Reko International Group Inc.
TSX : REK

Reko International Group Inc.

March 12, 2008 17:13 ET

Reko Announces Second Quarter Results for Fiscal 2008

WINDSOR, ONTARIO--(Marketwire - March 12, 2008) - Reko International Group Inc. (TSX:REK) today announced results for its second quarter ended January 31, 2008.



Financial Highlights (complete statements follow):

Three Months Six Months
(unaudited) (unaudited)
-------------------------------------------
Fiscal Fiscal Fiscal Fiscal
2008 2007 2008 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales $ 11,766 $ 10,718 $ 27,250 $ 23,999
Net loss (2,180) (302) (2,091) (605)
EPS (basic) (0.30) (0.04) (0.29) (0.08)
Working capital 15,611 19,703
Shareholders' equity 45,491 50,314
Shareholders' Equity per Share 6.38 6.89
--------------------------------------------------------------------------


Consolidated sales for the quarter ended January 31, 2008, were $11.8 million, compared to $10.7 million last year, an increase of $1.1 million, or 10.3%. While sales increased in the quarter, largely as a result of increased specialty machine orders, the strength of the Canadian dollar, the uncertainty facing the North American automotive industry, and a very competitive pricing environment continue to represent formidable challenges to the company.

The gross loss for the three months ended January 31, 2008, was $1.1 million, or 8.9% of sales, compared to a gross profit of $1.7 million, or 16% of sales, for the same period in the last year. The decrease in the gross margin was largely due to the difficult pricing environment and the weak U.S. currency, which necessitated bids on new contracts at thin margins.

Selling and administrative expenses for the quarter were $2.3 million, or 19.7% of sales, compared to $1.8 million, or 16.8% of sales, for the same period last year. While the Company undertook restructuring measures in Q4 of 2007 and realized meaningful benefits from the restructuring, those costs were offset by one-time contractual obligations and further restructuring costs in the quarter. Absent the one-time obligations and restructuring costs, selling and administrative costs would have been $1.4 million, or 11.2% of sales. The net loss for the quarter was $2.2 million, or $0.30 per share, compared to a net loss of $0.3 million, or $0.04 per share, in the previous year. "The second quarter of 2008 represented a challenging period in the evolution of Reko International Group Inc.," said Diane St. John, C.E.O. "While the financial results for the quarter were disappointing, a large portion of our losses were onetime in nature or related to current competitive and economic conditions. Operationally, our restructuring process places us in a position to be more competitive in these difficult and changing times."

Founded in 1976, Reko International Group (TSX:REK) is a highly integrated, technology driven engineering and manufacturing firm providing engineered solutions for the plastics segment of the automotive, aerospace and consumer product markets. In its ten production facilities in Ontario, Reko designs and manufactures precision moulds and other related industrial tooling, in addition to its own proprietary line of CNC machining centres.



REKO INTERNATIONAL GROUP INC.

Second Quarter Report

INTERIM CONSOLIDATED BALANCE SHEETS
As at January 31, 2008 with comparative figures for July 31, 2007
(in 000's)
---------------------------------------------------------------------------
January 31, July 31,
(unaudited) (audited)
2008 2007
---------------------------------------------------------------------------
ASSETS
Current
Accounts receivable -trade $ 11,783 $ 22,014
Non-hedging financial derivatives 1,784 2,047
Income taxes receivable - 159
Work-in-progress 17,745 11,166
Prepaid expenses and deposits 618 525
Future income taxes (Note 5) 721 231
Discontinued operations (Note 3) - 128
----------- -----------
32,651 36,270
----------- -----------

Capital assets 44,295 41,946
Discontinued operations (Note 3) - 2,466
----------- -----------
44,295 44,412
----------- -----------
Future income taxes (Note 5) 2,109 859
----------- -----------
$ 79,055 $ 81,541
----------- -----------
----------- -----------

LIABILITIES
Current
Bank indebtedness $ 8,461 $ 8,678
Accounts payable and accrued liabilities (Note 4) 7,001 6,133
Income taxes payable 84 -
Current portion of long-term debt 1,494 1,628
Discontinued operations (Note 3) - 132
----------- -----------
17,040 16,571
----------- -----------

Long-term debt 16,524 17,266
----------- -----------

SHAREHOLDERS' EQUITY
Share capital (Note 6) 20,832 20,905
Contributed surplus (Note 7) 381 366
Retained earnings 24,278 26,369
Cumulative translation adjustment - 64
Accumulated other comprehensive income - -
----------- -----------
45,491 47,704
----------- -----------
$ 79,055 $ 81,541
----------- -----------
----------- -----------

See accompanying notes to the interim consolidated financial statements



INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS AND
RETAINED EARNINGS

Three months and six months ended January 31, 2008 with comparative figures
for 2007 (in 000's except per share data)
-------------------------------------------------------------------------
For the three months For the six months
ended January 31, ended January 31,
(unaudited) (unaudited)
2008 2007 2008 2007
-------------------------------------------------------------------------

Sales (Note 2) $ 11,766 $ 10,718 $ 27,250 $ 23,999

Costs and expenses
Cost of sales 11,523 7,979 23,793 18,430
Selling and
administrative 2,313 1,796 3,898 3,715
Depreciation and
amortization 1,295 1,026 2,342 2,041
-----------------------------------------------
15,131 10,801 30,033 24,186
-----------------------------------------------
Loss from continuing
operations before the
following (3,365) (83) (2,783) (187)
-----------------------------------------------

Gain on disposal of
capital assets - (121) - (121)

Interest
Long-term debt 276 261 557 525
Other - net 84 223 190 375
-----------------------------------------------
360 363 747 779
-----------------------------------------------
Loss before income taxes (3,725) (446) (3,530) (966)
-----------------------------------------------

Income taxes (recovered)
Current (14) 503 1 518
Future (1,531) (647) (1,440) (879)
-----------------------------------------------
(1,545) (144) (1,439) (361)
-----------------------------------------------
Net loss from continuing
operations (2,180) (302) (2,091) (605)
Net income from
discontinued operations
net of tax (Note 3) - 73 - 341
-----------------------------------------------

Net loss (2,180) (229) (2,091) (264)
Other comprehensive
income - - - -
-----------------------------------------------
Comprehensive loss (2,180) (229) (2,091) (264)
-----------------------------------------------
Retained earnings,
beginning of period 26,458 29,958 26,369 29,993
-----------------------------------------------
Retained earnings, end
of period $ 24,278 $ 29,729 $ 24,278 $ 29,729
-----------------------------------------------
-----------------------------------------------

Loss per common share
from continuing
operations

Basic $ (0.30) $ (0.04) $ (0.29) $ (0.08)
-----------------------------------------------
-----------------------------------------------

Diluted $ (0.30) $ (0.04) $ (0.29) $ (0.08)
-----------------------------------------------
-----------------------------------------------

Income per common share
from discontinued
operations

Basic $ - $ 0.01 $ - $ 0.05
-----------------------------------------------
-----------------------------------------------
Diluted $ - $ 0.01 $ - $ 0.05
-----------------------------------------------
-----------------------------------------------

See accompanying notes to the interim consolidated financial statements



INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months and six months ended January 31, 2008 with comparative
figures for 2007 (in 000's)
---------------------------------------------------------------------------
For the three months For the six months
ended January 31, ended January 31,
(unaudited) (unaudited)
2008 2007 2008 2007
---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $ (2,180) $ (302) $ (2,091) $ (605)
Add non-cash items:
Depreciation and
amortization 1,295 1,026 2,342 2,041
Future income taxes
recovered (1,531) (647) (1,440) (879)
Gain on disposal of
capital assets - (121) - (121)
Stock option expense 10 17 18 34
----------------------------------------------
(2,406) (27) (1,171) 470
Net change in non-cash
working capital 2,075 430 4,646 1,359
----------------------------------------------
Cash (used) provided from
operating activities (331) 403 3,475 1,829
----------------------------------------------

FINANCING ACTIVITIES
Net proceeds (payments) on
bank indebtedness 2,357 905 (147) 171
Payments on long-term debt (373) (306) (961) (579)
Cost of repurchase of shares (65) (667) (73) (667)
----------------------------------------------

Cash provided (used) from
financing activities 1,919 (68) (1,181) (1,075)
----------------------------------------------

INVESTING ACTIVITIES
Investment in capital assets (1,294) (949) (2,239) (1,292)
Proceeds on disposal of
capital assets - 121 - 121
----------------------------------------------

Cash used from investing
activities (1,294) (828) (2,239) (1,171)
----------------------------------------------

Effect of foreign exchange
rate changes on
cash and cash equivalents (294) 493 (55) 417
----------------------------------------------

Cash and cash equivalents,
beginning of period - - - -
----------------------------------------------

Cash and cash equivalents,
end of period $ - $ - $ - $ -
----------------------------------------------
----------------------------------------------

See accompanying notes to the interim consolidated financial statements


Notes to Interim Consolidated Financial Statements for January 31, 2008 (in 000's, except for share and per share figures) (Unaudited)

1. Significant accounting policies

Management prepared these interim consolidated financial statements in accordance with Canadian generally accepted accounting principles using the historical cost basis of accounting and approximation and estimates based on professional judgments. These interim consolidated financial statements contain all adjustments that management believes are necessary for a fair presentation of the Company's financial position, results of operations and changes in cash flows. These statements should be used in conjunction with the Company's most recent annual consolidated financial statements. The accounting policies and estimates used in preparing these interim consolidated financial statements are consistent with those used in preparing the annual consolidated financial statements, except as noted below and in Note 2.

Foreign currency translation

During the previous quarter, management evaluated the classification of the two remaining active U.S. subsidiaries, which were classified as self-sustaining. In considering factors such as the procurement of revenue, how financing was obtained and where binding decision making occurred, management concluded that these previously classified self-sustaining subsidiaries were, in fact, fully integrated. Thus, the temporal method of foreign currency translation should be used with the current rate applied to monetary assets and liabilities, and historical rates applied to non-monetary assets and liabilities. This did not have a significant impact on these consolidated financial statements.

Financial instruments, equity and comprehensive income

In January 2005, the Canadian Institute of Chartered Accountants approved Handbook Sections 1530, "Comprehensive Income"; 3251, "Equity"; 3855, "Financial Instruments - Recognition and Measurement"; and 3861, "Financial Instruments - Disclosure and Presentation". The Company adopted these new recommendations effective August 1, 2007 with no restatement of prior periods.

Financial instruments

Under the new standards, all of the Company's financial assets and financial liabilities are to be classified as held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets, or other financial liabilities. All financial instruments are measured at fair value on initial recognition. Held for trading financial instruments, which include cash and cash equivalents and non-hedging financial derivatives, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Loans and receivables, which include accounts receivable, current portion of long-term debt and long-term-debt, are recorded at amortized cost using the effective interest method. Other financial liabilities, which include accounts payable and accrued liabilities, are recorded at amortized cost using the effective interest method. The Company does not currently have any held to maturity investments or available for sale financial assets. The implementation of the new section had neither a positive nor negative impact on the financial results of the Company.

Equity

Section 3251, "Equity", establishes standards for the presentation of equity and unrealized gains and losses in equity during the reporting period. The main feature of this new standard is the requirement of an enterprise to present separately each of the unrealized gains and losses in equity during the reporting period. The new standard replaces Section 3250, "Surplus", and also incorporates amendments resulting from the issuance of Section 1530.

Comprehensive income

Other comprehensive income includes unrealized gains and losses on translation of a Company's net investment in self-sustaining foreign operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes. Other comprehensive income is presented below net income on the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is composed of net income and other comprehensive income.

Accumulated other comprehensive income is a separate component of shareholders' equity which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income but excluded from net income.

The Company does not currently maintain any financial instruments that require disclosure within other comprehensive income.

2. Revenue recognition

As detailed in the company's revenue recognition policy, revenue is recognized based on the percentage of completion method, provided the contract has progressed to the point where total costs can be reasonably estimated. Historically, the company considered all jobs, which were at least 50% complete to have progressed to the point where total costs could be reasonably estimated. After a detailed review of estimation abilities, manufacturing abilities and historical results, management determined that a job has progressed to the point where total costs can be reasonably estimated once that job has completed all aspects of engineering and design. Historically, this occurs somewhere between 15% and 25%, depending upon the complexity of the job. This change in management estimate was implemented with an effective date of August 1, 2007. The impact of this change in management estimate is a decrease in sales of $1,747 and a decrease in gross profit of $72 in the second quarter and an increase in sales of $90 and a decrease in gross profit of $18 for the six months ended.

3. Discontinued operations

During the period, the Company re-classified its remaining assets, liabilities, equity, revenues and expenses, which were previously classified as "Discontinued Operations" into continuing operations as the entities are now substantially disposed.

The balance sheet at July 31, 2007, includes the following assets and liabilities related to discontinued activities:



2007
------
Cash $ 71
Accounts Receivable - trade 36
Prepaid expense and deposits 21
------
128
------

Capital assets 2,466
------

Accounts payable and accrued liabilities 45
Current portion of long-term debt 87
------
132
------


The statement of loss for the three months and six months ended January 31, 2007 includes the following related to discontinued operations:



For the three For the six
months ended months ended
January 31, 2007 January 31, 2007
---------------- ----------------

Sales for the period $12,336 $27,290
Sales from continuing operations 10,718 23,999
Sales from discontinued operations 1,618 3,291

Operating expenses related to
discontinued operations 1,545 2,950

Net income from discontinued operations 73 341


4. Related party transactions

Accounts payable and accrued liabilities include $780 of related party liabilities to a shareholder with regard to fulfillment of a contractual obligation. The contractual obligation will be paid over a six-month period commencing February 2008.

5. Income taxes

During the quarter, the Company adjusted their future tax liability by $300. The adjustment in the future tax liability is due to a change in the enacted Federal statutory rates. The decrease in the Federal statutory rate from 19% to 15% commences January 2008, and will be fully implemented by January 2012. The reduction in the Federal statutory tax rate resulted in a $300 reduction in the future tax liability pertaining primarily to capital assets.

6. Share capital

In July 2007, the Company announced its intention to make a normal course issuer bid to re-purchase, at market prices, for cancellation up to 357,525 common shares representing approximately 5% of the outstanding common shares as at July 31, 2007. During the quarter, the Company re-purchased 22,200 shares and no options were exercised.



Shares Amount
------------ ---------
Balance July 31, 2007 7,150,492 $ 20,905
Re-purchase in respect of
normal course issuer bid:
First Quarter (2,600) (8)
Second Quarter (22,200) (65)
------------ ---------
7,125,692 $ 20,832
------------ ---------
------------ ---------


The share re-purchases were recorded at stated capital value of $2.92 per share with the difference between the amount recorded and the amount paid charged to contributed surplus.

7. Stock based compensation

The fair value of the stock options granted since August 1, 2002 was determined using the Black-Scholes option-pricing model based on the following underlying assumptions:

- 5 year risk free interest rate of 3.50%;

- Average expected life of 5 years;

- Average expected volatility of 30.60%.

During the period, no options were granted, and for the three months ended January 31, 2008, $10 was recorded as compensation cost for the quarter.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is management's interim discussion and analysis of operations and financial position ("MD&A") and should be read in conjunction with the unaudited interim consolidated financial statements for the six months ended January 31, 2008 and the audited consolidated financial statements and MD&A for the year ended July 31, 2007 included in our 2007 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the six months ended January 31, 2008 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and the audited consolidated financial statements for the year ended July 31, 2007 have been prepared in accordance with Canadian GAAP. All amounts in this MD&A are presented in thousands of Canadian dollars, except per share figures, which are in Canadian dollars, unless otherwise noted. When we use the terms "we", "us", "our", "Reko", or "Company", we are referring to Reko International Group Inc. and its subsidiaries.

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 "Continuous Disclosure Obligations" ("NI 51-102") of the Canadian Securities Administrators. Additional information regarding, including copies of our continuous disclosure materials such as our annual information form, is available on our website at www.rekointl.com or through the SEDAR website at www.sedar.com.

In this MD&A, reference is made to gross margin, which is not a measure of financial performance under Canadian GAAP. The Company calculates gross margin as sales less cost of sales. The Company included information concerning this measure because it is used by management as a measure of performance, and management believes it is used by certain investors and analysts as a measure of the Company's financial performance. This measure is not necessarily comparable to similarly titled measures used by other companies.

This MD&A is current to March 12, 2008.

OVERVIEW

Reko designs and manufactures a variety of engineered products and services for original equipment manufacturers ("OEMs") and their Tier 1 suppliers. These products include plastic injection moulds, fixtures, gauges, lean cell factory automation, high precision custom machining, and assemblies. Customers are typically OEMs or their Tier 1 suppliers and are predominantly in the automotive market. Divisions of Reko are generally invited to bid upon programmes comprised of a number of custom products used by the customer to produce a complete assembly or product.

Injection moulds are manufactured using milling machines that cut away metal from steel or aluminum blocks. Skilled mould makers assemble and finish surface details. Injection moulds range in size from less than one cubic foot to approximately four feet wide, ten feet long, and six feet high. They range in weight from approximately 100 pounds to 50 tons. Typically, plastic injection moulds are expected to perform up to 1,000,000 production cycles with limited maintenance. Each production cycle lasts between 30 and 120 seconds.

The factory automation systems include stand alone lean manufacturing cells, asynchronous assembly and test systems, leak and flow test systems, robotic assembly/machines vision work cells and various welding systems. Our strength in engineering, design, and machining proves very effective in achieving additional sales volume. This business has benefited from the cross over selling of the Reko "Tool Box" in that the majority of the current business is from customers that, initially, were Reko's mould customers.

We expanded our products to include hydro forming dies, larger two-shot moulds, low pressure moulds, and foam moulds. The hydro forming process involves the manufacturing of metal parts by application of water pressure on metal in a mould-like die to form the metal part. This allows parts to be manufactured using less material, with additional strength, due to a more uniform thickness of the metal. Reko has extensive experience and knowledge in mould design and material flow and the impact of pressure on segments of the die.

The large custom machining business involves the precision machining of large components. Predominantly non-automotive, it supplies the transportation (rail) and energy (oil and gas) industries.

Our design and manufacturing activities are carried on in ten manufacturing plants located at four industrial sites in the suburbs of the City of Windsor in Southwestern Ontario.

INDUSTRY TRENDS AND RISKS

Our success is primarily dependent upon the levels of new model releases of cars and light trucks by North American original equipment manufacturers ("OEM") and our ability to source moulding and automation programs with them. OEM new model releases can be impacted by many factors, including general economic and political conditions, interest rates, energy and fuel prices, labour relation issues, regulatory requirements, infrastructure, legislative changes, environmental emissions and safety issues.

The economic, industry and risk factors discussed in our Annual Information Form and Annual Report, each in respect of the year ended July 31, 2007, remain substantially unchanged in respect of the six months ended January 31, 2008, with the exception of the following:

- as a result of the strengthened value of the Canadian dollar relative to the U.S. dollar, our manufacturing facilities may have greater difficulty competing with facilities located outside Canada; and,

- recent quality concerns with respect to goods produced in China have resulted in a reduction in the pressure from our customer base to source mould manufacture in China. Despite these quality concerns, price pressures to meet "Made in China" pricing remains.

CHANGES IN ACCOUNTING POLICY

COMPREHENSIVE INCOME AND FINANCIAL INSTRUMENTS

In January 2005, the Canadian Institute of Chartered Accountants approved Handbook Sections 1530 - "Comprehensive Income"; 3251, "Equity"; 3855, "Financial Instruments - Recognition and Measurement"; 3861, "Financial Instruments - Disclosure and Presentation"; and 3865, "Hedges". Reko adopted these new recommendations effective August 1, 2007, without restatement of prior periods.

Financial instruments

Under the new standards, financial assets and financial liabilities are to be classified as held for trading, held to maturity investments, loans and receivables, available for sale financial assets or other financial liabilities. All financial instruments are measured at fair value on initial recognition. Held for trading financial instruments, which include cash and cash equivalents and non-hedging financial derivatives, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Loans and receivables, which include accounts receivable, current portion of long-term debt, and long-term debt, are recorded at amortized cost using the effective interest method. Other financial liabilities, which include accounts payable and accrued liabilities, are recorded at amortized cost using the effective interest method. Reko does not currently have any held to maturity investments or available for sale financial assets. The implementation of the new section had neither a positive nor negative impact on the financial results of the Company.

Equity

Section 3251, "Equity", establishes standards for the presentation of equity and unrealized gains and losses in equity during the reporting period. The main feature of this new standard is the requirement for an enterprise to present separately each of the unrealized gains and losses in equity during the reporting period. The standard replaces Section 3250, "Surplus", and incorporates amendments resulting from the issuance of Section 1530.

Comprehensive income

Other comprehensive income would include the unrealized gains and losses in translation of net investments in self-sustaining operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes, and unrealized gains and losses on available for sale financial assets. Other comprehensive income is to be presented below net income in the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is comprised of net income and other comprehensive income.

Accumulated other comprehensive income is a separate component of shareholders' equity, which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income, but excluded from net income.

The Company does not currently maintain any financial instruments whose change in fair value would require disclosure within other comprehensive income.

UNUSUAL ITEMS

FOREIGN CURRENCY TRANSLATION

During the previous quarter, management evaluated the classification of the two remaining active U.S. subsidiaries, which were classified as self-sustaining. In considering factors such as the procurement of revenue, how financing was obtained and where binding decision making occurred, management concluded that these previously classified self-sustaining subsidiaries were, in fact, integrated. Thus, the temporal method of foreign currency translation should be used with the current rate applied to monetary assets and liabilities, and historical rates applied to non-monetary assets and liabilities. This did not have a significant impact on these consolidated financial statements.

INCOME TAXES

During the quarter, the Federal government announced a gradual reduction in future federal income tax rates from 19% to 15%, commencing January 2008 and to be fully implemented by January 2012. As a result of the income tax decrease, the future tax liability was revalued, resulting in a decrease of $300 in the liability and a $300 increase in net income.



AVERAGE FOREIGN EXCHANGE
------------------------

For the three months ended January 31,
-----------------------------------------------
2008 2007
--------- ---------- ---------- -----------
Reko Reko
Effective Effective
Actual Rate Actual Rate
--------- ---------- ---------- -----------
U.S. Dollar equals
Canadian Dollar 0.9938 1.0429 1.1550 1.1312


AVERAGE FOREIGN EXCHANGE
------------------------

For the six months ended January 31,
-----------------------------------------------
2008 2007
--------- ---------- ---------- -----------
Reko Reko
Effective Effective
Actual Rate Actual Rate
--------- ---------- ---------- -----------
U.S. Dollar equals
Canadian Dollar 1.0067 1.0693 1.1380 1.1366


The preceding table compares the average foreign currency exchange rates for the disclosed periods and the average effective rates of the forward exchange contracts we booked during that period. This foreign currency exchange impacts our reported sales and income. At the end of the second quarter of 2008, we held forward exchange contracts of $28,300 compared to $31,850 at the end of the second quarter of 2007. During fiscal 2008, on average, we have had $30,700 of forward exchange contracts outstanding monthly, as compared to $32,100 in fiscal 2007, year-to-date. The decline in forward exchange contracts largely relates to declining volumes.

Reko's forward exchange contract program is based on maintaining sufficient forward exchange contracts at all times that are practically equal to the U.S. dollar value of our accounts receivable, work-in-process and our backlog of booked business that has yet to kick-off, net of any US dollar denominated debt. This program is designed to minimize the Company's exposure to foreign exchange risks over the long-term. As a consequence of this long-term exposure protection, the Company is subject to short-term paper gains and losses on its exposed foreign exchange contracts. During periods of rapid fluctuation in the foreign exchange rate between the Canadian dollar and the U.S. dollar, the Company can generate significant gains or losses, which will materially impact financial results.

As a result of the forward exchange contracts program employed, foreign currency transactions in the current period were not, and in future periods may not, be fully impacted by movements in exchange rates. The following table outlines the level of forward exchange contracts presently maintained and the average effective rate of these contracts:



Fiscal Contract value Effective
Period booked (000's) average rate
--------------------------------------------------------

Q3 - 2008 $28,300 1.0479

Q4 - 2008 21,950 1.0274

Q1 - 2009 16,400 1.0105

Q2 - 2009 10,000 0.9880


During the quarter, the Company incurred a pre-tax loss of approximately $850 related to the fair value of its forward exchange contracts. This loss is due to a 591 basis point reduction in the value of the Canadian dollar during the quarter and an increase in the interest rate disparity between Canadian and U.S. borrowing rates.

The Company notes that at current levels of Forward Exchange Contracts, U.S. dollar denominated debt, Unbilled Contract Revenue and Accounts Receivable, it is exposed to foreign exchange rate changes at the rate of approximately $100 for every 100 basis point change in the U.S. dollar / Canadian dollar exchange rate. An increase in the value of the U.S. dollar against the Canadian dollar results in the Company recording losses and an increase in the value of the Canadian dollar against the U.S. dollar results in financial gains for the Company. Future periods may experience greater or less exposure based on the net level of U.S. dollar denominated net assets or liabilities.

Foreign currency transactions are recorded at rates in effect at the time of the transaction. Forward exchange contracts are recorded at month-end at their fair value, with holding gains and losses recorded in sales.

RESTRUCTURING CHARGES

At the start of the quarter, the Company recalled several previously laid-off employees. The workers were laid-off during the fourth quarter of 2007, as a result of reductions in volumes at our mould building facility. At the time of their lay-off, the Company accrued for certain termination costs associated with their layoff. At the start of the second quarter, the Company recalled the remaining employees on layoff. As a result, of their recall, the Company is no longer obligated to make certain previously accrued termination payments to those individuals. This resulted in a recovery of approximately $140 for the Company. The recovery was included as part of selling and administrative costs.

At the end of the quarter, the Company accrued $150 of new restructuring charges related to further reductions in its workforce. The restructuring charges are anticipated to generate annualized savings, beginning in the fourth quarter of 2008, of approximately $800 and to effectively lower our break-even level by between $6,000 and $7,000. The reductions are a direct result of reduced mould release volumes by the OEMs. The restructuring costs were charged to selling and administrative costs.

PASSING OF OUR FOUNDER, CEO AND CHAIR OF THE BOARD

As previously announced, on December 22, 2007, Steve Reko, our founder, President and CEO, and Chair of the Board passed away. Approximately one month prior to his passing, the Company implemented its succession plan, naming Mrs. Diane St. John, Acting CEO and Mr. Greg Henwood, President. At its Board meeting on March 6, 2008, the Board confirmed Mrs. St. John as Reko's CEO.

Under the terms of Mr. Reko's employment contract, his passing triggered a termination payment, which is payable in equal installments over a six-month period beginning in February 2008. The termination payment is equal to two times the sum of (a) Mr. Reko's annual salary; (b) the average bonus earned by Mr. Reko during the three-year period prior to his termination; and (c) the value of all employment benefits received by Mr. Reko during the 12 months immediately preceding his termination. During the quarter, the Company accrued $780 related to the termination of the contract. The accrual was charged to selling and administrative costs.

RESULTS OF OPERATIONS

The financial results for the second quarter ended January 31, 2008 present all remaining assets, liabilities, equity, revenues and expenses of The Mold Company, Superior Plastics, Inc., Excel Decorating and Finishing, Inc., Novi Laser, Inc. and Proto-Techniques, Inc. as continuing operations. In the prior year's financial statements, these entities' assets, liabilities, equity, revenue and expenses were reflected as "Discontinued Operations". This change in classification is consistent with the requirements of Canadian GAAP for Discontinued Operations, where businesses not disposed of within a fixed period of time after they are first presented as discontinued operations are reclassified as continuing operations. The change in classification did not result in a material change to these consolidated financial statements.

Revenue recognition

As detailed in the company's revenue recognition policy, revenue is recognized based on the percentage of completion method, provided the contract has progressed to the point where total costs can be reasonably estimated. Historically, the company considered all jobs, which were at least 50% complete to have progressed to the point where total costs could be reasonably estimated. After a detailed review of estimation abilities, manufacturing abilities and historical results, management determined that a job has progressed to the point where total costs can be reasonably estimated once that job has completed all aspects of engineering and design. Historically, this occurs somewhere between 15% and 25%, depending upon the complexity of the job. This change in management estimate was implemented with an effective date of August 1, 2007. The impact of this change in management estimate is a decrease in sales of $1,747 and a decrease in gross profit of $72, in the second quarter. For the six months ended January 31, 2008, sales increased $90 and gross profit decreased $18.

Sales

Sales for the three months ended January 31, 2008 increased $1.1 million, or 10.3%, to $11.8 million compared to $10.7 million for the same period last year.

The increase in sales in the quarter was caused by an increase in specialty machine orders. The increase in automation sales were partially offset by:

- reductions in the number and dollar value of mould release programs, which continue at historic lows;

- reduction in Reko's effective foreign exchange rate;

- greater complexity of the mould programs worked on than originally contemplated resulting in less revenue earned per hour of work; and,

- changes in the fair value of forward exchange contracts, as described above.

Sales for the six months ended January 31, 2008 increased $3.3 million, or 13.8%, to $27.3 million compared to $24.0 million for the same period last year.

The increase in sales for the first six months of the year primarily related to increased orders associated with our automation products and to the change in interpretation of our revenue recognition policy.

While the company continues to actively quote and receive new orders, mould release programs continue to experience customer-initiated delays. These delays impact the company's ability to proactively manage the timing and amount of work completed during each quarter, as well as impact the ability of the Company to absorb our relatively fixed overhead costs.

Gross margin

The gross profit for the second quarter decreased $2,765 to a gross loss of $1,052 or 8.9% of sales, compared to a gross profit of $1,713, or 16% of sales, for the same period in the prior year.

The gross profit for the year-to-date decreased $2,413 to $1,115, or 4.1% of sales, compared to a gross profit of $3,528, or 14.7% of sales, for the same period in the prior year.

The decrease in gross margin as a percentage of total sales for the second quarter was primarily the result of:

- demands for commodity-type pricing from our customer base;

- reductions in volumes resulting in unabsorbed fixed overhead costs at our mould building facility;

- the mould programs worked on involved greater complexity than originally contemplated resulting in less revenue earned per hour of work;

- reduced machining availability as two machining centres were inactive for 3 weeks during the quarter as they were moved from a temporary location into the recently completed expansion of our machining facility;

- costs incurred to move the two machining centres identified above; and,

- lower effective foreign exchange rates on U.S. sales.

These factors were partially offset by:

- productivity and efficiency improvements resulting from last year's restructuring charges.

The decrease in gross margin as a percentage of total sales for the year-to-date period was primarily the result of:

- the issues identified above; and,

- lower margins in our automation facility as a result of building two large machines for internal purposes, as internal builds are transferred at cost to affiliates.

Selling and administration

Selling and administration expenses ("S,G&A") increased by $517, or 28.8%, to $2,313 or 19.7% of sales for the three months ended January 31, 2008, compared to $1,796 or 16.8% of sales for the same period last year.

The increase in S,G&A for the three months ended January 31, 2008, relates primarily to:

- accruals with respect to payments to be made under the employment contract of our former CEO, discussed above; and,

- restructuring charges, discussed above.

These factors were partially offset by:

- impacts of cost reduction actions taken in the fourth quarter of 2007. Excluding the accruals related to Mr. Reko's employment contract and the restructuring charges, S,G&A costs in the second quarter would have been $1,383 or 11.2% of sales, a reduction of $413 from the same period in the prior year.

Selling and administration expenses ("S,G&A") increased by $183, or 4.7%, to $3,898 or 14.3% of sales for the six months ended January 31, 2008, compared to $3,715 or 15.5% of sales for the same period last year.

Earnings overview

The net loss for the quarter was $2,180 or $0.30 per share, compared to a net loss of $229 or $0.03 per share in the prior year.

The year-to-date net loss was $2,091 or $0.29 per share, compared to a net loss of $264 or 0.03 per share in the prior year.

Discontinued operations

As previously discussed, the company no longer accounts for the remaining assets and liabilities of its former US operations as discontinued operations. In the prior year, net income from discontinued operations for the first six months of the year was $341 or $0.05 per share and for the three months ended January 31 was $73 or $0.01 per share.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations decreased $734 to cash used in operations of $331 for the quarter compared to cash generated by operations of $403 for the same period last year.

The decrease in cash flow from operations is primarily a result of:

- decrease in net income offset by increases in non-cash charges related to future income taxes;

- increases in work-in-process as the volume of mould release programs increased from historic lows in prior periods; and

- slowing collections of accounts receivable balances.

During the year-to-date period, a capital lease on a machining centre came up for renewal. However, the company decided to finance the remaining balance on the machining centre internally.

During the quarter, the Company renegotiated its banking agreement with its lender. After the renegotiation, the Company believes it has sufficient operating room with respect to its financial covenants for the remainder of this year and does not anticipate being in breach of any of its financial covenants during the remainder of this period, absent a rapid increase in the value of the U.S. dollar against the Canadian dollar.



---------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 year years years 5 years
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Long-term debt $ 14,453 $ 843 $13,569 $ 41 $ -
---------------------------------------------------------------------------
Capital lease obligations 3,565 651 2,855 59 -
---------------------------------------------------------------------------
Operating leases - - - - -
---------------------------------------------------------------------------
Purchase obligations - - - - -
---------------------------------------------------------------------------
Other long-term
obligations - - - - -
---------------------------------------------------------------------------
Total contractual
obligations $ 18,018 $1,494 $16,424 $ 100 $ -
---------------------------------------------------------------------------


Capital assets and investment spending

In the second quarter of 2008, we invested $1,294 in capital assets. While a portion of this spending can be considered maintenance capital expenditure intended to refurbish or replace assets consumed in the normal course of business, a large portion of the investment consisted of manufacturing equipment required to support volumes associated with new long term contracts for the machining facility.

In fiscal 2008 to date, $2,239 has been invested in capital assets.

During the remainder of this year, capital asset investments will largely relate to the expansion program at the machining facility. In the fourth quarter of 2007, we completed the infrastructure portion of the expansion. Beginning in the second quarter of 2008, the first of two additional machines was available for use, with the remaining machine expected to be available for use by the end of the third quarter.

Cash resources

As at January 31, 2008, Reko had borrowed $8,461 on its revolving line of credit, compared to $6,104 at October 31, 2007. The revolver borrowings increased by approximately $2,300 in the quarter, and we expect borrowings to continue to increase over at least the next eight quarters as volumes increase from historic lows.

Reko has a $20,000 revolver available to it, although at the end of the second quarter, our borrowing base was $15,030 under the facility, of which $6,600 was unused and available. Under the terms of our credit facilities, Reko must achieve certain financial covenants including a maximum Total Debt to Tangible Net Worth, a minimum Current Ratio and a minimum Debt Service Coverage Ratio. As previously discussed, Reko is currently positioned positively with respect to its ability to meet these financial covenants over the remainder of the fiscal year.

Contractual obligations and off-balance sheet financing

There have been no material changes with respect to the contractual obligations of the Company in the first or second quarter.

Reko does not maintain any off balance sheet financing.

QUARTERLY RESULTS

The following table sets out certain financial information for each of the eight fiscal quarters up to and including the second quarter of fiscal 2008, ended January 31, 2008.



--------------------------------------------------------------------------
Apr/06 July/06 Oct/06 Jan/07
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales $ 22,045 $ 12,367 $ 13,281 $ 10,718
--------------------------------------------------------------------------
Net income (loss) from
continuing operations 644 899 (303) (302)
--------------------------------------------------------------------------
Earnings (loss) per share from
continuing operations:
Basic 0.09 0.12 (0.04) (0.04)
Diluted 0.09 0.12 (0.04) (0.04)
--------------------------------------------------------------------------
Net income (loss) (241) 891 (35) (229)
--------------------------------------------------------------------------
Earnings (loss) per share:
Basic (0.03) 0.12 (0.00) (0.03)
Diluted (0.03) 0.12 (0.00) (0.03)
--------------------------------------------------------------------------

Apr/07 July/07 Oct/07 Jan/08
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales $ 14,760 $ 10,618 $ 15,484 $ 11,766
--------------------------------------------------------------------------
Net (loss) income from
continuing operations (491) (456) 89 (2,180)
--------------------------------------------------------------------------
(Loss) earnings per share from
continuing operations:
Basic (0.07) (0.07) 0.01 (0.30)
Diluted (0.07) (0.07) 0.01 (0.30)
--------------------------------------------------------------------------
(Loss) net income (1,219) (3,032) 89 (2,180)
--------------------------------------------------------------------------
(Loss) earnings per share:
Basic (0.17) (0.42) 0.01 (0.30)
Diluted (0.17) (0.42) 0.01 (0.30)
--------------------------------------------------------------------------


NORMAL COURSE ISSUER BID

Under the company's current normal course issuer bid, during the second quarter, 22,200 shares were purchased for cancellation at an average cost of $3.06. The company's directors believe that, from time-to-time, such purchases constitute an appropriate use of corporate funds.

OUTLOOK

In a one-year period, the U.S. dollar lost 20% of its purchasing power in Canadian terms and then regained 5% in the last three months. In this environment both short and long term planning is extremely challenging. Continuing price pressures, a lack of mould program releases from the North American original equipment manufacturers and the weakening U.S. dollar have resulted in sharply lower profitability expectations for Canadian tool and mould manufacturers.

The weak U.S. dollar necessitates ongoing investment aimed at achieving operating efficiencies and cost reductions. As Reko continues to manage costs through reduced break-even levels, including targeted use of Asian alliances, we believe we have positioned ourselves to best respond to a very challenging operating environment.

This news release contains forward-looking information and forward-looking statements within the meaning of applicable securities laws. We use words such as "anticipate", "plan", "may", "will", "should", expect", "believe", "estimate" and similar expressions to identify forward-looking information and statements. Such forward-looking information and statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe to be relevant and appropriate in the circumstances. Readers are cautioned not to place undue reliance on forward-looking information and statements, as there can be no assurance that the assumptions, plans, intentions or expectations upon which such statements are based will occur. Forward-looking information and statements are subject to known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed, implied or anticipated by such information and statements. These risks, uncertainties and assumptions include, among other things: industry cyclicality; global economic conditions, causing decreases in automobile production volumes and demand for capital goods; changing demand for specific models or products; price reduction pressures; pressure to absorb certain fixed costs; dependence on major customers and changes in such customers' financial capabilities; technological changes; compliance with various laws; obtaining necessary permits and consents; fluctuations in currency exchange and interest rates; employee work stoppages; dependence on key employees; the competitive nature of the automotive and capital goods industries, including competition with suppliers operating in low cost countries; product supply and demand; the conduct of business in foreign countries; and other risks, uncertainties and assumptions as described in the Company's Management's Discussion and Analysis included in our 2007 Annual Report, in our 2007 Annual Information Form and, from time to time, in other reports and filings made by the Company with securities regulators.

While the Company believes that the expectations expressed by such forward-looking information and statements are reasonable, there can be no assurance that such expectations and assumptions will prove to be correct. In evaluating forward-looking information and statements, readers should carefully consider the various factors, which could cause actual results or events to differ materially from those, indicated in the forward-looking information and statements. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the Company disclaims any obligations to update publicly or otherwise revise any such factors of any of the forward-looking information or statements contained herein to reflect subsequent information, events or developments, changes in risk factors or otherwise.



REKO INTERNATIONAL GROUP INC.
5390 Brendan Lane
Oldcastle, Ontario
N0R 1L0
www.rekointl.com



SUBSIDIARIES/DIVISIONS:


Canada:
-------


- Reko Tool & Mould (1987) Inc.
Divisions -
- Reko Automation and Machine Tool
- Concorde Machine Tool


United States:
--------------


- Reko International Sales Inc.
- Reko International Holdings Inc.



Contact Information

  • Reko International Group Inc.
    Carl A. Merton
    Chief Financial Officer
    (519) 737-6974
    Website: www.rekointl.com