Velan Inc.

Velan Inc.

January 10, 2005 15:45 ET

Velan Inc. Reports its 2nd Quarter and Six-Month Results for the Period Ending November 30, 2004


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: VELAN INC.

TSX SYMBOL: VLN.SV

JANUARY 10, 2005 - 15:45 ET

Velan Inc. Reports its 2nd Quarter and Six-Month
Results for the Period Ending November 30, 2004

MONTREAL, QUEBEC--(CCNMatthews - Jan. 10, 2005) - Revenues for our
second quarter increased $12.9 million or 19.5% to $79.1 million from
$66.2 million in the second quarter last year. For the six-month period
revenues reached $149.5 million representing an increase of $28.5
million or 23.6% over the $121.0 million achieved in the same period
last year.

The strengthening of the Canadian dollar in relation to the U.S. dollar
has negatively impacted our results for the three and six-month periods.
The consolidated net loss of $3.5 million in the quarter or $(0.15) per
share compares to a net loss of $3.4 million or $(0.15) per share last
year. The net loss for the current quarter is due mainly to a large $4.3
million unrealized foreign exchange loss on translation of our
integrated subsidiaries ("unrealized translation loss") and a $2.0
million provision for a large claim settlement (see below). The
comparative quarter includes a $2.7 million unrealized translation loss.
The net loss for the six months amounted to $4.1 million or $(0.18) per
share compared to a net loss of $4.5 million or $(0.20) per share for
the comparative period. A $5.8 million unrealized translation loss for
the 6 months compared to a $2.8 million loss recorded in the same period
last year, has negatively impacted the six-month period.

A chart is available on CCNMatthews' website at the following address:
http://www2.ccnmatthews.com/database/fax/2000/vlna.pdf

Velan has reached a tentative agreement to pay $2.0 million relating to
claims made by Shell Canada and certain other parties against Velan
Inc., Velan Proquip, and a number of other defendants. Final agreements
have not yet been signed but the $2.0 million has been accrued in the
accounts. The claims alleged breaches by contractors related to the
supply of high-pressure clamp connectors and initially aggregated $43.3
million.

Order bookings remained strong as we entered $80 million of orders
during the quarter bringing the six-month total to $168 million an
increase of 9.8% and 18% over the comparative periods. The order backlog
increased by $1.3 million during the quarter and reached $179.5 million
an 11.6% increase from May 31, 2004.

Our balance sheet remains strong with shareholders' equity of $234.6
million. As at November 30, 2004, cash and short-term investments
amounted to $48.8 million down $8.7 million in the quarter and $24.2
million from our fiscal year end. Increased inventory levels are the
main reason for the decreased cash position. The Company has increased
inventory in order to better service its customers' needs and in
relation to the higher volume of sales and higher backlog of orders.
The strengthening of the Canadian dollar also contributed to the decline
in cash and short-term investments.

The global increases in prices of carbon, alloy and stainless steel
castings, forgings and parts continue to be a very important concern for
us. We have already received significant increases and unless the demand
in the market abates, there is a risk of further large increases in
2005. Some recent price increase demands of our suppliers are
unacceptable and we are trying to negotiate a better price while
developing alternative sources. There is a risk of not being able to get
enough material when we need it, so we are working on developing more
capacity in our supply chain.

We expect that our margins will continue to be impacted by several
factors including the strong Canadian dollar, cost increases for
materials, competitive price levels in US dollars required to maintain
market share, and out of the ordinary expenses this year for Bill 198
compliance, lean training and implementation costs, and professional
fees related to legal proceedings against our company.

We need to become a leaner and more productive valve manufacturer. We
are facing tough challenges including many factors beyond our control,
but we are determined to become a profitable growing company again and
our operating results in the second quarter, excluding the translation
loss and claims settlement, are a good step in the right direction.


T.C. Velan

President


Consolidated Statements of Earnings (Loss) and Retained Earnings




Unaudited Unaudited
Three months ended Six months ended
(in thousands of dollars, November 30 November 30
excluding per share amounts) 2004 2003 2004 2003
--------------------------------------------------------------------
Sales $79,066 $66,164 $149,523 $120,957
Cost of sales (note 4) 58,150 51,199 109,991 93,979
--------------------------------------------------------------------
Gross profit 20,916 14,965 39,532 26,978
--------------------------------------------------------------------

Expenses (other income)
Engineering, selling,
general and
administrative and
research (note 5) 15,997 14,226 31,297 25,852
Interest
Long-term debt 36 47 70 100
Other 73 53 143 105
Amortization of
property, plant and
equipment 2,094 2,107 4,139 4,093
Other expense (income) 1,647 (388) 1,324 (617)
Foreign exchange loss
on translation of
integrated subsidiaries 4,259 2,723 5,787 2,838
--------------------------------------------------------------------
24,106 18,768 42,760 32,371
--------------------------------------------------------------------
Loss before income taxes (3,190) (3,803) (3,228) (5,393)

Provision (recovery) for
income taxes 309 (382) 841 (847)
--------------------------------------------------------------------
Net loss $(3,499) $(3,421) $(4,069) $(4,546)
--------------------------------------------------------------------
--------------------------------------------------------------------


Retained earnings -
beginning $132,992 $141,999 $133,562 $143,124
Net loss (3,499) (3,421) (4,069) (4,546)

Dividends
Multiple Voting Shares (4,726) (2,363) (4,726) (2,363)
Subordinate Voting Shares (1,970) (985) (1,970) (985)
--------------------------------------------------------------------
Retained earnings - ending $122,797 $135,230 $122,797 $135,230
--------------------------------------------------------------------
--------------------------------------------------------------------


Loss per Share (note 3)
Basic $(0.15) $(0.15) $(0.18) $(0.20)
--------------------------------------------------------------------
Diluted $(0.15) $(0.15) $(0.18) $(0.20)
--------------------------------------------------------------------


Consolidated Balance Sheets

Unaudited Audited
November 30 May 31
(in thousands of dollars) 2004 2004
--------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $48,767 $52,902
Short-term investments - 20,041
Accounts receivable 68,062 65,885
Income taxes recoverable 3,883 2,981
Inventories 117,153 105,001
Deposits and prepaid expenses 1,602 2,435
Advance to an affiliated company - -
Future income taxes 2,710 3,052
--------------------------------------------------------------------
242,177 252,297

Future income taxes - -
Property, plant and equipment 54,024 55,070
Goodwill 12,502 12,502
Other assets 2,450 1,765
--------------------------------------------------------------------
$311,153 $321,634
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $47,561 $47,978
Dividend payable 6,696 3,348
Customers' deposits 4,350 5,004
Provision for performance guarantees 7,301 7,714
Current portion of long-term debt 556 558
--------------------------------------------------------------------
66,464 64,602
Future income taxes 511 396
Long-term debt 3,202 2,997
Non-controlling interest 1,739 1,669
Other long-term liabilities 4,621 4,583
--------------------------------------------------------------------
76,537 74,247
--------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 6) 109,390 109,390
Contributed surplus (note 6) 1,419 1,419
Retained earnings 122,797 133,562
Foreign exchange translation adjustments 1,010 3,016
--------------------------------------------------------------------
234,616 247,387
--------------------------------------------------------------------
$311,153 $321,634
--------------------------------------------------------------------
--------------------------------------------------------------------

Consolidated Statements of Cash Flows

Unaudited Unaudited
Three months ended Six months ended
November 30 November 30
(in thousands of dollars) 2004 2003 2004 2003
--------------------------------------------------------------------
Cash provided from (required for):
Operating activities
Net loss $(3,499) $(3,421) $(4,069) $(4,546)
Items not affecting cash -
Amortization 2,094 2,107 4,139 4,093
Loss (gain) on disposal of
property, plant and equipment 1 (2) (6) (2)
Non-controlling interest 43 6 71 20
Net change in other long-term
liabilities 122 406 38 409
--------------------------------------------------------------------
(1,239) (904) 173 (26)
--------------------------------------------------------------------

Net changes in non-cash
working capital items
Accounts receivable 307 (5,181) (2,205) 8,193
Income tax recoverable (589) (1,320) (914) (3,803)
Inventories (2,296) 1,463 (12,309) 2,445
Deposits and prepaid
expenses 733 980 822 637
Accounts payable and
accrued liabilities (3,158) 6,202 (422) 1,660
Customers' deposits 227 1,046 (662) 955
Provision for performance
guarantees (180) (9) (418) (613)
--------------------------------------------------------------------
(4,956) 3,181 (16,108) 9,474
--------------------------------------------------------------------
(6,195) 2,277 (15,935) 9,448
--------------------------------------------------------------------

Investing activities
Short-term investments - - 20,041 -
Additions to property, plant
and equipment (1,958) (1,405) (3,520) (2,498)
Proceeds on disposal of
property, plant and equipment - 3 32 3
Net change in other assets (29) - (694) (99)
--------------------------------------------------------------------
(1,987) (1,402) 15,859 (2,594)
--------------------------------------------------------------------

Financing activities
Repurchase of shares - - - (153)
Dividends - - (3,348) (3,350)
Increase in long-term debt 54 142 713 142
Repayment of long-term debt (266) (359) (364) (564)
--------------------------------------------------------------------
(212) (217) (2,999) (3,925)
--------------------------------------------------------------------
Effect of exchange rate
differences on cash and
cash equivalents (311) 422 (1,060) (728)
--------------------------------------------------------------------
Net change in cash and
cash equivalents (8,705) 1,080 (4,135) 2,201
Cash and cash equivalents
- beginning 57,472 68,032 52,902 66,911
--------------------------------------------------------------------
Cash and cash equivalents
- ending $48,767 $69,112 $48,767 $69,112
--------------------------------------------------------------------
--------------------------------------------------------------------

Interest paid amounted to : 93 89 204 194
Income tax paid amounted to: 41 1,301 683 2,161



Notes to Consolidated Financial Statements

For the six months ended November 30, 2004

(in thousands, excluding number of shares and per share amounts)

1. Summary of Accounting Policies

These interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles. The
same accounting policies as outlined in Note 1 of the consolidated
financial statements for the year ended May 31, 2004, have been used,
except as described in Note 2 below.

These interim consolidated financial statements do not include all of
the disclosures included in the company's annual consolidated financial
statements and as such should be read in conjunction with the
consolidated financial statements for the year ended May 31, 2004. In
addition, an auditor has not performed a review of the interim financial
statements.

Certain of the prior year's numbers have been reclassified to conform to
the current year's presentation.

2. Adoption of New Accounting Pronouncements

On June 1, 2004, the company adopted the new requirements of the
Canadian Institute of Chartered Accountants regarding hedging
relationships (Accounting Guideline 13). The guideline establishes
additional documentation and designation requirements for hedge
accounting and requires regular, periodic assessments of effectiveness.
The company has decided to cease hedge accounting and begin recording
the fair value of all forward contracts effective June 1, 2004. This
change was implemented on a prospective basis.

As a result of this change, a gain of $80 for the quarter and $184 for
the six months has been recorded in cost of sales and amounts of $222
and $38 have been recorded in accounts receivable and accounts payable,
respectively.

3. Loss Per Share

Loss per share is calculated using the weighted average number of shares
outstanding of 22,318,968 (November 2003 - 22,319,527). The options do
not have a dilutive effect.

4. Foreign Exchange Translation

Foreign exchange gains and losses realized on the translation of foreign
currency balances and transactions is included in cost of sales and
amounted to:



-------------------------------------------------------------------
Three months ended Six months ended
November 30 November 30
2004 2003 2004 2003
$ $ $ $
-------------------------------------------------------------------
Actual net gain (loss)
on translation of
foreign currencies 1,798 (119) 2,233 25
-------------------------------------------------------------------


5. Research Expense

Research Expenses included the following:

-------------------------------------------------------------------
Three months ended Six months ended
November 30 November 30
2004 2003 2004 2003
$ $ $ $
-------------------------------------------------------------------
Research Expenditures 1,553 1,361 2,919 2,306
Less: Scientific
research tax credits (585) (420) (927) (747)
-------------------------------------------------------------------
968 941 1,992 1,559
-------------------------------------------------------------------

6. Capital Stock

a) Authorized - in unlimited number
Preferred Shares, issuable in series
Subordinate Voting Shares
Multiple Voting Shares (five votes per share), convertible
into Subordinate Voting Shares

b) Issued
November 30 May 31
2004 2004
--------------------------------------------------------------------
$ $
6,707,401 (May 31, 2004 - 6,707,401)
Subordinate Voting Shares 100,541 100,541
15,611,567 (May 31, 2004 - 15,611,567)
Multiple Voting Shares 8,849 8,849
--------------------------------------------------------------------
109,390 109,390
--------------------------------------------------------------------

c) Stock Options

If the fair value based method of accounting had been used to account
for the options granted, modified or settled between June 1, 2001
and June 1, 2003, the company's net loss and loss per share would
have been the pro forma amounts indicated below:


-------------------------------------------------------------------
Three months ended Six months ended
November 30 November 30
2004 2003 2004 2003
$ $ $ $
-------------------------------------------------------------------
Net Earnings (Loss)
As reported (3,499) (3,421) (4,069) (4,546)
Pro forma (3,507) (3,459) (4,087) (4,594)
Basic and Diluted
earnings (loss)
per share
As reported (0.15) (0.15) (0.18) (0.20)
Pro forma (0.15) (0.16) (0.18) (0.21)
-------------------------------------------------------------------


The fair value of the options is estimated as at the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions:

Risk-free interest rate 4.2 %
Expected dividend yield 2.0 %
Expected life of the options 5.1 years
Expected volatility 25.0 %

The weighted average fair value at grant date of the options is
$3.30 per option.

The table below summarizes the status of the share option plan:

--------------------------------------------------------------------
Three months ended November 30, 2004
--------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
--------------------------------------------------------------------
Outstanding, beginning of period 140,000 15.42 21.5 months
Granted - - -
Exercised - - -
Expired/Forfeited 10,000 19.00 -
--------------------------------------------------------------------
Outstanding, end of period 130,000 15.14 18.5 months
--------------------------------------------------------------------
--------------------------------------------------------------------
Exercisable, end of period - - -
--------------------------------------------------------------------
--------------------------------------------------------------------


--------------------------------------------------------------------
Six months ended November 30, 2004
--------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
--------------------------------------------------------------------
Outstanding, beginning of period 142,000 15.39 24.2 months
Granted - - -
Exercised - - -
Expired/Forfeited 12,000 18.08 -
--------------------------------------------------------------------
Outstanding, end of period 130,000 15.14 18.5 months
--------------------------------------------------------------------
Exercisable, end of period 130,000 15.14 -
--------------------------------------------------------------------
--------------------------------------------------------------------


7. Contingencies

An action was instituted against the company and one of its
subsidiaries, together with other defendants, claiming damages
aggregating $43,273. The action alleges breaches by contractors and
suppliers related to the supply of high-pressure clamp connectors for a
specific project. Our subsidiary supplied the high-pressure clamp
connectors with respect to this project. The Company has now reached a
tentative agreement that would result in the company paying $2,000 as
full and final settlement for this claim. The amount has been accrued
and is recorded in other expense (income).

8. Segment Disclosure

Consistent with the prior year, the company reflects its results under a
single reportable operating segment.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    VELAN Inc.
    Tom Velan
    President
    (514) 748-7743
    (514) 748-8635 (FAX)
    Web: www.velan.com