Coretec Inc.
TSX : CYY

Coretec Inc.

August 04, 2005 18:45 ET

Coretec Announces Second Quarter 2005 Results Second Quarter Sequential Revenue Growth of 2%

TORONTO, ONTARIO--(CCNMatthews - Aug. 4, 2005) - Coretec Inc. (TSX:CYY) today reported its financial results for the second quarter ended June 30, 2005. The Company recorded sales from continuing operations of $19.7 million in the quarter, a 6% decrease over sales of $21.0 million in the second quarter of 2004, although a 2% increase sequentially from the first quarter of 2005. Gross profit for the quarter was $4.3 million or 22% of sales compared to $6.2 million or 30% of sales in the second quarter of 2004. Sequentially, gross profit increased 4% from gross profit of $4.1 million or 21% of sales in the first quarter of 2005. The Company recorded a loss per share in the quarter of $0.07 compared to earnings per share of $0.04 in the second quarter of 2004 and sequentially, compared to a loss of $0.05 per share in the first quarter of 2005. In the second quarter of 2005 the Company recorded a charge of $0.5 million or $0.03 per share representing the costs associated with the abandoned merger transaction with Unicircuit, Inc.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") were $0.9 million in the quarter, a decrease of $1.8 million compared to EBITDA of $2.8 million in the second quarter of 2004 and sequentially, an increase of $0.1 million compared to EBITDA of $0.8 million in the first quarter of 2005. Free cash flow, defined as earnings (loss) plus depreciation and amortization less capital expenditures, was approximately nil in the quarter, compared to positive free cash flow of $2.0 million in the second quarter of 2004 and sequentially, an improvement of $0.5 million from negative free cash flow of $0.5 million in the first quarter of 2005.

"While abandoning the proposed merger with Unicircuit Inc. was the right decision for the Company, we still believe in the underlying principles which fostered the proposed transaction. Those principles include capacity consolidation, the alignment of our customer base towards higher margin and secure market segments such as military/aerospace, instrumentation, high reliability and time expedited products and the expansion of our technology platform and expertise. We have focused the activities of Coretec on these key principles and will continue to do so going forward. We continue to focus on prudent financial management of our resources during the current tough market conditions and believe that recent and upcoming competitor closures will serve to stabilize the industry and allow us to improve our financial performance. Ensuring that we are optimized in terms of productivity, cost, and technology will enable us to continue to increase market share," said Paul Langston, Coretec's President and Chief Executive Officer.

"As part of our consolidation focus, we have put our Lawrence facility up for sale with the intention of transferring the remaining production processes at this facility to our two other Toronto sites. We have signed a conditional purchase and sale agreement to sell the facility's real estate in the amount of $2.1 million and anticipate the transaction to close in the fourth quarter of this year. The contemplated transaction will also provide us with a period of up to 18 months after closing in which to vacate the building. If completed, we will receive approximately 50% of the proceeds by closing and receive the remainder in an interest bearing 30-month vendor take-back note with an optional early redemption to be paid twelve months after we vacate the facility. Although there can be no assurance given that this particular transaction will be completed, it is our ongoing intention to relocate the production activities in this facility and ultimately sell the real estate asset," continued Mr. Langston.

"Although we are seeing positive results as a result of our focus, market conditions in the first half of 2005 remained volatile and weak, precipitating further price compression across virtually all products and services. According to IPC, shipments of PCBs in North America declined 6.4% for the six months ending June 2005 as compared to the same period in 2004. Demand softness in the defense and aerospace sectors has been particularly disappointing as has an absence of quick turn requirements in that same sector. To offset these declines in activity, we have aggressively stepped up our pursuit of commercial prototypes and time sensitive production. Our focus continues to be on accelerated cycle times, optimized sales and operations planning, and continuous improvements in process control, staying true to our game plan," said Mr. Langston.

Coretec is one of the leading designers and fabricators of printed circuit boards for the prototype and quick turnaround production segments of the North American and European markets. Coretec distinguishes itself from its competitors by providing complete printed circuit board solutions, including design, advanced prototyping and quick turnaround production across an outstanding range of product technologies.

This news release may include statements about future expectations, plans and prospects that may constitute forward-looking statements. Please be cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties. Actual results or developments may vary materially from those projected or implied in the forward-looking statements as a result of any number of factors, including currency exchange rate fluctuations; variability of operating results; dependence on certain industries; management of growth and expansion; integration of operations; ability to attract and retain key personnel; nature of sales; product complexity and product defects; international operations; material cost fluctuations and limited availability of raw materials; potential loss of customers; competition; industry contraction and slow economic growth; technological change and process development; environmental liability; need for additional financing; product liability; pricing pressure; ability to reduce costs; and other risks listed in Coretec's public disclosure documents and other filings with securities regulatory authorities found at www.sedar.com.

Additional information about Coretec Inc. is available at www.coretec-inc.com.

TO THE SHAREHOLDERS OF CORETEC INC.

The consolidated balance sheet of Coretec Inc. as at June 30, 2005, and the consolidated statements of operations, deficits and cash flows for the period then ended have not been reviewed by the company's auditors, Ernst & Young LLP. These financial statements are the responsibility of management and have been reviewed and approved by the company's audit committee.



CONSOLIDATED BALANCE SHEETS
(in thousands - unaudited)


June 30, December 31,
2005 2004
$ $
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ASSETS
Current
Cash 82 354
Accounts receivable 12,521 13,903
Inventories 4,987 5,002
Income taxes recoverable - 631
Prepaid expenses 1,170 1,752
Note receivable from
discontinued operations 146 1,524
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Total current assets 18,906 23,166
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Long-lived assets held for sale 2,129 -
Property, plant and equipment, net 26,900 30,193
Other assets 217 386
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48,152 53,745
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 808 1,608
Accounts payable and accrued liabilities 7,739 9,969
Current portion of long-term debt 4,710 5,044
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Total current liabilities 13,257 16,621
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Long-term debt 3,140 3,406
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Total liabilities 16,397 20,027
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Shareholders' equity
Share capital 61,007 60,992
Contributed surplus 549 340
Deficit (29,801) (27,614)
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Total shareholders' equity 31,755 33,718
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48,152 53,745
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CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands - unaudited)

Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
$ $ $ $
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Sales 19,718 20,969 39,067 39,402
Cost of sales 15,443 14,737 30,698 27,886
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Gross profit 4,275 6,232 8,369 11,516
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Expenses
Selling, general and
administrative 3,126 3,336 6,468 6,182
Depreciation and amortization 1,498 1,722 3,025 3,334
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4,624 5,058 9,493 9,516
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Income (loss) from continuing
operations (349) 1,174 (1,124) 2,000
Terminated merger costs 534 - 534 -
Interest and other expenses 259 222 507 378
Foreign exchange loss (gain) 223 106 143 (18)
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Income (loss) before income
taxes (1,365) 846 (2,308) 1,640
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Provision for income taxes - 20 - 20
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Income (loss) from continuing
operations (1,365) 826 (2,308) 1,620
Income (loss) from
discontinued operations 5 (196) (121) (417)
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Net income (loss) for the year (1,370) 630 (2,187) 1,203
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Earnings (loss) per share:
From continuing operations,
basic and diluted $(0.07) $0.04 $(0.12) $0.09
Net income (loss) per share,
basic and diluted $(0.07) $0.03 $(0.12) $0.06
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CONSOLIDATED STATEMENTS OF DEFICIT
(in thousands - unaudited)

Quarters ended June 30

2005 2004
$ $
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Deficit, beginning of year (27,614) (25,832)
Net income (loss) for the period (2,187) 1,203
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Deficit, end of period (29,801) (24,629)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands - unaudited)

Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
$ $ $ $
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OPERATING ACTIVITIES
Income (loss) for the year
from continuing operations (1,365) 826 (2,308) 1,620
Non-cash items
Depreciation 1,498 1,722 3,025 3,334
Stock-based compensation 103 61 209 122
Unrealized foreign exchange loss 242 25 527 91
Amortization of deferred
finance charges 54 39 107 57
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532 2,673 1,560 5,224
Net change in non-cash working
capital balances
related to operations 1,507 (1,176) (86) (1,869)
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Cash provided by operating
activities 2,039 1,497 1,474 3,355
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FINANCING ACTIVITES
Increase of long-term debt - - - 4,454
Repayment of long-term debt (353) (427) (699) (1,530)
Decrease in bank indebtedness (2,106) (475) (800) (474)
Increase in share capital 15 14 15 14
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Cash (used in) provided by
financing activities (2,444) (888) (1,454) 2,464
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INVESTING ACTIVITIES
Purchase of capital assets (703) (619) (1,861) (950)
Increase (decrease) in other
assets (8) (156) 62 (284)
Advance to Proto Circuit - - - (3,798)
Acquisition of Proto Circuit - - - (236)
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Cash used in investing activities (711) (775) (1,799) (5,268)
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Effect of exchange rate
changes on cash 21 (1) 7 6
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Net increase (decrease) in
cash during the period (1,095) (167) (1,771) 557
Change in cash from
discontinued operations (5) (199) 1,499 (555)
Cash, beginning of period 1,182 1,278 354 910
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Cash, end of period 82 912 82 912
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Supplemental cash flow information
Interest paid 159 186 354 336
Income taxes paid 63 144 63 144
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Coretec Inc.
Selected financial Information (000's)


%
% Change
Q2/05 Q2/04 Change Q1/05 Q2/Q1 YTD05 YTD04
-------------- ------ --------------
Continuing
operations:
Revenue 19,718 20,969 -6% 19,349 2% 39,067 39,402
Gross Profit 4,275 6,232 -31% 4,095 4% 8,369 11,516
Income (loss) (1,365) 826 -265% (942) 45% (2,308) 1,620


Reconciliation of EBITDA from continuing operations

%
% Change
Q2/05 Q2/04 Change Q1/05 Q2/Q1 YTD05 YTD04
-------------- ------
Income (loss)
for the period
from continuing
operations (1,365) 826 (942) (2,308) 1,620
Add/(Deduct):
Interest 259 222 248 507 378
Depreciation
and
amortization 1,498 1,722 1,527 3,025 3,334
Provision for
income tax - 20 - - 20
Abandoned
merger costs 534 - - 534 -
-------------- ------ --------------
EBITDA from
continuing
operations 926 2,790 -67% 833 11% 1,758 5,352


Reconciliation of Free Cash Flow from continuing operations

%
% Change
Q2/05 Q2/04 Change Q1/05 Q2/Q1 YTD05 YTD04
-------------- ------
Income (loss)
for the period
from continuing
operations (1,365) 826 (942) (2,308) 1,620
Add:
Depreciation
and
amortization 1,498 1,722 1,527 3,025 3,334
Amortization of
deferred
finance charges 54 39 53 107 57
Abandoned
merger costs 534 - - 534 -
-------------- ------ --------------
721 2,587 638 1,358 5,011
Deduct:
Capital
expenditures (703) (619) (1,158) (1,861) (950)
-------------- ------ --------------
Free Cash Flow
from continuing
operations 18 1,968 -99% (520) 103% (503) 4,061


- EBITDA and free cash flow are not measures recognized under Canadian generally accepted accounting principles ("GAAP"). EBITDA is calculated as earnings before interest and certain other expenses, provision for income taxes, depreciation and amortization and impairment of capital assets. Free cash flow is calculated as net income plus depreciation and amortization and impairment of capital assets less capital expenditures. Management believe that many of the Company's shareholders, creditors, other stakeholders and analysts prefer to assess the Company's performance using EBITDA and free cash flow in addition to the GAAP measures. The Company's method of calculating EBITDA and free cash flow may differ from other companies and accordingly may not be comparable to measures used by other companies.

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