Hardwoods Distribution Income Fund will hold a conference call and webcast to discuss second quarter and first half financial results on August 7, 2009 at 8:00 a.m. Pacific Time (11:00 am Eastern). The call can be accessed by dialing: 1-866-250-4910 or 416-644-3434. A replay will be available until August 21, 2009 at: 1-877-289-8525 or 416-640-1917 (Passcode 21312100 followed by the number sign).
LANGLEY, BC, Aug. 6 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the second quarter and first half of 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 serves over 2000 industrial customers through a network of 27 distribution centres in the US and Canada.
Second Quarter Overview
(For the three months ended June 30, 2009)
- Second quarter revenue declined 25.6% to $49.5 million year-over-year
- Gross profit percentage of 17.5% declined from 18.0% in Q2 2008
- Selling and administrative expenses decreased by 4.4% to
$8.8 million, from $9.2 million in Q2 2008
- Second quarter EBITDA, net loss and Distributable Cash were lower
year-over-year
- The Fund amended its US credit facility to gain more covenant
flexibility and ease financing risk in the US
- Hardwoods continued to rationalize its distribution network with the
closure of two additional satellite branches
"We continued to feel the impact of reduced market demand and lower prices for hardwood lumber products during the second quarter," said Maurice Paquette, Hardwoods' President and CEO.
"The Canadian and US economies remained weak, with housing starts at historically low levels. Hardwood lumber prices also continued to decline in reaction to lower demand. While we began to see indications that the US housing market may finally be starting to stabilize, we do not expect to see any corresponding benefit in hardwood prices or demand for several more quarters. As we have noted previously, hardwood demand typically lags the residential construction cycle because kitchen cabinets and furniture, which are key end-uses for hardwood products, are purchased late in the building cycle," said Mr. Paquette.
"In light of the reduced demand, we took action to further reduce costs during the second quarter. We closed two satellite facilities in Portland, Oregon and Sacramento, California, and continued to reduce our workforce in line with market conditions. Our strict focus on cost control has helped to trim $3 million from our S&A costs in the first half of 2009, despite incurring higher bad debt expense and a negative foreign currency impact on conversion of our US operating costs. Factoring out the negative foreign exchange impact, we reduced underlying expenses by $4.9 million, or 23.9%, in the first six months of 2009, compared to the same period in 2008."
"Reducing financing risk also continues to be a key strategy for us. Year-to-date, we have lowered our bank indebtedness (net of cash) by $8.0 million, or 45.7%. In addition, we renegotiated our US credit facility during the second quarter, reducing the size of the facility and making favourable modifications to our bank covenant," said Mr. Paquette. "Overall, we are focused on not simply surviving this downturn, but on emerging as a financially sound business with our strong market position intact."
Summary of Results
Selected Unaudited Consolidated Financial Information (in thousands
of Canadian dollars except where noted)
3 months 3 months 6 months 6 months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
Total sales $ 49,489 $ 66,488 $ 102,911 $ 137,536
Sales in the US (US$) 26,303 42,584 52,806 88,776
Sales in Canada 18,806 23,464 39,243 48,103
Gross profit 8,643 11,962 18,259 25,598
Gross profit % 17.5% 18.0% 17.7% 18.0%
Selling and
administrative
expenses (8,835) (9,225) (17,535) (20,543)
Realized gain on
foreign currency
contracts - 354 - 949
-------------------------------------------------------------------------
Earnings before
interest, taxes,
depreciation and
amortization and
non-controlling
interest ("EBITDA") (192) 3,091 724 6,004
Add (deduct):
Amortization (240) (422) (465) (847)
Interest (116) (310) (268) (698)
Non-cash foreign
currency
gains (losses) (666) (108) (334) (1,309)
Intangibles
impairment - (5,468) - (5,468)
Goodwill impairment - (64,606) - (64,606)
Non-controlling
interest 891 14,182 1,365 14,590
Income tax recovery
(expense) (168) 19,925 354 28,147
-------------------------------------------------------------------------
Net earnings (loss)
for the period $ (491) $ (33,716) $ 1,376 $ (24,187)
-------------------------------------------------------------------------
Basic and fully
diluted earnings
(loss) per Class A
Unit $ (0.034) $ (2.340) $ 0.095 $ (1.678)
Average Canadian
dollar exchange rate
for one US dollar 1.1669 1.0101 1.2057 1.0074
-------------------------------------------------------------------------
Distributable Cash and Cash Distributions
Selected Unaudited Consolidated Financial Information
(in thousands of dollars except per unit amounts)
3 months 3 months 6 months 6 months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
Net cash provided by
operating activities $ 1,498 $ 7,663 $ 6,912 $ 10,260
Increase (decrease)
in non-cash
operating working
capital (2,022) (5,011) (6,726) (4,264)
------------ ------------ ------------ ------------
Cash flow from
operations before
changes in non-cash
operating working
capital (524) 2,652 186 5,996
Capital expenditures (45) (225) (50) (298)
------------ ------------ ------------ ------------
Distributable Cash $ (569) $ 2,427 $ 136 $ 5,698
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Distributions relating
to the period:
Class A Units $ - $ 3,242(1) $ - $ 6,484(2)
Class B Units(2) - - - -
------------ ------------ ------------ ------------
Total Units $ - $ 3,242 $ - $ 6,484
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
-------------------------------------------------------------------------
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 $ (0.032) $ 0.135 $ 0.008 $ 0.316
Distributions relating
to the period:
Class A Units $ - $ 0.225(1) $ - $ 0.450(2)
Class B Units(3) $ - $ - $ - $ -
Total Units $ - $ 0.180 $ - $ 0.360
Payout ratio(4) 0.0% 133.6% 0.0% 113.8%
-------------------------------------------------------------------------
March 23, 2004
Cumulative since to June 30, 2009
inception: ----------------
Distributable Cash 75,753
Distributions
relating to the
period 66,754
Payout ratio(4) 88.1%
-------------------------------------------------------------------------
(1) Includes the cash distributions of $0.075 per Class A Unit per month
which relate to the operations of the Fund for January, February, and
March 2008.
(2) Includes the cash distributions of $0.075 per Class A Unit per month
which relate to the operations of the Fund for January through June
2008.
(3) 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 March 31, 2009
balance sheet.
(4) 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 June 30, 2009
For the three months ended June 30, 2009, the Fund and its subsidiaries reported negative Distributable Cash of $0.6 million or $0.032 per unit. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units. By comparison, the Fund generated total distributable cash of $2.4 million or $0.135 per unit in the same period of 2008. Distributions of $3.2 million, or $0.225 per unit were declared to the Class A Units and no distributions were paid to the Class B Units, for a payout ratio of 133.6% in the second quarter of 2008.
Second quarter 2009 sales were $49.5 million, down 25.6% from $66.5 million in 2008. The change reflects a 31.8% decrease in underlying sales activity, partially offset by a 6.2% increase in sales due to the positive effect of a weaker Canadian dollar. Sales in the United States, as measured in US dollars, decreased 38.2% to $26.3 million, compared to $42.6 million during the second quarter of 2008. This decline reflects the continuing impact of the depressed housing market and recession in the general US economy, as well as the impact of lower prices for hardwood lumber products. Sales in Canada, as measured in Canadian dollars, decreased by 19.9%, with sales down as a result of a slowing in the Canadian housing market and weakness in the general economy.
Second quarter gross profit was $8.6 million, compared to $11.9 million in Q2 2008. The change in gross profit reflects lower sales, as well as a decrease in gross profit percentage to 17.5%, from 18.0% a year ago. The lower gross margin reflects the impact of product price reductions in response to more intense competition, and discounting of some inventory in an effort to continue to balance inventory levels to the reduced sales pace.
Selling and administrative expenses decreased by $0.4 million, or 4.4%, to $8.8 million, from $9.2 million in Q2 2008. This improvement primarily reflects lower employee costs and a $0.8 million reduction in premises and sales and warehousing costs. These savings were partially offset by the negative impact of a weaker Canadian dollar on the conversion of S&A expenses at Hardwoods' US operations, an increase in bad debt expense and an increase in other expenses related to the closure of the two satellite branches during the quarter.
The Fund reported a second quarter EBITDA loss of $0.2 million, compared to positive EBITDA of $3.1 million in Q2 2008. The change in EBITDA primarily reflects lower gross profit and reduced gains on foreign currency contracts, partially offset by lower S&A expenses.
The Fund also reported a net loss of $0.5 million, compared to a net loss of $33.7 million in the comparable quarter in 2008. The $33.2 million decrease in net loss primarily reflects a $70.1 million reduction in goodwill and intangibles impairment, $0.2 million reduction in interest expense, and $0.2 million reduction in amortization expense. These decreases were partially offset by the $3.3 million decrease in EBITDA, a $0.6 million increase in non-cash foreign currency losses, a $13.3 million decrease related to the change in the non-controlling interest and a $20.1 million decrease in income tax recovery.
Results from Operations - Six months ended June 30, 2009
For the six months ended June 30, 2009, the Fund and its subsidiaries generated Distributable Cash of $0.1 million, or $0.008 per unit. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units. By comparison, the Fund generated total Distributable Cash of $5.7 million or $0.316 per unit in the first half of 2008 and declared distributions of $6.5 million, or $0.45 per unit to the Class A Units, for a payout ratio of 113.8%. No distributions were paid to the Class B Units in either year.
First-half 2008 sales declined by 25.2% to $102.9 million, from $137.5 million in 2008 as a result of this year's more challenging market conditions. The decline in total sales reflects a 32.8% decrease in underlying sales activity and a 7.6% increase in sales due to the positive impact of a stronger Canadian dollar. Sales at Hardwoods' US operations, as measured in US dollars, decreased by 40.5% in the first half of 2009, and sales in Canada, as measured in Canadian dollars, were down by 18.4% year-over-year.
First-half gross profit was $18.3 million, down from $25.6 million during the first six months of 2008. The reduction in gross profit primarily reflects lower sales. As a percentage of sales, gross profit was 17.7% in the first half of 2009, compared to 18.0% during the same period last year. The change in margin reflects highly competitive market conditions and ongoing efforts to reduce inventory in line with reduced sales demand.
Hardwoods was successful in decreasing selling and administrative expenses to $17.5 million in the first half of 2009, from $20.5 million last year. The improvement in S&A expense primarily reflects workforce reductions and lower employee bonus accruals, along with savings related to branch network downsizing and the absence of reorganization costs that were incurred during the first half of 2008. These cost reductions were partially offset by increased bad debt expense and the negative impacts of a weaker Canadian dollar on costs at Hardwoods' US operations.
First-half EBITDA was $0.7 million, compared to $6.0 million in the same period in 2008. The decrease in EBITDA reflects the lower gross profit and a decrease in realized gains on foreign currency contracts, partially offset by lower S&A costs.
The Fund reported net earnings of $1.4 million in the first half of 2009, compared to a net loss of $24.2 million in the same period in 2008. The significant improvement in net earnings primarily reflects the absence of the $70.1 million reduction in goodwill and intangibles impairment that negatively affected 2008 results, a $0.4 million reduction in interest expense, a $0.3 million reduction in amortization expense, and a $1.0 million reduction in non-cash foreign currency losses. These improvements to net earnings were partially offset by the $5.3 million decrease in EBITDA, a $13.2 million decrease related to the change in the non-controlling interest, and a $27.7 million decrease in income tax recovery.
Outlook
Hardwoods anticipates that business conditions will remain extremely challenging through 2009 and into 2010. Demand for furniture, cabinets, recreational vehicles and other products that utilize hardwood lumber and sheet goods are expected to remain weak in the near-term as a result of the depressed US housing market and the global recession. While there are signs that the US residential construction market may finally be starting to stabilize, it will likely be several more quarters before Hardwoods experiences a corresponding trend in its business. This reflects the fact that demand for the type of hardwood products sold by the company typically lags the construction cycle by between six and twelve months.
In this environment, Hardwoods continues to believe that its business risk is higher than normal, particularly in the areas of product demand and the potential for customer and supplier business failures in a weakened economy. While the Fund has made good progress in reducing debt and securing new credit facilities, financing risk also remains a concern, particularly in the US where it is uncertain if Hardwoods' results will be strong enough to remain in compliance with its bank agreement in the next 12 months.
Accordingly, the focus going forward will remain on cost reduction and tight management of inventory levels and working capital as management works to align the business as closely as possible to sales levels. Minimizing customer credit risk also remains a priority as Hardwoods works to contain bad debt expense resulting from customer business failures. At the same time, the company is aggressively pursuing market opportunities for its growing lines of "green" building products, while also continuing to support its successful import program. Hardwoods' goal is to protect its business, balance sheet and strong market position through the balance of this economic downturn, and to emerge positioned to participate fully in the eventual recovery.
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.
We believe 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 2008 Second Quarter 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 2008 Second Quarter 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 one of North America's largest distributors 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 organized into eight geographic regions throughout North America.
Forward-Looking Information
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 is based on a number of assumptions including, but not limited to: while we began to see indications that the US housing market may finally starting to stabilize, we do not expect to see any corresponding benefit in hardwood prices or demand for several more quarters; hardwood demand typically lags the residential construction cycle because kitchen cabinets and furniture, which are key end-uses for hardwood products, are purchased late in the building cycle; we anticipate that business conditions will remain extremely challenging through 2009 and into 2010; demand for furniture, cabinets, recreational vehicles and other products that utilize hardwood lumber and sheet goods are expected to remain weak in the near-term as a result of the depressed US housing market and the global recession; while there are signs that the US residential construction market may finally be starting to stabilize, it will likely be several more quarters before Hardwoods experiences a corresponding trend in its business; in the current business environment, Hardwoods continues to believe that its business risk is higher than normal, particularly in the areas of product demand and the potential for customer and supplier business failures in a weakened economy; while the Fund has made good progress in reducing debt and securing new credit facilities, financing risk also remains a concern, particularly in the US where it is uncertain if Hardwoods' results will remain strong enough to remain in compliance with its bank agreement in the next 12 months; our focus going forward will remain on cost reduction and tight management of inventory levels and working capital as management works to align the business as closely as possible to sales levels; minimizing customer credit risk also remains a priority as Hardwoods works to contain bad debt expense resulting from customer business failures; the company is aggressively pursuing market opportunities for its growing lines of "green" building products, while also continuing to support its successful import program; Hardwoods' goal is to protect its business, balance sheet and strong market position through the balance of this economic downturn, and to emerge positioned to participate fully in the eventual recovery.
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 the amount of cash we are able to generate in Canadian dollars; we do not lose any key personnel; there are no significant 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 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; the downturn in the general state of the economy does not worsen and impact upon our results; 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 the amount of cash we have available to distribute to our unitholders in Canadian dollars; 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 or 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; our results are dependent upon the general state of the economy; 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; our credit facilities contain restrictions on our ability to borrow funds and restrictions on distributions that can be made; there are tax risks associated with an investment in our units; 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 our other continuous disclosure documents.
All forward-looking information in this press release is qualified in its entirety by this cautionary statement and, except as may be required by law, the Fund undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 190 $ 85
Accounts receivable (note 6) 33,335 32,218
Income tax recoverable 376 2,316
Inventory (note 5) 24,923 30,868
Prepaid expenses 1,250 1,039
-----------------------------------------------------------------------
60,074 66,526
Long-term receivables (note 6) 2,550 3,639
Property, plant and equipment 1,728 2,168
Deferred financing costs 226 235
Future income taxes 30,221 30,782
-------------------------------------------------------------------------
$ 94,799 $ 103,350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current liabilities:
Bank indebtedness (note 7) $ 9,735 $ 17,561
Accounts payable and accrued liabilities 4,593 3,365
-----------------------------------------------------------------------
14,328 20,926
Deferred gain on sale-leaseback of land
and building 503 572
Non-controlling interests (note 8) 11,045 13,080
Unitholders' equity:
Fund units 133,454 133,454
Deficit (48,582) (49,958)
Accumulated other comprehensive loss (15,949) (14,724)
-----------------------------------------------------------------------
68,923 68,772
Continuance of operations (note 1)
Contingencies (note 15)
-------------------------------------------------------------------------
$ 94,799 $ 103,350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statement of Earnings (Loss) and Retained Earnings (Deficit)
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Sales $ 49,489 $ 66,488 $ 102,911 $ 137,536
Cost of sales 40,846 54,526 84,652 111,938
-------------------------------------------------------------------------
Gross profit 8,643 11,962 18,259 25,598
Expenses:
Selling and
administrative 8,835 9,225 17,535 20,543
Amortization:
Plant and equipment 207 235 430 474
Deferred financing
costs 55 3 79 5
Other intangible
assets - 203 - 405
Deferred gain on
sale - leaseback
of land and
building (22) (18) (44) (37)
Interest 116 310 268 698
Unrealized foreign
currency losses
(gains) 666 (247) 334 360
Intangibles impairment - 5,468 - 5,468
Goodwill impairment - 64,606 - 64,606
-----------------------------------------------------------------------
9,857 79,785 18,602 92,522
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interests and income
taxes (1,214) (67,823) (343) (66,924)
Non-controlling
interests (note 8) (891) (14,182) (1,366) (14,590)
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (323) (53,641) 1,022 (52,334)
Income tax expense
(recovery) (note 13):
Current 102 39 107 (752)
Future 66 (19,964) (461) (27,395)
-----------------------------------------------------------------------
168 (19,925) (354) (28,147)
-------------------------------------------------------------------------
Net earnings (loss)
for the period (491) (33,716) 1,376 (24,187)
Retained earnings
(deficit), beginning
of period (48,091) 137 (49,958) (6,150)
Distributions declared
to Unitholders - (3,242) - (6,484)
-------------------------------------------------------------------------
Deficit, end of
period $ (48,582) $ (36,821) $ (48,582) $ (36,821)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss)
per Unit $ (0.03) $ (2.34) $ 0.10 $ (1.68)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of Units
outstanding 14,410,000 14,410,000 14,410,000 14,410,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statement of Comprehensive Income (Loss)
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss)
for the period $ (491) $ (33,716) $ 1,376 $ (24,187)
Other comprehensive
income:
Unrealized gain
(loss) on translation
of self-sustaining
foreign operations (2,275) (411) (1,225) 1,658
-----------------------------------------------------------------------
Other comprehensive
income (loss) (2,275) (411) (1,225) 1,658
-------------------------------------------------------------------------
Comprehensive income
(loss) $ (2,766) $ (34,127) $ 151 $ (22,529)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Accumulated Other Comprehensive Income (Loss)
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Accumulated other
comprehensive loss,
beginning of period $ (13,674) $ (19,496) $ (14,724) $ (21,565)
Other comprehensive
income (loss) (2,275) (411) (1,225) 1,658
-------------------------------------------------------------------------
Accumulated other
comprehensive loss,
end of period $ (15,949) $ (19,907) $ (15,949) $ (19,907)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
HARDWOODS DISTRIBUTION INCOME FUND
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in thousands of Canadian dollars)
-------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows provided
by (used in) operating
activities:
Net earnings (loss)
for the period $ (491) $ (33,716) $ 1,376 $ (24,187)
Items not involving
cash:
Amortization 240 422 465 847
Imputed interest
income in employee
loans (98) (17) (137) (31)
Gain on sale of
property, plant
and equipment (16) - (25) -
Unrealized foreign
exchange losses
(gains) 666 108 334 1,309
Non-controlling
interests (891) (14,182) (1,366) (14,590)
Future income taxes 66 (20,037) (461) (27,426)
Intangibles
impairment - 5,468 - 5,468
Goodwill impairment - 64,606 - 64,606
-----------------------------------------------------------------------
(524) 2,652 186 5,996
Change in non-cash
operating working
capital (note 9) 2,022 5,011 6,726 4,264
-----------------------------------------------------------------------
Net cash provided by
operating
activities 1,498 7,663 6,912 10,260
Cash flows provided by
(used in) investing
activities:
Additions to
property, plant and
equipment (45) (225) (50) (298)
Proceeds on disposal
of property, plant
and equipment 20 - 30 -
Increase (decrease)
in long-term
receivables, net 437 (303) 623 (116)
-----------------------------------------------------------------------
Net cash provided by
(used in) investing
activities 412 (528) 603 (414)
Cash flows provided by
(used in) financing
activities:
Decrease in bank
indebtedness (2,227) (3,012) (7,330) (2,423)
Increase in deferred
bank fees (80) - (80) -
Distributions paid
to Unitholders - (3,242) - (6,484)
-----------------------------------------------------------------------
Net cash used in
financing activities (2,307) (6,254) (7,410) (8,907)
-------------------------------------------------------------------------
Increase (decrease)
in cash (397) 881 106 939
Cash, beginning of
period 587 353 84 295
-------------------------------------------------------------------------
Cash, end of period $ 190 $ 1,234 $ 190 $ 1,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary
information
(cash amounts):
Interest paid $ 278 $ 310 $ $ 698
Income taxes paid - 43 - 752
Income taxes received 175 - 1,975 -
Transfer of accounts
receivable to
long-term customer
notes receivable,
net of write offs,
being a non-cash
transaction 958 35 958 2,270
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
HARDWOODS DISTRIBUTION INCOME FUND
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of Canadian dollars)
For the periods ended June 30, 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.
In accordance with the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 1400, General Standards of Financial
Statement Presentation, the Fund is required to assess and disclose
its ability to continue as a going concern. 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 to be effective to
the June 30, 2009 reporting period. The 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 June 30, 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 financial covenant at June 30, 2009, it would not have
met its minimum trailing EBITDA 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 incurring significant customer or credit
losses, could cause the U.S. subsidiary to violate 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 as circumstance, the
Fund anticipates 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 which 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. Basis of presentation:
The Fund prepares its consolidated interim financial statements in
accordance with Canadian generally accepted accounting principles on
a basis consistent with those used and described in the annual
consolidated financial statements for the year ended December 31,
2008. The disclosures contained in these consolidated interim
financial statements do not include all the requirements of Canadian
generally accepted accounting principles for annual financial
statements, and accordingly, these consolidated interim financial
statements should be read in conjunction with the annual consolidated
financial statements for the period ended December 31, 2008. Certain
comparative figures have been restated to conform to the current
period's financial statement presentation.
3. Adoption of changes in accounting standards:
Effective January 1, 2009, the Fund adopted 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 did not have any goodwill or intangible assets at December 31,
2008, the adoption of this new standard did not impact the amounts
presented in 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:
---------------------------------------------------------------------
June 30, December 31,
2009 2008
---------------------------------------------------------------------
Cash and cash equivalents $ (190) $ (85)
Bank indebtedness 9,735 17,561
---------------------------------------------------------------------
Net debt 9,545 17,476
Unitholders' equity 68,923 68,772
---------------------------------------------------------------------
Total capitalization $ 78,468 $ 86,248
---------------------------------------------------------------------
---------------------------------------------------------------------
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 maximum ratio of net debt to EBITDA allowed
under the Canadian credit facility is 2.50 times, and the minimum
ratio of EBITDA to interest is 3.0 times. 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 terms of the agreements with the Fund's lenders provide that
distributions cannot be made to its unitholders in the event that its
subsidiaries did not meet the foregoing leverage as well as certain
additional credit ratios. The Fund's operating subsidiaries were
compliant with all required credit ratios under the US and Canadian
credit facilities as at June 30, 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 period ended June 30, 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:
---------------------------------------------------------------------
June 30, December 31,
2009 2008
---------------------------------------------------------------------
Lumber $ 9,140 $ 12,077
Sheet Goods 12,419 14,990
Specialty 2,307 2,356
Goods in-transit 1,057 1,445
---------------------------------------------------------------------
$ 24,923 $ 30,868
---------------------------------------------------------------------
---------------------------------------------------------------------
During the three months ended June 30, 2008 inventory write-downs
totaling $0.4 million (six months ended June 30, 2009 - $0.9 million)
were recorded to reduce certain inventory items to their net
realizable value.
Cost of sales for the three months ended June 30, 2009 were
$40.8 million (six months ended June 30, 2009 - $84.7 million), which
included $39.3 million (six months ended June 30, 2009 -
$81.4 million) of costs associated with inventory. The other
$1.5 million (six months ended June 30, 2009 - $3.3 million) related
principally to freight and other related selling expenses.
6. Receivables:
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:
---------------------------------------------------------------------
June 30, December 31,
Accounts receivable 2009 2008
---------------------------------------------------------------------
Trade accounts receivable - Canada $ 11,075 $ 8,404
Trade accounts receivable - United States 21,705 23,423
Sundry receivable 208 495
Current portion of long-term receivables 3,524 2,243
---------------------------------------------------------------------
36,512 34,565
Less: allowance for doubtful accounts 3,177 2,347
---------------------------------------------------------------------
$ 33,335 $ 32,218
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, December 31,
Long-term receivables 2009 2008
---------------------------------------------------------------------
Employee housing loans $ 1,203 $ 1,507
Customer notes 4,306 3,772
Security deposits 565 603
---------------------------------------------------------------------
6,074 5,882
Less: current portion, included in accounts
receivable 3,524 2,243
---------------------------------------------------------------------
$ 2,550 $ 3,639
---------------------------------------------------------------------
---------------------------------------------------------------------
The aging of trade receivables was:
---------------------------------------------------------------------
June 30, December 31,
2009 2008
---------------------------------------------------------------------
Current $ 18,604 $ 17,037
Past due 31-60 days 6,306 6,696
Past due 61-90 days 2,899 3,706
Past due 90+ days 4,971 4,388
---------------------------------------------------------------------
$ 32,780 $ 31,827
---------------------------------------------------------------------
---------------------------------------------------------------------
The Fund determines its allowance for doubtful accounts based on its
best estimate of the net recoverable amount by customer account.
Accounts that are considered uncollectable are written off. The total
allowance at June 30, 2009 was $3.1 million (December 31, 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.
Bad debt expense for the three months ended June 30, 2009 was
$1.2 million which equates to 2.4% of sales (three month period ended
June 30, 2008 - $0.5 million, being 0.8% of sales). Historically bad
debt as a percentage of sales has averaged approximately 0.7%.
7. Bank indebtedness:
---------------------------------------------------------------------
June 30, December 31,
2009 2008
---------------------------------------------------------------------
Checks issued in excess of funds on deposit $ 897 $ 1,087
Credit facility, Hardwoods LP 362 265
Credit facility, Hardwoods USLP (June 30,
2009 - US$7,288;December 31, 2008 -
US$13,308) 8,476 16,209
---------------------------------------------------------------------
$ 9,735 $ 17,561
---------------------------------------------------------------------
---------------------------------------------------------------------
In Canada, a subsidiary of the Fund has a revolving credit facility
of up to $12.0 million. In the US, a subsidiary of the Fund has a
revolving credit facility of up to $29.1 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 these credit facilities is
limited to the extent of the value of certain accounts receivable and
inventories held by subsidiaries of the Fund in Canada and the US
respectively. At June 30, 2009 the Canadian and US credit facilities
have $11.4 million and $7.2 million (US$6.2 million), respectively of
additional borrowing capacity, subject to the subsidiaries being able
to continue to meet their respective financial covenants as described
in note 4.
8. Non-controlling interests:
---------------------------------------------------------------------
Balance, January 1, 2009 $ 13,080
Interest in earnings:
Interest in earnings before taxes (69)
Adjustment to non-controlling interest from
subordination of Class B Unit Holders (1,297)
-------------------------------------------------------------------
(1,366)
Foreign currency translation adjustment of
non-controlling interest in Hardwoods USLP (669)
---------------------------------------------------------------------
Balance, end of period $ 11,045
---------------------------------------------------------------------
---------------------------------------------------------------------
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 US 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 at June 30, 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 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
June 30, 2009, the amount of such deficiency was $12.6 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 June 30, 2009, the amount of such deficiency was
$3.1 million.
- 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 prior to June 30, 2008, 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
$0.6 million for the three-month period ended June 30, 2009
($1.3 million for the six-month period ended June 30, 2009).
9. Changes in non-cash operating working capital and additional cash
flow disclosures:
---------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
---------------------------------------------------------------------
Accounts
receivable $ (833) $ 927 $ (4,743) $ (2,577)
Income taxes
recoverable/payable 184 (1) 1,915 (858)
Inventory 1,788 5,395 5,150 8,638
Prepaid expenses (438) (585) (239) (327)
Accounts payable and
accrued liabilities 1,321 (725) 4,643 (612)
---------------------------------------------------------------------
$ 2,022 $ 5,011 $ 6,726 $ 4,264
---------------------------------------------------------------------
---------------------------------------------------------------------
CICA 1540, Cash Flow Statements, require 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 three month period ended June 30, 2009 no discretionary
cash distributions were paid to Unitholders (2008 - $3.2 million).
During the six month period ended June 30, 2009 no discretionary cash
distributions were paid to Unitholders (2008 - $6.5 million).
10. Segment disclosure:
Information about geographic areas is as follows:
---------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
---------------------------------------------------------------------
Revenue from
external
customers:
Canada $ 18,806 $ 23,464 $ 39,243 $ 48,103
United States 26,303 43,024 63,668 89,433
---------------------------------------------------------------------
$ 49,489 $ 66,488 $ 102,911 $ 137,536
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, December 31,
2009 2008
---------------------------------------------------------------------
Property, plant and equipment:
Canada $ 622 $ 752
United States 1,106 1,416
---------------------------------------------------------------------
$ 1,728 $ 2,168
---------------------------------------------------------------------
---------------------------------------------------------------------
11. 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 three months
ended June 30, 2009, Hardwoods USLP contributed and expensed $60,131
(US$51,531) (three months ended June 30, 2008 - $72,545 (US$72,012))
in relation to the USLP Plan. During the six months ended June 30,
2009, Hardwoods USLP contributed and expensed $128,816 (US$106,839)
(six months ended June 30, 2008 - $216,923 (US$215,330)) 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
three months ended June 30, 2009, Hardwoods LP contributed and
expensed $41,728 (three months ended June 30, 2008 - $60,775) in
relation to the LP Plan. During the six months ended June 30, 2009,
Hardwoods LP contributed and expensed $91,581 (six months ended
June 30, 2008 - $176,969) in relation to the LP Plan.
12. Related party transactions:
For the three months ended June 30, 2009, sales of $108,553 (three
months ended June 30, 2008 - $108,048) were made to affiliates of
SIL, and the Fund made purchases of $24,169 (three months ended June
30, 2008 - $24,143) from affiliates of SIL. For the six months ended
June 30, 2009, sales of $270,762 (six months ended June 30, 2008 -
$235,123) were made to affiliates of SIL, and the Fund made purchases
of $32,087 (six months ended June 30, 2008 - $40,628) from affiliates
of SIL. All these sales and purchases took place at prevailing market
prices.
13. Income taxes:
Effective, March 31, 2008 the Fund completed an internal
reorganization that involved the refinancing of inter-corporate debt
in the form of notes issued and held by subsidiaries of the Fund. The
reorganization did not have any effect upon the management or
business activities of the Fund's operating subsidiaries. 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 amounts 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 is comprised
of an estimated $0.8 million current income tax recovery and
$2.8 million future income tax recovery.
During the quarter ended March 31, 2008, tax pools consisting
principally of Canadian tax losses carried forward, of approximately
$16.0 million were recorded by a subsidiary of the Fund
as a result of the Fund's re-organization plan. The tax losses
carried forward will result in a reduction of tax otherwise payable
under the Canadian federal government's tax on publicly traded income
trusts. 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.
In addition, during the quarter ended June 30, 2008, the Fund
recorded a future tax asset of approximately $20.1 million as a
result of the write-down of the goodwill and intangible assets.
Goodwill and intangible assets remain deductible for Canadian and
U.S. tax purposes.
14. Seasonality:
The Fund is subject to seasonal influences. Historically the first
and fourth quarters are seasonally slower periods for construction
activity and therefore demand for hardwood products.
15. 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