period in 2006, sales of color toner cartridges increased by about 18%, while sales of solid ink sticks decreased approximately 19%. Net revenues for the six months ended December 31, 2007 compared to the same period last year, increased by $414,000, or 4% from $11,702,000 to $12,116,000. For the six months ended December 31, 2007 as compared to the same period in 2006, sales of color toner cartridges increased by about 46%, while sales of solid ink sticks decreased approximately 19%. Sequentially for the second fiscal quarter versus the first fiscal quarter, solid ink revenues increased by 9%, while toner revenues decreased by 22%.

Gross Margin

For the three and six months ended December 31, 2007 our gross margin was 46% of net revenues as compared with 58% and 57% of net revenues for the three and six months ended December 31, 2006, respectively. The 1,100 - 1,200 basis point decrease in margin is primarily attributed to: (1) our sales mix; (2) the higher year-over-year production and shipping costs; and (3) slightly greater comparative warranty costs.

The Company's greater mix of toner-based versus solid ink product sales was the greatest driver of the year-over-year margin decline. On a portfolio basis, toner-based products typically carry lower margins than solid ink products. Our sales mix of products resulted in about 500 basis points of year-over-year change in our margins.

Year-over-year, we experienced increases in our delivered material and finished goods prices as well as in our out-bound shipping costs that we pay on behalf of our customers due to higher shipping costs. The impact of these greater shipping costs was about 300 basis points of year-over-year change in our margins. We recognized about $230,000 of expense associated with importing toner-based products from Asia. This compares with about $221,000 in the preceding quarter ended September 30, 2007. Respectively, these costs, although similar in amount, represented about 4% and 3% of each quarter's reported net revenues.

The impact of higher production costs represented about 200 basis points of year-over-year change in our margins. These increased costs included (1) the costs of labor and supplies associated with custom labeling for certain new private label customers; (2) additional quality assurance labor associated with the growth of our toner-based product volumes; (3) domestic personnel to fill and package limited quantities of toner-based product for sale to U.S. military and governmental entities; and (4) during the three months ended December 31, 2007, we incurred substantial overtime and temporary labor costs on production earmarked for our newly established European distribution operation.

Research and Development

Versus the same quarter last year, research and development spending increased by $97,000 or 26% to $469,000 from $372,000. Sequentially, as compared with the prior quarter, our research and development spending decreased by $28,000, or 6% to $469,000 from $497,000.

Selling, General and Administrative

Selling, general and administrative expense, exclusive of depreciation and amortization, for the quarter, compared to the same period last year, increased by $712,000 or 33% to $2,877,000 from $2,165,000. The increase in selling, general and administrative expense was primarily driven by greater year-over-year compensation and benefits costs and increased professional fee spending, including litigation costs.

For the three and six months ended December 31, 2007 as compared to the same period in 2006, compensation and benefit costs, including sales commissions, increased by about $482,000 and $1,118,000, respectively. This increase was driven by the hiring of additional: (1) sales and marketing personnel; (2) management personnel associated with the start-up of our operations in China; and (3) some operations personnel. For the three and six months ended December 31, 2007, start-up costs associated with our toner-based manufacturing operations in China totaled about $196,000 and $346,000, respectively (compensation and benefits costs representing $147,000 and $264,000, respectively, of these costs). In the comparative year ago period, we had no start-up expenses.

Most of the increase in professional fees was attributed to legal fees associated with the Xerox litigation; for the three and six months ended December 31, 2007 litigation costs totaled $352,000 and $593,000, respectively. In the prior fiscal year, litigation costs totaled $124,000 for the three months and $260,000 for the six months ended December 31, 2006.

Sequentially, as compared with the prior quarter, selling, general and administrative expense for the three months ended December 31, 2007, increased by $185,000, or 7% to $2,877,000 from $2,692,000. This increase was primarily driven by greater litigation costs, travel and entertainment costs, and shipping costs associated with moving inventories to our third-party logistics facility in Europe. These increases were partially offset by lower non-legal professional fees, advertising, and sales commissions. Legal fees associated with our Xerox litigation increased by $107,000 or 45%, to $343,000 for the three months ended December 31, 2007 from $236,000 in the prior fiscal quarter.

Net Income

For the quarter, we lost $485,000 or $0.04 per share basic and diluted. This compares with the $625,000 or $0.06 per share basic and diluted earned for same period last year.

Effective Tax Rate

For the quarter, the Company's blended effective tax rate was 42.5% versus 35.0% for the same period last year. The Company's blended effective state and federal tax rate varies due to the magnitude of various permanent differences between reported pretax income and what is recognized as taxable income by various taxing authorities. The availability of tax credits associated with manufacturing, research and development activities, as well as exclusions, such as the Extraterritorial Income Exclusion, can result in an effective rate that is lower than the statutory rate.

CEO's Comments

Commenting on the Company's strategy, Mr. Levin noted, "Approximately one year ago, we embarked on two key initiatives; (1) build a sales team capable of addressing the largest channels for color workgroup printer supplies - office and computer; and (2) build Asian based manufacturing. These significant undertakings were and are fundamental changes to Media Sciences' business, and intended to provide Media Sciences with a platform for sustainable growth and profitability. The opportunities and challenges we encounter on a daily basis reinforce this strategy.

These efforts have taken longer to yield results than we had anticipated. That said, our commitment to these initiatives is unwavering, and our expectations for meaningful and tangible results as measured by revenue growth, margin enhancement, inventory reductions, operational leverage and profitability are unchanged.

Non-Executive Chairman

Media Sciences President and CEO Michael W. Levin continues, "I called upon Willem van Rijn to assume the role of non-executive Chairman, which he has agreed to do. During his two years as a Media Sciences Director, I have come to admire Willem's experience and style, and believe he is uniquely suited to lead Media Sciences' active and diverse Board. This change will allow me to focus on the execution of our strategy, while bringing more attention to our daily operations."

Conference Call Note

Media Sciences International, Inc. will hold a conference call to discuss annual results on Friday, February 15, 2008, at 8:45 a.m. Eastern Time. The call will be webcast live by Thomson/CCBN and may be accessed through Media Sciences' web site at www.mediasciences.com. Investors and other interested parties in the United States may access the teleconference by calling 866.700.7173. International callers may dial 617.213.8838. The pass-code for the teleconference is 99571740.

For more information on Media Sciences or its SEC filings, please visit the investor relations section of the Company's website at www.mediasciences.com.

About Media Sciences International, Inc. (NASDAQ: MSII) : Media Sciences International, Inc. (NASDAQ: MSII) , the leading independent manufacturer of solid ink and color toner cartridges for office color printers, has a strong reputation for being the informed customer's choice. As the premium quality price alternative to the printer manufacturer's brand, Media Sciences' newly manufactured color toner and solid ink products for use in Dell(R), Samsung(R), Xerox(R), Tektronix(R), OKI(R), Ricoh(R), Konica Minolta(TM)/Minolta QMS(R), Epson(R), and Brother(R) office color printers deliver up to and over 30% in savings when compared to the printer manufacturer's brand. Behind every Media Sciences product is The Science of Color(TM)-the company's proprietary process for delivering high quality products at the very best price, including its commitment to exceptional, highly responsive technical support and its longstanding, industry-leading warranty. For more information on the Company, its products, and its programs, visit www.mediasciences.com, E-mail info@mediasciences.com, or call 201.677.9311.

Brand names are used for descriptive purposes only and are the properties of their respective owners.

Forward Looking Statements

This press release contains certain forward-looking statements about our goals and prospects within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current beliefs and expectations and are subject to risks and uncertainties. Actual results may differ materially from those included in these statements due to a variety of factors, including those factors identified in our Annual Report on Form 10- KSB for the year ended June 30, 2007, on file with the Securities and Exchange Commission. Any forward-looking statements contained in this release speak only as of the time made and we assume no duty to update them, whether as a result of new information, unexpected events, future changes, or otherwise.

    Non-GAAP Financial Measures    Reconciliation of Non-GAAP Measures                         Three Months Ended              Six Months Ended                   12/31/2007   9/30/2007  12/31/2006  12/31/2007  12/31/2006      Reported       income       (loss) from       operations   (838,541)   (333,717)    937,284  (1,172,258)  1,724,848      Depreciation       &       amortization  260,168     248,107     223,510     508,275     442,442      EBITDA        (578,373)    (85,610)  1,160,794    (663,983)  2,167,290    Add-back of     non-cash     expenses:      Increases       (decreases)       to inventory       reserves      (18,904)     27,385      80,734       8,481     114,329      Stock-based       compensation  136,725      82,292     250,418     219,017     396,741                     117,821     109,677     331,152     227,498     511,070      Cash EBITDA   (460,552)     24,067   1,491,946    (436,485)  2,678,360    Add-back of non-     recurring items:      Litigation       Cost          352,032     241,508     123,973     593,540     259,476                     352,032     241,508     123,973     593,540     259,476      Normalized       EBITDA       (108,520)    265,575   1,615,919     157,055   2,937,836    Weighted Avg.     Common Share     Outstanding  11,576,357  11,470,759  11,221,435  11,523,930  11,179,621      - Adjusted       EBITDA /       Share       - Basic        ($0.04)      $0.00       $0.13      ($0.04)      $0.24      - Normalized       EBITDA /       Share       - Basic        ($0.01)      $0.02       $0.14       $0.01       $0.26    Adjusted     Weighted     Avg. Shares     Outstanding  11,576,357  11,470,759  11,769,260  11,523,930  11,709,703      - Adjusted       EBITDA /       Share       - Diluted      ($0.04)      $0.00       $0.13      ($0.04)      $0.23      - Normalized       EBITDA /       Share       - Diluted      ($0.01)      $0.02       $0.14       $0.01       $0.25             MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES               Condensed Consolidated Statements of OPERATIONS                                 (UNAUDITED)                              Three Months Ended         Six Months Ended                                 December 31,               December 31,                              2007         2006          2007        2006    NET REVENUES          $5,685,477   $6,077,555   $12,116,367 $11,702,089    COST OF GOODS SOLD:      Cost of goods       sold, excluding       depreciation and       amortization,       product warranty,       shipping and       freight             2,567,505    2,152,445     5,526,609   4,194,939      Depreciation and       amortization          153,293      152,311       300,300     304,406      Product warranty       199,234      112,138       411,351     320,172      Shipping and       freight               163,136      115,928       330,708     228,050        Total cost of         goods sold        3,083,168    2,532,822     6,568,968   5,047,567    GROSS PROFIT           2,602,309    3,544,733     5,547,399   6,654,522    OTHER COSTS AND     EXPENSES:      Research and       development           468,914      372,144       966,280     792,020      Selling, general and       administrative,       excluding       depreciation and       amortization        2,876,776    2,164,534     5,568,822   4,000,170      Depreciation and       amortization           95,160       70,771       184,555     137,484        Total other         costs and         expenses          3,440,850    2,607,449     6,719,657   4,929,674    INCOME (LOSS) FROM     OPERATIONS             (838,541)     937,284    (1,172,258)  1,724,848    Interest income, net       1,052       24,933         9,042      33,048    INCOME (LOSS)     BEFORE INCOME TAXES    (837,489)     962,217    (1,163,216)  1,757,896    Provision (benefit)     for income taxes       (352,330)     336,794      (490,899)    590,008    NET INCOME (LOSS)      $(485,159)    $625,423      (672,318)  1,167,888    EARNINGS (LOSS) PER     SHARE      Basic                   $(0.04)       $0.06        $(0.06)      $0.10      Diluted                 $(0.04)       $0.05        $(0.06)      $0.10    WEIGHTED AVERAGE     SHARES USED TO     COMPUTE EARNINGS     PER SHARE      Basic               11,576,357   11,221,435    11,523,930  11,179,621      Diluted             11,576,357   11,769,260    11,523,930  11,709,703

The above results of operations and following Balance Sheet and Statement of Cash Flows, as reported under U.S. Generally Accepted Accounting Principles (U.S. GAAP), will be presented in the Company's 10-Q for the quarter ended December 31, 2007. We encourage you to review the accompanying notes to these consolidated statements, found in that filing.

             MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES                    Condensed Consolidated Balance Sheets                                                    December 31,    June 30,                                                        2007          2007                          ASSETS                    (Unaudited)    CURRENT ASSETS:      Cash and cash equivalents                       $925,006    $1,808,285      Accounts receivable, net                       2,495,472     2,164,826      Inventories                                    7,489,109     5,801,526      Taxes receivable                                 317,289       566,967      Deferred tax assets                              727,349       727,349      Prepaid expenses and other current assets        263,830       253,387        Total Current Assets                        12,218,054    11,322,340    PROPERTY AND EQUIPMENT, NET                      2,490,366     2,752,223    OTHER ASSETS:      Goodwill and other intangible assets, net      3,584,231     3,584,231      Deferred tax assets                              291,515             -      Other assets                                     142,271        65,672        Total Other Assets                           4,018,017     3,649,903    TOTAL ASSETS                                   $18,726,437   $17,724,466             LIABILITIES AND SHAREHOLDERS' EQUITY    CURRENT LIABILITIES:      Bank line of credit                             $155,220            $-      Current maturities of long-term debt             147,118       147,118      Accounts payable                               2,226,711     1,428,379      Accrued compensation and benefits                591,414       757,116      Other accrued expenses and current       liabilities                                   1,547,617       722,725      Accrued product warranty costs                   203,895       192,707      Deferred revenue                                 571,831       603,234        Total Current Liabilities                    5,443,806     3,851,279    OTHER LIABILITIES:      Long-term debt, less current maturities          250,994       323,965      Deferred rent liability                          200,918       234,378      Deferred revenue, less current portion           196,383       240,893      Other tax obligations                            724,556       589,298      Deferred tax liabilities                               -       463,590        Total Other Liabilities                      1,372,851     1,852,124    TOTAL LIABILITIES                                6,816,657     5,703,403    COMMITMENTS AND CONTINGENCIES    SHAREHOLDERS' EQUITY:      Series A Convertible Preferred Stock,       $.001 par value Authorized 1,000,000       shares; none issued                                   -             -      Common Stock, $.001 par value Authorized       25,000,000 shares; issued and       outstanding 11,679,699 shares 11,679,699       shares in December and 11,435,354       shares in June                                   11,679        11,435      Additional paid-in capital                    11,729,110    11,136,505      Retained earnings                                168,991       873,123        Total Shareholders' Equity                  11,909,780    12,021,063    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     $18,726,437   $17,724,466             MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES               Condensed Consolidated Statements of Cash Flows                                 (UNAUDITED)                                                         Six Months Ended                                                           December 31,                                                       2007           2006    CASH FLOWS FROM OPERATING ACTIVITIES      Net income (loss)                              $(672,318)   $1,167,888      Adjustments to reconcile net income       (loss) to net cash provided(used) by       operating activities:        Depreciation and amortization                  508,275       442,442        Deferred income taxes                         (755,105)       65,000        Tax benefits from employee stock options       125,058             -        Provision for inventory obsolescence             8,481             -        Recovery of bad debts                           (4,134)            -        Stock-based compensation expense               221,337       396,741        Excess tax benefits from stock-based         compensation                                        -       (98,120)        Changes in operating assets and         liabilities :          Accounts receivable                         (326,512)     (316,236)          Inventories                               (1,693,128)     (966,893)          Income taxes                                 353,122       149,980          Prepaid expenses and other           current assets                              (87,042)      236,926          Accounts payable                             798,332       946,264          Accrued compensation and benefits           (165,702)     (243,377)          Other accrued expenses and           current liabilities                         836,080       108,914          Deferred rent liability                      (33,460)      (32,539)          Deferred revenue                             (75,913)     (134,319)            Net cash provided (used) by             operating activities                     (962,629)    1,722,671    CASH FLOWS FROM INVESTING ACTIVITIES      Purchases of property and equipment             (246,417)     (426,157)            Net cash used in investing activities     (246,417)     (426,157)    CASH FLOWS FROM FINANCING ACTIVITIES      Proceeds from bank credit line, net       of repayments                                   155,220             -      Bank term loan repayments                        (72,971)      (71,235)      Excess tax benefits from stock-based       compensation                                          -        98,120      Proceeds from issuance of common stock           243,518       157,646            Net cash provided by financing             activities                                325,767       184,531    NET (DECREASE) INCREASE IN CASH                   (883,279)    1,481,045    CASH, BEGINNING OF PERIOD                        1,808,285     1,485,399    CASH, END OF PERIOD                               $925,006    $2,966,444    SUPPLEMENTAL CASH FLOW INFORMATION      Interest paid                                   $ 16,191      $ 33,020      Income taxes paid (refunded)                   $(213,974)     $374,902