The Goldfarb Corporation announces first quarter results
TORONTO, May 26 /CNW/ - The Goldfarb Corporation (the "Corporation") today announced its first quarter 2010 results.
Revenues from operations for the first quarter of 2010 were $10,000 compared to $56,000 in 2009, a decrease of $46,000. The net income for the Corporation in the first quarter of 2010 was $1,088,000 or $0.18 per share compared to a net loss of $87,000 or $0.01 per share in 2009. Net income for the quarter increased primarily as a result of the recovery of $834,000 from the Corporation's insurer on the arbitration of the 2008 litigation settlement with Fleming Packaging Corporation and a fair value recovery of $500,000 on the Corporation's long-term investments.
The accompanying ten pages of unaudited interim financial statements have been prepared by and are the responsibility of the Corporation's management. The Corporation's auditor has not performed a review of these interim financial statements.
Statement of Income (Loss), Comprehensive Income (Loss) and Deficit
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(unaudited) Three Months Ended
March 31
2010 2009
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(thousands of dollars except per share information) $ $
Interest Revenue 10 56
Administrative expenses 235 207
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(225) (151)
Litigation recovery (note 7) 834 -
Fair value recovery on long-term investments
(note 2) 500 -
Depreciation (1) (1)
Foreign exchange gains (losses) (20) 65
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Income (loss) before income taxes 1,088 (87)
Income tax expense (note 5) - -
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Net Income (Loss) and Comprehensive Income (Loss) 1,088 (87)
Deficit, beginning of period (33,141) (33,224)
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Deficit, end of period (32,053) (33,311)
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Basic Income (Loss) per Share 0.18 (0.01)
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Weighted average number of shares outstanding 5,936,660 5,936,660
Cash Flow Statement
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(unaudited) Three Months Ended
March 31
2010 2009
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(thousands of dollars) $ $
Operating Activities
Net Income (loss) 1,088 (87)
Add (deduct) items not involving cash:
Depreciation 1 1
Foreign exchange losses (gains) 20 (65)
Fair value recovery on long-term investments
(note 2) (500) -
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609 (151)
Changes in non-cash working capital balances (note 4) 33 (28)
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Cash provided by (used in) operating activities 642 (179)
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Financing Activities
Distribution to shareholders (note 3) - (6,530)
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Cash used in financing activities - (6,530)
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Investing Activities
Repayment of note receivable - 356
Redemption of short-term investments 241 6,582
Principal and Interest received on long-term
investments (note 2) 5 572
Additions to capital assets, net (2) -
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Cash provided by investing activities 244 7,510
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Foreign exchange gain (loss) on cash held in foreign
currency (20) 40
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Increase in cash and cash equivalents for
the period 866 841
Cash and cash equivalents, beginning of period 1,025 5,180
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Cash and cash equivalents, end of period (note 4) 1,891 6,021
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Balance Sheet
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(unaudited) March 31 December 31
2010 2009
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(thousands of dollars) $ $
ASSETS
Current Assets
Cash and cash equivalents (note 4) 1,891 1,025
Short-term investments 6,409 6,650
Accounts receivable and prepaid expenses 139 55
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Total Current Assets 8,439 7,730
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Long-term Investments (note 2) 9,376 8,881
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Capital Assets 13 12
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17,828 16,623
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities 222 105
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Total Current Liabilities 222 105
Shareholders' Equity
Capital stock 49,206 49,206
Contributed surplus 453 453
Deficit (32,053) (33,141)
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Total Shareholders' Equity 17,606 16,518
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17,828 16,623
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Notes to Interim Financial Statements
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For the period ended March 31, 2010 (thousands of dollars)
(unaudited)
1. Significant Accounting Policies
The disclosures contained in these unaudited interim financial statements
do not include all requirements of generally accepted accounting
principles for annual financial statements. The unaudited interim
financial statements are based upon accounting principles consistent with
those used and described in the annual financial statements for the year
ended December 31, 2009. The unaudited interim financial statements
should be read in conjunction with the annual financial statements for
the year ended December 31, 2009.
The unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring accruals, which are, in the opinion
of management, necessary to present fairly the financial position of the
Corporation as of March 31, 2010 and the results of operations and cash
flows for the periods ended March 31, 2010 and 2009.
2. Long-Term Investments (formerly Asset-Backed Commercial Papers
("ABCP"))
March 31 December 31
2010 2009
------------------------
$ $
Long-Term Investments 9,376 8,881
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In 2007, the Corporation invested $17.1 million in three separate non-
bank sponsored ABCP that did not redeem on maturity as a consequence of
liquidity issues in the non-bank sponsored ABCP market. Since that time,
the market for these asset-backed securities has been frozen. As a
result, the Corporation has classified its investment as held-for-trading
long-term investments. These investments are recorded at fair value with
unrealized gains and losses included in earnings.
The securities were subject to restructuring pursuant to which the
holders of the ABCP, including the Corporation, exchanged their
securities for new floating rate notes with maturities that match the
maturities of the underlying assets. The restructuring was completed in
January 2009 and on closing, the Corporation exchanged its holdings of
ABCP for $17.1 million of long-term floating rate notes from Master Asset
Vehicle 2 ("MAV 2"). During 2009, interest (net of restructuring fees and
expenses) of $898 was received on the ABCP for the period from August 13,
2007 to the closing of the restructuring in January 2009. These amounts
have been included in the calculation of the fair value of the long-term
investments.
The MAV 2 Notes can be summarized as follows at March 31, 2010:
Note Categories Interest Rate
--------------- -------------
$
Class A-1 BA - 50 bps 5,964
Class A-2 BA - 50 bps 8,497
Class B BA - 50 bps 1,542
Class C 20% 496
Class 15 Tracking Notes Floating 541
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17,040
Interest received (926)
Valuation provision (6,738)
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Balance at March 31, 2010 9,376
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Interest on the Class A-1 and A-2 Notes is payable quarterly after
payment of the margin funding facility ("MFF"). The Class B and C Notes
will pay interest only after the Class A-1 and A-2 Notes are fully
repaid. The Class 15 Notes pay interest quarterly to the extent that
proceeds are realized and cash is available for that note. The Class A-1
and A-2 Notes were assigned an "A" rating by DBRS. In August 2009, DBRS
downgraded the rating of the Class A-2 Notes to BBB (low) from A and
maintained the rating Under Review with Negative Implication. On
February 9, 2010, DBRS removed the ratings from Under Review with
Negative Implication. The remaining notes are not rated.
Interest rates on the MAV 2 Notes are primarily based on prevailing
Banker's Acceptance rates. Interest on the Class A-1 and A-2 Notes has
not been consistently paid when it became due because of low prevailing
banker's acceptance rates. As a result of these low rates, there were
insufficient funds to pay the fixed expense of the MFF required to be
paid prior to interest being paid. Interest on the Class 15 Notes has
been paid through all quarters since their issuance. A one-time principal
repayment attributable to excluded securities was made on the Class A-1
Notes and was received in two distributions that occurred during 2009 and
2010.
There is currently an illiquid market for the MAV 2 Notes. Trading has
been limited and at distressed prices. It is uncertain when or if a
liquid market will develop. As a result, until a liquid market develops,
the Corporation will continue to estimate the fair value of its long-term
investments using a valuation technique which incorporates a probability
weighted discounted cash flow approach considering the best available
market data for such investments. At March 31, 2010, the Corporation
estimated the fair value of its long-term investments to be $9.4 million
(December 31, 2009 - $8.9 million). Consequently, the Corporation
recorded a fair value recovery on its long-term investments of $500
during the period ended March 31, 2010.
The significant assumptions used to value the Corporation's investment in
these securities are as follows:
Timing of principal repayments at maturity
Risk free interest rate on Class A-1, A-2 and
Class 15 Notes 2.59% to 4.25%
Discount rate on Class B and C Notes 30%
Interest rate on Class A-1 and A-2 Notes 2.0%
Interest rate on Class B, C and Class 15 Notes 2.0% to 20.0%
Term of notes 6-8 years
Recovery of Class A-1 and A-2 Note principal
and interest 45% to 100%
Recovery of Class B and C Note principal and
interest 0% to 40%
Recovery of Class 15 Note principal and interest 80% to 100%
The fair value of these investments could range from $8.6 million to
$10.4 million using the same valuation methodology with alternative
reasonably possible assumptions. In subsequent periods, the recorded fair
values may change materially from the estimated fair values. No changes
to the fair value resulted from the completion of the restructuring in
January 2009. A 1% change in the discount rate would increase or decrease
the estimated fair value of these long-term investments by approximately
$0.6 million.
3. Capital Stock
The Corporation's authorized capital stock is as follows:
- Unlimited number of Preference Shares, issued in series;
- Unlimited number of Class A Subordinate Voting Shares;
- 182,000 Class B Shares carrying 15 votes per share, convertible into
Class A Subordinate Voting Shares on a one-for-one basis. In certain
prescribed circumstances, additional Class B Shares as may be
required to effect the conversion of Class A Subordinate Voting
Shares into Class B Shares.
The issued share capital is summarized as follows:
March 31 December 31
2010 2009
------------------------
$ $
5,754,660 Class A Subordinate Voting Shares 49,193 49,193
182,000 Class B Shares 13 13
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49,206 49,206
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In February 2009, the shareholders of the Corporation passed a special
resolution approving the reduction of the Corporation's stated capital by
an aggregate of $6.5 million, resulting in a distribution of $1.10 per
Class A Subordinate Voting Share and Class B Share. The distribution was
made in February 2009.
4. Supplementary Cash Flow Information
a) Changes in non-cash working capital balances
Three Months Ended
March 31
2010 2009
----------------------
$ $
Decrease (increase) in accounts and other amounts
receivable (84) 62
Increase (decrease) in accounts payable and
accrued liabilities 117 (90)
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Changes in non-cash working capital balances 33 (28)
b) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and with banks, and
short-term investments in highly liquid instruments with original
maturities of 90 days or less. Cash and cash equivalents included in cash
flow statements comprise the following balance sheet amounts:
March 31 December 31
2010 2009
------------------------
$ $
Cash on hand and with banks 974 94
Cash equivalents 917 5,927
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1,891 6,021
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c) Income taxes
There were no income tax payments or recoveries during the periods ended
March 31, 2010 and 2009.
5. Income Taxes
The Corporation's provision for income taxes differs from the Canadian
statutory income tax rate of 31.0% (2009 - 33.5%) due to the unrecognized
benefit of non-capital loss carry-forwards from losses incurred in prior
years. At December 31, 2009, the Corporation had non-capital losses
available to reduce future taxable income of approximately $13.3 million.
No tax benefits have been recognized on the losses incurred because it is
more likely than not that the losses will not be realized. If unused,
these losses expire as follows:
Year of Expiry Amount
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2026 $10,696
2028 2,593
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$13,289
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At December 31, 2009, the Corporation had capital losses available to
offset future capital gains of approximately $27.0 million. These capital
losses do not expire.
6. Segmented Information
The Corporation's sole business segment is an investment holding company.
The Corporation's operations reside entirely in Canada.
7. Litigation Recovery
In 2008, the Corporation reached a settlement in the amount of US$1.45
million in the claim that had been filed against the Corporation and
certain of its directors and officers by the trustee of Fleming Packaging
Corp. ("Fleming"). The Corporation sought contribution toward the
settlement amount from the insurer of the Corporation's directors and
officers. Arbitration proceedings were completed in 2009 and in the first
quarter of 2010, the arbitrator ruled in favour of the Corporation
determining that the insurer should contribute US$725 plus interest and
costs. In March 2010, the Corporation received CDN$834. The recovery has
been recorded as income.
8. Financial Instruments
The carrying values reported in the balance sheet for cash and cash
equivalents, short-term investments, accounts receivable and accounts
payable and accrued liabilities approximate fair values due to the short
maturity of those instruments. Long-term investments are carried at
estimated fair value.
The Corporation uses the following hierarchy in attempting to maximize
the use of observable inputs and minimize the use of unobservable inputs,
primarily using market prices in active markets.
Level 1 - Quoted prices in active markets for identical assets or
liabilities. An active market for an asset or liability is a market in
which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing on an ongoing basis.
Level 2 - Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted prices in markets that
are not active, or other inputs that are observable that can be
corroborated by observable market data for substantially the full term of
the asset or liability.
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
The following details the fair value hierarchy classification for
financial instruments carried at fair value on the balance sheets:
Fair value at March 31, 2010 using
Level 1 Level 2 Level 3
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$ $ $
Cash and cash equivalents 1,891 - -
Short-term investments 6,409 - -
Long-term investments - - 9,376
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8,300 - 9,376
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The nature of these financial instruments and the Corporation's structure
as an investment holding company expose the Corporation to credit risk,
interest rate risk, currency risk and liquidity risk. The Corporation
manages its exposure to these risks by employing risk management
strategies and policies to ensure that any exposure to risk is in
compliance with the Corporation's capital management objectives and risk
tolerance levels. These risks are monitored in relation to market
conditions. The Board of Directors has overall responsibility for the
establishment and oversight of the Corporation's risk management
framework.
a) Credit risk
Financial instruments that potentially subject the Corporation to
concentrations of credit risk consist of cash and cash equivalents,
short-term and long-term investments and accounts receivable. The
Corporation's cash and cash equivalents and short-term investments
consist of bank deposits and investments in highly rated liquid
investments with Canadian financial institutions. The long-term
investments are in floating rate notes receivable.
Financial instruments are exposed to credit risk as a result of the risk
of the counter-party defaulting on its obligations. The Corporation
monitors and limits its exposure to credit risk on a continuous basis.
The Corporation provides reserves for credit risks based on the financial
condition and short and long-term exposures to counter-parties.
As at March 31, 2010, the maximum exposure to credit risk was $17,815
(December 31, 2009 - $16,611) being the carrying value of its cash and
cash equivalents, short-term and long-term investments and accounts
receivable. None of the financial assets that are fully performing have
been renegotiated during the year. The Corporation does not believe that
there is significant credit risk arising from any of its receivables and
investments except in connection with its long-term investments as
disclosed in Note 2.
b) Interest rate risk
The Corporation is exposed to interest rate risk arising from
fluctuations in interest rates on its cash and cash equivalents, short-
term investments and long-term investments. Cash and cash equivalents
which are in excess of day-to-day requirements are placed on short-term
deposit with Canadian financial institutions and earn interest at rates
available at the time the deposits are made. A 1% change in market
interest rates would have increased or decreased interest revenue by
approximately $18 for the three months ended March 31, 2010. The
Corporation also has interest rate risk relating to its long-term
investments as disclosed in Note 2.
c) Currency risk
The Corporation has financial assets which are denominated in U.S.
dollars and are subject to fluctuations in exchange rates of the Canadian
dollar with the U.S. dollar. The Corporation does not utilize any
financial instruments or cash management policies to mitigate the risks
arising from changes in exchange rates. At March 31, 2010, the
Corporation had cash and cash equivalents and short-term investments of
$1,737 and accounts payable of $130 which were denominated in U.S.
dollars. A 10% change in the foreign exchange rate from Canadian dollars
to United States dollars at March 31, 2010 would have increased or
decreased the foreign exchange gain by approximately $174 for the three
months ended March 31, 2010.
d) Liquidity risk
The Corporation's approach to managing liquidity is to ensure that it
will have sufficient liquidity to meet its liabilities when they are due.
The Corporation manages liquidity risk through timing the maturities of
its investments to match its financial obligations and ensuring that it
invests in secure instruments. The Corporation's contractual obligations
are specifically related to its accounts payable and accrued liabilities.
At March 31, 2010, the Corporation's accounts payable and accrued
liabilities were $222, all of which become due for payment within the
normal terms of trade, generally between 30 and 60 days (December 31,
2009 - $105).
10. Capital Management
The Corporation defines its capital as cash and cash equivalents, short-
term investments and long-term investments. Since the resolution of the
arbitration proceedings and other contingencies, the Board of Directors
have been evaluating the various alternatives for the use of its capital,
including determining the cash available for distribution to
shareholders. The Board will consider alternative methods of effecting a
tax efficient distribution prior to making such a distribution. The
Corporation's objectives in managing its capital are to provide an
appropriate return on investment to its shareholders while maintaining
capital preservation.
There were no changes in the Corporation's approach to capital management
in the period ended March 31, 2010.
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The Goldfarb Corporation trades on the NEX Board of the TSX Venture Exchange under the symbol GDF.H.
%SEDAR: 00002535E
For further information: Karen Killeen, Chief Financial Officer, at (416) 928-3710, Toronto, [email protected]
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