TRADING SYMBOL: Toronto Stock Exchange - GRO.UN
Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2006 fourth quarter and year-end results on March 9, 2007 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-800- 814-4860 or 416-644-3417. A replay will be available through March 23, 2007 at: 1-877-289-8525 or 416-640-1917. (Passcode: 21218117 followed by the number sign)
To access the live and archived webcast, please go to: http://www.vcall.com/IC/CEPage.asp?ID(equal sign)113422 or to the fund's website at: www.sungro.com.
VANCOUVER, March 8 /CNW/ - Sun Gro Horticulture Income Fund (the Fund) today reported financial results for the three and twelve-month periods ended December 31, 2006. The three-month period represents the final quarter of the Fund's 2006 fiscal year.
Distributable Cash
For the fourth consecutive quarter, the Fund generated record year-over- year distributable cash. In the three months ended December 31, 2006, it earned $4.5 million, or $0.21 per unit, of distributable cash, up from $3.8 million, or $0.17 per unit, in the final quarter of 2005. Distributable cash for the twelve-month period totalled $24.3 million, or $1.10 per unit, up from $20.1 million, or $0.91 per unit, in 2005. Distributable cash paid to unitholders was unchanged at $5.0 million, or $0.225 per unit, for the quarter and $19.8 million, or $0.90 per unit, for the twelve months in both years. This represents a payout ratio of 82% for 2006 compared to 99% in fiscal 2005.
"Thanks to the sustained improvement in our distributable cash generation in 2006, we made significant progress in reducing the Fund's payout ratio, one of our primary goals for the year," said Mitch Weaver, president and CEO of the Fund's wholly owned subsidiary, Sun Gro Horticulture Canada (Sun Gro, or the company) and a Trustee of the Fund. "We are pleased with Sun Gro's performance and remain dedicated to building value for our unitholders over the long term."
(in thousands of dollars except per unit amounts)
For the For the
three three For the For the
months months year year
Statement of distributable ended ended ended ended
cash December December December December
31, 2006 31, 2005 31, 2006 31, 2005
------------------------------------------
Cash flows from operating
activities before change
in non-cash operating
working capital $ 4,629 $ 3,335 $ 22,409 $ 16,675
Adjustments:
Realized gain on
foreign currency
contracts 617 1,538 4,691 5,702
Sustaining capital
expenditures (664) (614) (2,650) (2,821)
Proceeds from government
grants and loans - - 60 688
Repayment of government
loans (50) (25) (200) (100)
Current income taxes
expected to seasonally
reverse in the current
fiscal year (416)
------------------------------------------
Distributable cash $ 4,532 $ 3,818 $ 24,310 $ 20,144
------------------------------------------
------------------------------------------
Distributable cash per unit $ 0.21 $ 0.17 $ 1.10 $ 0.91
------------------------------------------
------------------------------------------
Distributions declared
per unit $ 0.225 $ 0.225 $ 0.90 $ 0.90
------------------------------------------
------------------------------------------
Fourth Quarter Operating Results
In the final three months of 2006, Sun Gro sustained the trend of gross margin improvement it began early in the year. Gross margin for the quarter increased to 46% from 45% in 2005. The gain was mainly due to the positive impact of Sun Gro's pricing strategy and a return to more normal peat harvest volumes in 2006 after an unprecedented two consecutive years of harvest shortfalls.
The company's fourth quarter revenues of $46.5 million were up by $3.8 million, or 9%, from $42.7 million in 2005. The revenue gain was driven by a 4% year-over-year increase in overall sales volumes, including a nearly 13% increase in growing mix volumes, and improved pricing performance. The company's average fourth quarter US dollar prices for growing mixes were up by 4% and Canadian dollar revenue per equivalent bale, or EB (10 cubic feet of peat), of growing mixes was flat from the same period in 2005. In the fourth quarter, peat moss prices were up by 21% year-over-year in US dollars and by 17% in Canadian dollars.
During the fourth quarter of 2006, the value of the Canadian dollar averaged US$0.88, compared to US$0.86 in the same period of 2005. The negative impact of the year-over-year difference in exchange rates was effectively offset by the company's pricing strategy.
Fourth quarter operating income of $2.5 million increased by $0.9 million from $1.6 million in 2005. The gain was primarily due to improved product prices and the production efficiencies that resulted from this year's larger peat harvest. Sun Gro also realized truck loading efficiencies in its West and Central regions as dryer harvest conditions enabled a greater number of pallets to be shipped per truck. Per-EB distribution costs during the quarter were down by 2% year-over-year. General and administrative expenses were up by 20% during the period, due in part to higher professional fees. These were associated with tax matters and the establishment of necessary procedures to satisfy regulatory requirements relating to internal controls and certification of internal controls over financial reporting. In addition, the company incurred interest expense of $0.3 million related to the repayment of an income tax refund received in 2003.
Fourth quarter net earnings were $67,000 in 2006, generating basic and diluted earnings of $0.003 per unit. In the corresponding period of 2005, Sun Gro generated basic and diluted earnings of ($0.54) per unit on a fourth quarter net loss of $11.8 million. The variance between quarters was primarily due to differences in unrealized gains on forward currency contracts and the 2005 impairment of goodwill.
Full-Year Operating Results
For the twelve months ended December 31, 2006, revenue of $197.3 million was down by $1.5 million, or 0.75%, from the $198.8 million reported in fiscal 2005. The slight decrease was primarily due to a 6% decline in annual sales of Sun Gro's higher priced mixes, partially offset by increased sales of peat moss. In 2006, the average US dollar exchange rate was $0.88, compared to $0.83 in 2005. As in the fourth quarter, the negative impact of foreign exchange was effectively offset by Sun Gro's pricing strategy.
Gross profit margin for the twelve months increased to 48% from 46% in 2005. As with the quarterly result, the improvement was primarily due to improved pricing performance and the year's larger peat harvest. Total harvest volumes were up by 9% over 2005.
Annual operating income rose to a record $16.5 million from $9.6 million in 2005, reflecting the year's improved gross margin and a 6% decrease in distribution expenses. The distribution cost decrease was due to the year's lower sales volumes, reduced cross-regional shipments and weather-related truck loading efficiencies. In 2005, a peat harvest shortfall necessitated significant shipments to customers in the central US from other regions, pushing up distribution expenses.
Net earnings increased to $15.9 million, or $0.72 per unit, from a loss of $3.5 million, or ($0.16) per unit, in 2005. The net earnings difference is mainly attributable to the $13.6 million impairment of goodwill that was recorded in 2005 and improved overall performance.
Operational Highlights
Of Sun Gro's total sales in 2006, professional and retail growing mixes accounted for 64% of revenues, peat moss contributed 30%, and fertilizers and minerals made up the remaining 6%. In keeping with its strategic focus on the higher margin professional growing mix market, Sun Gro launched a number of initiatives designed to increase sales of its value-added peat and bark-based growing mix products to professional growers. One initiative was the development of new products, such as the lighter-weight line of Metro-Mix(R) bark-based growing mixes that are more cost-effective to deliver to customers. The company also continued to build sales momentum for the Multicote(R) controlled release fertilizers that Sun Gro added to its professional product offerings in 2005. Revenues for the Multicote(R) line in 2006 were $1.9 million, up from $0.3 million in 2005.
In August 2006, Sun Gro enhanced its long-term peat supply by acquiring substantially all of the operating assets of Fort Frances, Ontario peat moss producer Normiska Peat Inc. Funded through the company's existing acquisition line of credit, the $3.4 million transaction gives Sun Gro an expanded presence in Central Canada. The acquired assets included a peat processing plant and related harvesting equipment, inventory on hand, and 1,440 acres of largely undeveloped professional grade peat bogs.
In September, Sun Gro strengthened its financial position by negotiating an amendment to its credit facilities with its lenders. The amendment extended the maturity of the company's term loans to November 1, 2009 and its revolving operating facility to November 1, 2008. Maturity of both the term loans and operating facility may be further extended by one year annually, subject to the approval of the lender.
In the final months of the year, Sun Gro entered into agreements for two acquisitions in California, North America's largest horticultural market. Both transactions were successfully completed early in 2007. On January 16, Sun Gro acquired all of the outstanding shares of Sun-Up Horticulture in Sacramento, adding two peat-mixing plants and a bark-processing plant to its North America- wide production network. On January 24, Sun Gro purchased the operating assets of Kellogg-Rich Grow, LLC. in Santa Maria, including an additional peat-mixing plant. The four newly acquired plants have significantly enhanced the company's ability to increase its share of both the professional and retail growing mix markets in California.
Income Tax Settlements
In March 2007, Sun Gro reached the basis of a settlement with the United
States Internal Revenue Service (IRS) regarding the proposed adjustment of the interest rate charged between the Fund's Canadian and US subsidiaries on $18.2 million of inter-company notes established at the Fund's inception. The IRS proposed to reduce the deductible portion of the interest rate on the notes from 13% to approximately 7%. Sun Gro has agreed with the IRS to settle the matter at an interest rate of 10.5% and has recorded an accrual of $0.7 million in its financial statements based on the settlement.
As previously announced, through an internal review of tax matters Sun Gro determined that it had filed an income tax return for 2002 that incorrectly carried back operating losses in that year to a prior period. This resulted in an income tax refund of $1.1 million that was received in 2003. The operating losses should have been carried forward to offset taxable income in subsequent years. The company has reached an agreement with the Canada Revenue Agency and to repay the $1.1 million tax refund plus $0.3 million of accrued interest. Payment will be made in March 2007 with funds drawn on Sun Gro's revolving operating facility. The company has restated its 2005 balance sheet to reflect a reclassification of this income tax asset. The benefit of these operating losses will be available to offset taxes payable in future years. The reclassification did not affect earnings or distributable cash in 2005 and 2006.
Proposed Changes to Tax Legislation Affecting Income Trusts
On October 31, 2006, the Canadian federal government announced proposed changes to the way in which income trusts are taxed. Under the proposed changes, a portion of the distributions that are currently paid out and taxed in the hands of unitholders would first be subject to tax at the trust level. If passed into legislation, the proposed changes to the existing tax treatment of trust income and distributions will take effect in 2011 for existing income trusts like the Fund.
Current Tax Position
Sun Gro is subject to income tax in both Canada and the Unites States. The total income tax recovery of $3.4 million for 2006 consists of a recovery of $3.9 million in Canada and an expense of $0.6 million in the United States. In 2006, Sun Gro utilized $0.9 million of non-capital loss carryforwards to offset taxable income in Canada. This leaves Sun Gro with $9.9 million of loss carryforwards as at December 31, 2006 to offset future taxable income in Canada. Of this total, $5.4 million expire in 2010 and $4.5 million expire in 2015. By utilizing these loss carryforwards, the company has not yet needed to take any tax deduction for depreciation. These deductions will still be available to offset future taxable income in Canada after the loss carryforwards are utilized.
In 2006, Sun Gro paid income taxes of $0.8 million, most of which was for income taxes in the United States. Management anticipates that U.S. income taxes will continue to comprise the majority of Sun Gro's income tax payments for the next several years and that Sun Gro's Canadian current income tax exposure will not be significant for the near future.
Financial Highlights
Comparative Statements
of Earnings
(In thousands of
dollars except per For the three For the three
unit amounts and months ended months ended
number of units December 31, 2006 December 31, 2005
outstanding and EBs) (unaudited) (unaudited)
------------------------- -------------------------
Revenue $ 46,459 100% $ 42,730 100%
Cost of goods sold 25,029 54% 23,448 55%
----------- -----------
Gross profit 21,430 46% 19,282 45%
Distribution expenses 10,176 22% 10,001 23%
Selling expenses 3,680 8% 3,496 8%
General and
administrative
expenses 5,066 11% 4,210 10%
----------- -----------
Total operating
expenses 18,922 41% 17,707 41%
----------- -----------
Operating income 2,508 5% 1,575 4%
Other income
(expense), net (2,860) -6% (497) -1%
Goodwill impairment - 0% (13,572) -32%
Interest expense (1,066) -2% (812) -2%
----------- -----------
Earnings (loss)
before income taxes (1,418) -3% (13,306) -31%
Income tax
(provision) recovery
Current 356 1% 565 1%
Future 1,129 2% 964 2%
----------- -----------
Income tax (provision)
recovery, net 1,485 3% 1,529 3%
----------- -----------
Net earnings (loss)
for the period $ 67 0% $ (11,777) -28%
----------- -----------
----------- -----------
Basic and diluted
earnings (loss) per
unit $ 0.00 $ (0.54)
----------- -----------
----------- -----------
Weighted average
number of units
outstanding 22,023,000 22,023,000
----------- -----------
----------- -----------
Selected supplemental
revenue information
Volume in thousands
of EBs (1)
Growing Mixes 1,578 1,401
Peat Moss 1,152 1,215
Fertilizer and
Minerals 60 66
----------- -----------
Total company sales 2,790 2,682
----------- -----------
----------- -----------
Average revenue per
EB(1) (US $)
Growing Mixes $ 18.31 $ 17.67
Peat Moss 9.22 7.61
Fertilizer and
Minerals 36.30 25.62
----------- -----------
Total company
sales $ 14.94 $ 13.31
----------- -----------
----------- -----------
Average revenue per
EB(1)
(Canadian $)
Growing Mixes $ 20.67 $ 20.59
Peat Moss 10.41 8.87
Fertilizer and
Minerals 41.00 29.87
----------- -----------
Total company
sales $ 16.86 $ 15.52
----------- -----------
----------- -----------
(1) An EB, or equivalent bale, is Sun Gro's standard unit of measure
referring to 10 cubic feet of peat. Average revenue per EB calculation
does not include transportation-related surcharges.
Comparative Statements
of Earnings
(In thousands of
dollars except per For the For the
unit amounts and year ended year ended
number of units December 31, 2006 December 31, 2005
outstanding and EBs) (audited) (audited)
------------------------- -------------------------
Revenue $ 197,307 100% $ 198,761 100%
Cost of goods sold 102,161 52% 107,317 54%
----------- -----------
Gross profit 95,146 48% 91,444 46%
Distribution expenses 44,410 22% 47,441 24%
Selling expenses 15,331 8% 15,954 8%
General and
administrative
expenses 18,942 10% 18,425 9%
----------- -----------
Total operating
expenses 78,683 40% 81,820 41%
----------- -----------
Operating income 16,463 8% 9,624 5%
Other income, net 449 0% 602 0%
Goodwill impairment - 0% (13,572) -7%
Interest expense (4,316) -2% (2,896) -2%
----------- -----------
Earnings (loss)
before income taxes 12,596 6% (6,242) -4%
Income tax
(provision)
recovery
Current (956) 0% (553) 0%
Future 4,307 2% 3,335 2%
----------- -----------
Income tax
(provision)
recovery, net 3,351 2% 2,782 2%
----------- -----------
Net earnings (loss)
for the year $ 15,947 8% $ (3,460) -2%
----------- -----------
----------- -----------
Basic and diluted
earnings (loss)
per unit $ 0.72 $ (0.16)
----------- -----------
----------- -----------
Weighted average
number of units
outstanding 22,023,000 22,023,000
----------- -----------
----------- -----------
Selected supplemental
revenue information
Volume in thousands
of EBs(1)
Growing Mixes 6,143 6,509
Peat Moss 6,076 6,044
Fertilizer and
Minerals 324 345
----------- -----------
Total company sales 12,543 12,898
----------- -----------
----------- -----------
Average revenue per
EB(1) (US $)
Growing Mixes $ 18.05 $ 16.70
Peat Moss 8.49 7.38
Fertilizer and
Minerals 30.17 23.07
----------- -----------
Total company
sales $ 13.73 $ 12.50
----------- -----------
----------- -----------
Average revenue
per EB(1)
(Canadian $)
Growing Mixes $ 20.46 $ 20.25
Peat Moss 9.61 8.94
Fertilizer and
Minerals 34.22 27.98
----------- -----------
Total company
sales $ 15.56 $ 15.16
----------- -----------
----------- -----------
1) An EB, or equivalent bale, is Sun Gro's standard unit of measure
referring to 10 cubic feet of peat. Average revenue per EB calculation
does not include transportation-related surcharges.
Outlook
The information contained in "Outlook" is forward-looking information. Please see "Forward-Looking Statements" below for a discussion of the risks and uncertainties in connection with forward-looking information.
Industry-wide, supply is expected to remain tight until the 2007 harvest begins. Assuming that the new harvest commences in line with last year's and normal harvest levels are achieved, Sun Gro expects that overall sales volumes will be slightly higher than in 2006, largely due to the bog resources added by the Normiska peat acquisition and the company's recent expansion in California.
"Through our strategic acquisitions of the past several years, we have enhanced and strengthened the geographic diversity of our peat resources, while expanding our product offerings," said Weaver. "We are moving forward on a very solid footing, and remain confident in our ability to generate sufficient distributable cash to continue to meet the current rate of distributions, as well as provide for other corporate purposes."
Sun Gro holds foreign currency contracts to manage the near-term impact of a strengthening of the Canadian dollar. For 2007, the company has entered into foreign currency contracts with a blended rate of $1.14 (US$0.88) that will offset approximately 70% of its expected net US dollar cash flows.
Forward-Looking Statements
This news release contains forward-looking statements. These statements relate to future events or future performance and reflect Sun Gro's expectations regarding its growth, results of operations, performance, business prospects, opportunities or industry performance or trends. These forward-looking statements reflect management's current internal projections, expectations or beliefs and are based on information currently available. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "intend", "plan", "anticipate", "believe", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. A number of factors could cause actual events or results to differ materially from those discussed in the forward-looking statements. Important factors that could cause actual results to differ materially from Sun Gro's expectations include, among other things, fluctuations in currency exchange rates, changes in tax laws, the impact of adverse weather conditions on harvesting operations, an increase in freight rates, and the impact of an increase in fuel costs. You should specifically consider these factors, including the risks and uncertainties described in the Fund's most recent annual information form. In addition, the Fund's ability to make distributions to unitholders is entirely dependent on Sun Gro's performance. Although management believes that the forward-looking statements contained in this news release are based on reasonable assumptions, readers cannot be assured that actual results will be consistent with such statements. Forward-looking statements are made as of the date of this news release and Sun Gro assumes no obligation to update or revise them to reflect new events or circumstances.
Non-GAAP Measures
Distributable cash is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, the distributable cash of the Fund may not be comparable to the distributable cash measures presented by other issuers. However, distributable cash is commonly used by Canadian open-ended trusts as an indicator of financial performance and the Fund believes that distributable cash is a useful supplemental measure that may assist in assessing the potential return on an investment in the Fund.
The calculation of distributable cash is based on cash flows from operating activities before changes in non-cash operating working capital, adjusted for sustaining capital expenditures, realized gains from forward currency contracts, government grants and government loans. Certain expenditures that are incurred as part of earnings-enhancing capital projects and acquisitions are excluded from the determination of distributable cash flow if the project or acquisition is funded by term debt or equity financing.
Income Fund Profile
Sun Gro Horticulture Income Fund was launched with the completion of an Initial Public Offering of 22,023,000 trust units on March 27, 2002. The Fund is dependent on Sun Gro's operations, with monthly distributions to its unitholders based entirely on Sun Gro's performance.
Company Profile
Sun Gro was founded in 1929 in Vancouver, BC and has grown to become North America's largest producer of sphagnum peat, and the largest distributor of peat moss, and peat and bark-based growing media to professional plant growers in the US and Canada. Sun Gro sells its professional products primarily to greenhouse, nursery and specialty crop growers, as well as to golf course developers and landscapers. Sun Gro also sells peat moss and peat- based growing mixes to retail customers, either by way of private label partnerships or under its own brand names. Approximately 80% of the company's sales volume goes to the US.
Sun Gro Horticulture Income Fund
Consolidated Balance Sheet
(in thousands of dollars)
(audited)
As at As at
December 31, December 31,
Assets 2006 2005
---------------------------
(Restated -
note 2)
Current assets
Accounts receivable $ 38,338 $ 46,310
Inventories (note 5) 33,874 29,856
Unrealized gain on foreign currency
contracts (note 19) - 3,041
Prepaid expenses and other assets 3,522 3,844
75,734 83,051
---------------------------
Property, plant and equipment (note 6) 122,459 126,608
Intangible assets (note 6) 33,653 35,616
Goodwill (note 8) 11,202 11,202
Other assets 442 119
---------------------------
$ 243,490 $ 256,596
---------------------------
---------------------------
Liabilities and Unitholders' Equity
Current liabilities
Bank indebtedness $ 649 $ 1,053
Operating line (note 9) 31,146 38,329
Accounts payable and accrued
liabilities (note 10) 15,781 17,170
Unrealized loss on foreign currency
contracts (note 19) 824 -
Current portion of long-term debt (note 9) 221 200
Distribution payable to unitholders (note 11) 1,652 1,652
---------------------------
50,273 58,404
Other liabilities (note 12) 4,561 4,175
Long-term debt (note 9) 27,511 24,261
Future income taxes (note 14) 13,678 17,940
---------------------------
96,023 104,780
Unitholders' equity
Capital contributions (note 13) 209,733 209,733
Cumulative translation account (15,717) (15,245)
Cumulative earnings 57,395 41,448
Cumulative distributions declared (note 11) (103,944) (84,120)
---------------------------
147,467 151,816
---------------------------
$ 243,490 $ 256,596
---------------------------
---------------------------
Commitment and contingencies (note 15)
Subsequent events (note 20)
Approved by the Trustees
(Signed) (Signed)
W. John Dawson, FCA Mitchell J. Weaver
Chairman of the Trustee; President and CEO
Board of Trustees
The accompanying notes are an integral part of these consolidated
financial statements.
Sun Gro Horticulture Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
(in thousands of dollars except per unit amounts and number of units
outstanding)
(audited)
Year ended Year ended
December 31, December 31,
2006 2005
---------------------------
Revenue $ 197,307 $ 198,761
Cost of goods sold 102,161 107,317
---------------------------
Gross profit 95,146 91,444
Distribution expenses 44,410 47,441
Selling expenses 15,331 15,954
General and administrative expenses 18,942 18,425
---------------------------
Total operating expenses 78,683 81,820
---------------------------
Operating income 16,463 9,624
Other income, net (note 16) 449 602
Goodwill impairment (note 8) - (13,572)
Interest expense (4,316) (2,896)
---------------------------
Earnings (loss) before income taxes 12,596 (6,242)
Income tax (provision) recovery (note 14)
Current (956) (553)
Future 4,307 3,335
---------------------------
Income tax (provision) recovery, net 3,351 2,782
---------------------------
Net earnings (loss) for the year 15,947 (3,460)
Cumulative earnings - beginning of year 41,448 44,908
---------------------------
Cumulative earnings - end of year $ 57,395 $ 41,448
---------------------------
---------------------------
Basic and diluted earnings per unit $ 0.72 $ (0.16)
---------------------------
---------------------------
Weighted average number of units
outstanding 22,023,000 22,023,000
---------------------------
---------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
Sun Gro Horticulture Income Fund
Consolidated Statements of Cash Flows
(in thousands of dollars)
(audited)
Year ended Year ended
December 31, December 31,
2006 2005
---------------------------
Cash flows from operating activities
Net earnings (loss) for the year $ 15,947 $ (3,460)
Items not affecting cash
Depreciation, depletion and accretion 9,655 8,919
Amortization of intangible assets 1,963 2,077
Gain on foreign currency contracts (826) (1,068)
Gain on disposal of property, plant
and equipment (23) (30)
Goodwill impairment - 13,572
Future income tax recovery (4,307) (3,335)
---------------------------
22,409 16,675
Change in non-cash operating working capital 3,306 (8,583)
---------------------------
25,715 8,092
Cash flows from investing activities
Acquisitions (note 4) (3,366) (3,250)
Realized gain on foreign currency contracts 4,691 5,702
Additions to property, plant and equipment (2,650) (2,821)
Proceeds from disposal of property, plant
and equipment 43 498
---------------------------
(1,282) 129
Cash flows from financing activities
Distributions paid to unitholders (note 11) (19,824) (19,824)
Proceeds from term loans 3,350 3,250
Increase (decrease) in operating line (7,183) 6,540
Proceeds from government grants and loans 165 688
Repayment of government loan (200) (100)
---------------------------
(23,692) (9,446)
Effect of exchange rate changes on cash (337) 334
---------------------------
(Increase) decrease in bank indebtedness 404 (891)
Bank indebtedness - beginning of year (1,053) (162)
---------------------------
Bank indebtedness - end of year $ (649) $ (1,053)
---------------------------
---------------------------
Supplemental cash flow information
Interest paid $ 4,652 $ 2,801
Income taxes paid $ 767 $ 416
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to the Consolidated Financial Statements
(tabular amounts in thousands of dollars, except per unit amounts)
1. Nature of operations and basis of presentation
Nature of operations
Sun Gro Horticulture Income Fund (the "Fund") is a limited purpose,
open-ended trust established under the laws of the Province of British
Columbia on February 12, 2002. The Fund was created to acquire and hold,
directly and indirectly, 100% of the outstanding securities of Sun Gro
Horticulture Canada Ltd. and its wholly owned subsidiaries (collectively
"Sun Gro" or the "Company"). These subsidiaries are: Sun Gro Horticulture
CM Ltd., Horticulture Brands Limited Partnership, Sun Gro Holdings Inc.,
and its wholly owned subsidiaries, Sun Gro Horticulture Processing Inc.
and Sun Gro Horticulture Distribution Inc. Sun Gro, founded in 1929 in
Vancouver, British Columbia, is a producer and distributor of
horticultural-grade peat moss and peat and bark-based growing media with
customers throughout North America.
Basis of presentation
The consolidated financial statements of the Fund have been prepared in
accordance with accounting principles generally accepted in Canada.
Fiscal year end
The fiscal year end of the Fund is December 31. The fiscal year of the
Fund's subsidiaries is a 52-week or 53-week period ending on the Sunday
nearest to December 31. Fiscal years 2006 and 2005 ended on December 31,
2006 and January 1, 2006, respectively. The financial statements of the
Fund for the year ended December 31, 2006 include Sun Gro for the period
from January 2, 2006 to December 31, 2006. The financial statements of
the Fund for the year ended December 31, 2005 include Sun Gro for the
period from January 3, 2005 to January 1, 2006.
Principles of consolidation
The consolidated financial statements include the accounts of the Fund
and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments
having original terms to maturity of 90 days or less when acquired.
Inventories
Inventories are stated at the lower of average cost or net realizable
value. Cost of finished goods includes materials, labour and an
allocation of manufacturing overhead.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and proceeds from government grants, and are depreciated on
a straight-line basis using the following estimated useful lives:
Buildings 20 years
Machinery and equipment 3 to 8 years
Peat bogs consist of peat bog acquisition costs and bog development costs
to prepare bog areas for harvesting operations, such as building access
roads, clearing surface vegetation and creating drainage ditches. Peat
bogs are depleted based on the volume of peat produced during the period
over the total expected volume of the peat bog.
Depreciation of property, plant and equipment, including peat bog
depletion, is included in cost of goods sold, except for depreciation not
directly related to production, which is included in general and
administrative expenses.
Intangible assets
Intangible assets include brand names, customer relationships and
internally developed software and databases. The Sunshine brand name has
been determined to have an indefinite useful life and is not amortized.
The remaining intangible assets are amortized on a straight-line basis
using the following estimated useful lives:
Brand names (other than Sunshine) 10 years
Customer relationships 3 to 20 years
Internally developed software and databases 5 to 10 years
Amortization of brand names and customer relationships are included in
selling expenses and amortization of internally developed software and
databases is included in general and administrative expenses.
Impairment of long-lived assets
Property, plant and equipment and intangible assets with a finite life
are reviewed for impairment whenever events or changes in circumstances
suggest that the carrying amount of an asset may not be recoverable and
may be in excess of its fair value.
Impairment is assessed using a two step approach. Under the first step,
long-lived assets are tested for recoverability by comparing the carrying
amount of an asset to the undiscounted estimated future net cash flows
expected from its use and disposal.
If the carrying amount of the asset exceeds the undiscounted cash flows,
it is considered to be impaired. The impairment loss is then measured and
recorded as the amount by which the carrying amount of the asset exceeds
its fair value, which is estimated based on the discounted future
expected cash flows of the asset.
Intangible assets with an indefinite life are reviewed for impairment
annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The asset is written down when
the carrying value exceeds its fair value.
Goodwill
Goodwill comprises the excess of cost over fair values of the acquired
underlying net assets arising from business combinations accounted for
using the purchase method and is not amortized. Management tests goodwill
for impairment annually, or more frequently if events or changes in
circumstances indicate that it might be impaired. Goodwill impairment is
assessed based upon the comparison of the fair value of the Fund to the
underlying carrying values of the Fund's net assets, including goodwill.
If the carrying amount of the Fund exceeds its fair value, an impairment
charge is recorded to the extent that the carrying amount of the goodwill
exceeds its fair value (see note 8).
Asset retirement obligations
The Fund records the estimated fair value of a liability for asset
retirement obligations in the period a reasonable estimate of fair value
can be made. The Fund's asset retirement obligations relate primarily to
the Company's peat bogs, which are located on land leased from Canadian
provincial governments. These leases generally contain provisions that
require the Company to rehabilitate the bogs once they become fully
depleted. The nature of the rehabilitation varies among the leases, may
not be specified in the leases, or may be specified at a later date. The
obligation to rehabilitate is incurred when an area of a bog is cleared
for harvesting operations and the liability is settled in the period in
which the rehabilitation work is completed. In the period a reasonable
estimate can be made, the fair value of the liability is added to the
carrying amount of the peat bog and is depleted over its useful life. The
liability is accreted over time through periodic charges to earnings, and
is reduced by actual costs of rehabilitation.
Revenue recognition
The Fund's revenues are earned from the sale of various grades of peat
moss, horticultural growing media (including both peat-based and bark-
based growing mixes), and water-soluble and controlled release
fertilizers and minerals. Revenues are recognized, net of customer
rebates and discount programs, when the significant risks and rewards of
ownership are transferred, which is generally at the time of shipment to
the customer. The Fund classifies amounts charged to its customers for
shipping and handling as part of its revenues and recognizes costs
incurred for shipping and handling of products to customers as part of
distribution expenses.
Reporting currency and foreign currency translations
The accounts of the Fund's United States operations are considered to be
self-sustaining and are translated into Canadian dollars using the
current rate method. Assets and liabilities are translated at the rates
in effect at the balance sheet date and revenue and expenses are
translated at average exchange rates for the period. Gains or losses
arising from the translation of the financial statements of self-
sustaining United States operations are recorded in a cumulative
translation account in unitholders' equity.
Hedging relationships
The Fund generates a significant portion of its operating cash flows in
US dollars and makes distributions to unitholders in Canadian dollars.
The Fund utilizes foreign currency contracts to manage a portion of its
foreign currency risk. The Fund's policy is not to utilize foreign
currency contracts for trading or speculative purposes. All contracts
have been marked to market value and recorded in other income.
Income taxes
Income taxes are accounted for using the asset and liability method.
Under this method, future tax assets and liabilities are recognized for
temporary differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. Future tax assets
and liabilities are measured using enacted or substantively enacted tax
rates expected to apply when the asset is realized or the liability
settled. The effect on future tax assets and liabilities of a change in
tax rates is recognized in income in the period that enactment or
substantive enactment occurs.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
estimates are related to economic lives of depreciable long-lived assets,
asset impairment, asset retirement obligations, accounts receivable
valuation, inventory valuation, and income taxes.
2. Reclassification of 2005 income tax balances
During 2006, the Company determined that it incorrectly recorded its
income tax liabilities as a result of filing an income tax return for
2002 that incorrectly carried back operating losses in that year to a
prior period; rather, the operating losses should have been carried
forward to offset taxable income in subsequent years. A refund of
$1.1 million was received in 2003 in respect of those losses.
Accordingly, the 2005 balances of accounts payable and accrued
liabilities and future income taxes have been revised as follows:
Accounts
payable and Future
accrued income
liabilities taxes
------------ -----------
December 31, 2005 balance as reported
previously $ 16,059 $ 19,051
Reclassification of 2002 operating losses
to future income taxes 1,111 (1,111)
------------ -----------
December 31, 2005 balance as revised $ 17,170 $ 17,940
------------ -----------
------------ -----------
This correction did not affect earnings of prior periods. Accrued
interest of $0.3 million is reflected in the 2006 consolidated statement
of earnings. As at December 31, 2006, the total liability of $1.4 million
is included in accounts payable and accrued liabilities on the
consolidated balance sheet. The Company will pay the amount owing to the
Canada Revenue Agency in March 2007.
3. Changes in accounting policy
Accounting for consideration given a customer
Effective January 1, 2006 the Fund adopted EIC-156 "Accounting by a
Vendor for Consideration Given to a Customer", providing guidance as to
the circumstances under which a consideration is an adjustment of the
selling price of the vendor's products or services and under which it is
a cost incurred by the vendor to sell its products. Early payment
discounts to customers previously included in general and administrative
expenses are now reported as a reduction of revenue. The EIC was applied
retroactively and did not affect retained earnings. The adoption of the
statement resulted in the reduction of revenue and the reduction of
general and administrative expenses. Following the application of
EIC-156, revenue for the years ended December 31, 2006 and 2005, was
reduced by $1.6 million and $1.2 million respectively.
4. Acquisitions
Normiska Peat Inc.
On August 15, 2006, Sun Gro acquired substantially all of the assets of
Normiska Peat Inc., a peat moss and bark producer in Fort Frances,
Ontario for cash consideration of $3.4 million. The acquired assets
include leased peat bogs, inventories and related assets at a production
facility. The acquisition was funded through additional borrowings under
Sun Gro's credit facility.
The acquisition has been accounted for by the purchase method and the
results of the acquired business have been included in the Fund's
consolidated financial statements from the date of acquisition. These
consolidated financial statements reflect the assets and liabilities
acquired from Normiska Peat Inc. at assigned fair values as follows:
Inventories $553
Property, plant and equipment 2,869
Other liabilities (56)
---------
Total acquistion cost $3,366
---------
---------
Pigeon Hill Peat Ltd.
On January 27, 2005, Sun Gro acquired substantially all of the assets of
Pigeon Hill Peat Ltd., a peat producer in New Brunswick, for cash
consideration of $3.25 million. The acquired assets include leased peat
bogs, inventories and related assets at a production facility. The
acquisition was funded through additional borrowings under Sun Gro's
credit facility.
The acquisition has been accounted for by the purchase method and the
results of the acquired business have been included in the Fund's
consolidated financial statements from the date of acquisition. These
consolidated financial statements reflect the assets and liabilities
acquired from Pigeon Hill Peat Ltd. at assigned fair values as follows:
Inventories $ 90
Property, plant
and equipment 3,287
Other liabilities (127)
-------------------------------
Total acquisition cost $ 3,250
-------------------------------
-------------------------------
5. Inventories
December 31, December 31,
2006 2005
------------ ------------
Raw materials $ 7,264 $ 6,913
Scratch peat 4,691 2,870
Packaging 5,586 5,923
Finished goods 16,333 14,150
------------ ------------
$ 33,874 $ 29,856
------------ ------------
------------ ------------
6. Property, plant and equipment
December 31, 2006
----------------------------------------
Accumulated
Depletion and
Cost Depreciation Net
------------ ------------ ------------
Peat bog acquisition and
development costs $ 100,068 $ (16,573) $ 83,495
Land 3,380 - 3,380
Buildings 21,499 (4,470) 17,029
Machinery and equipment 34,153 (15,598) 18,555
------------ ------------ ------------
$ 159,100 $ (36,641) $ 122,459
------------ ------------ ------------
------------ ------------ ------------
December 31, 2005
----------------------------------------
Accumulated
Depletion and
Cost Depreciation Net
------------ ------------ ------------
Peat bog acquisition and
development costs $ 96,888 $ 12,557) $ 84,331
Land 3,317 - 3,317
Buildings 21,430 (3,396) 18,034
Machinery and equipment 32,212 (11,286) 20,926
------------ ------------ ------------
$ 153,847 $ (27,239) $ 126,608
------------ ------------ ------------
------------ ------------ ------------
7. Intangible assets
December 31, 2006
----------------------------------------
Accumulated
Cost Amortization Net
------------ ------------ ------------
Brand names
Sunshine $ 13,753 $ - $ 13,753
Other 1,903 (679) 1,224
Customer relationships 24,796 (6,422) 18,374
Internally developed software
and databases 2,210 (1,908) 302
------------ ------------ ------------
$ 42,662 $ (9,009) $ 33,653
------------ ------------ ------------
------------ ------------ ------------
December 31, 2005
----------------------------------------
Accumulated
Cost Amortization Net
------------ ------------ ------------
Brand names
Sunshine $ 13,753 $ - $ 13,753
Other 1,903 (488) 1,415
Customer relationships 24,796 (5,051) 19,745
Internally developed software
and databases 2,210 (1,507) 703
------------ ------------ ------------
$ 42,662 $ (7,046) $ 35,616
------------ ------------ ------------
------------ ------------ ------------
8. Goodwill
During the 2006 annual impairment testing, Sun Gro identified no
impairment to the value of goodwill. In 2005, Sun Gro recorded a goodwill
impairment charge of $13.6 million. This impairment charge was due to the
carrying amount of the recorded value of goodwill exceeding the implied
fair value of the goodwill, as measured by the market value of the Fund's
units. The impairment was a non-cash charge.
9. Credit Facilities
Sun Gro's credit facilities include a revolving operating facility, term
loans and an acquisition line. In September 2006, Sun Gro amended its
credit facilities to extend the maturity date of the term loans to
November 1, 2009 and the revolving operating facility to November 1,
2008. In future years, subject to the approval of the lender and the
payment of certain fees, Sun Gro may extend the maturity of the term
loans and revolving operating facility by one year between March 1 and
May 31 of each year. Historically, Sun Gro has been able to renew its
credit facilities under terms acceptable to the Company. The credit
facilities consist of the following:
a) Revolving operating facility
In February 2006, Sun Gro amended its revolving operating facility to
increase the amount available at all times to $50.0 million except for
the period from March 1 to May 31 of each year, during which the total
amount available is $55.0 million. In addition, the amendment increased
the senior leverage ratio permitted under the credit facility for Sun
Gro's first quarter of each year.
The amount of revolving operating facility available is dependent upon
meeting certain covenant requirements. As at December 31, 2006, Sun Gro
had drawn $31.1 million (2005 - $38.3 million) of the fully available
$50.0 million revolving operating facility at a weighted average interest
rate of 6.4%. In addition the revolving operating facility includes
US$15.0 million which can be drawn on by Sun Gro's US subsidiaries to
finance working capital and general corporate requirements. Interest on
the revolving operating facility is due monthly at the Canadian prime
rate, LIBOR, Banker Acceptance rate, or US base rate, plus a margin based
on Sun Gro's senior debt ratio. Inventories, trade accounts receivable,
certain peat bog lease assignments and owned real property are provided
as security.
b) Long-term debt
December 31, December 31,
2006 2005
------------ ------------
Term loan due November 2009 (2005 - due
September 2008) $ 17,100 $ 13,750
Term loan (US$8.5 million), due November 2009
(2005 - due September 2008) 9,902 9,886
Government loans due monthly through 2011
(2005 - due monthly through 2010) 730 825
------------ ------------
27,732 24,461
Less: Current portion (221) (200)
------------ ------------
$ 27,511 $ 24,261
------------ ------------
------------ ------------
Term loans
The term loans are collateralized by certain property, plant and
equipment along with the leasing rights to certain peat bogs. Interest on
the term loans is due monthly at the Canadian prime rate, LIBOR, Banker
Acceptance rate, or US base rate, plus a margin based on Sun Gro's senior
leverage ratio. At December 31, 2006, the weighted average interest rate
on the term loans was 7.0%.
Government grant and loans
During September 2006, Sun Gro received a provincial government grant of
$60,000 and related interest free loan of $105,000. The loan proceeds
have been allocated to offset some of the expenses associated with the
repairs and upgrades in one of our New Brunswick plants that was damaged
by a fire in June of 2005. The grant was recorded as a reduction of the
cost of the equipment. Principal payments on the loan are due monthly
beginning in 2007 through 2011.
During 2005, Sun Gro received a provincial government grant of $188,000
and related loan of $500,000 to finance equipment purchases. The grant
was recorded as a reduction of the cost of the equipment. The loan
principal and interest are due monthly through 2010. Interest is
calculated by the bank's floating base rate, currently 8.0%.
Amounts due under the term and government loans are as follows:
2007 $ 221
2008 221
2009 27,148
2010 121
2011 21
----------
$ 27,732
----------
----------
c) Acquisition line
In August 2006, $3.4 million was drawn under the acquisition line to fund
the acquisition of substantially all of the assets of Normiska Peat Inc.
This amount is now included in the term loan due November 1, 2009. Of the
total $10.0 million acquisition line $6.6 million is available to fund
future acquisitions. (see note 20)
10. Accounts payable and accrued liabilities
December 31, December 31,
2006 2005
------------ ------------
(Restated -
note 2)
Trade accounts payable $ 9,177 $ 9,584
Employee compensation payable 3,656 3,058
Other accrued liabilities 2,948 4,528
------------ ------------
$ 15,781 $ 17,170
------------ ------------
------------ ------------
11. Distributions to unitholders
The Fund's distribution policy is to make level distributions to
unitholders of its available cash. The Fund makes monthly cash
distributions of its net monthly cash receipts, less estimated amounts
required for the payment of expenses.
Cash distributions are payable monthly to the unitholders of record on
the last business day of each month and are paid no later than the 15th
day of the following month or, if such day is not a business day, no
later than the next business day. The cash receipts of the Fund depend on
the performance of Sun Gro and its payment of dividends and interest on
the securities of Sun Gro held by the Fund. Due to the seasonality of Sun
Gro's operations and cash flows during certain months, the revolving
operating facility is used to supplement Sun Gro's available cash.
During each of the years ended December 31, 2006 and December 31, 2005,
the Fund declared distributions to the unitholders of $19.8 million or
$0.90 per unit. The amounts and record dates of these distributions were
as follows:
Year ended December 31, 2006
2006 Record Date Amount Per Unit
-------------------------
January 31 $ 1,652 $ 0.0750
February 28 1,652 0.0750
March 31 1,652 0.0750
April 28 1,652 0.0750
May 31 1,652 0.0750
June 30 1,652 0.0750
July 31 1,652 0.0750
August 31 1,652 0.0750
September 29 1,652 0.0750
October 31 1,652 0.0750
November 30 1,652 0.0750
December 29 1,652 0.0750
-------------------------
$ 19,824 $ 0.9000
-------------------------
-------------------------
Year ended December 31, 2005
2005 Record Date Amount Per Unit
-------------------------
January 31 $ 1,652 $ 0.0750
February 28 1,652 0.0750
March 31 1,652 0.0750
April 29 1,652 0.0750
May 31 1,652 0.0750
June 30 1,652 0.0750
July 29 1,652 0.0750
August 31 1,652 0.0750
September 30 1,652 0.0750
October 31 1,652 0.0750
November 30 1,652 0.0750
December 30 1,652 0.0750
-------------------------
$ 19,824 $ 0.9000
-------------------------
-------------------------
The distribution of $1,652,000 with a record date of December 29, 2006
was accrued at December 31, 2006 and paid in January 2007.
The distributions declared have been allocated as follows for income tax
purposes:
Year ended Year ended
December 31, December 31,
2006 2005
------------ ------------
Taxable - interest $ 18,235 $ 17,851
Taxable - dividends 1,589 1,973
------------ ------------
Total distribution $ 19,824 $ 19,824
------------ ------------
------------ ------------
Per unit $ 0.9000 $ 0.9000
------------ ------------
------------ ------------
12. Other liabilities
December 31, December 31,
2006 2005
------------ ------------
Pension plan (note 17) $ 298 $ 358
Asset retirement obligations 4,263 3,817
------------ ------------
$ 4,561 $ 4,175
------------ ------------
------------ ------------
Sun Gro's asset retirement obligations relate primarily to its obligation
to rehabilitate its leased peat bogs. Asset retirement obligations
activity for the years ended December 31, 2006 and December 31, 2005 is
as follows:
Year ended Year ended
December 31, December 31,
2006 2005
------------ ------------
Obligations at the beginning of the year $ 3,817 $ 3,265
Liabilities incurred 109 200
Liabilities acquired from acquisitions 56 127
Accretion expense 281 225
Rehabilitation work completed - -
------------ ------------
Obligations at the end of the year $ 4,263 $ 3,817
------------ ------------
------------ ------------
The estimated undiscounted future cash flows required to settle the
obligations are approximately $21.5 million and are discounted at credit
adjusted risk free rates ranging from 7.2% to 7.6% over periods ranging
from 8 to 72 years based on the estimated remaining life of the related
bogs.
13. Capital contributions
The Fund's Declaration of Trust provides that an unlimited number of
units may be issued. Each unit is transferable and represents an equal
undivided beneficial interest in any distributions of the Fund and in the
net assets of the Fund. All units have equal rights and privileges. Each
unit entitles the holder thereof to participate equally in allocations
and distributions and to one vote at all meetings of unitholders for each
whole unit held. The units issued are not subject to future calls or
assessments. Units are redeemable at any time at the option of the holder
at amounts related to market prices at the time, subject to a maximum of
$50,000 in cash redemption by the Fund in any particular month. This
limitation may be waived at the discretion of the Trustees of the Fund.
Redemption in excess of this amount, assuming no waiving of the
limitation, shall be paid by way of a distribution in specie of a pro
rata number of Sun Gro securities held by the Fund.
As at December 31, 2006 and 2005, capital contributions consisted of
22,023,000 units issued at $10.00 per unit, less net expenses pursuant to
the initial public offering of $10.5 million.
14. Income taxes
The Fund is a unit trust for income tax purposes and, accordingly, the
Fund is taxable only on any taxable income not allocated to the
unitholders. Subsidiaries of the Fund are subject to tax at statutory
rates. During the years ended December 31, 2006 and December 31, 2005,
all taxable income of the Fund has been distributed to unitholders. Any
income tax obligations relating to the distributions are the obligations
of the unitholders.
The income tax provision (recovery) varies from the amount computed by
applying combined Canadian federal and provincial tax rates to earnings
before income taxes as follows:
Year ended Year ended
December 31, December 31,
2006 2005
------------ ------------
Earnings (loss) before income taxes $ 12,596 $ (6,242)
------------ ------------
------------ ------------
Income taxes at statutory rates $ 4,447 $ (2,247)
Income tax benefit of Fund distributions (6,385) (6,429)
Impairment of goodwill - 4,886
Changes in statutory income tax rates (2,516) -
Large corporations tax - 173
Non deductible expenses 296 315
Other 807 520
------------ ------------
$ (3,351) $ (2,782)
------------ ------------
------------ ------------
Temporary differences that gave rise to future income tax assets and
liabilities are as follows:
December 31, December 31,
2006 2005
------------ ------------
(Restated -
note 2)
Future income tax assets (liabilities)
Property, plant and equipment $ (22,562) $ (29,826)
Intangible assets 2,678 3,255
Unit issue costs 1,798 3,254
Non-capital loss carryforwards 3,168 4,020
Asset retirement obligations 1,322 1,466
Other (82) (109)
------------ ------------
$ (13,678) $ (17,940)
------------ ------------
------------ ------------
The Fund's Canadian subsidiaries have non-capital loss carryforwards of
$5.4 million which expire in 2010, and $4.5 million which expire in 2015.
The benefit of these non-capital loss carry forwards have been recognized
as a future income tax asset. The subsidiaries also have capital loss
carryforwards of $776,000 which may be used to reduce future taxable
capital gains. Due to the uncertainty of these carryforwards being
utilized, the capital loss carryforwards have not been recorded as an
asset.
Income tax matter
Settlement of IRS Audit for years 2002-2004: In July 2005, one of Sun
Gro's US subsidiaries received a Notice of Proposed Adjustment from the
United States Internal Revenue Service (IRS) regarding the interest rate
charged between the Fund's Canadian and US subsidiaries on US$18.2
million of inter-company notes established at the Fund's inception. The
IRS notice proposed to reduce the interest rate on the notes that would
be deductible from 13% to approximately 7%. Sun Gro appealed the proposed
adjustment and in February 2007 agreed with the IRS to settle the matter
based on an interest rate of 10.5%. An accrual for the estimated
liability of $0.8 million for the difference between the 13% rate and the
agreed upon rate of 10.5% for all financial periods through December 31,
2006 has been recorded in Sun Gro's 2006 financial statements.
15. Commitments and contingencies
Lease commitments
The Company has various operating lease commitments relating to bog
sites, offices and warehouse facilities requiring the following future
minimum annual lease payments:
2007 $ 4,267
2008 2,925
2009 1,666
2010 778
2011 430
Thereafter 358
----------
$ 10,424
----------
----------
Total rent expense under these operating lease agreements for the years
ended December 31, 2006 and 2005 was $4.0 million and $3.3 million,
respectively. Certain of the facility lease agreements give the Company
the option to renew the agreements beyond their original terms.
Claims
During the ordinary course of business, certain product liability claims
may be brought against the Company and its suppliers. Management contests
these claims and believes that they are without merit and that any
possible settlement will have no material impact on the financial
position or results of operations of the Company.
16. Other income
Other income consists of the following:
Year Ended December 31,
-------------------------
2006 2005
------------ ------------
Realized gain on foreign currency contracts $ 4,691 $ 5,702
Unrealized (loss) on foreign currency contracts (3,865) (4,634)
Gain on disposal of property, plant and
equipment 23 30
Other (400) (496)
------------ ------------
Total other income $ 449 $ 602
------------ ------------
------------ ------------
17. Employee benefit plans
Defined Contribution Plans
Sun Gro sponsors a Registered Pension Plan (a defined contribution plan)
for Canadian salaried and certain hourly employees (the "Canadian Plan")
and a 401(k) Retirement Savings Plan for salaried and hourly United
States employees (the "US Plan"). The total pension expense related to
the US Plan and the Canadian Plan was $768,000 and $730,000 for the years
ended December 31, 2006 and 2005, respectively.
Pension Plan
Sun Gro sponsors an unfunded Salaried Employee Retirement Pension (SERP)
plan for a small number of former management employees. In 1997, Sun Gro
altered its SERP arrangement, froze membership and benefits payable in
this plan as of that date and accrued the full actuarially determined
liability in the financial statements at that time. As at December 31,
2006 and 2005, the liability for the SERP amounted to $298,000 and
$358,000, respectively. The remaining plan participants are no longer
active employees (see note 12).
Long-Term Incentive Plan
In December 2006, Sun Gro canceled the Long-Term Incentive Plan (the
"LTIP") that was implemented in January 2005. The LTIP provided eligible
employees the opportunity to receive units of the Fund based on the
achievement of certain distributed cash targets, as defined in the LTIP.
For 2006 and 2005, the threshold amount of $1.00 per unit of distributed
cash was not met; accordingly, no contributions were made to the LTIP for
2006 or 2005.
Restricted Unit Plan
In December 2006, Sun Gro's Human Resources and Compensation Committee
(the "Committee") canceled the LTIP and authorized a restricted unit
grant (the "2006 Grant") to certain management employees and directors,
subject to the subsequent adoption of a restricted unit plan to be
effective December 31, 2006 (the "Restricted Unit Plan"). Under the
Restricted Unit Plan, the Committee shall have the authority to grant
restricted units at any time as a bonus for services rendered by the
participants in the fiscal year of the grant. The units will be purchased
on the open market from funds contributed to the Restricted Unit Plan by
Sun Gro. Units shall vest based on the passage of time on the date or
dates determined by the Committee on the grant date, the achievement of
certain performance criteria, or both. Additional restricted units will
be granted automatically to participants for distributions on previously
granted restricted units. The number of additional restricted units
granted will be determined by the distribution paid less any applicable
withholding taxes divided by the fair market value of the Fund's units on
the date the distributions are paid.
As at December 31, 2006, Sun Gro has recorded a liability in the
consolidated financial statements of approximately $489,000 for the 2006
Grant. The accrual represents the fair value as at December 31, 2006 of
the units to be purchased under the 2006 Grant. The majority of the units
will vest over a predetermined period to a maximum of three years. The
liability will be amortized over the vesting period.
18. Segment information
The Fund has one reportable business segment, related to the
manufacturing and sale of horticultural growing media. Substantially all
assets of the business support these operations. Geographic segment
information is presented as follows:
Year ended Year ended
December 31, December 31,
2006 2005
------------ ------------
Revenue
United States $ 152,644 $ 154,312
Canada 28,268 26,603
Mexico and other 16,395 17,846
------------ ------------
$ 197,307 $ 198,761
------------ ------------
------------ ------------
December 31, December 31,
Property, plant and equipment 2006 2005
------------ ------------
United States $ 9,805 $ 11,324
Canada 112,654 115,284
------------ ------------
$ 122,459 $ 126,608
------------ ------------
------------ ------------
Goodwill
Canada $ 11,202 $ 11,202
------------ ------------
$ 11,202 $ 11,202
------------ ------------
------------ ------------
Intangible assets
United States $ 28,823 $ 30,866
Canada 4,830 4,750
------------ ------------
$ 33,653 $ 35,616
------------ ------------
------------ ------------
19. Financial instruments
Foreign currency contracts
During the year ended December 31, 2006, the Company realized gains on
maturing foreign currency contracts of $4.7 million (2005 - $5.7 million)
and recorded unrealized losses of $3.9 million (2005 - unrealized gains
of $4.6 million) on outstanding contracts, which are included in other
income (note 16). As at December 31, 2006, the Company held foreign
currency contracts to purchase $56.0 million at a weighted average
exchange rate of $1.14 (US$ 0.88). Unrealized losses on these contracts
were $0.8 million at December 31, 2006 (2005 - unrealized gains of
$3.0 million). These contracts mature during the period January 2007
through December 2007.
Fair value of financial instruments
As at December 31, 2006, the carrying amounts of accounts receivable,
bank indebtedness, operating line, accounts payable and accrued
liabilities, distribution payable to unitholders, other liabilities and
long-term debt approximate their fair values.
Interest rate risk
Sun Gro maintains a revolving operating facility and term debt with
interest due monthly based on the current market interest rates. Interest
rate fluctuations could have a material affect on interest expense.
Concentration of credit risk
The Company is subject to credit risk primarily through its accounts
receivable. Credit risk on accounts receivable is minimized as a result
of the large customer base. The Company does not require collateral for
its accounts receivable. Certain professional product customers are
granted deferred payment terms due to the seasonality of their
businesses.
20. Subsequent Events
On January 16, 2007, Sun Gro acquired all of the outstanding shares of
Sacramento, California horticultural growing mix and bark producer,
Sun-Up Horticulture for US $4.3 million plus a cash payment of US $0.4
million each year for three years, including six percent (6%) simple
interest calculated on the balance then due.
On January 23, 2007, Sun Gro acquired substantially all of the operating
assets of Santa Maria, California horticultural growing mix producer,
Kellogg-Rich Grow, LLC. for US $0.9 million and purchased the product
inventory on hand for US $0.2 million.
These acquisitions were funded by the existing term debt facility and
will be accounted for by the purchase method. The financial results of
the acquired companies will be included in the Fund's consolidated
financial statements from the date of acquisition. Sun Gro has not yet
finalized the allocation of the purchase price for each company.
%SEDAR: 00017490E