THE GOLDFARB CORPORATION ANNOUNCES 2010 YEAR END AND FOURTH QUARTER RESULTS

TORONTO, April 21 /CNW/ - The Goldfarb Corporation (the "Corporation") today announced its fourth quarter and fiscal 2010 results.

Revenues from operations for the fourth quarter of 2010 were $22,000 compared to $10,000 in 2009, an increase of $12,000. Net income for the Corporation in the fourth quarter of 2010 was $848,000 or $0.14 per share compared to a net loss of $294,000 or $0.05 per share in the fourth quarter of 2009.  For the year ended December 31, 2010, the Corporation's revenues from operations were $55,000 compared to $95,000 in 2009, a decrease of $40,000. Net income for 2010 was $1,843,000 or $0.31 per share compared to net income of $83,000 ($0.01 per share) in 2009.

The accompanying ten pages of unaudited interim and annual financial statements have been prepared by and are the responsibility of the Corporation's management.  The Corporation's auditor has not performed a review of the interim financial statements.

Statement of Income (Loss), Comprehensive Income (Loss) and Deficit        
  Three Months Ended
December 31

Year Ended
December 31

        2010       2009       2010       2009
(thousands of dollars except per share information) (unaudited) $ $ $ $
         
Interest revenue 22 10 55 95
Administrative expenses 345 266 1,109 1,039
  (323) (256) (1,054) (944)
Litigation recovery (note 7) - - 834 1,315
Gain on disposal of long-term investments (note 2) 2,132 - 2,132 -
Fair value recovery on long-term investments (note 2) (900) - - -
Depreciation (1) (2) (4) (5)
Foreign exchange losses (60) (36) (65) (283)
Income (loss) before income taxes 848 (294) 1,843 83
Income tax expense (note 5) - - - -
         
Net Income (Loss) and Comprehensive Income (Loss) 848 (294) 1,843 83
         
Deficit, beginning of period (32,146) (32,847) (33,141) (33,224)
Deficit, end of period (31,298) (33,141) (31,298) (33,141)
Basic Income (Loss) per Share 0.14 (0.05) 0.31 0.01
Weighted average number of shares outstanding 5,936,660 5,936,660 5,936,660 5,936,660

Cash Flow Statement

    

Three Months Ended
December 31

Year Ended
December 31

           2010       2009       2010       2009
(thousands of dollars) (unaudited)       $       $       $       $
Operating Activities        
Net income (loss) 848 (294) 1,843 83
Add (deduct) items not involving cash:        
  Depreciation 1 2 4 5
  Unrealized foreign exchange losses (gains) 60 (72) 65 175
  Gain on disposal of long-term investments (note 2) (2,132) - (2,132) -
  Reversal of fair value recovery on long-term investments 900 - - -
     (323) (364) (220) 263
Changes in non-cash working capital balances (note 4(a)) 61 39 36 (64)
Cash provided by (used in) operating activities (262) (325) (184) 199
         
Financing Activities        
Distribution to shareholders (note 3) - - - (6,530)
Cash used in financing activities - - - (6,530)
Investing Activities        
Proceeds from sale of long-term investments (note 2) 10,966 - 10,966 -
Redemption of short-term investments 80 - 6,650 6,582
Acquisition of short-term investments - 135 - (6,650)
Repayment of note receivable - - - 1,478
Principal and interest received on long-term investments (note 2) 36 81 47 941
Acquisition of capital assets (1) - (3) -
Cash provided by investing activities 11,081 216 17,660 2,351
         
Foreign exchange gain (loss) on cash held in foreign currency (60) 72 (65) (175)
Increase (decrease) in cash and cash equivalents for the period 10,759 (37) 17,411 (4,155)
Cash and cash equivalents, beginning of period (note 4(b)) 7,677 1,062 1,025 5,180
Cash and cash equivalents, end of period (note 4(b)) 18,436 1,025 18,436 1,025


Balance Sheet    
As at December 31       2010       2009
(thousands of dollars) (unaudited)       $       $
     
ASSETS          

Current Assets

   
Cash and cash equivalents (note 4(b)) 18,436 1,025
Short-term investments - 6,650
Accounts receivable and prepaid expenses 40 55
Total Current Assets 18,476 7,730
Long-term Investments (note 2) - 8,881
Capital Assets 11 12
  18,487 16,623
     
LIABILITIES AND SHAREHOLDERS' EQUITY    
Current Liabilities    
Accounts payable and accrued liabilities 126 105
Total Current Liabilities 126 105
Shareholders' Equity    
Capital stock (note 3) 49,206 49,206
Contributed surplus 453 453
Deficit (31,298) (33,141)
Total Shareholders' Equity 18,361 16,518
     
     
  18,487 16,623

Notes to Interim Financial Statements


For the periods ended December 31, 2010 and 2009 (thousands of dollars)
(unaudited)

1. Significant Accounting Policies

The disclosures contained in these unaudited interim financial statements do not include all requirements of generally accepted accounting principles for annual financial statements.  The unaudited interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2009.

The unaudited interim financial statements are based upon accounting principles consistent with those used and described in the annual financial statements for the year ended December 31, 2009. The unaudited interim financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary to present fairly the financial position of the Corporation as of December 31, 2010 and the results of operations and cash flows for the periods ended December 31, 2010 and 2009.

2. Long-Term Investments (formerly Asset-Backed Commercial Papers ("ABCP"))

    December 31
    2010 2009
    $ $
       
Long-Term Investments   - 8,881

In 2007, the Corporation invested $17.1 million in three separate non-bank sponsored asset-backed commercial papers that did not redeem on maturity.  As a result, the Corporation classified its investment as held-for-trading long-term investments.  These investments were recorded at fair value with unrealized gains and losses included in earnings.

The securities were subject to restructuring pursuant to which the holders of the ABCP, including the Corporation, exchanged their securities for new floating rate notes with maturities that matched the maturities of the underlying assets.  The restructuring was completed in January 2009 and on closing the Corporation exchanged its holdings of ABCP for $17.1 million of long-term floating rate notes from Master Asset Vehicle 2 ("MAV 2"). During 2010, net interest of $43 (2009 - $898) was received. These amounts have been included in the calculation of the fair value of the long-term investments.  In December 2010, the Corporation sold its entire holding of MAV 2 notes for total proceeds of $10,966, resulting in a gain of $2,132.

MAV 2 Note Categories Interest Rate  
    $
Class A-1 BA - 50 bps 5,968
Class A-2   BA - 50 bps 8,497
Class B BA - 50 bps 1,542
Class C 20% 496
Class 15 Tracking Notes Floating 541
    17,044
Interest received   (925)
Valuation provision   (7,238)
Balance at December 31, 2009   8,881
Principal and interest received in 2010   (47)
Proceeds of disposition   10,966
     
Gain on disposal   2,132

Interest rates on the MAV 2 Notes were primarily based on prevailing Banker's Acceptance rates.  Interest on the Class A-1 and A-2 Notes was not consistently paid when it became due because of low prevailing banker's acceptance rates.  As a result of these low rates, there were insufficient funds to pay the fixed expense of the MFF required to be paid prior to interest being paid.  Interest on the Class 15 Notes was paid through all quarters since their issuance.  A one-time principal repayment attributable to excluded securities was made on the Class A-1 Notes and was received in two distributions that occurred during 2009 and 2010.

As the market for the MAV 2 Notes was very illiquid, the Corporation estimated the fair value of its long-term investments using a valuation technique which incorporated a probability weighted discounted cash flow approach considering the best available market data for such investments. At December 31, 2009, the Corporation estimated the fair value of its long-term investments to be $8.9 million.

The significant assumptions used to value the Corporation's investment in these securities were as follows:

       
Timing of principal repayments     at maturity
Risk free interest rate on Class A-1, A-2 and Class 15 Notes     3.28% to 4.28%
Discount rate on Class B and C Notes     30%
Interest rate on Class A-1 and A-2 Notes     2.0%
Interest rate on Class B, C and Class 15 Notes     2.0% to 20.0%
Term of notes     6-8 years
Recovery of Class A-1 and A-2 Note principal and interest     40% to 100%
Recovery of Class B and C Note principal and interest     0% to 40%
Recovery of Class 15 Note principal and interest     80% to 100%

3. Capital Stock

At December 31, 2010, the Corporation's authorized capital stock was as follows:

  • Unlimited number of Preference Shares, issued in series;
  • Unlimited number of Class A Subordinate Voting Shares;
  • 182,000 Class B Shares carrying 15 votes per share, convertible into Class A Subordinate Voting Shares on a one-for-one basis.  In certain prescribed circumstances, additional Class B Shares as may be required to effect the conversion of Class A Subordinate Voting Shares into Class B Shares.

The issued share capital is summarized as follows:

  December 31
  2010 2009
  $ $
5,754,660 Class A Subordinate Voting Shares 49,193 49,193
182,000 Class B Shares 13 13
  49,206 49,206

In February  2009, the shareholders of the Corporation passed a special resolution approving the reduction of the Corporation's stated capital by an aggregate of $6.5 million, resulting in a distribution of $1.10 per Class A Subordinate Voting Share and Class B Share. The distribution was made in February 2009.


4.   Supplementary Cash Flow Information
a)  Changes in non-cash working capital balances
  Three Months Ended
December 31
Year Ended
December 31
        2010       2009 2010       2009
              $       $       $       $
         
Decrease in accounts and other amounts receivable 30 48 15 23
Increase (decrease) in accounts payable and accrued liabilities 31 (9) 21 (87)
  61 39 36    (64)

b)  Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and with banks, and short-term investments in highly liquid instruments with original maturities of 90 days or less.  Cash and cash equivalents included in cash flow statements comprise the following balance sheet amounts:

 

December 31

   2010  2009
        $       $
Cash on hand and with banks 137 81
Cash equivalents 18,299 944
  18,436 1,025

c)  Short-term investments
Short-term investments at December 31, 2009 consisted of redeemable guaranteed investment certificates ("GIC's") with original maturities of 365 days or less bearing interest at rates ranging from 0.3% to 0.7%.

d)  Income taxes recovered
There were no income tax payments or recoveries during the years ended December 31, 2010 and 2009.

5. Income Taxes

The Corporation's provision for income taxes differs from the Canadian statutory income tax rate of 31.0% (2009 - 33.5%) due to the unrecognized benefit of non-capital and capital loss carry-forwards from losses incurred in prior years.

At December 31, 2010, the Corporation had non-capital losses available to reduce future taxable income of approximately $13.5 million.  If unused, these losses expire as follows:

Year of
Expiry
Amount
  $
2026 10,696
2028 2,593
2030 237
  13,526

At December 31, 2010, the Corporation had capital losses available to offset future capital gains of approximately $33.1 million.  These capital losses do not expire, except in the event of an acquisition of control of the Corporation.

No tax benefits have been recognized on the non-capital and capital losses incurred because it is more likely than not that the non-capital and capital losses will not be realized.

6. Segmented Information

The Corporation's sole business segment is an investment holding company.  The Corporation's operations reside entirely in Canada.

7. Litigation Settlements

a)   In 2008, the Corporation reached a settlement in the amount of $12 million in the claim that had been filed against the Corporation and certain of its officers by the purchaser of Goldfarb Consultants, the market research and consulting business sold by the Corporation in 1998.  The Corporation sought contribution toward the settlement amount from the insurer of the Corporation's directors and officers.  In April 2009, a panel of arbitrators ruled in favour of the Corporation and determined that the insurer should contribute US$ 960 plus related interest costs. The Corporation received Cdn $1.32 million. The recovery has been recorded as income in 2009.
b)   In 2008, the Corporation reached a settlement in the amount of US$ 1.45 million in the claim that had been filed against the Corporation and certain of its directors and officers by the trustee of Fleming Packaging Corp. ("Fleming").  The Corporation sought contribution toward the settlement amount from the insurer of the Corporation's directors and officers. Arbitration proceedings were completed in December 2009 and in the first quarter of 2010, the arbitrator ruled in favour of the Corporation and determined that the insurer should contribute US$725 plus interest and costs. In March 2010, the Corporation received Cdn $834.  The recovery has been recognized as income in 2010.

8. Financial Instruments 

The carrying values reported in the balance sheet for cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accrued liabilities approximate fair values due to the short maturity of those instruments.  Long-term investments are carried at estimated fair value.

The Corporation uses the following hierarchy in attempting to maximize the use of observable inputs and minimize the use of unobservable inputs, primarily using market prices in active markets.

Level 1 - Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing on an ongoing basis.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable that can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following details the fair value hierarchy classification for financial instruments carried at fair value on the balance sheets:

  Fair value at December 31, 2010 using
  Level 1 Level 2 Level 3
  $ $ $
Cash and cash equivalents 18,436 - -
Short-term investments - - -
Long-term investments - - -
  18,436 - -

The nature of these financial instruments and the Corporation's structure as an investment holding company expose the Corporation to credit risk, interest rate risk, currency risk and liquidity risk. The Corporation manages its exposure to these risks by employing risk management strategies and polices to ensure that any exposure to risk is in compliance with the Corporation's capital management objectives and risk tolerance levels. These risks are monitored in relation to market conditions. The Board of Directors has overall responsibility for the establishment and oversight of the Corporation's risk management framework.

a) Credit risk
Financial instruments that potentially subject the Corporation to concentrations of credit risk consist of cash and cash equivalents, short-term and long-term investments and accounts receivable.  The Corporation's cash and cash equivalents and short-term investments consist of bank deposits and investments in highly rated liquid investments with Canadian financial institutions.  The long-term investments were in floating rate notes receivable (note 2).

Financial instruments are exposed to credit risk as a result of the risk of the counter-party defaulting on its obligations. The Corporation monitors and limits its exposure to credit risk on a continuous basis. The Corporation provides reserves for credit risks based on the financial condition and short and long-term exposures to counter-parties.

As at December 31, 2010, the maximum exposure to credit risk was $18,476 (2009 - $16,611) being the carrying value of its cash and cash equivalents, short-term and long-term investments and accounts receivable. None of the financial assets that are fully performing have been renegotiated during the year. The Corporation does not believe that there is significant credit risk arising from any of its receivables and investments.

b) Interest rate risk
The Corporation is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, short-term investments, and long-term investments.  Cash and cash equivalents which are in excess of day-to-day requirements are placed on short-term deposit with Canadian financial institutions and earn interest at rates available at the time the deposits are made. A 1% change in market interest rates would have increased or decreased interest revenue by approximately $81 for the year ended December 31, 2010. Prior to their disposal, the Corporation also had interest rate risk relating to its long-term investments as disclosed in Note 2.

c) Currency risk
The Corporation has financial assets which are denominated in U.S. dollars and are subject to fluctuations in exchange rates of the Canadian dollar with the U.S. dollar.  The Corporation does not utilize any financial instruments or cash management policies to mitigate the risks arising from changes in exchange rates.  At December 31, 2010, the Corporation had cash and cash equivalents and short-term investments of $1,505 and accounts payable of $44 which were denominated in U.S. dollars. A 10% change in the foreign exchange rate from Canadian dollars to United States dollars at December 31, 2010 would have increased or decreased the foreign exchange loss by approximately $150 for the year ended December 31, 2010.

d) Liquidity risk
The Corporation's approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities when they are due. The Corporation manages liquidity risk through timing the maturities of its investments to match its financial obligations and ensuring that it invests in secure instruments. The Corporation's contractual obligations are specifically related to its accounts payable and accrued liabilities and operating lease obligations. At December 31, 2010, the Corporation's accounts payable and accrued liabilities were $126, all of which become due for payment within the normal terms of trade, generally between 30 and 60 days (2009 - $105). At December 31, 2010, the Corporation's operating lease obligation was $166 which expires in 2012.

9. Capital Management

The Corporation defines its capital as cash and cash equivalents, short-term investments and long-term investments. Since the resolution of the arbitration and other contingencies and the disposal of its long-term investments, the Board of Directors have been evaluating the various alternatives for the use of its capital, including determining the cash available for distribution to shareholders. The Corporation's objectives in managing its capital are to provide an appropriate return on investment to its shareholders while maintaining capital preservation.

There were no changes in the Corporation's approach to capital management in the year ended December 31, 2010.

10.  Going Private Transaction

On January 5, 2011, the Corporation's Board of Directors established a special committee (the "Special Committee") in anticipation of a transaction expected to be proposed by Martin Goldfarb, President and CEO of the Corporation, and Stanley Goldfarb (collectively, the "Majority Shareholders") to take the Corporation private.  On April 21, 2011, the Corporation announced that it had received a formal proposal from the Majority Shareholders and that the Corporation's Board of Directors, upon the recommendation of the Special Committee, approved and recommends to the remaining shareholders of the Class A Subordinate Voting Shares (the "Minority Shareholders", which excludes the Majority Shareholders and any other related entities) a plan to effect a share consolidation that would result, upon shareholder approval and completion of the consolidation, in the privatization of the Corporation.  In reaching its recommendation, the Special Committee considered a number of factors including the receipt of a fairness opinion from its independent financial advisor, Meyers Norris Penny LLP, that concluded that the going private transaction was fair, from a financial point of view, to the Minority Shareholders.

The going private transaction results in the consolidation of the Class A Subordinate Voting Shares using a multiple designed to leave fractional shares in the hands of the Minority Shareholders, with the result that all fractional shareholders will receive a cash payment equal to their pro-rata share of the cash in the Corporation on the effective date of the going private transaction, less any accrued and unpaid liabilities of the Corporation, plus a premium of (i) $0.10 per pre-consolidation share held and (ii) incremental costs. The incremental costs represent the costs attributable to the costs of the going private transaction and which exceed the costs otherwise attributable to a wind-up of the Corporation in the ordinary course, such amount not to exceed $75,000.

A special meeting of the Corporation's shareholders has been called for Thursday, June 9, 2011, at which time the shareholders will be asked to consider and, if deemed advisable, approve the going private transaction.  Concurrent with the completion of the going private transaction, the Corporation will apply to have its Class A Subordinate Voting Shares de-listed from the NEX Board of the TSX Venture Exchange.

The Goldfarb Corporation trades on the NEX Board of the TSX Venture Exchange under the Symbol GDF.H 

 

 

 

 

SOURCE Goldfarb Corporation

For further information:

Karen Killeen, Chief Financial Officer, at (416) 928-3710, Toronto. info@goldfarbcorp.com

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