PRT Forest Regeneration Income Fund
TSX : PRT.UN

PRT Forest Regeneration Income Fund

November 05, 2007 15:55 ET

PRT Announces Results for Third Quarter, Completion of Strategic Review, and Closing of Management Internalization

VICTORIA, BRITISH COLUMBIA--(Marketwire - Nov. 5, 2007) - PRT Forest Regeneration Income Fund (TSX:PRT.UN) today reported results for its third quarter and nine months ended September 30, 2007, announced completion of its review of strategic alternatives for the Fund, and the closing of its previously announced acquisition of PRT Management Inc.

Third Quarter Results

For the nine months ended September 30, 2007, the Fund reported net earnings of $4,310,000 ($0.45 per unit) and distributable cash flow of $6,121,000 ($0.64 per unit), compared with $5,289,000 ($0.55 per unit) and $6,912,000 ($0.72 per unit) respectively for 2006. Net earnings and distributable cash declined over the same period of 2006 due to the impact of lower contract volumes in the current year, and one-time costs associated with proxy solicitation expenses of the Fund, the Fund's review of strategic alternatives, and the closure of the Nevada nursery site. Excluding these one time costs, pro-forma distributable cash would have been $0.71 per unit, a slight decline related to the volume decrease this year.

For the three months ended September 30, 2007, the Fund reported a net loss of $61,000 ($0.01 per unit) and distributable cash flow deficit of $12,000 ($0.00 per unit), compared with earnings of $294,000 ($0.03 per unit) and distributable cash of $90,000 ($0.01 per unit) respectively in 2006. Results decreased due principally to the impacts of the one-time costs. The Funds' third quarter results are typically lower than in other quarters, reflecting the seasonal nature of PRT's business.

Year-to-date revenues decreased by 3.4%, to $38,057,000. This is attributable to approximately 10% lower contracted seedling volumes in 2007, with this impact being partially offset by higher tree planting revenues and the effect of certain contract adjustments in the third quarter last year. Margins in the nine month period increased slightly as a result of lower energy costs, improved pricing, and a change in product mix.

Commenting on the quarter, President and CEO, John Kitchen said, "Fundamentally, our core operations remain solid despite the current market slowdown caused by the downturn in US housing starts, higher Canadian dollar, and changes in reforestation responsibilities in BC. When one-time costs are excluded, we have been able to offset a significant part of the market impact with sales to non-traditional markets and margin improvement."

"Markets could remain under pressure for another year while the forest industry works through the current cycle. However, we believe there is a growing backlog in reforestation that will need to be addressed over the mid-term. We look forward to working with government and industry to service these silviculture needs in the coming years, and to maintaining a relatively stable operating base through this market cycle."

The Fund's interim financial report is enclosed as part of this release.

Strategic Review

On April 30, 2007 the Trustees of the Fund announced that they would appoint CIBC World Markets to assist in a review of strategic alternatives for the Fund, commencing after Fund's Annual General Meeting on June 26, 2007.

The review, which has now been completed, considered the following alternatives:

- Continuation of the Fund's current strategy of focusing on stable distributions and growth within the forest seedling sector

- Implementation of a broader growth strategy

- Sale or restructuring of the Fund

The Trustees have concluded that Unitholders' interests will be best served by the Fund remaining independent and focused on the forest seedling sector. While the Fund's advisors engaged in strategic discussions with several potential purchasers of the Fund's business, they did not receive indications of interest which generated values superior to the value inherent in the Fund's current strategic plan.

"The Trustees believe that PRT has good opportunities to grow its business over the mid to long term, and that by executing on our strategic plan we can generate better Unitholder value as compared to the other options considered in this review," commented Colin Dobell, Chairman of the Board of Trustees. "During this process we had the opportunity to streamline PRT's management and the structure of the Fund through the previously announced management internalization agreement. The Fund Trustees and Directors of PRT endorse the current strategic plan, which is focused on continued growth in the forest seedling sector but includes investment in related industries."

Management Internalization Confirmed

The Fund also announced that shareholders of PRT Management Inc. ("PMI") have approved the acquisition by amalgamation of PMI with PRT, effective November 1, 2007, and that the Fund has also received acceptance of notice from the TSX for the transaction. This acquisition effectively terminates the existing external management arrangements, resulting in an internalized Fund management structure that more clearly aligns the fiduciary obligations of PRT's management team with the management and operation of the Fund's business. All employees of PMI will now be employed directly by PRT and some cost savings in management will also be realized as a result of the amalgamation.

About the Fund

PRT is the largest producer of container grown forest seedlings in North America, operating 15 nurseries and managing over 200 million seedlings annually. Units of the Fund are listed for trading on the Toronto Stock Exchange under the trading symbol PRT.UN.

Conference Call and Taped Replay

The Fund will host a conference call to further discuss the matters contained in this press release. The call will take place on November 6, 2007 at 11:00 AM PST, 2:00 PM EST. To participate in this conference, please call 1-866-585-6398.

Persons unable to attend the conference call may listen to a recorded version by dialing 1-866-245-6755 and entering the pass code 675653. This option is available until November 13, 2007. A recorded web cast version of the call may also be accessed from the Fund's website at www.prtgroup.com.

Management's Discussion and Analysis

We are pleased to present the 2007 third quarter report for the PRT Forest Regeneration Income Fund ("The Fund"). The Fund's operating results are dependent on the results of its operating subsidiary, Pacific Regeneration Technologies Inc. ("PRT"), and are highly seasonal. Seasonality is due to variations in activity levels in PRT throughout the year in completing annual seedling contracts, as well as the related seasonal nature of silviculture services; this makes year-over-year quarterly comparisons more relevant than sequential comparisons. Typically, the third quarter is the least active period in the annual cycle with activities restricted to completion of summer harvest, tree planting contracts and routine crop maintenance.

This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for future order volumes, pricing, operating costs and other expenditures; the outlook for future energy prices; plans and opportunities for capital spending; and other statements contained in this discussion that are not historical fact. Words such as "anticipate", "expect", "potential", "intends", "opportunity", "believes", "may", "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs, and actual events or results may differ materially. Risks and uncertainties include, but are not limited to, agricultural risks and crop yields, future commodity prices, exchange rate risks, the outlook for the forest industry, the risk that acquisitions may not be integrated as planned, the impact of proposed changes to income trust taxation, and other risks identified from time to time in the Fund's annual report, annual information return, prospectus, and other filing documents. These documents are available in electronic form at www.sedar.com, or by contacting the Fund directly. Forward-looking statements are based on current expectations and the company assumes no obligation to update such information to reflect later events or developments, except as required by law. Readers are cautioned not to place undue reliance on forward looking statements.

Operating Results - first nine months of 2007 compared to first nine months of 2006

Year-over-year earnings in 2007 are down somewhat, mainly due to lower contract volumes in the current year, and certain one-time expenses of the Fund.

Revenues in the period were $1.3 million lower than the same period of 2006. This was primarily due to a decline in seedling contract volumes this year, related to a temporary market slowdown. In addition, revenue recognition was slightly later this year as a result of a slight change in 2007 crop mix towards later season crops. Partially offsetting these factors were earned revenue contributions from 2006 contracts that were not completed until the first quarter of 2007, crop yield adjustments in the prior year period, and higher year over year tree planting service revenues. In 2007, PRT expects to produce approximately 208 million seedlings under contract, as compared to approximately 225 million in 2006.

Production costs declined overall with the lower volume and with lower energy costs, improving to 58.6% of revenues, as compared to 60.6% last year. Margins also improved with improved prices, and a decrease in the proportion of certain lower margin products. Energy costs were lower on a volume adjusted basis in the current period; this was impacted by the mix of crops, including more orders with later season sowing dates, and by lower commodity prices. PRT contracted forward approximately 60% of its anticipated natural gas needs for 2007, as a way to reduce exposure to commodity price swings. Most heating energy is consumed in the first six months of the year.

Selling, general and administration costs increased in the period, reflecting approximately $0.5 million in one-time costs related to proxy solicitation activities for the Fund's Annual General Meeting in June 2007, as well as costs associated with the previously announced review of strategic alternatives and management internalization.

Interest costs decreased slightly over the same period last year as a result of lower operating line requirements which was driven by improved working capital liquidity, and lower term debt balances due to minimal capital spending during the current market downturn.

Depreciation and amortization charges were higher in 2007, as a result of revisions in the estimated useful life of certain nursery assets on leased property.

During the first quarter PRT announced its intention to close its Nevada nursery facility to improve crop reliability and economies of scale. The Nevada nursery was an important pilot project stemming from PRT's strategy to develop more energy-efficient growing techniques. Expenditures to dismantle and relocate production assets totalled $0.2 million and are classified as "Exit activity charges" in the interim financial statements. These costs are expected to be funded from the proceeds from the sale of the Nevada real estate assets, and accordingly do not impact the Fund's calculation of distributable cash.

With the lower volumes, the one-time expenses, higher depreciation charges and costs associated with the Nevada closure, pre-tax earnings declined by $1.3 million relative to the same period of 2006.

The tax recovery in the period increased due to the lower earnings in the period which are less than the tax sheltered distributions made to the Trust during the nine months.

The Fund determines distributable cash flow as cash flow from operating activities before changes in non-cash working capital items, adjusted for seedling container depreciation (which provides a reserve for seedling container replacement), sustaining capital expenditures, long-term debt repayments from operating cash flow, gains or losses on asset sales, and such other reserves as the PRT Board of Directors may consider appropriate. Certain expense items, which are incurred as part of earnings enhancing capital projects, may be excluded from the determination of distributable cash flow if the overall project return exceeds PRT's cost of capital and will be funded from external cash sources such as term debt or equity financing. For example, 2007 costs associated with the closure of the Nevada nursery site and repayment of bank financing on the site will be funded from the proceeds of the eventual sale of the property, and therefore have been excluded from this calculation as the funds and expenditures did not arise from or utilize normal course operating cash flows.

The Fund considers distributable cash flow as defined to be a useful measure of the free cash flow from operations available for making unitholder distributions, as it is determined after providing for the maintenance and replacement of PRT's underlying asset base, as well as providing for expansionary capital spending.

The Fund calculates distributable cash as follows:



Three months ended Nine months ended
In $000's except per unit amounts September 30 September 30
2007 2006 2007 2006
--------------------------------------
Cash flow from operating activities $ 4,888 $ 6,496 $ 12,813 $ 15,752
Less: Changes in non cash working
capital, funded from operating
line (4,208) (5,731) ( 4,910) (6,787)
--------------------------------------------------------------------------
680 765 7,903 8,965
Cash flow adjustments:
Seedling container replacement
reserve (depreciation) (344) (393) (1,014) (1,111)
Repayment of long term debt from
operating cash flow (246) (178) (666) (539)
Sustaining capital expenditures (102) (154) (272) (453)
Exit activity charges to be funded
from other sources - - 170 -
Reserve for sustaining capital
expenditures created in prior
year to fund future period
capital spending - 50 - 50
--------------------------------------------------------------------------
Distributable cash (deficit) $ (12) $ 90 $ 6,121 $ 6,912
Seasonal deficiency (excess) of
cash flow to distributions
declared, applied from (to)
working capital 2,019 2,069 409 (188)
--------------------------------------------------------------------------
Distributions declared $ 2,017 $ 2,159 $ 6,530 $ 6,724
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Distributable cash per unit - $ 0.01 $ 0.64 $ 0.72

Distributions per unit declared
from current year's cash flow $ 0.21 $ 0.23 $ 0.65 $ 0.67

Distributions per unit declared
from prior year's cash flow - - $ 0.03 $ 0.03


Distributable cash flow for the period was lower than the corresponding period in 2006, due to lower order volumes and one-time proxy solicitation and strategic review expenses, partially offset by improved margins and lower sustaining capital spending this year. For comparison, if these one-time costs were excluded, pro-forma distributable cash for the period would have been $0.71 per unit, or $0.01 per unit lower, than the corresponding period of 2006.

Operating Results - three months ended September 30, 2007 compared to three months ended September 30, 2006

Revenues in the third quarter were $0.4 million higher than in the same period of 2006, primarily due to the timing of revenue recognition under seedling contracts this year; in 2006 proportionately more contract revenue was recorded in the first two quarters, whereas in 2007 a higher proportion will be recognized in the final two quarters. In addition, certain crop inventory adjustments were booked against revenue in the third quarter of 2006.

Production cost margins in the quarter improved by 2.9 percentage points compared to the third quarter of 2006, due to the impacts of the crop inventory adjustments in 2006 as well as a lower proportion of certain low margin products this year.

Selling, general and administration costs were higher than the same period in 2006, affected by the same factors outlined in the nine month discussion above.

Although the impact of lower contracted seedling volumes and higher selling, general and administration spending was offset by improved production margins in the quarter, higher depreciation charges resulted in a $0.1 million decrease in pre-tax earnings in the third quarter of 2007 as compared to the same period of 2006.

The tax recovery in the current quarter was lower than in the same period of 2006 primarily due to revisions to the tax basis of certain capital assets.

Distributable cash flow in the quarter decreased slightly relative to 2006, primarily due to one time costs and foreign exchange effects resulting from the weaker US dollar. On a pro forma basis, excluding the one-time expenses, distributable cash flow would be $0.02, an increase of $0.01 from the third quarter of 2006.

Summary of Quarterly Results



-------------------------------------------------------------------------
2005
-----------------------------
January
to
December
4th Q 31
-------------------------------------------------------------------------
Operating Results
-----------------
Revenues $ 13,160 $ 42,097

Net earnings $ 1,566 $ 6,008
Per Unit(1) $ 0.20 $ 0.79
Distributable cash $ 2,417 $ 7,456
Per Unit $ 0.32 $ 0.98

Distributions declared $ 1,805 $ 6,786
Per Unit $ 0.22 $ 0.88
-------------------------------------------------------------------------


-------------------------------------------------------------------------
2006
-------------------------------------------------
January
to
December
1st Q 2nd Q 3rd Q 4th Q 31
-------------------------------------------------------------------------
Operating Results
-----------------
Revenues $ 12,808 $ 17,767 $ 8,804 $ 12,195 $ 51,574

Net earnings $ 1,697 $ 3,298 $ 294 $ 2,076 $ 7,365
Per Unit(1) $ 0.18 $ 0.34 $ 0.03 $ 0.22 $ 0.77
Distributable cash $ 2,203 $ 4,619 $ 90 $ 2,187 $ 9,099
Per Unit $ 0.23 $ 0.48 $ 0.01 $ 0.23 $ 0.95

Distributions declared $ 2,407 $ 2,158 $ 2,159 $ 2,160 $ 8,884
Per Unit $ 0.25 $ 0.23 $ 0.23 $ 0.22 $ 0.93
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-------------------------------------------------------------------------
2007
-----------------------------
1st Q 2nd Q 3rd Q
-------------------------------------------------------------------------
Operating Results
-----------------
Revenues $11,714 $ 17,104 $ 9,239

Net earnings $ 1,478 $ 2,893 $ (61)
Per Unit(1) $ 0.15 $ 0.31 $ (0.01)
Distributable cash $ 2,160 $ 3,973 $ (12)
Per Unit $ 0.23 $ 0.41 $ -

Distributions declared $ 2,449 $ 2,064 $ 2,017
Per Unit $ 0.26 $ 0.21 $ 0.21
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Note 1: Basic and Fully Diluted

The above summarized financial data is presented in Canadian dollars, and
has been prepared in accordance with Canadian generally accepted
accounting principles, with the exception of distributable cash amounts.
Distributable Cash Flow is a term which does not have standardized meaning
under Canadian generally accepted accounting principles, and may not be
comparable to similar measures provided by other reporting entities.


Liquidity and Cash Flow

In the current quarter and nine months ending September 30, 2007, the Fund reported year over year decreases in cash flow from operating activities before changes in working capital of $0.1 million and $1.1 million respectively, relative to the corresponding periods in 2006. These decreases are mainly attributable to the lower earnings in 2007, impacted by the factors reviewed in the Operating Results discussion above. Cash flow from changes in non-cash working capital items decreased by a further $1.9 million in the first nine months of 2007, primarily due to lower accounts receivable and unbilled revenue balances because of lower contract volumes this year. In the third quarter, cash generated from changes in non-cash working capital items was $1.5 million lower than the third quarter of 2006, caused by invoicing timing shifts related to the later season crop mix changes and lower volumes.

Distributions to unitholders decreased on a year-over-year basis in both periods of 2007, due to a temporary $0.005 per unit reduction in the monthly distribution which commenced with the May 2007 distribution. This temporary reduction in the distribution amount is expected to continue for at least the balance of the year to fund the proxy solicitation and strategic review expenses previously discussed.

Capital expenditures were $1.2 million lower in the first nine months of 2007, at $1.1 million, reflecting the lower order volumes in 2007 which eliminated the need for facility expansion. Capital spending mainly consisted of seedling container replacement and other sustaining capital projects.

The Fund drew $0.2 million on its term debt facilities during the nine-month period, to refinance the final instalment of the vendor financing associated with the Oregon nursery purchase in 2004. A similar draw was made in the first nine months of 2006 for the first instalment. Repayments of debt in both years consisted primarily of scheduled amortization on term loans. However, 2007 also included a balloon payment of $0.3 million to retire the bank debt associated with the now closed Nevada nursery, and 2006 also included a $0.1 million repayment of vendor financing associated with a prior acquisition.

With the seasonal excess of operating cash flow over distributions paid, PRT was able to make a $4.1 million reduction in its operating loan balance in the first nine months of 2007, compared to $5.9 million in the first nine months of 2006. The pay down was lower in 2007, a consequence of lower earnings and more late season crops, which increased working capital investments over the period end, as well as the retirement of the Nevada loan.

Contractual Obligations of the Fund as of September 30, 2007 are as follows:



-----------------------------------------------------------------------
Payments Due by Period - $'000's
----------------------------------------------
Less
than 1 - 3 4 - 5 After
Contractual Obligations Total 1 Year years years 5 years
-----------------------------------------------------------------------
Long Term Debt 5,930 713 3,443 1,635 139
-----------------------------------------------------------------------
Operating Leases 5,806 854 1,528 1,198 2,226
-----------------------------------------------------------------------
Other 1,029 873 156 - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total Contractual
Obligations 12,765 2,440 5,127 2,833 2,365
-----------------------------------------------------------------------


Financial Position

At September 30, 2007, working capital was $2.9 million compared to $3.4 million at the end of 2006, a decrease of $0.5 million. This was mainly a result of lower cash flow in 2007 resulting from lower volumes and the one-time trust expenses, as well as funding the Nevada bank loan pay down out of working capital. The Fund reduced distributions by $0.005 per unit per month starting in May 2007 in order to fund the one-time expenses over future months. In addition, the working capital used to retire the Nevada loan will be replaced from the property sale proceeds. With existing credit lines and at the current distribution level, the Fund's working capital position is expected to be adequate relative to its operating needs.

Property, plant and equipment was $44.1 million at September 30, 2007, a net decrease of $4.1 million since December 31, 2006. The decrease is attributable to current period capital expenditures being less than total depreciation charges, and the balance sheet reclassification of assets held for sale at the former Nevada nursery site.

Unitholders' Equity at September 30, 2007 decreased $2.2 million since the 2006 year-end to $73.7 million. This decline was due to distributions declared exceeding net earnings during the period; distributions declared included the $0.03 per unit "top up" distribution on account of 2006. Annual distributable cash flow and distributions from the Fund are typically higher than reported earnings, since asset service lives of growing facilities and equipment are often extended beyond their amortization period with a regular maintenance program, and therefore depreciation charges may exceed sustaining capital expenditures for asset replacement. In quarterly periods, seasonal variations in PRT's cash flow may also occur relative to its level monthly distribution policy.

Units outstanding at the end of the period totaled 9,603,116, an increase of 1,900 units since year end due to issuances under the Fund's Employee Unit Purchase Plan. During the first quarter, the Fund Trustees elected to cause future employee purchases to be made as market based purchases instead of treasury based purchases, due to PRT's reduced capital needs.

Accounting Policy Changes

Effective January 1, 2007, the Fund adopted CICA Handbook Section 1530, "Comprehensive Income", CICA Handbook Section 3251, "Equity", CICA Handbook Section 3855, "Financial Instruments - Recognition and Measurement" and CICA Handbook Section 3865, "Hedges". These new Handbook Sections provide comprehensive requirements for the recognition and measurement of financial instruments, as well as standards on when and how hedge accounting may be applied. Handbook Section 1530 also introduces a new component of equity referred to as "Comprehensive Income".

The Fund had previously adopted the CICA's Accounting Guideline 13 ("AcG-13") "Hedging Relationships" on January 1, 2004. CICA Handbook Section 3865, "Hedges" replaces AcG-13.

Under these new standards, all financial instruments, including derivatives, are included on the consolidated balance sheet and are measured either at fair market value or, in limited circumstances, at cost or amortized cost. Derivatives that qualify as hedging instruments must be designated as either a "cash flow hedge", when the hedged item is a future cash flow, or a "fair value hedge", when the hedged item is a recognized asset or liability. The unrealized gains and losses related to a cash flow hedge are included in other comprehensive income. For a fair value hedge, both the derivative and the hedged item are recorded at fair value in the consolidated balance sheet and the unrealized gains and losses from both items are included in earnings. For derivatives that do not qualify, or that are not designated as hedging instruments, unrealized gains and losses arising from changes in fair market value are reported in earnings.

Management has determined that there is no impact to the financial statements as a result of adopting these new standards.

Outlook

PRT's orders in 2007 were somewhat lower as a result of a temporary slowdown in the demand for seedlings. This was due to three main factors:

1. A temporary and unexpected decline in BC market seedling demand. Legislative changes to forest tenure policies have resulted in changes in tenure for up to 20% of the provincial crown forest lands, and management believes this may have caused a delay in reforestation activity in some situations.

2. Some customers may have elected to defer silviculture spending as a response to the slowdown in lumber exports due to a commensurate slowdown in the US housing market.

3. A reduction of order volumes due to price increases for 2007 contracts, which were implemented to partially offset increased energy and other production costs.

Final contracted seedling volumes in 2007 total approximately 208 million trees, representing approximately 2.2 million seedling blocks of production. This is approximately 10% below the contracted seedling block volume in 2006. However, PRT is supplementing revenues with sales of non-contracted seedlings in certain markets. In addition, PRT will achieve somewhat higher average block revenues, due to the effect of modest seedling price increases, improved yield, and changes in product mix. These factors are expected to partially offset the impact of reduced contract volumes.

With lower volumes, operating earnings will remain under some pressure, but distributable cash from normalized operations is expected to remain above PRT's typical base distribution level. However, the impact of the additional costs of proxy solicitation, plus fees of financial advisors related to the previously announced strategic review, have resulted in increased administrative expense for the Fund in the current year. The Trustees estimate that these costs could amount to approximately $0.7 million over the course of the year, which will need to be funded from the Fund's available cash flow, and accordingly the monthly distribution declaration is expected to remain at the current reduced level of $0.07 per unit per month for the balance of the year and until these costs are recovered. Distributions may return to their normal level sometime in 2008, but this decision will be made in light of circumstances at the time.

Silviculture spending deferrals are likely to be temporary, and management expects demand to increase in subsequent years, likely after 2008, once the forest industry comes through the current challenging economic cycle. This view is supported by the growing reforestation backlog created by mountain pine beetle devastation in BC. Nevertheless, during the current cycle some customer restructuring may occur, and customer credit concerns are heightened. Management is carefully monitoring industry developments and the associated credit risks in the forest industry.

In the mid-term, the underlying fundamentals for the forest seedling industry remain sound, but will vary regionally. On a national level, the long-term demand for seedlings has remained remarkably stable. To take advantage of this broader market stability, PRT has positioned itself as a market leader in a number of key markets to help reduce the impact of regional market fluctuations, and contribute to stability in the Fund's performance. Our past marketing results have benefited from such regional diversity and we expect this will continue to be the case in the future.

Our current group of 15 nursery locations gives us the scope and capabilities to service a forest industry that is expected to be characterized by continuing consolidation. We are also executing on our strategy to gradually become less energy dependent, and to adopt new growing technologies that make us more cost-effective producers, in order to remain leaders in a competitive marketplace.

On behalf of the Trustees and Management

Colin A.C. Dobell, Chairman & Trustee

PRT Forest Regeneration Income Fund

John Kitchen, President and CEO

Pacific Regeneration Technologies Inc.

November 2, 2007

REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



Consolidated Balance Sheets (unaudited)
($000's)

As at As at
September 30 December 31
2007 2006
--------------------------

Assets

Current assets
Cash $ 916 $ 720
Accounts receivable 7,327 10,352
Inventories 1,455 2,247
Prepaid expenses and deposits 165 639
Unbilled revenue 1,632 3,366
--------------------------------------------------------------------------

11,495 17,324

Property, plant and equipment 44,134 48,208
Property, plant and equipment held
for sale (note 4) 1,035 -
Investment 304 401
Intangibles 964 1,164
Goodwill 32,375 32,375
--------------------------------------------------------------------------

$ 90,307 $ 99,472
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Liabilities

Current liabilities
Operating line $ 5,368 $ 9,445
Accounts payable and accrued liabilities 1,888 2,835
Distribution payable to Unitholders 672 720
Current portion of long-term debt 713 905
--------------------------------------------------------------------------
8,641 13,905

Long-term debt 5,217 6,273

Future income taxes 2,723 3,364
--------------------------------------------------------------------------

16,581 23,542
--------------------------------------------------------------------------

Unitholders' Equity

Capital contributions (note 5) 90,249 90,233

Cumulative net earnings 50,839 46,529

Cumulative distributions declared (67,362) (60,832)
--------------------------------------------------------------------------

73,726 75,930
--------------------------------------------------------------------------

$ 90,307 $ 99,472
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Consolidated Statements of Earnings and Cumulative Earnings (unaudited)
($000's)

Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
--------------------------------------------------

Revenue $ 9,239 $ 8,804 $ 38,057 $ 39,379
--------------------------------------------------------------------------

Expenses
Costs of production 6,056 6,023 22,315 23,865
Selling, general and
administration (note 9) 2,547 2,214 7,849 6,992
Foreign exchange loss
(gain) 19 9 (107) (62)
--------------------------------------------------------------------------

Operating earnings
before the following 617 558 8,000 8,584

Interest expense 238 267 735 841
Depreciation 1,012 848 3,060 2,527
Amortization of
Intangibles 67 67 200 200
Equity in loss of
investee 31 23 97 115
Exit activity charges
(note 6) - - 170 -
Loss (gain) on sale of
property, plant and
equipment 16 (11) 48 (90)
--------------------------------------------------------------------------

Earnings (loss) before
income taxes (747) (636) 3,690 4,991

Recovery of income taxes 686 930 620 298
--------------------------------------------------------------------------

Net earnings (loss) and
comprehensive income
(loss) $ (61) $ 294 $ 4,310 $ 5,289

Cumulative earnings -
beginning of the period 50,900 44,159 46,529 39,164
--------------------------------------------------------------------------

Cumulative earnings -
end of period $ 50,839 $ 44,453 $ 50,839 $ 44,453
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Basic and diluted
earnings (loss) per
Trust Unit $ (0.01) $ 0.03 $ 0.45 $ 0.55
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Weighted average number
of Trust Units
outstanding 9,603,116 9,595,703 9,603,046 9,592,387
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Consolidated Statements of Cash Flows (unaudited)
($000's)
Three months ended Nine Months ended
September 30 September 30
2007 2006 2007 2006
--------------------------------------------

Cash flows from operating
activities
Net earnings $ (61) $ 294 $ 4,310 $ 5,289
Items not affecting cash
Depreciation and
amortization
(excluding seedling
containers) 1,012 848 3,060 2,527
Seedling container
depreciation included
in costs of production 344 393 1,014 1,111
Amortization of intangibles 67 67 200 200
Recovery of future income
taxes (691) (895) (640) (271)
Unrealized loss (gain) on
foreign exchange (63) 46 (172) 84
Change in unrealized gain on
interest rate swaps 25 - (14) -
Equity in loss of investment 31 23 97 115
Loss (gain) on sale of
property, plant and
equipment 16 (11) 48 (90)
-------------------------------------------------------------------------
680 765 7,903 8,965

Net change in non-cash
working capital items 4,208 5,731 4,910 6,787
-------------------------------------------------------------------------

4,888 6,496 12,813 15,752
-------------------------------------------------------------------------

Cash flows from financing
activities
Distributions paid to
Unitholders (2,017) (2,159) (6,578) (6,702)
Proceeds of long-term debt - - 174 174
Repayment of long-term debt (475) (37) (1,069) (934)
Repayment of vendor's
holdback - - - (135)
Decrease in operating line (2,214) (3,953) (4,077) (5,857)
Issuance of Trust Units - 41 16 107
-------------------------------------------------------------------------

(4,706) (6,108) (11,534) (13,347)
-------------------------------------------------------------------------

Cash flows from investing
activities
Purchase of property, plant
and equipment (102) (327) (1,146) (2,368)
Proceeds on sale (cost to
dispose) of property,
plant and equipment (15) 11 63 90
-------------------------------------------------------------------------
(117) (316) (1,083) (2,278)
-------------------------------------------------------------------------

Increase in cash $ 65 $ 72 $ 196 $ 127

Cash - beginning of period 851 752 720 697

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Cash - end of period $ 916 $ 824 $ 916 $ 824
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Notes to Financial Statements

1. Significant accounting policies

These unaudited interim consolidated financial statements of the PRT Forest Regeneration Income Fund ("The Fund") have been prepared in accordance with Canadian generally accepted accounting principles. The interim financial statements follow the same accounting policies and method of application as the most recent annual consolidated financial statements. As such, these statements should be read in conjunction with the Fund's most recent annual report.

The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and the operating results for the interim period presented are not necessarily indicative of the results expected for the full year.

The Fund uses the temporal method of foreign currency translation to translate foreign currency denominated accounts and the accounts of its foreign subsidiary. Monetary items are translated at the rate of exchange in effect at the balance sheet date. Non-monetary items and revenue and expense items are converted at the historical exchange rate in effect at the time the transaction occurred. The Fund records realized and unrealized foreign exchange (gains) losses in the Statement of Earnings and in Unitholders' Equity as "Foreign exchange (gain) loss", and identifies unrealized (gains) losses on the translation of non-cash monetary items as "Unrealized (gain) loss on foreign exchange" in the Statement of Cash Flows.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the Fund's financial position as at September 30, 2007 and December 31, 2006, as well as its results of operations and cash flow for the three months ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 and 2006.

2. Seasonality of operating results

Revenues and cash flow are affected by the Fund's subsidiary, Pacific Regeneration Technologies Inc.'s ("PRT's") seedling crop cycles and by the seasonality of PRT's customers' planting season. PRT recognizes revenue under contracts on a percentage completion basis with costs incurred as a base. Revenue from non-contracted goods and services is recognized when the goods are delivered or the service has been substantially rendered. As such, fluctuations between quarters occur depending upon the activities and expenditures in the quarter. Comparatively high cost activities, such as harvesting, typically occur in the second and fourth quarters, and accordingly these quarters normally reflect a higher proportion of annual revenues.

3. Changes in accounting policies

Effective January 1, 2007, the Fund adopted CICA Handbook Section 1530, "Comprehensive Income", CICA Handbook Section 3251, "Equity", CICA Handbook Section 3855, "Financial Instruments - Recognition and Measurement" and CICA Handbook Section 3865, "Hedges". These new Handbook Sections provide comprehensive requirements for the recognition and measurement of financial instruments, as well as standards on when and how hedge accounting may be applied. Handbook Section 1530 also introduces a new component of equity referred to as comprehensive income.

The Fund had previously adopted the CICA's Accounting Guideline 13 ("AcG-13") "Hedging Relationships" on January 1, 2004. CICA Handbook Section 3865, "Hedges" replaces AcG-13.

Under these new standards, all financial instruments, including derivatives, are included on the consolidated balance sheets and are measured either at fair market value or, in limited circumstances, at cost or amortized cost. Derivatives that qualify as hedging instruments must be designated as either a "cash flow hedge", when the hedged item is a future cash flow, or a "fair value hedge", when the hedged item is a recognized asset or liability. The unrealized gains and losses related to a cash flow hedge are included in other comprehensive income. For a fair value hedge, both the derivative and the hedged item are recorded at fair value in the consolidated balance sheets and the unrealized gains and losses from both items are included in earnings. For derivatives that do not qualify, or that are not designated as hedging instruments, unrealized gains and losses arising from changes in fair market value are reported in earnings.

The Fund has determined that there is no impact to the financial statements as a result of adopting these new recommendations.

4. Property held for sale

During the first quarter of 2007, PRT discontinued production at its Nevada nursery site in order to improve production costs and crop production reliability. Production that would otherwise have been located at the Nevada nursery site has been absorbed by the Company's other nursery sites.

The majority of the Nevada capital assets are being actively marketed for sale. Assets which can be utilized at other nursery sites will not be sold. The following assets have been classified as held for sale, by major category:



Net Book Value ($000's) September 30, 2007
------------------
Land 398
Buildings 294
Growing facilities 190
Equipment 153
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1,035
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5. Capital Contributions

Capital contributions and units outstanding are:



Capital Contributions ($000's)
Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
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Capital Contributions -
Beginning of period $ 90,249 $ 90,156 $ 90,233 $ 90,090
Units issued under ESOP
program - 41 16 107
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Capital Contributions -
End of period $ 90,249 $ 90,197 $ 90,249 $ 90,197
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Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
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Units outstanding -
Beginning of period 9,603,116 9,593,761 9,601,216 9,587,414
Units issued under ESOP
program - 3,682 1,900 10,029
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Units outstanding - End of
period 9,603,116 9,597,443 9,603,116 9,597,443
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6. Exit activity charges

During the first quarter of 2007, PRT discontinued production at its Nevada nursery site (see note 4). Exit activities are substantially complete and no further exit activity costs are expected.

Exit expenditures related to the Nevada site were as follows:



Total Amounts Amounts
expected incurred incurred
expenditures in the period to date
($000's) ($000's) ($000's)
Dismantling and transportation
of assets to other sites $ 170 $ - $ 170
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The above table excludes costs associated with the disposal of capital assets from the Nevada nursery site (see note 4), but does include the cost of relocating equipment and other assets to other nursery sites.

Costs to dismantle and ship equipment are recognized when the activities take place and the costs are incurred, and are included in the Statement of Earnings as exit activity charges.

7. Distribution to Unitholders

As of September 30, 2007 the Fund declared distributions to Unitholders from current year operations of $6,530,000 (2006 - $6,725,000). Per unit distributions declared on account of current year operations are as follows:



Record Payment Taxable Taxable
Date Date Interest Non-Taxable Dividend Total
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01/31/2007 02/15/2007 $ 0.07122 $ 0.00238 $ 0.00140 $ 0.07500
02/28/2007 03/15/2007 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
03/30/2007 04/13/2007 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
04/30/2007 05/15/2007 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
05/31/2007 06/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
06/29/2007 07/13/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
07/31/2007 08/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
08/31/2007 09/14/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
09/28/2007 10/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
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Total $ 0.61486 $ 0.02134 $ 0.01380 $ 0.65000
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In addition, on March 31, 2007 the Fund made a special distribution of $288,093 (March 31, 2006 - $287,719), or $0.03 per unit, in respect of additional distributable cash flow available from PRT's 2006 operating results, to Unitholders of record on March 15, 2007.

8. Segmented information - geographic areas

The Company recorded revenues from customers located in the United States in the amount of $3,802,000 and $850,000 in the nine months and three months ending September 30, 2007 respectively ($4,070,000 and $878,000 in the nine months and three months ending September 30, 2006 respectively). In addition, as at September 30, 2007 the Fund's total capital assets located in the USA amounted to $4,496,000 (December 31, 2006 - $4,876,000).

9. Management Agreement and management fees

PRT has a management agreement with PRT Management Inc. ("PMI") whereby PMI provides management and administration services and strategic advice to PRT, as well as certain individuals to serve in executive positions. The fees under this agreement are reviewed and set annually, at a level necessary to achieve reimbursement, without profit, of PMI's internal costs and out of pocket expenses incurred in providing these services. Management fees are billed monthly in accordance with PMI's budgeted costs for the period. Management fees included in selling, general and administrative expenses totaled $1,064,000 and $347,000 for the nine months and three months ended September 30, 2007 ($908,000 and $323,000 for the nine months and three months ended September 30, 2006). PMI's operating results are consolidated into the Fund as a Variable Interest Entity (see also note 10).

10. Subsequent event

During October 2007, the Fund announced that it has reached an agreement to acquire PMI, the Fund's external manager, by way of amalgamation with a wholly owned subsidiary of PRT. The Fund expects that the $375,000 purchase price, plus costs to complete the amalgamation, net of identifiable assets acquired if any, will be charged against earnings in the fourth quarter. The amalgamation is expected to simplify the Fund's corporate structure and governance, and result in administrative cost savings.

11. Comparative figures

Certain of the comparative figures have been restated to conform with the presentation adopted in the current period.



INFORMATION PRT Forest Regeneration Income Fund
Board of Trustees
Mailing Office Colin A.C. Dobell
Pacific Regeneration Technologies Inc. Allan D. Laird
#101-1006 Fort Street George C. Stevens, Q.C.
Victoria, BC, Canada V8V 3K4
Tel: 250-381-1404 Pacific Regeneration Technologies
Fax: 250-381-0252 Inc.
Board of Directors and Officers
Registrar and Transfer Agent Colin A.C. Dobell, Chairman &
Computershare Investor Services Director
John Kitchen, President & CEO
World Wide Web & Director
www.prtgroup.com Allan D. Laird, Director
George C. Stevens, Q.C., Director
Market Information Gerry Bellerive, Director
Stock symbol: PRT.UN Robert A. Miller, V.P. Finance &
Stock Exchange: Toronto Administration, CFO & Secretary
Herb Markgraf, V.P. Business
Investor Relations Development
Tel: 250-381-1404 ext. 227 Robert Maxwell, V.P. Production
Toll free: 1-866-553-8733
Email: investor_relations@prtgroup.com


Contact Information

  • PRT Forest Regeneration Income Fund
    Robert Miller
    VP Finance/CFO
    1-866-553-8733 ext. 227
    Website: www.prtgroup.com