Head N.V. Q2 Sales Up 5%, Net Swings to Positive

Head N.V. announced results for the three months ended 30 June 2005 compared in which net revenues were up 4.9% to $86.0 million. Operating result before restructuring costs and gain on the sale of property increased by $7.0 million to a profit of $1.2 million. The net income increased to $4.5 million

For the six months ended 30 June 2005 compared to the six months ended 30 June 2004, net revenues were down 2.7% to $169.6 million, operating result before restructuring costs and gain on the sale, of property increased by $2.3 million to a loss of $7.8 million, and the net loss reduced to $4.6 million.

Johan Eliasch, chairman and CEO, commented:
“The company developed positively in the second quarter of 2005. Whilst market conditions remain tough, the results of our restructuring have started to impact the profitability and both margins and absolute profits improved in all divisions compared to the prior year. In addition to strong profitability, the company also improved its operating cashflow which for the first six months of the year was up from $7.5 million to $26.9 million in 2005. Whilst market conditions have not improved significantly, our performance is improving. We are therefore more optimistic about our outcome for the full year 2005, although operating profit (after planned restructuring costs and gains on sale of property) will still be lower than that achieved last year.”

Winter Sports

Winter Sports revenues for the three months ended June 30, 2005 increased by $5.6 million, or 76%, to $12.8 million from $7.3 million in the comparable 2004 period. For the six months ended June 30, 2005, Winter Sports revenues increased by $4.7 million, or 16.0%, to $34.1 million from $29.4 million in the comparable 2004 period. This increase was due to higher sales volumes of ski boots and original equipment manufacturing (“OEM'') bindings as well as the strengthening of the euro against the U.S. dollar.

Racquet Sports

Racquet Sports revenues for the three months ended June 30, 2005 increased by $0.8 million, or 1.6%, to $47.7 million from $46.9 million in the comparable 2004 period. This increase was mainly due to higher sales volumes of tennis balls and the strengthening of the euro against the U.S. dollar. For the six months ended June 30, 2005, Racquet Sports revenues decreased by $6.4 million, or 6.6%, to $90.0 million from $96.4 million in the comparable 2004 period. This decrease was mainly due to lower sales volumes in tennis racquets and balls as well as a change in product mix in tennis racquets. In tennis balls a part of the decline is a result of the discontinued original equipment manufacturing (“OEM'') business. Due to the closure of its tennis ball plant in Mullingar, Ireland the company predictably lost a part of its tennis ball business with European OEM accounts. The strengthening of the euro against the U.S. dollar, partially offset the negative market impacts.

Diving

Diving revenues for the three months ended June 30, 2005 decreased by $3.6 million, or 13.9%, to $22.4 million from $26.0 million in the comparable 2004 period. For the six months ended June 30, 2005, Diving revenues decreased by $4.4 million, or 9.7%, to $41.4 million from $45.9 million in the comparable 2004 period. This decrease comes from the Italian market as well as from the reduction of our product range to optimize profitability. The strengthening of the euro against the U.S. dollar partially offset the negative development.

Licensing

Licensing revenues for the three months ended June 30, 2005 increased by $1.5 million, or 49.8%, to $4.5 million from $3.0 million in the comparable 2004 period. For the six months ended June 30, 2005, licensing revenues increased by $1.7 million, or 28.1%, to $7.6 million from $5.9 million in the comparable 2004 period due to new licensing agreements as well as timing impacts and the strengthening of the euro against the U.S. dollar.

Other Revenues

Other revenues include amounts billed to customers for shipping and handling and are recognized also as selling and marketing expense.

Sales Deductions

Sales deductions for the three months ended June 30, 2005 increased by $0.2 million, or 10.8%, to $1.7 million from $1.5 million in the comparable 2004 period. For the six months ended June 30, 2005, sales deductions increased by $0.2 million, or 6.4%, to $4.1 million from $3.8 million in the comparable 2004 period due to the strengthening of the euro against the U.S. dollar partially offset by lower sales.

Profitability

Gross Profit for the three months ended June 30, 2005 increased by $7.5 million to $39.2 million from $31.7 million in the comparable 2004 period. Gross margin increased to 45.6% in 2005 from 38.7% in the comparable 2004 period. For the six months ended June 30, 2005 gross profit increased by $4.3 million to $70.6 million from $66.2 million in the comparable 2004 period due to declining sales. Gross margin increased to 41.6% in 2005 from 38.0% in the comparable 2004 period due to improved operating performance and product mix.

Selling and Marketing Expenses for the three months ended June 30, 2005, increased by $0.4 million, or 1.4%, to $27.5 million from $27.1 million in the comparable 2004 period. For the six months ended June 30, 2005, selling and marketing expenses increased by $3.3 million, or 6.0%, to $58.4 million from $55.2 million in the comparable 2004 period. This increase was due to higher advertising expenses promoting the introduction of the company's Flexpoint racquets as well as the strength of the euro against the dollar.

General and Administrative Expenses for the three months ended June 30, 2005, increased by $0.2 million, or 1.9%, to $10.4 million from $10.2 million in the comparable 2004 period. For the six months ended June 30, 2005, general and administrative expenses decreased by $1.2 million, or 5.7%, to $19.7 million from $20.9 million in the comparable 2004 period. This decrease was due to lower expenses for warehousing due to decreased sales volumes partially offset by the strengthening of the euro against the dollar.

Head also recorded a non-cash compensation expense of $0.1 million and $0.1 million for the three months ended June 2004 and 2005, respectively and $0.3 million and $0.2 million for the six months ended June 2004 and 2005, respectively, due to the grant of stock options under its stock option plans 1998 and 2001 and the resulting amortization expense.

In June 2005, the company sold the property in Tallinn, Estonia which was previously leased and realized a gain of $7.2 million.

In addition, in June 2005, the company recorded restructuring costs of $3.0 million in relation to the 90% reduction of its tennis racquet production in Kennelbach, Austria and Budweis, Czech Republic primarily resulting from an impairment of $1.8 million and employee severance cost of $0.9 million. In the six months ended June 30, 2004 the company recorded restructuring costs of $1.3 million consisting of dismissal and transportation costs in connection with the closing of its production facility in Mullingar, Ireland and its plant in Tallinn, Estonia.

As a result of the foregoing factors, operating income for the three months ended June 30, 2005 was $5.5 million compared to an operation loss of $6.7 million in the comparable 2004 period, an increase of $12.2 million. For the six months ended June 30, 2005 operating loss decreased by $7.9 million to $3.5 million from $11.4 million in the comparable 2004 period.

For the three months ended June 30, 2005, interest expense decreased by $0.3 million, or 6.3%, to $4.1 million from $4.4 million in the comparable 2004 period. For the six months ended June 30, 2005, interest expense decreased by $8.7 million, or 50.4%, to $8.6 million from $17.2 million in the comparable 2004 period. This decrease was mainly due to the write-off of the capitalized debt issuance costs of $3.2 million relating to the company's former 10.75% senior notes, which were repaid upon issuance of our new 8.5% senior notes in January 2004, the premium of $4.4 million for the early redemption of the 10.75% senior notes, lower interest expenses on its long-term debts due to the fact that in 2004 the company repaid its 10.75% senior notes one month after the issuance of the 8.5% senior notes and lower expenses for its short-term loans.

For the three months ended June 30, 2005, interest income increased by $1.1 million, or 194.7%, to $1.7 million from $0.6 million in the comparable 2004 period. For the six months ended June 30, 2005, interest income increased by $1.0 million, or 102.8%, to $2.0 million from $1.0 million in the comparable 2004 period. This increase was due to gain realized on the repurchase of its 8.5% senior notes.

For the three months ended June 30, 2005, Head had a foreign currency gain of $0.9 million compared to a gain of $0.4 million in the comparable 2004 period. For the six months ended June 30, 2005, the company had a foreign currency gain of $1.9 million compared to a gain of $0.5 million in the comparable 2004 period.

For the three months ended June 30, 2005, income tax benefit was $0.5 million, an increase of $21.1 million compared to income tax expense of $20.6 million in the comparable 2004 period. For the six months ended June 30, 2005, income tax benefit was $3.5 million, an increase of $21.5 million compared to income tax expense of $18.0 million in the comparable 2004 period. This results mainly from a reduction in Austrian tax rate announced in June 2004 which led to a write down of deferred tax assets resulting from tax losses carried forward.

As a result of the foregoing factors, for the three months ended June 30, 2005, Head had a net income of $4.5 million, compared to a net loss of $30.7 million in the comparable 2004 period. For the six months ended June 30, 2005, the net loss decreased to $4.6 million from $45.1 million in the comparable 2004 period.