Hardwoods Distribution Income Fund Announces 2009 Fourth Quarter and Year-End
Results
Hardwoods Distribution Income Fund will hold a conference call and webcast to discuss fourth quarter and 2009 full-year financial results on March 30, 2010 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-888-231-8191 or 647-427-7450 (local call in Toronto) and referencing conference call number 61033289. A replay will be available until April 13, 2010 at: 1-800-642-1687 or 416-849-0833 (Passcode 61033289).
TRADING SYMBOL: Toronto Stock Exchange - HWD.UN
LANGLEY, BC, March 29 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the three months and 12 months ended December 31, 2009. The Fund's results are based on the performance of Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively "Hardwoods") - one of North America's largest wholesale distributors of hardwood lumber and related sheet good products. Hardwoods operates 27 distribution centres in the U.S. and Canada.
2009 Overview
(For the 12 months ended December 31, 2009)
- Full-year revenue declined 25.5% to $190.9 million
- Gross profit percentage increased to 18.1%, from 18.0% in 2008
- Selling and administrative expenses were successfully reduced by
$5.8 million, a 14.0% reduction from 2008
- The Fund recorded an EBITDA loss of $1.2 million, compared to an
EBITDA profit of $5.9 million in 2008
- A net loss of $10.2 million was recorded, compared to a net loss of
$36.2 million in 2008
- The Fund continued to strengthen its balance sheet, reducing debt by
$13.0 million and ending the year with just $4.5 million of bank
indebtedness (net of cash)
"We maintained stable gross margins, reduced expenses and strengthened our financial position in the midst of extremely challenging market conditions," said Maurice Paquette, Hardwoods President and CEO in describing results for the fourth quarter and 12 months of fiscal 2009.
"As we anticipated, the collapse of the US housing market and recessionary conditions in the US and Canada continued to negatively affect demand and prices for our products. Although we saw indications of stability returning to the residential construction market in the second half of 2009, it remains uncertain to what extent market conditions will improve. We have not yet seen any corresponding improvement in demand for the hardwood products we sell, which normally lag changes in housing starts by six to twelve months. Fourth quarter and full-year sales and EBITDA results remained well below last year's levels," added Paquette.
"To help mitigate the short-term sales impact of these conditions, we implemented new incentive programs in 2009 that rewarded our sales force for identifying and winning new customer accounts and for implementing new product programs that produce sustained sales. Approximately 18% of our second half sales were generated as a result of these programs. We also continued to develop our Hardwoods Greenbelt(TM) product line, marketing directly to the architects and designers that specify environmentally friendly green building products in their building projects. These strategies provided important support for our sales and margins in 2009, while laying a foundation for stronger results once markets recover," added Mr. Paquette.
"One of our key objectives in 2009 was to ensure our costs remained closely aligned with the lower level of market demand. We completed further downsizing of our branch network early in the year, reducing our underlying sales and administrative (S&A) costs by $8.5 million, or by $5.8 million after accounting for higher bad debts and negative foreign exchange impacts. Combined with responsible reductions in our working capital, we ended the year with positive cash flow from operating activities of $10.3 million, Distributable Cash results that were close to breakeven, and a further strengthening of our balance sheet. As at December 31, 2009, we had reduced our bank indebtedness (net of cash) to just $4.5 million, from $17.5 million at the start of 2009, and had $20.5 million of unused borrowings available to us."
"Our improved financial position enabled us to make two favourable amendments to our US credit facilities during the year, and secure an attractive new three-year credit facility in Canada. The Fund is now moving forward on a very stable financial footing."
"Overall, we are pleased with our achievements in 2009 given difficult economic conditions, and believe that we have now put the worst of the market downturn behind us. That said, our expectations for 2010 remain cautious. Overall, we anticipate that any improvement in market conditions that occurs in 2010 will be gradual, and that a more sustainable and robust market recovery will not occur prior to 2011. Our focus will remain on tight management of costs, cash and working capital and on continuing to successfully meet new challenges as they arise," said Mr. Paquette.
Summary of Results
Selected Unaudited Consolidated Financial Information (in thousands of
Canadian dollars except where noted)
12 months 12 months 3 months 3 months
ended ended ended ended
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
------------ ------------ ------------ ------------
Total sales $ 190,923 $ 256,301 $ 41,577 $ 56,650
Sales in the US
(US$) 101,212 156,398 22,987 29,270
Sales in Canada 75,339 89,581 17,500 19,423
Gross profit 34,482 46,096 7,636 9,485
Gross profit % 18.1% 18.0% 18.4% 16.7%
Selling and
administrative
expenses (35,636) (41,425) (10,057) (10,915)
Realized gain on
foreign currency
contracts - 1,247 - -
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Earnings before
interest, taxes,
depreciation and
amortization and
non-controlling
interest ("EBITDA") (1,154) 5,918 (2,421) (1,430)
Add (deduct):
Amortization (870) (1,471) (198) (326)
Interest (586) (1,219) (152) (284)
Non-cash foreign
currency gains
(losses) (1,553) (333) (171) 1,498
Intangibles
impairment - (8,612) - (3,144)
Goodwill impairment - (82,083) - (17,477)
Non-controlling
interest 2,347 20,031 590 4,881
Income tax recovery
(expense) (8,424) 31,526 1,808 3,341
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Net loss for the
period $ (10,240) $ (36,243) $ (544) $ (12,941)
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Basic and fully
diluted loss per
Class A Unit $ (0.711) $ (2.515) $ (0.038) $ (0.898)
Average Canadian
dollar exchange rate
for one US dollar 1.1420 1.066 1.0571 1.2115
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Distributable Cash and Cash Distributions
Selected Unaudited Consolidated Financial Information
(in thousands of dollars except per unit amounts)
3 months 3 months
Year ended Year ended ended ended
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
------------ ------------ ------------ ------------
Net cash provided by
operating activities $ 10,247 $ 20,229 $ 1,380 $ 6,028
Increase (decrease)
in non-cash operating
working capital (10,291) (14,836) (1,885) (7,679)
------------ ------------ ------------ ------------
Cash flow from
operations before
changes in non-cash
operating working
capital (44) 5,393 (505) (1,651)
Capital expenditures (95) (425) - (79)
------------ ------------ ------------ ------------
Distributable Cash $ (139) $ 4,968 $ (505) $ (1,730)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Distributions relating
to the period:
Class A Units $ - $ 7,565(1) $ - $ -
Class B Units(2) - - - -
------------ ------------ ------------ ------------
Total Units $ - $ 7,565 $ - $ -
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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Outstanding units and
per unit amounts:
Class A Units
outstanding 14,410,000 14,410,000 14,410,000 14,410,000
Class B Units
outstanding 3,602,500 3,602,500 3,602,500 3,602,500
------------ ------------ ------------ ------------
Total Units
outstanding 18,012,500 18,012,500 18,012,500 18,012,500
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Distributable Cash
per Total Units $ (0.008) $ 0.276 $ (0.028) $ (0.096)
Distributions relating
to the period:
Class A Units $ - $ 0.525(1) $ - $ -
Class B Units(2) $ - $ - $ - $ -
Total Units $ - $ 0.420 $ - $ -
Payout ratio(3) 0.0% 152.3% 0.0% 0.0%
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March 23,
2004 to
December
31, 2009
------------
Cumulative since
inception:
Distributable Cash 75,478
Distributions
relating to the
period 66,754
Payout ratio(3) 88.4%
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(1) Includes the cash distributions of $0.075 per Class A Unit per month
which relate to the operations of the Fund for January to June 2008,
and cash distributions of $0.025 per Class A Unit per month which
relate to the operations of the Fund for July to September 2008.
(2) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
Specialty Products US LP, limited partnerships in each of which the
Fund owns an 80% interest, announced that quarterly distributions
were suspended on the Class B LP and Class B US LP units. The Class B
LP units and Class B US LP units represent a 20% interest in
Hardwoods Specialty Products LP and Hardwoods Specialty Products US
LP, respectively. No distributions are to be paid on the Class B LP
units and Class B US LP units unless distributions in stipulated
minimum amounts are paid on the units in the limited partnerships
held by the Fund, and in certain other circumstances. Accordingly, no
distributions have been declared since the third quarter of 2005 to
the non-controlling interests. No liability for distributions payable
to the non-controlling interests is reflected in the December 31,
2009 balance sheet.
(3) Payout ratio measures the ratio of distributions by the Fund relating
to the period to Distributable Cash for the period.
Results from Operations - Three Months Ended December 31, 2009
For the three months ended December 31, 2009 the Fund and its subsidiaries reported negative Distributable Cash of ($0.5) million, or ($0.028) per unit. By comparison, the Fund reported negative Distributable Cash of ($1.7 million) or ($0.096) per unit in the same period of 2008. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units in either period, resulting in a payout ratio of 0% in both the fourth quarter of 2008 and 2009.
Total fourth quarter sales declined by 26.6% to $41.6 million, from the $56.7 million reported in 2008. The change in sales revenue reflects a 20.0% decrease in underlying sales activity and a 6.6% decrease in sales due to the negative effect of a stronger Canadian dollar. Sales in the United States, as measured in US dollars, decreased by 21.5% to $23.0 million. Sales in Canada, as measured in Canadian dollars, declined by 9.9% to $17.5 million.
Fourth quarter gross profit declined to $7.6 million, from $9.5 million in Q4 2008 as a result of the lower sales revenue, partially offset by a higher gross profit margin. Gross profit as a percentage of sales increased to 18.4% from 16.7% in Q4 2008. Gross margin percentage in 2008 was weaker than normal due to a write-down to the carrying value of specialized inventory held for a significant customer that went out of business.
Selling and administrative (S&A) expenses continued to improve in the fourth quarter, declining to $10.1 million, from $10.9 million in the same period of 2008. The reduction in S&A expenses reflects a $1.5 million reduction in underlying costs as the Fund implemented a broad range of cost-saving measures, as well as the $0.9 million positive foreign exchange impact of a stronger Canadian dollar on the conversion of S&A expenses at our US operations. These reductions were partially offset by a $0.4 million increase in bad debt expense and by the absence of a $1.1 million credit against fourth quarter S&A which occurred in the 2008 period. The 2008 credit against expenses reflected the last year's decision to cancel accrued year-end incentive plan payments for management and staff. As a percentage of sales, fourth quarter 2009 S&A expenses were 24.2% of sales, compared to 19.3% in 2008.
The Fund reported a fourth quarter EBITDA loss of $2.4 million, compared to a loss of $1.4 million in Q4 2008. The change in EBITDA reflects the lower gross profit, partially offset by the reduced S&A expenses.
The fourth quarter net loss of $0.5 million compared favourably to a net loss of $12.9 million during the same period in 2008. The improvement in net loss reflects a $20.6 million decrease in goodwill and intangible impairment, and a $0.1 million decrease in amortization and interest expense respectively. This was partially offset by the $1.0 million decrease in EBITDA, a $1.7 million decrease in non-cash foreign currency gains, a $4.3 million decrease in recovery from the non-controlling interest, and a $1.5 million decrease in income tax recovery.
Results from Operations - 12 months ended December 31, 2009
For the 12 months ended December 31, 2009, the Fund and its subsidiaries reported negative Distributable Cash of ($0.1) million, or ($0.008) per unit, compared to positive Distributable Cash of $5.0 million, or $0.276 per unit, in 2008. No distributions were paid to the Class A or Blass B Units in 2009 resulting in a payout ratio of 0% for the year, compared to distributions of $7.6 million and a payout ratio of 152.3% in the 2008 period.
Total sales declined by 25.5% to $190.9 million, from $256.3 million in 2008, reflecting significantly reduced demand and lower product prices. Sales at Hardwoods' US operations, as measured in US dollars, decreased by 35.2%. Sales in Canada, as measured in Canadian dollars, were down 15.9% year-over-year.
Gross profit for the 2009 year was $34.5 million, compared to $46.1 million in 2008. The reduction in gross profit reflects lower sales, partially offset by a slightly higher gross profit margin. As a percentage of sales, gross profit was 18.1% in 2009, compared to 18.0% in 2008.
Selling and administrative expenses decreased by $5.8 million to $35.6 million, from $41.4 million in 2008. By reducing the size of the branch network and realizing savings across most expense categories, the Fund achieved underlying 2009 cost savings of $8.5 million, which were partially offset by the $1.7 million negative impact of a weaker Canadian dollar on US operating expenses and a $1.0 million increase in bad debt expense.
The Fund reported an EBITDA loss of $1.2 million, compared to an EBITDA profit of $5.9 million in 2008. The change in EBITDA reflects lower gross profit and a $1.2 million decrease in realized gains on foreign currency contracts, partially offset by lower S&A expenses.
The Fund recorded a net loss of $10.2 million for the 2009 year, compared to a net loss of $36.2 million in 2008. The decrease in net loss primarily reflects a $90.7 million decrease in impairment in goodwill and other intangible assets, a $0.6 million decrease in amortization, and a $0.6 million decrease in interest expense. This was partially offset by the $7.1 million decrease in EBITDA, a $1.2 million increase in non-cash foreign currency losses, a $17.7 million decrease in recovery from non-controlling interest, and a $39.9 million increase in income tax expense.
Outlook
While Hardwoods believes that the bottom of the market cycle has now been reached, its near-term outlook remains cautious. Many economists predict that the recent encouraging signs in the residential construction market may be tempered by higher mortgage rates and the April 2010 expiry of the US government's home-buyers tax credit. Hardwoods' risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn. Overall, management anticipates that 2010 will bring a slow, and potentially uneven, improvement in market conditions, and that a more sustainable and robust market recovery will not occur prior to 2011.
In light of these expectations, tight management of expenses, cash and working capital will remain a key focus in 2010, with Hardwoods continuing to ensure that its distribution network and expenditures are appropriately aligned with market conditions. The company plans to remain proactive on the marketing front with continued sales force motivation and further investment in strategic product lines.
The Fund is also preparing for a management transition in 2010, with President and CEO, Maurice Paquette expected to retire in 2010 following a 36-year career with Hardwoods and its predecessor companies. The Board is currently working to identify a successor. In discussing Mr. Paquette's contribution to the company, Terry Holland, Chairman of the Board of Trustees, said, "Maurice Paquette not only strengthened Hardwoods position as one of North America's leading hardwood distributors, but he has also done a superb job of protecting the business and reducing risk through an unprecedented market downturn."
"We are going to greatly miss having Maurice at the helm, but it is a testament to his leadership skill that he leaves a strong business that will be able to participate fully in the eventual recovery, and one that will continue to thrive even after he retires. During his tenure, Maurice has built an exceptional team of operational leaders. The average tenure of the top dozen managers at Hardwoods is over 20 years. This will give us tremendous depth and stability as we prepare for a leadership transition later this year."
Regarding the January 2011 implementation of new taxes on Canadian income trusts, the Board of Trustees announced today that it does not intend to convert the Fund to a corporate structure at this time. The Fund's taxable earnings currently flow through corporate subsidiaries in both Canada and the US, which are already subject to corporate taxation. Accordingly, the introduction of the new income trust tax is not expected to have any near-term impact on the Fund's tax situation. Furthermore, the move to a corporate structure would entail an estimated $0.3 million in costs at a time when the Fund is focused on conserving cash. Given that the tax-free rollover rules for income trusts do not expire until the end of 2012, ample time remains to convert to an alternate structure should the Board determine it is advantageous to do so. The Board will continue to monitor the situation closely.
Non-GAAP Measures - EBITDA and Distributable Cash
References to "EBITDA" are to earnings before interest, income taxes, depreciation and amortization, mark-to-market adjustments on foreign currency contracts, goodwill and other intangible assets impairments, and the non-controlling interest in earnings. In addition to net income or loss, EBITDA is a useful supplemental measure of performance and cash available for distribution prior to debt service, changes in working capital, capital expenditures and income taxes.
References to "Distributable Cash" is to net cash provided by operating activities, before changes in non-cash operating working capital, less capital expenditures and contributions to any reserves that the Boards of Directors of Hardwoods' operating entities determine to be reasonable and necessary for the operation of the businesses owned by these entities.
Hardwoods believes that, in addition to net income or loss, EBITDA and Distributable Cash are each a useful supplemental measure of operating performance that may assist investors in assessing their investment in units of the Fund. Neither EBITDA nor Distributable Cash are earnings measures recognized by GAAP and they do not have a standardized meaning prescribed by GAAP. Investors are cautioned that EBITDA should not replace net income or loss (as determined in accordance with GAAP) as an indicator of our performance, nor should Distributable Cash replace cash flows from operating, investing and financing activities or as a measure of liquidity and cash flows. The Fund's method of calculating EBITDA and Distributable Cash may differ from the methods used by other issuers. Therefore, the Fund's EBITDA and Distributable Cash may not be comparable to similar measures presented by other issuers. For reconciliation between EBITDA and net income or loss as determined in accordance with GAAP, and for reconciliation between Distributable Cash and net cash provided by operating activities as determined in accordance with GAAP, please refer to the Management Discussion and Analysis ("MD&A") included in the Fund's 2009 Annual Report to Unitholders, which will be filed at www.sedar.com.
Additional guidance regarding disclosure of distributable cash and cash distributions was issued in 2007 in an interpretative release by the Canadian Institute of Chartered Accountants (the "CICA") in respect of "Standardized Distributable Cash in Income Trusts and other Flow Through Entities" and National Policy 41-201 of the Canadian Securities Administrators "Income Trusts and other Indirect Offerings" (collectively, the "Interpretative Guidance"). For disclosure and discussion of the Fund's Standardized Distributable Cash in accordance with the Interpretive Guidance, please refer to the MD&A included in the Fund's 200 Annual Report to Unitholders, which will be filed at www.sedar.com.
About the Fund
Hardwoods Distribution Income Fund is an unincorporated, open-ended, limited purpose trust established to hold, indirectly, the securities of Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP (collectively, "Hardwoods"). The Fund was launched on March 23, 2004, with the completion of an initial public offering of 14,410,000 shares.
About Hardwoods
Hardwoods is North America's largest distributor of high-grade hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture and specialty wood products industries. The company currently operates a network of 27 distribution centres in the U.S. and Canada.
Forward Looking Statements
Certain statements in this press release contain forward-looking information within the meaning of applicable securities laws in Canada ("forward-looking information"). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.
The forward-looking information in this press release includes, but is not limited to: our belief that although we saw indications of stability returning to the residential construction market in the second half of 2009, it remains uncertain to what extent market conditions will improve; our belief that strategies undertaken to support our sales and margins in 2009 will lay a foundation for stronger results once markets recover; our belief that the Fund is now moving forward on a very stable financial footing; our belief that we have now put the worst of the market downturn behind us but our expectations for 2010 remain cautious; our anticipation that any improvement in market conditions that occurs in 2010 will be gradual and that a more sustainable and robust market recovery will not occur prior to 2011; our intention to remain focused on tight management of costs, cash and working capital and ensuring our distribution network and expenditures are properly aligned with market conditions; our intention to remain proactive on the marketing front with continued sales force motivation and further investment in strategic product lines; our Chief Executive Officer's intention to retire from the business once the board has identified his successor and we have had the chance to make a smooth transition; and our intention not to convert the Fund to a corporate structure at this time.
The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: there are no material exchange rate fluctuations between the Canadian and US dollar that affect our performance; the general state of the economy does not worsen; we do not lose any key personnel; there are no decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods that harm our business; we do not incur material losses related to credit provided to our customers; our products are not subjected to negative trade outcomes; we are able to sustain our level of sales and EBITDA margins; we are able to grow our business long term and to manage our growth; there is no new competition in our markets that leads to reduced revenues and profitability; we do not become subject to more stringent regulations; importation of products manufactured with hardwood lumber or sheet goods does not increase and replace products manufactured in North America; our management information systems upon which we are dependent are not impaired; our insurance is sufficient to cover losses that may occur as a result of our operations; and, the financial condition and results of operations of our business upon which we are dependent is not impaired.
The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. The factors which could cause results to differ from current expectations include, but are not limited to: exchange rate fluctuations between the Canadian and US dollar could affect our performance; our results are dependent upon the general state of the economy; we depend on key personnel, the loss of which could harm our business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm our business; we may incur losses related to credit provided to our customers; our products may be subject to negative trade outcomes; we may not be able to sustain our level of sales or EBITDA margins; we may be unable to grow our business long term to manage any growth; competition in our markets may lead to reduced revenues and profitability; we may become subject to more stringent regulations; importation of products manufactured with hardwood lumber or sheet goods may increase, and replace products manufactured in North America; we are dependent upon our management information systems; our insurance may be insufficient to cover losses that may occur as a result of our operations; we are dependent upon the financial condition and results of operations of our business; our credit facilities affect our liquidity, contain restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by our operating limited partnerships; our future growth may be restricted by the payout of substantially all of our operating cash flow; and, other risks described in our Annual Information Form and this MD&A.
All forward-looking information in this MD&A is qualified in its entirety by this cautionary statement and, except as may be required by law, we undertake no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.
Consolidated Financial Statements
(Expressed in Canadian dollars)
HARDWOODS DISTRIBUTION INCOME FUND
Years ended December 31, 2009 and 2008
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
December 31, 2009 and 2008
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 463 $ 85
Accounts receivable (note 6(c)) 25,585 32,218
Income taxes recoverable 2,286 2,316
Inventory (note 5) 23,901 30,868
Prepaid expenses 878 1,039
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53,113 66,526
Long-term receivables (note 6(c)) 1,883 3,639
Property, plant and equipment (note 7) 1,291 2,168
Deferred financing costs 396 235
Future income taxes (note 13) 17,587 30,782
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$ 74,270 $ 103,350
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Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness (note 10) $ 4,960 $ 17,561
Accounts payable and accrued liabilities 4,988 3,365
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9,948 20,926
Deferred gain on sale-leaseback of land and
building 416 572
Non-controlling interests (note 11) 8,748 13,080
Unitholders' equity:
Fund Units (note 12) 133,454 133,454
Deficit (60,198) (49,958)
Accumulated other comprehensive loss (18,098) (14,724)
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55,158 68,772
Nature and continuance of operations (note 1)
Commitments (note 15)
Contingencies (note 19)
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$ 74,270 $ 103,350
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See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statements of Operations and Deficit
(Expressed in thousands of Canadian dollars, except per unit amounts)
Years ended December 31, 2009 and 2008
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Sales $ 190,923 $ 256,301
Cost of sales 156,441 210,205
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Gross profit 34,482 46,096
Expenses (income):
Selling and administrative 35,636 41,425
Amortization:
Plant and equipment 795 941
Deferred financing costs 159 36
Other intangible assets - 573
Deferred gain on sale-leaseback of land
and building (84) (79)
Interest 586 1,219
Foreign exchange losses (gains) 1,553 (914)
Intangibles impairment (note 9) - 8,612
Goodwill impairment (note 9) - 82,083
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38,645 133,896
-------------------------------------------------------------------------
Loss before non-controlling interests and
income taxes (4,163) (87,800)
Non-controlling interests (note 11) 2,347 20,031
-------------------------------------------------------------------------
Loss before income taxes (1,816) (67,769)
Income tax expense (recovery) (note 13):
Current (1,896) (734)
Future 10,320 (30,792)
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8,424 (31,526)
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Loss for the year (10,240) (36,243)
Deficit, beginning of year (49,958) (6,150)
Distributions declared to Unitholders - (7,565)
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Deficit, end of year $ (60,198) $ (49,958)
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Basic and diluted loss per Unit $ (0.71) $ (2.52)
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-------------------------------------------------------------------------
Weighted average number of Units outstanding 14,410,000 14,410,000
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See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statements of Comprehensive Income (Loss)
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2009 and 2008
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Net loss for the year $ (10,240) $ (36,243)
Other comprehensive income (loss):
Unrealized gains (losses) on translation of
self-sustaining foreign operations (3,374) 6,841
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Comprehensive loss $ (13,614) $ (29,402)
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Consolidated Statements of Accumulated Other
Comprehensive Loss
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2009 and 2008
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of year $ (14,724) $ (21,565)
Other comprehensive income (loss) $ (3,374) $ 6,841
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Accumulated other comprehensive loss,
end of year $ (18,098) $ (14,724)
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-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2009 and 2008
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Cash flows provided by (used in) operating
activities:
Net loss for the year $ (10,240) $ (36,243)
Items not involving cash:
Amortization 954 1,550
Imputed interest income on employee loans (158) (67)
Deferred gain on sale-leaseback of land
and building (84) (79)
Gain on sale of property, plant and equipment (42) (14)
Unrealized foreign exchange losses 1,553 333
Non-controlling interests (2,347) (20,031)
Future income taxes 10,320 (30,751)
Intangibles impairment - 8,612
Goodwill impairment - 82,083
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(44) 5,393
Change in non-cash operating working
capital (note 14) 10,291 14,836
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Net cash provided by operating activities 10,247 20,229
Cash flows used in financing activities:
Bank indebtedness (11,031) (11,575)
Deferred financing fees (345) (221)
Distributions paid to Unitholders - (8,646)
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Net cash used in financing activities (11,376) (20,442)
Cash flows provided by (used in) investing
activities:
Additions to property, plant and equipment (95) (425)
Proceeds on disposal of property, plant
and equipment 57 25
Long-term receivables, net 1,545 403
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Net cash provided by investing activities 1,507 3
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Increase (decrease) in cash 378 (210)
Cash, beginning of year 85 295
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Cash, end of year $ 463 $ 85
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Supplemental information:
Interest paid $ 586 $ 1,219
Income taxes paid 207 75
Transfer of accounts receivable to long-term
customer notes receivable, being a non-cash
transaction 685 2,508
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See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31, 2009 and 2008
-------------------------------------------------------------------------
1. Nature and continuance of operations:
Hardwoods Distribution Income Fund (the "Fund") is an unincorporated,
open ended, limited purpose trust established under the laws of the
Province of British Columbia on January 30, 2004 by a Declaration of
Trust. The Fund commenced operations on March 23, 2004 when it
completed an initial public offering of Units and acquired an 80%
interest in a hardwood lumber and sheet goods distribution business
in North America (the "Business") from affiliates of Sauder
Industries Limited ("SIL"). The Fund holds, indirectly, 80% of the
outstanding limited partnership units of Hardwoods Specialty Products
LP ("Hardwoods LP") and Hardwoods Specialty Products US LP
("Hardwoods USLP"), limited partnerships established under the laws
of the Province of Manitoba and the state of Delaware, respectively.
The Fund has forecast its financial results and cash flows for the
next 12 months (the "Forecast Period"). The forecasts are based on
management's best estimates of operating conditions in the context of
the current economic climate, today's capital market conditions and
the depressed state of the housing and renovation markets in both
Canada and the United States.
In the second quarter of 2009, the Fund's U.S. subsidiary and its
lender amended their credit agreement with changes effective for the
June 30, 2009 reporting period. This amendment removed the U.S.
subsidiary's previous fixed charge coverage ratio financial covenant
and replaced it with a minimum trailing EBITDA covenant. Under the
amendment, the minimum trailing EBITDA covenant is only applicable in
the event the U.S. subsidiary's unused credit availability falls
below US$4.0 million. At December 31, 2009, the U.S. subsidiary's
unused credit availability was in excess of US$4.0 million, and
accordingly the U.S. subsidiary was not subject to any financial
covenant and was compliant with its credit facility. If the U.S.
subsidiary had been subject to its trailing EBITDA covenant at
December 31, 2009, it would have been in compliance with this
covenant. Due to the difficulty in predicting the continued severity
and duration of the current economic and financial crisis, management
is uncertain whether its U.S. subsidiary will remain in compliance
with its financial covenant during the Forecast Period. Further
weakening of the housing and renovation market, or significant
customer or credit losses, could cause the U.S. subsidiary to be in
violation of its financial covenant. This could cause the Fund's
U.S. subsidiary bank indebtedness to become immediately due and
payable, and the Fund and its U.S. subsidiary may not be able to
access funds under its revolving credit facility. In the event of
such a circumstance, the Fund could draw on its Canadian credit
facility, or if that does not suffice, it would need to raise
additional capital in the form of equity or debt to supplement or
replace its existing credit facilities in order to have sufficient
liquidity to meet its obligations in the Forecast Period.
The accompanying consolidated financial statements have been prepared
assuming the Fund will continue as a going concern and contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business. The consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts should the Fund be unable to
continue as a going concern.
2. Significant accounting policies:
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles.
(a) Basis of presentation:
These consolidated financial statements include the accounts of
the Fund and its 80% owned subsidiaries Hardwoods LP and
Hardwoods USLP and other wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated on consolidation.
(b) Cash and cash equivalents:
The Fund considers deposits in banks, certificates of deposit and
short-term investments with original maturities of three months
or less when acquired as cash and cash equivalents.
(c) Accounts receivable:
Accounts receivable includes trade accounts receivable net of
allowances for doubtful accounts plus the current portion of
housing loans receivable from employees related to their
relocation and customer notes receivable.
(d) Inventory:
Inventory is valued at lower of cost and net realizable value.
Cost is determined using the weighted average cost method and
includes invoice cost, duties, freight, and other directly
attributable costs of acquiring the inventory.
Volume rebates and other supplier discounts are included in
income when earned. Volume discounts and supplier trade
discounts are accounted for as a reduction of the cost of the
related inventory and are earned when inventory is sold.
(e) Property, plant and equipment:
Property, plant and equipment is stated at cost less accumulated
amortization. Amortization is provided at straight-line rates
sufficient to amortize the cost of the assets over their
estimated useful lives as follows:
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Assets Estimated useful life
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Machinery and equipment 3 to 10 years
Mobile equipment 7 years
Leasehold improvements Over the term of the lease
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(f) Deferred financing costs:
Financing costs incurred to obtain credit facilities are deferred
and amortized on a straight-line basis over the term of the
related credit facility.
(g) Intangible assets:
Intangible assets represent customer relationships acquired at
the time the Business was purchased from SIL (note 1) and were
recorded at cost less accumulated amortization and any
write-downs. Amortization was provided for on a straight-line
basis over 15 years. During the year ended December 31, 2008,
management performed impairment tests at June 30, 2008 and at
December 31, 2008 and recorded aggregate intangibles impairments
of $8.6 million, leaving no intangible asset value at December
31, 2008.
(h) Goodwill:
Goodwill was recorded at cost less any write-downs and was not
amortized. Management reviewed the carrying value of goodwill for
impairment annually, or more frequently if events or changes in
circumstances indicated that the asset may be impaired. Any
excess of carrying value over fair value was charged to earnings
in the period in which the impairment is determined. During the
year ended December 31, 2008, management performed impairment
tests at June 30, 2008 and at December 31, 2008 and recorded
aggregate goodwill impairments of $82.1 million, leaving no
goodwill at December 31, 2008.
(i) Impairment of long-lived assets:
Long-lived assets, including property, plant and equipment, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount for the asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount that the carrying amount of the asset exceeds its fair
value.
(j) Sales-leaseback of land and building:
During the year ended December 31, 2005, a subsidiary of the Fund
sold a building and related land and leased back the facilities.
The gain on the sale has been deferred and is amortized in
proportion to the rental payments over the lease term.
(k) Income taxes:
Incorporated subsidiaries of the Fund use the asset and liability
method of accounting for income taxes. Under the asset and
liability method, future income tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the substantive enactment
date. The amount of future income tax assets recognized is
limited to the amount that is more likely than not to be
realized.
As the Fund allocates all of its net earnings to Unitholders and
deducts these amounts in computing its taxable income,
Unitholders, rather than the Fund, will generally be liable for
any income tax obligations until January 1, 2011. Accordingly, no
provision for current income taxes has been made in respect of
the Fund itself.
On June 12, 2007, the Canadian federal government's legislation
to tax publicly traded income trusts passed third reading in the
House of Commons and thus the associated income tax became
substantively enacted for accounting purposes. The legislation
imposes a tax on distributions from Canadian public income
trusts. The new tax is not expected to apply to the Fund until
January 1, 2011 as a transition period applies to publicly traded
trusts that existed prior to November 1, 2006. As a result of the
substantive enactment of the new tax legislation, the Fund has
recognized future income tax assets and liabilities that are
expected to reverse subsequent to January 1, 2011.
(l) Revenue recognition:
Revenue from the sale of hardwood lumber and sheet goods is
recognized at the time of delivery, which is when title and the
risks and rewards of ownership transfer to the customer.
(m) Translation of foreign currencies:
The accounts of the Fund's self-sustaining foreign operations are
translated into Canadian dollars using the current rate method.
Assets and liabilities are translated at the exchange rate in
effect at the balance sheet date and revenue and expenses are
translated at average exchange rates for the period as a proxy
for the exchange rates prevailing at the transaction dates. Gains
or losses arising from the translation of the financial
statements of the self-sustaining foreign operations are deferred
in the accumulated other comprehensive loss account in
Unitholders' equity.
Foreign monetary assets and liabilities of the Canadian
operations have been translated into Canadian dollars using the
rate of exchange in effect at the balance sheet date. Revenue and
expenses of the Canadian operations denominated in foreign
currencies are translated at the average exchange rates for the
period. Exchange gains or losses arising from translation of
these foreign monetary balances and transactions are reflected in
earnings for the period.
(n) Foreign currency contracts:
The Fund has used, in preceding years, currency derivatives to
manage its exposure to fluctuations in exchange rates between the
Canadian and the United States dollar. The foreign currency
contracts were recognized in the balance sheet and measured at
fair value, with changes in fair value recognized in the
statement of operations.
(o) Loss per Unit:
Basic loss per Unit is calculated by dividing net loss by the
weighted average number of Units outstanding during the reporting
period. Diluted loss per Unit is calculated by application of the
if-converted method for convertible securities (being
exchangeable Units held by the non-controlling interest). As the
conversion of convertible securities would not have a dilutive
effect on loss per Unit, diluted and basic loss per Unit are the
same amount.
(p) Use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Areas requiring significant management estimate include
the assessment of the Fund's ability to continue as a going
concern, the valuation and impairment analysis of goodwill and
intangible assts, the determination of the allowance for doubtful
accounts, future income taxes and amounts of accrued liabilities.
Actual amounts may differ from the estimates applied in the
preparation of these financial statements.
(q) Future changes in accounting standards:
International Financial Reporting Standards:
The CICA will transition Canadian generally accepted accounting
principles ("GAAP") for publicly accountable entities to
International Financial Reporting Standards ("IFRS"). The Fund's
consolidated financial statements are to be prepared in
accordance with IFRS for the fiscal year commencing January 1,
2011. While IFRS uses a conceptual framework similar to Canadian
GAAP, there are significant differences on recognition,
measurement, and disclosures. While the effects of IFRS have not
yet been fully determined, the Fund has identified a number of
key areas which are likely to be impacted, including: deferred
gain on sale-leaseback of land and building; accumulated other
comprehensive loss; property plant and equipment, leased
vehicles, and potentially the classification of non-controlling
interests and Fund units. In addition, financial statement
presentation changes and additional disclosure requirements are
anticipated under IFRS. The adoption of IFRS is not expected to
have a material impact on the Fund's reported cash flows.
3. Adoption of new accounting standards:
Goodwill and Intangible Assets:
Effective January 1, 2009, the Fund adopted the new CICA Handbook
Section 3064, Goodwill and Intangible Assets. This section replaces
CICA Handbook Section 3062, Goodwill and Intangible Assets, and
establishes revised standards for the recognition, measurement,
presentation and disclosure of goodwill and intangible assets. As the
Fund no longer has goodwill or intangible assets, the adoption of
this new standard does not impact the amounts presented in the
financial statements.
Credit risk and the fair value of financial assets and liabilities:
On January 23, 2009, the CICA Emerging Issues Committee (EIC) issued
EIC-173, Credit Risk and the Fair Value of Financial Assets and
Liabilities. EIC-173 is effective for interim and annual financial
statements ending on or after January 20, 2009. EIC-173 provides
guidance that an entity's own credit risk of counterparties should be
taken into account in determining the fair value of financial assets
and liabilities. Adoption of this guidance is to be applied
retrospectively without restatement of prior periods. The Fund has
evaluated the impact of this new standard and concluded that it does
not have a material impact on its financial statements.
Financial instruments disclosures:
Amended Handbook Section 3862, Financial Instruments - Disclosures,
establishes revised standards for the disclosure of financial
instruments. The new standard establishes a three-tier hierarchy as a
framework for disclosing fair value of financial instruments based on
inputs used to value the Fund's investments. The hierarchy of inputs
and description of inputs is described as follows:
Level 1 - fair values are based on quoted prices (unadjusted) in
active markets for identical assets or liabilities;
Level 2 - fair values are based on inputs other than quoted prices
included in Level 1 that are observable for the asset or liability,
either directly (as prices) or indirectly (derived from prices); or
Level 3 - fair values are based on unobservable inputs for which no
market data exists, therefore, requiring the Fund to develop its own
assumptions.
Changes in valuation methods may result in transfers into or out of
an investment's assigned level.
These additional disclosures have been provided in Note 6 to the
Financial Statements.
4. Capital disclosures:
The Fund's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the business. The Fund considers its capital to
be bank indebtedness (net of cash) plus Unitholders' equity. The
Fund's capitalization is as follows:
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2009 2008
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Cash and cash equivalents $ (463) $ (85)
Bank indebtedness 4,960 17,561
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Net debt 4,497 17,476
Unitholders' equity 55,158 68,772
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Total capitalization $ 59,655 $ 86,248
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The Fund monitors on a monthly basis the ratio of net debt to
earnings before interest, income taxes, depreciation and amortization
("EBITDA"). Net debt to EBITDA serves as an indicator of the Fund's
financial leverage. The U.S. credit facility is subject to a minimum
trailing EBITDA covenant that is only applicable in the event the
U.S. subsidiary's unused credit availability falls below US
$4.0 million. The Canadian credit facility is subject to a Fixed
Charge Coverage Ratio ("FCCR") calculated as (EBITDA - capital
expenditures - cash taxes)/(interest expense) which cannot be less
than 1.1 for Hardwoods LP.
The terms of the agreements with the Fund's lenders provide that
distributions cannot be made to its unitholders in the event that its
subsidiaries do not meet the above covenant requirements as well as
certain additional credit ratios. The Fund's operating subsidiaries
were compliant with all required credit ratios as at December 31,
2009, and accordingly there were no restrictions on distributions
arising from compliance with financial covenants.
Distributions are one of the ways the Fund manages its capital.
Distributions of the Fund's available cash are made to the maximum
extent possible, subject to reasonable reserves established by the
Trustees of the Fund. Distributions are made by the Fund having given
consideration to a variety of factors including the outlook for the
business, financial leverage, and the ratio of distributions to
available cash of the Fund.
There were no changes in the Fund's approach to capital management
during the year ended December 31, 2009. On November 3, 2008 the
Trustees of the Fund suspended further monthly distributions until
such time as market conditions and the Fund's generation of cash has
improved.
5. Inventory:
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2009 2008
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Lumber $ 8,224 $ 12,077
Sheet goods 12,171 14,990
Specialty 2,099 2,356
Goods in-transit 1,407 1,445
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$ 23,901 $ 30,868
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During the year ended December 31, 2009 inventory write-downs
totaling $2.7 million (2008 - $3.1 million) were recorded to reduce
certain inventory items to their net realizable value. The write-down
for the year ended December 31, 2008 included $0.6 million for
inventory stocked specifically for a large customer which declared
bankruptcy.
Cost of sales for the year ended December 31, 2009 were
$156.4 million (2008 - $210.2 million), which included $148.3 million
(2008 - $201.8 million) of costs associated with inventory. The other
$8.1 million (2008 - $8.4 million) related principally to freight and
other related expenses.
6. Financial instruments:
Financial assets include cash and cash equivalents, which are
designated as held-for-trading and measured at fair value, current
and long-term receivables, and income taxes recoverable which are
designated as loans and receivables and measured at amortized cost.
Financial liabilities include bank indebtedness and accounts payable
and accrued liabilities. All financial liabilities are designated as
other liabilities and are measured at amortized cost. There are no
financial instruments classified as available-for-sale or held-to-
maturity. Until August 2008, financial instruments of the Fund also
included foreign currency contracts which are derivative financial
instruments (note 6(b)) and measured at fair value.
(a) Fair values of financial instruments:
The carrying values of cash and cash equivalents, accounts
receivable, income taxes recoverable, accounts payable and
accrued liabilities approximate their fair values due to the
relatively short period to maturity of the instruments. The fair
value of long-term receivables is not expected to differ
materially from carrying value. The carrying values of the credit
facilities approximate their fair values due to the existence of
floating market based interest rates.
(b) Derivative financial instruments:
Until August 2008 the Fund used foreign currency contracts to
assist in managing its exposure to fluctuations in exchange rates
between the Canadian dollar and the U.S. dollar. The foreign
currency contracts were recognized in the balance sheet and
measured at their fair value based on the level two valuation
inputs as described in Note 3, with changes in fair value
recognized in the statement of operations.
All of the outstanding foreign currency contracts were settled
with the counterparty during the year ended December 31, 2008.
(c) Financial risk management:
Trustees of the Fund and the Board of Directors of the Fund's
subsidiaries have the overall responsibility for the
establishment and oversight of the Fund's risk management
framework. The Fund's risk management policies are established to
identify and analyze the risks faced by the Fund, to set
appropriate risk limits and controls, and to monitor risks and
adherence to limits. Risk management policies and systems are
reviewed regularly to reflect changes in market conditions and in
response to the Fund's activities. Through its standards and
procedures management has developed a disciplined and
constructive control environment in which all employees
understand their roles and obligations. Management regularly
monitors compliance with the Fund's risk management policies and
procedures and reviews the adequacy of the risk management
framework in relation to the risks faced by the Fund.
The Fund has exposure to credit, liquidity and market risks from
its use of financial instruments.
(i) Credit risk:
Credit risk is the risk of financial loss to the Fund if a
customer or counterparty to a financial instrument fails to
meet its contractual obligations. Credit risk arises
principally from the Fund's receivables from its customers.
Employee housing loans, customer notes and security deposits
also present credit risk to the Fund.
The following is a breakdown of the Fund's current and long-
term receivables and represents the Fund's exposure to
credit risk related to its financial assets:
------------------------------------------------------------
2009 2008
------------------------------------------------------------
Trade accounts receivable -
Canada $ 9,756 $ 8,404
Trade accounts receivable -
United States 16,117 23,423
Sundry receivable 203 495
Current portion of long-term
receivables 919 2,243
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26,995 34,565
Less: allowance for doubtful
accounts 1,410 2,347
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$ 25,585 $ 32,218
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Long-term receivables:
Employee housing loans $ 450 $ 1,507
Customer notes 1,834 3,772
Security deposits 518 603
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2,802 5,882
Less: current portion, included
in accounts receivable 919 2,243
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$ 1,883 $ 3,639
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Trade accounts receivable:
The Fund's exposure to credit risk is influenced mainly by
the individual characteristics of each customer. The Fund is
exposed to credit risk in the event it is unable to collect
in full amounts receivable from its customers. The Fund
employs established credit approval practices and engages
credit attorneys when appropriate to mitigate credit risk.
It is the Fund's policy to secure credit advanced to
customers whenever possible by registering security
interests in the assets of the customer and by obtaining
personal guarantees.
Credit limits are established for each customer and are
regularly reviewed. In some instances the Fund may choose to
transact with a customer on a cash-on-delivery basis. The
Fund's largest individual customer balance amounted to 9.1%
(2008 - 8.2%) of trade accounts receivable and customer
notes receivable at December 31, 2009.
The aging of trade receivables was:
------------------------------------------------------------
2009 2008
------------------------------------------------------------
Current $ 14,557 $ 17,037
Past due 31-60 days 5,283 6,696
Past due 61-90 days 2,181 3,706
Past due 90+ days 3,852 4,388
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$ 25,873 $ 31,827
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The Fund determines its allowance for doubtful accounts
based on its best estimate of the net recoverable amount by
customer. Accounts that are considered uncollectable are
written off. The total allowance at December 31, 2009 was
$1.4 million (2008 - $2.3 million). The amount of the
allowance is considered sufficient based on the past
experience of the business, the security the Fund has in
place for past due accounts and management's regular review
and assessment of customer accounts and credit risk.
The change in the allowance for doubtful accounts can be
reconciled as follows:
------------------------------------------------------------
2009 2008
------------------------------------------------------------
Balance as at January 1 $ 2,347 $ 1,046
Additions during the period 2,774 2,121
Changes due to currency rate
fluctuations (263) 359
Use during the period (3,448) (1,179)
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Balance as at December 31 $ 1,410 $ 2,347
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Bad debt expense comprises additions to the allowance for
doubtful accounts plus the value of receivables directly
written off. Bad debt expense, net of recoveries, for the
year ended December 31, 2009 was $5.2 million which includes
$3.4 million related to trade accounts receivable and $1.8
million to long-term receivables. For the year ended
December 31, 2008 bad debt expense was $3.9 million, all of
which related to trade accounts receivable. Historically bad
debt expense has averaged approximately 0.8% of sales.
Employee housing loans:
Employee loans are non-interest bearing and are granted to
employees who are relocated. Employee loans are secured by a
deed of trust or mortgage depending upon the jurisdiction.
Employee loans are repaid in accordance with the loan
agreement. These loans are measured at their fair market
value upon granting the loan and subsequently measured at
amortized cost.
Customer notes:
Customer notes are issued to certain customers to provide
fixed repayment schedules for amounts owing that have been
agreed will be repaid over longer periods of time. The terms
of each note are negotiated with the customer. For notes
issued the Fund requires a fixed payment amount, personal
guarantees, general security agreements, and in some cases
security over specific property or assets. Customer notes
bear market interest rates ranging from 8%-10%.
Security deposits:
Security deposits are recoverable on leased premises at the
end of the related lease term. The Fund does not believe
there is any material credit risk associated with its
security deposits.
(ii) Liquidity risk:
Liquidity risk is the risk that the Fund will not be able to
meet its financial obligations as they fall due. The Fund's
approach to managing liquidity is to ensure that it will
have sufficient cash available to meet its liabilities when
due, under both normal and stressed conditions, without
incurring unacceptable losses or risking damage to the
Fund's reputation. At December 31, 2009, in Canada, a
subsidiary of the Fund had a revolving credit facility of up
to $15.0 million. In the US, a subsidiary of the Fund had a
revolving credit facility of up to $26.3 million (US$25.0
million). These credit facilities can be drawn down to meet
short-term financing requirements, including fluctuations in
non-cash working capital. The amount made available under
the revolving credit facilities from time to time is limited
to the extent of the value of certain accounts receivable
and inventories held by subsidiaries of the Fund, as well as
by continued compliance with credit ratios and certain other
terms under the credit facilities. At December 31, 2009 the
Canadian and U.S. credit facilities had $9.2 million and
$11.3 million (US$10.8 million), respectively of additional
borrowing capacity.
(iii) Market risk:
Market risk is the risk that changes in market prices, such
as interest rates, foreign exchange rates, and commodity
prices will affect the Fund's net earnings or value of its
holdings of financial instruments.
Interest rate risk:
The Fund is exposed to interest rate risk on its credit
facilities which bear interest at floating market rates.
Based upon December 31, 2009 bank indebtedness balance of
$5.0 million, a 1% increase or decrease in the interest
rates charged would result in decrease or increase to annual
net earnings by $0.05 million.
Currency risk:
As the Fund conducts business in both Canada and the United
States it is exposed to currency risk. Most of the hardwood
lumber sold by the Fund in Canada is purchased in U.S.
dollars from suppliers in the United States. Although the
Fund reports its financial results in Canadian dollars,
approximately two-thirds of its sales are generated in the
United States. Changes in the currency exchange rates of the
Canadian dollar against the U.S. dollar will affect the
results presented in the Fund's financial statements and
cause its earnings to fluctuate. Changes in the costs of
hardwood lumber purchased by the Fund in the United States
as a result of the changing value of the Canadian dollar
against the U.S. dollar are usually absorbed by the Canadian
market. When the hardwood lumber is resold in Canada it is
generally sold at a Canadian dollar equivalent selling
price, and accordingly revenues in Canada are effectively
increased by decreases in value of the Canadian dollar and
vice versa. Fluctuations in the value of the Canadian dollar
against the U.S. dollar will affect the amount of cash
available to the Fund for distribution to its Unitholders.
The Fund no longer maintains foreign currency contracts to
mitigate the potential impact of foreign exchange on U.S.
dollar distributions made by its U.S. operations. Currently
no distributions are being made from the Fund's U.S.
subsidiary. The Fund previously maintained foreign currency
contracts to assist in forward planning cash flows to be
received from its U.S. subsidiary.
At December 31, 2009 the Fund's Canadian subsidiaries
primary exposure to foreign denominated working capital
financial instruments was in relation to accounts receivable
from U.S. customers (US$0.2 million, (2008 - US$0.1
million)), income taxes recoverable (US$1.9 million, (2008 -
US$1.3 million)), and accounts payable to U.S. suppliers
($0.2 million, (2008 - US$0.1 million)).
Based on the Fund's exposure to foreign denominated
financial instruments, the Fund estimates a $0.05 weakening
in the Canadian dollar as compared to the U.S. dollar would
have reduced the net loss for the year ended December 31,
2009 by approximately $0.1 million. A $0.05 strengthening of
the Canadian dollar as compared to the U.S. dollar would
have had the equal but opposite effect.
This foreign currency sensitivity is focused solely on the
currency risk associated with the Fund's Canadian
subsidiaries exposure to foreign denominated financial
instruments as at December 31, 2009 and does not take into
account the effect of a change in currency rates will have
on the translation of the balance sheet and operations of
the Fund's U.S. subsidiaries nor is it intended to estimate
the potential impact changes in currency rates would have on
the Fund's sales and purchases.
Commodity price risk:
The Fund does not enter in to any commodity contracts.
Inventory purchases are transacted at current market rates
based on expected usage and sale requirements and increases
or decreases in prices are reflected in the Fund's selling
prices to customers.
7. Property, plant and equipment:
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Accumulated Net book
December 31, 2009 Cost amortization value
---------------------------------------------------------------------
Machinery and equipment $ 2,095 $ 1,685 $ 410
Mobile equipment 3,225 2,394 831
Leasehold improvements 786 736 50
---------------------------------------------------------------------
$ 6,106 $ 4,815 $ 1,291
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net book
December 31, 2008 Cost amortization value
---------------------------------------------------------------------
Machinery and equipment $ 2,308 $ 1,610 $ 698
Mobile equipment 3,776 2,458 1,318
Leasehold improvements 840 688 152
---------------------------------------------------------------------
$ 6,924 $ 4,756 $ 2,168
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---------------------------------------------------------------------
8. Foreign currency contracts:
In August 2008, a subsidiary of the Fund agreed to settle all of its
remaining foreign currency contracts with the counterparty. The
amount received by the Fund's subsidiary in settling the remaining
twenty-two outstanding contracts was $0.2 million.
For the year ended December 31, 2008, the Fund's subsidiary realized
cash of $1.2 million from the settlement of foreign currency
contracts. For the year ended December 31, 2008, a loss of $0.8
million was recorded in the statement of operations as the cash
realized was less than the $2.0 million fair value of the contracts
recorded at December 31, 2007 due to the strengthening of the U.S.
dollar during that period.
9. Intangible assets and goodwill:
During the year ended December 31, 2008, management reviewed for
impairment the carrying value of intangible assets and goodwill.
Results of testing indicated impairment of the carrying value of
intangible assets of $8.6 million and goodwill of $82.1 million. This
impairment reduced the intangible asset and goodwill balances to
zero, and is attributable primarily to the significant decline in
sales in the U.S. and Canada resulting from reduced residential
housing starts and remodeling sales and a decline in consumer
confidence and overall economic activity.
10. Bank indebtedness:
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2009 2008
---------------------------------------------------------------------
Checks issued in excess of funds
on deposit $ 1,077 $ 1,087
Credit facility, Hardwoods LP 1,945 265
Credit facility, Hardwoods USLP
(December 31, 2009 - US$1,844;
December 31, 2008 - US$13,308) 1,938 16,209
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$ 4,960 $ 17,561
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Bank indebtedness consists of checks issued in excess of funds on
deposit and advances under operating lines of credit available to
Hardwoods LP and Hardwoods USLP (the "Credit Facilities").
Each of the Credit Facilities is separate, is not guaranteed by the
other partnership, and does not contain cross default provisions to
the other Credit Facility. The Credit Facility made available to
Hardwoods LP is secured by a first security interest in all of the
present and after acquired property of Hardwoods LP and its operating
subsidiaries, and by the LP Units held by a subsidiary of the Fund
and SIL. The Credit Facility made available to Hardwoods USLP is
secured by a first security interest in all of the present and after
acquired property of Hardwoods USLP and by the USLP Units held by a
subsidiary of the Fund and by SIL.
The Hardwoods LP Credit Facility has a three year term, provides
financing up to $15.0 million and has a maturity date of August 7,
2012. The Hardwoods USLP Credit Facility has a three year term,
provides financing of up to US$ 25.0 million and has a maturity date
of September 30, 2011. Each facility is payable in full at maturity.
The Hardwoods LP Credit Facility is repayable subject to prepayment
penalties of $225,000 if repaid in the first 12 months of the credit
facility term, $150,000 if repaid in the second 12 months of the
credit facility term, and $75,000 thereafter if repaid prior to the
maturity date of the credit facility. The Hardwoods USLP Credit
Facility is repayable without prepayment penalties. The Credit
Facilities bear interest at a floating rate based on the Canadian or
US prime rate (as the case may be), LIBOR or bankers acceptance rates
plus, in each case, an applicable margin. Letters of credit are also
available under the Credit Facilities on customary terms for
facilities of this nature. The Credit Facilities' rates vary with the
ratio of EBITDA minus capital expenditures and cash taxes, divided by
interest. Commitment fees and standby charges usual for borrowings of
this nature were and are payable.
The amount made available under the Credit Facility to Hardwoods LP
from time to time is limited to the extent of 85% of the book value
of accounts receivable and the lesser of 60% of the book value or 85%
of appraised value of inventories with the amount based on
inventories not to exceed 60% of the total amount to be available.
Certain identified accounts receivable and inventories are excluded
from the calculation of the amount available under the Credit
Facility. Hardwoods LP is required to maintain a fixed charge
coverage ratio (calculated as the ratio of EBITDA less cash taxes
less capital expenditures, divided by interest) of not less than 1.1
to 1. At December 31, 2009 the Hardwoods LP credit facility had $9.2
million of additional borrowing capacity.
The amount to be made available under the Credit Facility to
Hardwoods USLP from time to time is limited to the extent of 85% of
the book value of certain accounts receivable and 50% of the book
value of inventories (with certain accounts receivable and inventory
being excluded). Hardwoods USLP is required to maintain a minimum
trailing EBITDA covenant until December 31, 2010, and a fixed charge
coverage ratio (calculated as EBITDA less cash taxes less capital
expenditures, divided by interest plus distributions) of 1.0 to 1
thereafter. These covenants of the Hardwoods USLP Credit Facility do
not need to be met however when the unused availability under the
credit facility is in excess of US$4.0 million. At December 31, 2009
the Hardwoods USLP credit facility had unused availability of $11.3
million (US$10.8 million).
The average annual interest rates paid in respect of bank
indebtedness for the year ended December 31, 2009 were 3.82% and
4.88% (2008 - 5.19% and 5.09%) for the Hardwoods LP and Hardwoods
USLP credit facilities, respectively. In addition, standby fees of
0.5% and 0.75% (2008 - 0.25% and 0.25%) related to the unused portion
of the credit facilities was charged by the banks for Hardwoods LP
and Hardwoods USLP respectively.
11. Non-controlling interests:
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2009 2008
---------------------------------------------------------------------
Balance, beginning of year $ 13,080 $ 30,006
Interest in earnings:
Interest in earnings (loss)
before taxes (833) (17,560)
Adjustment to non-controlling interest
from subordination of Class B
Unit Holders (1,514) (2,471)
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Increase (decrease) (2,347) (20,031)
Foreign currency translation adjustment
of non-controlling interest in
Hardwoods USLP (1,985) 3,105
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Balance, end of year $ 8,748 $ 13,080
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The previous owners of the Business (note 1) have retained a 20%
interest in Hardwoods LP and Hardwoods USLP through ownership of
Class B Hardwoods LP units ("Class B LP Units") and Class B Hardwoods
USLP units ("Class B USLP Units"), respectively. The Fund owns an
indirect 80% interest in Hardwoods LP and Hardwoods USLP through
ownership of all Class A Hardwoods LP units ("Class A LP Units") and
Class A Hardwoods USLP units ("Class A USLP Units"), respectively.
The Class A LP Units and Class B LP Units and the Class A USLP Units
and Class B USLP Units, respectively, have economic and voting rights
that are equivalent in all material respects except distributions on
the Class B LP Units and Class B USLP Units are subject to the
subordination arrangements described below until the date (the
"Subordination End Date") on which:
- the consolidated Adjusted EBITDA, as defined in the Subordination
Agreement dated March 23, 2004, of the Fund for the 12 month
period ending on the last day of the month immediately preceding
such date is at least $21,300,000; and
- cash distributions of at least $29,540,000 ($2.05 per Unit) have
been paid on the Units and a combined amount of cash advances or
distributions of at least $7,385,000 has been paid on the Class B
LP Units and Class B USLP Units, being $2.05 per combined Class B
LP and Class B USLP Units (as adjusted for issuances, redemptions
and repurchases of Units, LP Units and USLP Units subsequently and
by converting the cash distributions or advances by Hardwoods USLP
on the USLP Units at the rate of exchange used by the Fund to
convert funds received by it in U.S. dollars into Canadian
dollars) for the 24 month period ending on the last day of the
month immediately preceding such date.
The Subordinated End Date had not occurred as at December 31, 2009.
Prior to the Subordination End Date, advances and distributions on
the LP Units and the USLP Units will be made in the following order
of priority:
- At the end of each month, cash advances or distributions will be
made to the holders of Class A LP Units and Class A USLP Units in
a combined amount that is sufficient to provide available cash to
the Fund to enable the Fund to make cash distributions upon the
Units for such month at least equal to $0.08542 per Unit or, if
there is insufficient available cash to make distributions or
advances in such amount, such lesser amount as is available and as
determined by the board of directors of the general partners;
- At the end of each fiscal quarter of Hardwoods LP and Hardwoods
USLP, including the fiscal quarter ending on the fiscal year end,
available cash of Hardwoods LP and Hardwoods USLP will be advanced
or distributed in the following order of priority:
- First, in payment of the monthly cash advance or distribution
to the holders of Class A LP Units and Class A USLP Units as
described above, for the month then ended;
- Second, to the holders of Class A LP Units and Class A USLP
Units, to the extent that the combined monthly cash advances or
distributions in respect of the 12 month period then ended (and
not, for greater certainty, in any previous 12 month period) on
Class A LP Units and Class A USLP Units were not made or were
made in amounts less than a combined amount at least equal to
$1.025 per Unit, the amount of any such deficiency. As of
December 31, 2009, the amount of such deficiency was $14.8
million (2008 - $7.2 million);
- Third, to the holders of Class B LP Units and Class B USLP
Units in a combined amount for one Class B LP Unit and one
Class B USLP Unit equal, on a pro-rated basis, to the combined
amount advanced or distributed on one Class A LP Unit and one
Class A USLP Unit during such fiscal quarter or, if there is
insufficient available cash to make advances or distributions
in such amount, such lesser amount as is available;
- Fourth, to the holders of Class B LP Units and Class B USLP
Units, to the extent only that combined advances or
distributions in respect of any fiscal quarter(s) during the 12
month period then ended (and not, for greater certainty, in any
previous 12 month period) on one Class B LP Unit and one Class
B USLP Unit were not made, or were made in amounts less, on a
pro-rated basis, that the combined amount advanced or
distributed on one Class A LP Unit and one Class A USLP Unit
during such 12 month period, the amount of such deficiency. As
of December 31, 2009, the amount of such deficiency was nil
(2008 - $1.9 million); and
- Fifth, to the extent of any excess, to the holders of the Class
A LP Units and Class B LP Units and Class A USLP Units and
Class B USLP Units, respectively, so that the combined advances
or distributions on one Class A LP Unit and one Class A USLP
Unit are the same as the combined advances or distribution on
one Class B LP Unit and one Class B USLP Unit in respect of the
12 month period then ended (and not, for greater certainty, any
previous 12 month period).
After the Subordination End Date, the holders of the Class B LP Units
and Class B USLP Units will generally be entitled to effectively
exchange all or a portion of their Class B LP Units and Class B USLP
Units together for up to 3,602,500 Units of the Fund, representing
20% of the issued and outstanding Units of the Fund on a fully
diluted basis. In the event the Fund enters into an agreement in
respect of an acquisition or a take-over bid of the Fund, the holders
of the Class B LP Units and Class B USLP Units will be entitled to
exchange such units for Units of the Fund.
The cumulative deficiency which is no longer recoverable by the Class
B LP Unitholders and the Class B USLP Unitholders, has been recorded
as an adjustment to the non-controlling interest's share of earnings
in the amount of $1.5 million for the year ended December 31, 2009
and $2.5 million for the year ended December 31, 2008.
12. Fund Units:
(a) An unlimited number of Units and Special Voting Units may be
created and issued pursuant to the Declaration of Trust. Each
Unit is transferable and represents an equal undivided beneficial
interest in any distributions from the Fund, whether of net
income, net realized capital gains or other amounts and in the
net assets of the Fund in the event of a termination or winding
up of the Fund. The Special Voting Units are not entitled to any
beneficial interest in any distribution from the Fund or in the
net assets of the Fund in the event of a termination or winding
up of the Fund. Each Unit, or Special Voting Unit, entitles the
holder thereof to one vote at all meetings of voting Unitholders.
On March 23, 2004, the Fund issued 14,410,000 Units at a price of
$10 per Unit pursuant to the Offering. Net proceeds from the
Offering were $133,454,000 after deducting expenses of the
Offering of $10,646,000. The holders of the Class B Units of
Hardwoods LP and Hardwoods USLP were issued 3,602,500 Special
Voting Units of the Fund, the value of which is included in non-
controlling interests (note 11). Such Special Voting Units are to
be cancelled on the exchange of Class B Units of Hardwoods LP and
Hardwoods USLP for Units of the Fund.
(b) The Trustees of the Fund approved the adoption of a Unitholders'
Rights Plan (the "Rights Plan") dated December 12, 2006, that is
intended to ensure fair treatment for all Unitholders in the
event of a take-over bid or any other attempt to acquire a
controlling interest in the Fund. The Rights Plan has been
accepted by the Toronto Stock Exchange and was approved at the
meeting of Unitholders on May 14, 2007. The Rights Plan will
continue in effect until the annual general meeting of
Unitholders in 2010. Provisions of the Rights Plan include the
limitation on Unitholder ownership at 20% of outstanding units in
the absence of a take-over bid for all outstanding units and a
requirement for a take-over bid to be open for a minimum of 60
days. At the effective date of the Rights Plan, beneficial
owners of 20% or more of the units of the Fund (including holders
of securities exchangeable for units of the Fund) were deemed to
be "Grandfathered Persons" and are exempt from the definition of
an "Acquiring Person" under the Rights Plan provided their
beneficial interest in the outstanding units does not increase by
more than 1.0% following December 12, 2006. The rights become
exercisable only when a person or party acquires 20% or more of
the Units, or in the case of a Grandfathered Person increases
their beneficial interest in Units by more than 1.0%, each
without complying with certain provisions of the Rights Plan.
Each right would entitle each holder of Units (other than the
acquiring person or party) to purchase additional Units of the
Fund at a 50 percent discount to the market price at the time.
13. Income taxes:
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2009 2008
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Current $ (1,896) $ (734)
Future 10,320 (30,792)
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$ 8,424 $ (31,526)
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During the year ended December 31, 2009, a subsidiary of the Fund
recorded a future tax expense of $10.1 million related to the
refinancing of inter-entity debt resulting from the continued
downturn in financial results in the Fund's US operating subsidiary.
The future tax expense was comprised of a reduction to the US
operating loss carry forwards of a subsidiary of the Fund and a
reduction in the associated tax basis in the subsidiary's investment
in Hardwoods USLP.
During the year ended December 31, 2008 the Fund completed an
internal reorganization that involved the refinancing of inter-entity
debt in the form of notes issued and held by subsidiaries of the
Fund. As a result of the internal re-organization, income tax losses
which are available to reduce US taxable income of approximately US
$10.3 million arose. Based on statutory income tax rates in effect
for the Fund's US subsidiary, this amounted to an estimated $3.6
million tax benefit available to subsidiaries of the Fund. This $3.6
million benefit was recorded at March 31, 2008 and was comprised of
an estimated $0.8 million current income tax recovery and $2.8
million future income tax recovery.
Also during the year ended December 31, 2008 a Canadian subsidiary of
the Fund recognized tax pools consisting principally of Canadian tax
losses carried forward, of approximately $16.0 million as a result of
the Fund's re-organization plan. Based on tax rates expected to apply
at the date such tax pools will be utilized, an additional $4.2
million of future income tax benefit was recorded by the Fund at
March 31, 2008.
The reorganizations and inter-entity refinancing noted in the
preceding paragraphs did not have any effect upon the management or
business activities of the Fund's operating subsidiaries.
During the year ended December 31, 2008, the Fund recorded a future
tax recovery of approximately $22.3 million as a result of the write-
down of goodwill and intangible assets. Goodwill and intangible
assets remain deductible for Canadian and U.S. tax purposes.
Under current income tax regulations subsidiaries of the Fund are
subject to income taxes in Canada and the United States. The
applicable statutory rate in Canada for the year ending December 31,
2009 is 30.4% (2008 - 31.0%) and in the United States is 39.4% (2008
- 39.4%). As the tax expense related to the Canadian subsidiaries of
the Fund is only $0.3 million, the following table reconciles the
Fund's consolidated income tax expense to the statutory rate
applicable in the United States. Income tax expense differs from that
calculated by applying the U.S. federal and state income tax rates to
earnings before income taxes for the following reasons:
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2009 2008
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Earnings before income tax $ (1,816) $ (67,769)
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Computed tax recovery at statutory rate $ (716) $ (26,701)
Internal restructuring and re-financing 10,129 (7,802)
Income of Fund distributed directly to
Unitholders - (2,382)
Income and deductions not subject to tax - (422)
Taxes paid as a result of Subordination
Agreement - 92
Adjustment to non-controlling interest
not subject to tax (596) (698)
State and branch profits tax 228 50
Reconciling items related to goodwill
and intangible impairment - 5,611
Rate changes (475) -
Other (146) 726
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Income tax expense (recovery) $ 8,424 $ (31,526)
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Taxes paid as a result of the Subordination Agreement represent
additional taxes incurred by subsidiaries of the Fund due to
distributions having not been made to the non-controlling interests
on a proportionate basis.
The tax effect of temporary differences that give rise to significant
portions of the future income tax assets and liabilities at December
31, 2009 is as follows:
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2009 2008
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Future income tax assets:
Accounts receivable $ 438 $ 380
Accounts payable 207 -
Inventory 290 351
Employee housing loans 44 77
Property, plant and equipment 351 309
Goodwill 15,926 19,307
Tax loss carry forwards and future
interest deductions 4,427 10,318
Deferred gain on sale-leaseback of land
and building 131 180
Financing charges and other 200 -
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22,014 30,922
Future income tax liabilities:
Prepaid expenses (45) (88)
Property, plant and equipment (62) (52)
Investment in Hardwoods USLP (4,320) -
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(4,427) (140)
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Net future income tax asset $ 17,587 $ 30,782
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At December 31, 2009, subsidiaries of the Fund have operating loss
carry forwards for income tax purposes of approximately $14.1 million
in Canada and US$ nil in the United States that may be utilized to
offset future taxable income. These losses, if not utilized expire
between 2014 and 2027.
At December 31, 2009 the Fund and its Canadian subsidiaries have
capital losses of approximately $23.4 million (2008 - $nil), and
suspended capital losses of approximately $44.2 million available to
offset future Canadian taxable capital gains. These capital losses
arose as a result of internal restructuring and inter-entity
transactions during the year ended December 31, 2009. A full
valuation allowance has been recorded against the associated future
income tax asset of $8.5 million.
14. Changes in non-cash operating working capital and additional cash
flow disclosures:
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2009 2008
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Source (use) of funds
Accounts receivable $ 3,842 $ 7,858
Income taxes recoverable/payable (223) (805)
Inventory 4,355 11,820
Prepaid expenses 74 155
Accounts payable and accrued liabilities 2,243 (4,192)
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Decrease in non-cash operating working
capital $ 10,291 $ 14,836
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CICA 1540, Cash Flow Statements, requires entities to disclose total
cash distributions on financial instruments classified as equity in
accordance with a contractual agreement and the extent to which total
cash distributions are non-discretionary. The Fund has no contractual
requirement to pay cash distributions to Unitholders' of the Fund.
During the year ended December 31, 2009 no discretionary cash
distributions were paid to Unitholders (2008 - $8.6 million).
15. Commitments:
The Fund's subsidiaries are obligated under various building and
automobile operating leases that require minimum rental payments in
each of the next five years as follows:
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2010 $ 5,746
2011 3,735
2012 2,733
2013 2,041
2014 1,536
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15,791
Thereafter 580
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$ 16,371
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16. Segment disclosure:
Information about geographic areas is as follows:
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2009 2008
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Revenue from external customers:
Canada $ 75,339 $ 89,581
United States 115,584 166,720
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$ 190,923 $ 256,301
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Property, plant and equipment:
Canada $ 450 $ 752
United States 841 1,416
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$ 1,291 $ 2,168
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17. Pensions:
Hardwoods USLP maintains a defined contribution 401 (k) retirement
savings plan (the "USLP Plan"). The assets of the USLP Plan are held
and related investment transactions are executed by the Plan's
Trustee, ING National Trust, and, accordingly, are not reflected in
these consolidated financial statements. During the year ended
December 31, 2009, Hardwoods USLP contributed and expensed $239,378
(US$209,378) (2008- $377,750 (US$354,362)) in relation to the USLP
Plan.
Hardwoods LP does not maintain a pension plan. Hardwoods LP does,
however, administer a group registered retirement savings plan ("LP
Plan") that has a matching component whereby Hardwoods LP makes
contributions to the LP Plan which match contributions made by
employees up to a certain level. The assets of the LP Plan are held
and related investment transactions are executed by LP Plan's
Trustee, Sun Life Financial Trust Inc., and, accordingly, are not
reflected in these consolidated financial statements. During the year
ended December 31, 2009, Hardwoods LP contributed and expensed
$196,561 (2008 - $256,469) in relation to the LP Plan.
18. Related party transactions:
For the year ended December 31, 2009, sales of $448,257 (2008 -
$427,795) were made to affiliates of SIL, and the Fund made purchases
of $53,210 (2008 - $98,005) from affiliates of SIL. All sales and
purchases took place at prevailing market prices.
During the year ended December 31, 2008, the Fund paid $108,000 to
affiliates of SIL under the terms of an agreement to provide services
for management information systems. This agreement ended December 31,
2008.
19. Contingencies:
The Fund and its subsidiaries are subject to legal proceedings that
arise in the ordinary course of its business. Management is of the
opinion, based upon information presently available, that it is
unlikely that any liability, to the extent not provided for through
insurance or otherwise, would be material in relation to the Fund's
consolidated financial statements.
%SEDAR: 00020372E
For further information: Rob Brown, Chief Financial Officer, Phone: (604) 881-1990, Fax: (604) 881-1995, Email: [email protected]
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