Pollard Banknote Announces 3rd Quarter Financial Results and Future Closure
of Kamloops Production Facility

WINNIPEG, Nov. 5 /CNW/ - Pollard Banknote Income Fund (TSX Symbol PBL.UN) (the "Fund") today released the financial results of the Fund and Pollard Holdings Limited Partnership ("Pollard LP") for the three and nine months ended September 30, 2009.

    
    HIGHLIGHTS
                                      3rd Quarter ended    3rd Quarter ended
                                     September 30, 2009   September 30, 2008
                                     ------------------   ------------------
    Sales (1)                            $ 48.4 million       $ 44.1 million
    EBITDA (1)                           $  6.3 million       $  8.0 million

    Adjusted Distributable Cash (1)      $  4.7 million       $  6.2 million
    Distributions Declared (1)           $  3.3 million       $  5.6 million

    Adjusted Distributable Cash per
     unit (1)                            $       0.1981       $       0.2644
    Distributions per unit (2)           $       0.1425       $       0.2376
    Payout ratio (3)                              71.5%                89.9%


    (1) Sales, EBITDA, Adjusted Distributable Cash, Distributions and
        Adjusted Distributable Cash per unit are for Pollard LP for the
        period ended September 30, 2009.

    (2) Distributions per unit are declared by the Fund for the period ended
        September 30, 2009.

    (3) Payout ratio is calculated as Distributions per unit divided by
        Adjusted Distributable Cash per unit.
    

"We are pleased with our third quarter results," said John Pollard, Co-Chief Executive Officer. "Our volumes continued to improve during the quarter and coupled with improving efficiencies, helped generate positive trends in our financial results and stronger cash flow."

"The increased volume achieved was due to additional orders placed by our existing customers, as quarter to quarter order patterns fluctuate based on a number of factors. Our continued cost improvement strategies introduced during the third quarter have made some immediate impacts on our cost structure and we will continue to focus considerable attention to this area"

"Our new press implementation is continuing and production volumes produced on this press have increased significantly. Improved cost efficiencies will continue to accrue going forward due to the efficiencies gained from this new technology."

"Based on expected variations in order patterns, we are anticipating lower volumes during our fourth quarter consistent with our experience during previous years. The instant ticket lottery market, however, continues to show good resilience during these difficult economic times and our overall expectation is for this market strength to continue."

On November 5, 2009, Pollard LP announced that its Kamloops production facility would be permanently closed in February 2010 with all related production being transferred to its other facilities. A one-time facility closing liability of approximately $5.0 million will be accrued in the fourth quarter of 2009, representing estimated closing costs including employee severance costs. The rationalization of facilities will result in significantly reduced annual operating costs after closure of approximately $4 million per year.

"While closing down any facility is a very difficult decision, we believe that it is critical that Pollard strive to be the lowest cost producer in our industry," said John Pollard. "The continued competitive marketplace makes this decision something that we are required to do to work towards that goal."

THE FUND

The Fund commenced business operations on August 5, 2005, and earnings from the Fund's investment in Pollard LP have been accounted for using the equity method of accounting. Under this method, the Fund's share of earnings of Pollard LP is adjusted for the amortization of certain intangible assets arising from the use of purchase accounting, certain administrative expenses and any future income tax reductions. The results of operations of the Fund are dependent on the performance of Pollard LP.

The Fund has declared distributions totaling $0.1425 per unit during the period ended September 30, 2009.

POLLARD LP

Pollard LP is one of the leading providers of products and services to lottery and charitable gaming industries throughout the world. Management believes Pollard LP is the largest provider of instant-win scratch tickets based in Canada and the third largest producer of instant tickets in the world.

SELECTED FINANCIAL INFORMATION

    
    (millions           Three months  Three months  Nine months  Nine months
    of dollars)             ended         ended        ended        ended
                          September     September    September    September
                           30, 2009      30, 2008     30, 2009     30, 2008
                        -----------------------------------------------------

    Sales                   $48.4         $44.1       $144.9       $127.8

    Cost of Sales            37.0          34.2        115.9        101.3
                        -----------------------------------------------------

    Gross Profit             11.4           9.9         29.0         26.5
    Gross Profit as
     a % of sales            23.6%         22.4%        20.0%        20.7%

    Selling and
     Administration
     Expenses                 5.1           5.0         16.3         14.7
    Expenses as
     a % of sales            10.5%         11.3%        11.2%        11.5%

    Realized foreign
     exchange loss (gain)     0.8          (0.9)         3.3         (3.4)
    Loss (gain) as
     a % of sales             1.6%         (2.0%)        2.3%        (2.7%)

    EBITDA                    6.3           8.0         15.3         20.0
    EBITDA as
     a % of sales            13.0%         18.1%        10.6%        15.6%

                         September      December
                          30, 2009      31, 2008
                        ---------------------------

    Total Assets           $107.6        $113.0
    Total Long Term
     Liabilities            $80.3         $60.4
    

The selected financial and operating information has been derived from, and should be read in conjunction with, the consolidated financial statements of Pollard LP.

Results of Operations - Three months ended September 30, 2009

EBITDA was $6.3 million in the third quarter of 2009 compared to $8.0 million in the third quarter of 2008. EBITDA margins were 13.0% in the third quarter of 2009 compared to 18.1% in the third quarter of 2008.

Included in the third quarter of 2008 EBITDA is a gain on sale of property, plant and equipment of $1.2 million. Excluding the gain on sale, EBITDA in the third quarter of 2008 was $6.8 million.

The reasons for the decrease in EBITDA was a change to a realized foreign exchange loss from a gain in 2008 (due to the impact of the exchange rates of the hedge program), partially offset by a higher gross margin.

During the three months ended September 30, 2009, Pollard LP achieved sales of $48.4 million, compared to $44.1 million in the three months ended September 30, 2008. Factors impacting the $4.3 million sales increase were:

    
    -  During the three months ended September 30, 2009, Pollard LP generated
       approximately 67% of its revenue in U.S. dollars including a
       significant portion of international sales which are priced in U.S.
       dollars. During the third quarter of 2009 the actual U.S. dollar value
       was converted to Canadian dollars at $1.11, compared to a rate of
       $1.04 during the third quarter of 2008. This 6.9% increase in the U.S.
       dollar value resulted in an approximate increase of $2.1 million in
       revenue relative to the third quarter of 2008.

    -  Instant ticket volumes for the third quarter of 2009 were higher by
       approximately 8% which, partially offset by lower priced product mix,
       increased sales by $2.2 million. Increased sales of related services
       generated an additional $0.5 million in sales. Charitable Gaming
       Products (pull-tabs and bingo paper) volume and product mix changes
       generated $0.1 million in additional sales. A volume decrease in other
       product lines reduced sales by $0.6 million.
    

Cost of sales was $37.0 million in the third quarter of 2009 compared to $34.2 million in the third quarter of 2008. Higher exchange rates on U.S. dollar transactions in the third quarter of 2009 increased cost of sales approximately $1.7 million and higher production volumes increased cost of sales by $1.1 million.

Gross profit increased from $9.9 million (22.4% of sales) in the third quarter of 2008 to $11.4 million (23.6% of sales) in the third quarter of 2009.

The ramp-up of the new press continued during the third quarter and production volumes increased significantly. Spoilage decreased and other efficiencies also continued to improve.

Selling and administration expenses were $5.1 million in the third quarter of 2009 which is similar to $5.0 million in the third quarter of 2008.

Foreign exchange transactions generated a gain of $0.2 million in the third quarter of 2009 compared to a loss of $0.2 million in the third quarter of 2008. Within the 2009 foreign exchange gain are unrealized gains of $1.0 million relating to the foreign exchange gain on U.S. dollar denominated debt (caused by the strengthening of the Canadian dollar) and realized gains on other accounts payable of $0.4 million offset by $0.7 million in realized losses relating to forward hedge contracts (caused by fixed exchange rates in the hedges being lower than the actual rates) and $0.5 million in realized losses on write-downs of U.S. dollar denominated receivables.

Over the course of the third quarter in 2009 the Canadian dollar strengthened significantly versus the U.S. dollar. While our cash flow during this period remained effectively hedged, our ongoing investment in U.S dollar denominated accounts receivable is impacted negatively when the Canadian dollar strengthens. These realized losses are non-recurring, assuming the relationship of the Canadian dollar remains steady relative to the U.S. dollar.

In the third quarter of 2008 the foreign exchange loss consisted of an unrealized loss of $1.1 million relating to the foreign exchange on U.S. dollar denominated debt and $0.9 million in realized gains relating primarily to forward hedge contracts having exchange rates higher than the actual rates.

A non-cash mark-to-market gain on foreign currency contracts of $4.4 million was recorded in the third quarter of 2009, compared to a non-cash loss of $3.3 million recognized in the third quarter of 2008. The strengthening of the Canadian dollar in relation to the U.S. dollar during the third quarter of 2009 resulted in a non-cash increase in the fair value of forward foreign currency contracts that Pollard LP had in place. These contracts expire during the next 12 months with the final one maturing in September 2010.

Net income was $9.3 million in the third quarter of 2009 and in the third quarter of 2008 net income was $0.3 million. The difference was primarily due to increased gross profit and a large mark-to-market gain on foreign currency contracts.

Pollard LP generated $4.7 million in Adjusted Distributable Cash, or $0.20 per unit, for the third quarter of 2009. Adjusted Distributable Cash will vary on a quarter-to-quarter basis due to changes in the product mix and short term variation in the order quantities from customers.

Use of Non-GAAP Financial Measures

Reference to "EBITDA" is to earnings before interest, income taxes, amortization, unrealized foreign exchange gains and losses, mark-to-market gains and losses on foreign exchange contracts and long term incentive plan expense. Reference to "Adjusted Distributable Cash" is to cash available for distribution to Unitholders, calculated as cash flow from operations, before changes in non-cash working capital, less maintenance capital expenditures. Management views Adjusted Distributable Cash as an operating performance measure, as it is a measure generally used by Canadian income funds as an indicator of financial performance. Adjusted Distributable Cash is important as it summarizes the funds available for distribution to Unitholders. As the Fund and Pollard LP will distribute substantially all of its cash on an ongoing basis and since EBITDA and Adjusted Distributable Cash are metrics used by many investors to compare issuers on the basis of the ability to generate cash from operations, management believes that, in addition to Net Income, EBITDA and Adjusted Distributable Cash are useful supplementary measures.

EBITDA, Adjusted Distributable Cash, Maintenance Capital Expenditures and Growth Capital Expenditures are not measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. Therefore, these measures may not be comparable to similar measures presented by other entities. Investors are cautioned that EBITDA should not be construed as an alternative to Net Income or Loss determined in accordance with GAAP as indicators of the Fund's and Pollard LP's performance or to cash flows from operating, investing and financing activities as measures of liquidity and cash flows.

Outlook

The retail sales of instant lottery tickets throughout North America and internationally remains strong and this is expected to continue for the foreseeable future.

We have no material contracts that come due in the remainder of 2009 and 2010 (when extensions are considered). The New Jersey Lottery contract has been extended on an open-ended basis with a maximum term ending June 30, 2010. Pollard has responded to the lottery's request for proposal to award a new long term contract. We continue to bid aggressively on all new contract opportunities as well as working to increase our market share for individual contracts where we share work with other suppliers.

Our volumes in the charitable gaming sector (pull-tabs and bingo paper) remain strong and ongoing cost management initiatives continue to generate positive returns which we expect to continue.

The Canadian dollar continued strengthening relative to the U.S. dollar during the third quarter and beginning of the fourth quarter. Our historical strategy of hedging our future net U.S. dollar cash flow has locked in our exchange value for U.S. dollar cash inflow until September 2010 at rates that are lower than the current exchange rate. On average our exchange rates for our U.S. dollar cash flow will be converted at $1.01 Canadian for every $1 U.S. cash flow over the next 12 months. Depending on the actual exchange rate during this time, the hedging strategy may result in higher realized foreign exchange losses over the next four quarters. We have discontinued hedging our net U.S. dollar cash flow with the final hedges expiring in September 2010.

Notwithstanding that we have locked in the exchange rate for our current U.S. dollar cash inflow, significant swings in the Canadian dollar relative to the U.S dollar would still result in significant volatility in our reported net income due to the accounting rules requiring foreign currency forward contracts be marked to market value. In addition, net income and distributable cash would be impacted due to the change in value of our investment in accounts receivable, accounts payable and long term debt denominated in U.S. dollars. If the Canadian dollar continues to strengthen relative to the US dollar this would result in unrealized gains in our mark to market adjustment of hedges, unrealized gains relating to US dollar denominated debt and accounts payable, and realized losses on US dollar denominated accounts receivable.

The fourth quarter traditionally generates lower instant ticket volumes than the other three quarters and as a result our volumes for the fourth quarter are expected to be somewhat lower. The nature of the industry does result in some ongoing variability in volumes on a quarter-to-quarter basis due to changes in our customers marketing plans, inventory management and the introduction or delay of new product offerings.

Production efficiencies improved during the third quarter and we expect these efficiencies to continue as volumes on the new press increase and other cost improvement initiatives are enacted.

Our improved operating results and lower capital expenditures will continue to strengthen our balance sheet.

On November 5, 2009, Pollard LP announced that its Kamloops production facility would be permanently closed in February 2010 with all related production being transferred to its other facilities. A facility closing liability of approximately $5.0 million will be accrued in the fourth quarter of 2009, representing estimated closing costs including employee severance costs. The rationalization of facilities will result in significantly reduced annual operating costs after closure of approximately $4 million per year.

The introduction of legislation relating to the Tax Fairness Plan will introduce certain income taxation to the Pollard Banknote Income Fund starting January 1, 2011. We are currently reviewing the alternative strategic plans including tax efficient means to revert to corporate status. No formal plans have been finalized however the introduction of taxation under the Tax Fairness Plan is not expected to apply to the Pollard Banknote Income Fund until 2011.

Pollard Banknote believes that its credit facilities and ongoing cash flow from operations will be sufficient to allow it to meet ongoing requirements for investment in capital expenditures, working capital and distributions at existing business levels.

Forward-Looking Statements

Certain statements in this report may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this document, such statements include such words as "may," "will," "expect," "believe," "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this document. There should not be an expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.

SOURCE Pollard Banknote Limited

For further information: For further information: John Pollard, Co-Chief Executive Officer, Telephone: (204) 474-2323 ext 204, Facsimile: (204) 453-1375; Gordon Pollard, Co-Chief Executive Officer, Telephone: (204) 474-2323 ext 211, Facsimile: (204) 453-1375; Rob Rose, Chief Financial Officer, Telephone: (204) 474-2323 ext 250, Facsimile: (204) 453-1375


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