Rogers Sugar Income Fund
TSX : RSI.UN

Rogers Sugar Income Fund

May 04, 2010 16:00 ET

Rogers Sugar Income Fund: Interim Report for the 2nd Quarter 2010 Results

Adjusted Net Earnings and Adjusted Distributable Cash Higher Than Last Year's Comparable Quarter and Year-To-Date

Unexpected Sales to the U.S. of Approximately 30,000 Metric Tonnes Booked for Delivery Over the Next Two Quarters

MONTREAL, QUEBEC--(Marketwire - May 4, 2010) - Rogers Sugar Income Fund (TSX:RSI.UN)

Message to Unitholders: On behalf of the Board of Trustees, I am pleased to present the unaudited consolidated financial results of Rogers Sugar Income Fund (the "Fund") for the three months ended March 31, 2010.

Volume for the second quarter was 153,103 metric tonnes, as opposed to 159,700 metric tonnes in the comparable quarter of last year, a decrease of approximately 6,600 metric tonnes. Year-to-date volume of 309,516 metric tonnes is approximately 35,900 metric tonnes lower than last year. Second quarter export volume was lower by approximately 5,900 metric tonnes as fiscal 2009 benefited from over 14,500 metric tonnes of shipments to the U.S. under special sugar quotas which opened in August and October 2008. This was partially offset by 4,300 metric tonnes shipped to Mexico and approximately 4,000 metric tonnes shipped against our regular Canadian U.S. quota. Year-to-date export volume is 18,500 metric tonnes lower than last year due to the opening of special quotas in fiscal 2009. Liquid volume decreased by approximately 2,200 metric tonnes for the quarter and 10,200 metric tonnes year-to- date, as one major HFCS substitutable account did not renew their contract in fiscal 2010. Consumer volume was lower by 1,700 metric tonnes for the quarter and 4,200 metric tonnes year-to-date due to competitive market activities. Industrial volume was higher by 3,200 metric tonnes due mainly to timing in deliveries, while year-to-date volume is 3,000 metric tonnes lower than last year due to a reduction of sugar containing production in Canada.

With the adoption of new accounting policies October 1, 2006 for derivative financial instruments, the Fund's operating results may now be subject to significant fluctuations. These fluctuations are due to the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments at the end of the reporting period. This accounting income does not represent a complete understanding of factors and trends affecting the business. We therefore prepared adjusted gross margin and adjusted earnings results to reflect the performance of the Fund during the reporting period. These adjusted results are comparable to the earnings reported in previous periods. All these non-GAAP adjustments are explained in detail in the Management's Discussion and Analysis prepared for the quarter ended March 31, 2010. We will therefore discuss adjusted gross margins, which reflect the operating income without the impact of the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments. At the end of the second quarter, a net negative adjustment of $26.5 million before income taxes was recorded due to a mark-to-market loss, thus reducing earnings before income taxes by that amount. Year-to-date, a mark-to-market net loss adjustment of $24.1 million before income taxes was recorded. Most of this loss is due to the decline in the price of raw sugar that occurred in March 2010 where, earlier in the quarter, it reached a high of 30.4 cents per pound and closed at 16.59 cents per pound on March 31, 2010. These mark-to-market charges are also adjusted in distributable cash.

For the quarter, adjusted gross margin decreased by approximately $0.4 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margin was $101.72 as compared to $100.09 for the comparable quarter of last year. The additional gross margins earned, due to higher values of raw sugar prices on domestic beet sugar sales, were partially offset by higher processing costs incurred at the Taber beet factory due to the poor condition of harvested beets in the Fall of 2009. Year-to- date adjusted gross margin rate was $135.85 compared to $127.43 in fiscal 2009. The increase in the year-to-date adjusted gross margin rate is due mainly to a favourable sales mix, with lower volume of low margin liquid sales, and higher values of raw sugar prices which is positive for domestic beet sugar sales.

Adjusted EBIT of $9.3 million was $2.8 million higher when compared to the same quarter last year due to lower administration and distribution costs which more than offset the lower adjusted gross margin income. Additional distribution costs of approximately $2.7 million were incurred in the first two quarters of fiscal 2009 due to large shipments to the U.S. against special U.S. sugar quotas. Year-to-date adjusted EBIT of $29.0 million was $3.3 million higher than last year due again to the lower distribution costs incurred this year.

For the quarter, adjusted distributable cash was $7.1 million, as compared to $4.5 million in fiscal 2009. Year-to-date adjusted distributable cash was $25.9 million, an increase of $3.5 million from last year's comparable period. The increase in the second quarter and year-to-date distributable cash was due to the higher profitability at the operational level. The Fund distributed $10.0 million during the second quarter, and $20.1 million year-to-date.

During the second quarter, approximately 30,000 metric tonnes of refined sugar was sold to U.S. manufacturers for delivery over the next two quarters. This unexpected sales opportunity was as a result of continued high refined sugar prices in the U.S., combined with a significant decline in the world raw sugar values. Due to that considerable difference between the U.S. refined sugar prices and world raw sugar values, Lantic was able absorb the high tier U.S. duty on refined sugar, of approximately $360.00 per metric tonne, and still generate a positive contribution to gross margins.

On April 8, 2010, the Fund issued a fourth series, 5.70% convertible unsecured subordinated debentures, maturing on April 30, 2017. The estimated net proceeds of $47.7 million, combined with available cash reserves, will be used to redeem the 6.0% second series convertible unsecured subordinated debentures on June 29, 2010. As a result of this transaction, the Fund was able to extend the term of the debentures being redeemed for a further five years at a lower rate of interest.

A total of 30,000 to 32,000 acres are expected to be planted this spring in Taber. Under normal growing and harvesting conditions, this should derive approximately 100,000 metric tonnes of beet sugar for fiscal 2011.

Management of Lantic and the Board of Trustees of the Fund are currently working on a plan to convert from the current income trust structure to a more conventional corporate structure. This conversion is expected to take place late in calendar 2010, in order to allow the current Unitholders of the Fund to maximize the benefits of the current income trust structure. As stated previously, the future cash distributions have not yet been determined, but the current intent is to pay dividends or distributions at levels that would provide an after-tax distribution equivalent to that currently enjoyed by our taxable Canadian Unitholders.

FOR THE BOARD OF TRUSTEES,
 
(s) Stuart Belkin
Stuart Belkin, Chairman
Vancouver, British Columbia – May 4, 2010

MANAGEMENTS' DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited financial statements and notes thereto in this quarterly report. The quarterly consolidated financial statements and any amounts shown in this MD&A were not reviewed or audited by our external auditors.

In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with generally accepted accounting principles (GAAP), with a number of non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's historical performance, financial position or cash flow that excludes (includes) amounts, or is subject to adjustments that have the effect of excluding (including) amounts, that are included (excluded) in most directly comparable measures calculated and presented in accordance with GAAP. Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar businesses. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

We use these non-GAAP financial measures in addition to, and in conjunction with, results presented in accordance with GAAP. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, may provide a more complete understanding of factors and trends affecting our business.

In the MD&A, we discuss the non-GAAP financial measures, including the reasons that we believe that these measures provide useful information regarding our financial condition, results of operations, cash flows and financial position, as applicable and, to the extent material, the additional purposes, if any, for which these measures are used. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in the MD&A.

This report contains certain forward-looking statements which reflect the current expectations of the Fund and Lantic Inc., (collectively the "Company") with respect to future events and performance. Wherever used, the words "may," "will," "anticipate," "intend," "expect," "plan," "believe," and similar expressions identify forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved. Forward-looking statements are based on information available at the time they are made, assumptions made by management, and management's good faith belief with respect to future events, and are subject to the risks and uncertainties outlined in this report that could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.

Additional information relating to the Fund and Lantic Inc., including the Annual Information Form, Quarterly and Annual reports and supplementary information is available on SEDAR at www.sedar.com.

This Management's Discussion and Analysis is dated May 4, 2010.

Internal controls disclosure

In accordance with Regulation 52-109 respecting certification of disclosure in issuers' interim filings, the Chief Executive Officer and Chief Financial Officer have designed or caused it to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that (i) information required to be disclosed by the Company in its quarterly filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods, and (ii) material information regarding the Company is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer in a timely manner.

In addition, the Chief Executive Officer and Chief Financial Officer have designed or caused it to be designed under their supervision internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

The Chief Executive Officer and the Chief Financial Officer have evaluated whether or not there were any changes to its ICFR during the three month period ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's ICFR. No such changes were identified through their evaluation.

Results of operations

 
Consolidated Results
For the three months ended March 31  
 
For the six months ended March 31  
 
(In thousands of dollars, except for volume and per trust unit information) 2010   2009   2010   2009  
(Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
                 
Volume (metric tonnes) 153,103   159,700   309,516   345,432  
Revenues $143,851   $121,849   $287,307   $260,246  
Gross margin (loss) (11,396 ) 9,329   17,067   23,998  
Administration and selling 4,428   5,011   9,174   9,494  
Distribution 1,672   4,337   3,539   8,531  
Depreciation and amortization 142   97   285   198  
(Loss) earnings before interest and provision for income taxes (EBIT) $(17,638 ) $(116 ) $4,069   $5,775  
Interest, net of interest income and other charges 3,423   3,768   6,202   12,568  
(Recovery of) provision for income taxes (8,925 ) (4,611 ) (6,549 ) (8,374 )
Net (loss) earnings $(12,136 ) $727   $4,416   $1,581  
Net (loss) earnings per trust unit – basic $(0.14 ) $0.01   $0.05   $0.02  

In the normal course of business, the Fund uses derivative financial instruments consisting of sugar futures, foreign exchange forward contracts, natural gas futures and interest rate swaps. The Fund's operating company sells refined sugar to some clients in US dollars. These sales contracts are viewed as having an embedded derivative if the functional currency of the customer is not US dollars, the embedded derivative being the source currency of the transaction, U.S. dollars. Derivative financial instruments and embedded derivatives are marked-to-market at each reporting date, with the unrealized gain/loss charged to the consolidated statement of operations with a corresponding offsetting amount charged to the balance sheet.

Management believes that the Fund's financial results are more meaningful to management, investors, analysts and any other interested parties when financial results are adjusted by the gains/losses from financial derivative instruments and from embedded derivatives for which adjusted financial results provide a more complete understanding of factors and trends affecting our business. This measurement is a non-GAAP measurement.

Management uses the non-GAAP adjusted results of the operating company to measure and evaluate the performance of the business through its adjusted gross margin, adjusted EBIT and adjusted net earnings. In addition, management believes that these measures are important to our investors and parties evaluating our performance and comparing such performances to our past results. Management also uses adjusted gross margin, adjusted EBIT and adjusted net earnings when discussing results with the Board of Directors, the Fund's Board of Trustees, analysts, investors, banks and other interested parties.

The results of operations would therefore need to be adjusted by the following:

Income (loss) For the three months ended March 31   For the six months ended March 31  
  2010   2009   2010   2009  
(In thousands) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
Mark-to-market adjustment (excluding interest swap) $(31,423 ) $(10,568 ) $(26,076 ) $(22,547 )
Timing in recognition of liquidation income (loss) for sugar inventories, sales and purchase contracts, natural gas futures swaps and options and foreign exchange futures 4,454   3,912   1,096   2,525  
Total adjustment to cost of sales $(26,969 ) $(6,656 ) $(24,980 ) $(20,022 )

A significant part of the above mark-to-market adjustment relates to raw sugar and natural gas futures contracts. There was a significant decline in world raw sugar values near the end of this quarter and as a consequence, a mark-to-market loss of $25.1 million was recorded on raw sugar futures contracts. This mark-to-market loss will be recovered when world raw sugar prices increase or when the actual sugar is delivered to customers. The Fund has hedged a substantial portion of its natural gas needs for fiscal 2010, as well as for fiscal years 2011 to 2013. As a result of the decline in that commodity, a mark-to-market loss of $3.5 was recorded for the second quarter. These natural gas contracts will be used in our day to day operations over the next several quarters.

In addition, the Fund recorded a mark-to-market gain of $0.5 million for the quarter, and of $0.9 year-to-date, on the mark-to- market of an interest swap under short-term interest expense.

Therefore, the total adjustment to net earnings before income taxes and distributable cash for the quarter was $26.4 million, and of $24.0 million year-to-date.

Adjusted financial information (non-GAAP reconciliation):

Consolidated Results For the three months ended March 31   For the six months ended March 31  
  2010   2009   2010   2009  
(In thousands except per trust unit information) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
Gross margin (loss) as per financial statements $(11,396 ) $9,329   $17,067   $23,998  
Adjustment as per above 26,969   6,656   24,980   20,022  
Adjusted gross margin 15,573   15,985   42,047   44,020  
EBIT (loss) as per financial statements (17,638 ) (116 ) 4,069   5,775  
Adjustment as per above 26,969   6,656   24,980   20,022  
Adjusted EBIT 9,331   6,540   29,049   25,797  
Net (loss) earnings as per financial statements (12,136 ) 727   4,416   1,581  
Adjustment as per above 26,969   6,656   24,980   20,022  
Adjustment for mark-to-market of interest swap (518 ) 394   (915 ) 5,865  
Future taxes recovery on above (7,767 ) (2,045 ) (7,057 ) (7,385 )
Adjusted net earnings $6,548   $5,732   $21,424   $20,083  
Net (loss) earnings per trust unit basic, as per financial statements $(0.14 ) $0.01   $0.05   $0.02  
Adjustment for the above 0.22   0.06   0.20   0.21  
Adjusted net earnings per trust unit basic $0.08   $0.07   $0.25   $0.23  

Second quarter volume decreased by approximately 6,600 metric tonnes from the comparable quarter in fiscal 2009. The decrease is due mainly to lower liquid, export and consumer volumes partially offset by higher industrial volume. Liquid volume decreased by approximately 2,200 metric tonnes due to the loss of a large HFCS substitutable account in calendar 2009. The decrease in export volume of approximately 5,900 metric tonnes occurred as a result of a special increase in the U.S. refined sugar quota in fiscal 2009 against which approximately 14,500 metric tonnes were sold in the second quarter of last fiscal year. This was partially mitigated by export volume to Mexico of approximately 4,300 metric tonnes and shipments against our yearly Canadian U.S. quota. Consumer volume decreased by approximately 1,700 metric tonnes due to competitive market activities. Industrial volume was higher by approximately 3,200 metric tonnes due mainly to timing in deliveries.

Year-to-date volume decreased by approximately 35,900 metric tonnes due mainly to lower export and liquid volume of 18,500 metric tonnes and 10,200 metric tonnes respectively, for the reasons mentioned above. In addition, consumer volume is also lower by 4,200 metric tonnes due to competitive market activities, while industrial volume is lower by approximately 3,000 metric tonnes due mainly to a reduction of sugar containing production in Canada.

Even though sales volume was lower, revenues for the quarter and year-to-date were $22.0 million and $27.1 million respectively, higher than the previous year's comparable periods due to the higher price of world raw sugar in fiscal 2010 than the comparable period of fiscal 2009. The price of the world raw sugar was over 20 cents per pound for most of the quarter, reaching a high of 30.40 cents per pound in February 2010. In the month of March 2010, on the news of larger than expected crop in Brazil and announced crop recovery in India for next year, raw sugar prices declined drastically to close at 16.59 cents on March 31, 2010.

As previously mentioned, gross margin loss of $11.4 million for the quarter does not reflect the economic margin of the Fund, as it includes a loss of $27.0 million for the mark-to-market of derivative financial instruments, mainly as a result of the large decline in world raw sugar values in March 2010. We will therefore comment on adjusted gross margin results.

For the quarter, adjusted gross margin decreased by $0.4 million, when compared to the same quarter of last year. On a per metric tonne basis, adjusted gross margins were $101.72 compared to $100.09 for the comparable quarter of last year. There is no significant difference from last year as higher processing costs in Taber, due to the poor quality of beets harvested, partially offset higher margin earned on domestic beet sugar sales. Year-to-date gross margin rate per metric tonne was $135.85 as compared to $127.43 for fiscal 2009, such increase due mainly to favourable sales mix with lower liquid volume, combined with higher values of raw sugar prices for domestic beet sugar sales.

Administration and selling costs were $0.6 million lower than the comparable quarter, and $0.3 million lower year-to-date, due mainly to timing of expenses. The lower distribution cost of $2.7 million for the quarter and of $5.0 million year-to-date, is due mainly to the large volume of sugar shipped and entered in the U.S. against the U.S. Canada Specific and Global quotas in fiscal 2009.

Interest expense for the quarter and year-to-date includes a mark-to-market gain of $0.5 million and $0.9 million respectively, applied on the 5-year, $70.0 million interest swap entered into in July 2008, as compared with an expense of $0.4 million and $5.9 million for the quarter and year-to-date of fiscal 2009. In addition, an additional amount of $0.6 million of deferred financing cost was expensed as a result of the early redemption of the 6.0% second series convertible unsecured subordinated debentures ("Second series debentures") announced for June 2010. Without the above two charges, interest expense for the quarter was in line with last year's comparable quarter and was slightly lower year-to-date as a result of the lower borrowing rates in fiscal 2010.

Statement of quarterly results

The following is a summary of selected financial information of the consolidated financial statements and non-GAAP measures of the Fund for the last eight quarters.

          QUARTERS        
 
      2010         2009   2008
  (Unaudited) (Unaudited) (Unaudited)
(In thousands of dollars, except for volume, margin rate and per trust unit information) 2-Q   1-Q 4-Q 3-Q 2-Q   1-Q 4-Q 3-Q
 
Volume (MT) 153,103   156,413 187,538 167,612 159,700   185,732 190,516 176,062
Total revenues 143,851   143,456 154,596 128,478 121,849   138,397 130,472 115,686
Gross margin (loss) (11,396 ) 28,463 40,559 28,236 9,329   14,669 19,672 21,649
EBIT (loss) (17,638 ) 21,707 32,434 20,447 (116 ) 5,891 11,494 13,433
Net (loss)earnings (12,136 ) 16,552 24,004 16,952 727   854 10,743 9,614
Gross margin rate per MT (74.43 ) 181.97 216.27 168.46 58.42   78.98 103.26 122.96
Per trust unit                    
Net (loss) earnings                    
  Basic (0.14 ) 0.19 0.27 0.19 0.01   0.01 0.12 0.11
  Diluted (0.14 ) 0.17 0.23 0.17 0.01   0.01 0.11 0.10
Non-GAAP Measures                    
Adjusted gross margin 15,573   26,474 33,208 24,320 15,985   28,035 25,748 20,994
Adjusted EBIT 9,331   19,718 25,083 16,531 6,540   19,257 17,570 12,778
Adjusted net earnings 6,548   14,876 18,638 12,578 5,732   14,351 15,857 9,236
Adjusted gross margin rate per MT 101.72   169.26 177.07 145.10 100.09   150.94 135.15 119.24
Adjusted net earnings per trust unit                    
  Basic 0.08   0.17 0.21 0.14 0.07   0.16 0.18 0.11
  Diluted 0.08   0.15 0.18 0.13 0.07   0.15 0.16 0.10

Historically the first quarter (October to December) of the fiscal year is the best quarter for adjusted gross margins and adjusted net earnings due to the favourable sales mix of products sold. This is due to the increased sales of baked goods during that period of the year. At the same time, the second quarter (January to March) is historically the lowest volume quarter, resulting in lower adjusted gross margins, adjusted gross margin rate and adjusted net earnings.

Liquidity

The distributable cash generated by the operating company, Lantic, is paid to the Fund by way of dividends and return of capital on the common shares of Lantic, and by the payment of interest on the subordinated notes of Lantic held by the Fund, after having taken reasonable reserve for capital expenditures and working capital. The cash received by the Fund is used to pay distributions to its Unitholders.

Standardized Distributable Cash, as per the Interpretive Release issued in July 2007 by the Canadian Institute of Chartered Accountants ("CICA"), is defined as the GAAP measure of cash from operating activities after adjusting for capital expenditures, restrictions on distributions arising from compliance with financial covenants, restrictive at the time of reporting, and minority interests.

Standardized distributable cash is as follows:

  For the three months ended March 31   For the six months ended March 31   Cumulative amounts for last 5 fiscal years, ended September 30  
  2010   2009   2010   2009   2009  
(In thousands of dollars) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
Cash flow from operating activities $(21,859 ) $30,315   $(21,200 ) $9,932   $248,094  
Capital expenditures (1,900 ) (1,584 ) (3,212 ) (2,486 ) (37,366 )
Financing restrictions -   -   -   -   -  
Standardized distributable cash $(23,759 ) $28,731   $(24,412 ) $7,446   $210,728  

There were no restrictions on distributions arising from the compliance of financial covenants for the periods shown above.

Cash flow from operations was negative $21.9 million in the second quarter of 2010, as opposed to $30.3 million in the comparable quarter of fiscal 2009. The major reason for the decreased cash flow balance is due to a mark-to-market loss adjustment of $27.0 million to cost of sales, and an increase in accounts receivable and inventories compared to last year, due to the higher values of the cost of raw sugar as compared to the corresponding period last year. These are also the major reasons for the year-to-date cash flow deficiency. Last year's positive cash flow balance was due mainly to a reduction of total inventories.

Total capital expenditures were higher than the previous year, due mainly to timing in projects when compared to fiscal 2009.

Standardized Distributable Cash does not constitute available cash for distribution due mainly to timing factors in the movement of non-cash working capital items, to mark-to-market derivative timing adjustment, to non-cash financial instruments, and to other financing items.

In order to provide additional information that the Fund's administrators believe is appropriate for the determination of levels of cash distribution, the Interpretive Release also allows a measure that includes additional items beyond those included in Standardized Distributable Cash. These additional measures may affect the Fund's distributions and are therefore forming a basis for the actual amount of cash available for distribution. All of these additional measures are separately identified and explained and result in Adjusted Distributable Cash.

Adjusted distributable cash is as follows:

      For the three months ended March 31       For the six months ended March 31   Cumulative amounts for last 5 fiscal years, ended September 30  
  2010   2009   2010   2009   2009  
(In thousands of dollars) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
Standardized distributable cash as per above $(23,759 ) $28,731   $(24,412 ) $7,446   $210,728  
Adjustments:                    
  Changes in non-cash working capital 10,239   (18,451 ) 31,437   8,648   56,786  
  Mark-to-market and derivative timing adjustment 26,451   7,050   24,065   25,887   $8,786  
  Financial instruments non-cash amount (5,833 ) (12,308 ) (5,177 ) (18,901 ) (18,156 )
  Investment capital expenditures -   39   -   39   7,858  
  Net repurchase of trust units -   (585 ) -   (690 ) (6,120 )
  Interest expense on equity portion of convertible unsecured debentures -       -   -   (9,390 )
  Deferred financing costs -   -   -   -   (8,191 )
Adjusted distributable cash $7,098   $4,476   $25,913   $22,429   $242,301  
Declared distributions $10,042   10,065   $20,084   $20,084   $189,468  

Adjusted distributable cash was $2.6 million higher than the comparable quarter in fiscal 2009 and $3.5 higher year-to-date. This was mainly due to the higher adjusted earnings before interest and income taxes.

Changes in non-cash operating working capital represents quarter-over-quarter movement in current assets such as accounts receivable and inventories, and current liabilities like accounts payable. Movements in these accounts are due mainly to timing in the collection of receivables, receipts of raw sugar and payment of liabilities. Increases or decreases in such accounts do not therefore constitute available cash for distribution. Such increases or decreases are financed from available cash or from the Company's available credit facilities of $200 million. Increases or decreases in short-term bank indebtedness are also due to timing issues from the above, and therefore do not constitute available cash for distribution.

Mark-to-market and financial instruments adjustments are due mainly to unrealized gains or losses on financial derivative instruments and are therefore non-cash amounts except for margin calls on net sugar positions and natural gas contracts.

Investment capital expenditures are added back to standardized distributable cash as these capital projects are not necessary for the operation of the plants, but are undertaken due to their substantial operational savings to be realized once these projects are completed.

In fiscal 2009, 225,100 trust units were repurchased and cancelled under the Normal Course Issuer Bid in place.

Excess cash flow and net income on distributions paid

Cash flow from operating activities includes year-over-year movement in current assets such as inventories and accounts receivable, and current liabilities, like accounts payable. Movements in these accounts are due to, in large part, timing and therefore do not constitute available cash for distribution.

The following table presents excess cash flows from operating activities and net income over distributions paid for the last three years ended September 30, and for the quarters and six months ended March 31, 2010 and 2009:

  For the three months ended March 31   For the six months ended March 31       Years ended September 30  
  2010   2009   2010   2009   2009   2008   2007  
(In thousands of dollars) (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited ) (Audited ) (Audited ) (Audited )
                             
Cash flow from operating activities $(21,859 ) $30,315   $(21,200 ) $9,932   $69,791   $ 23,372   $88,607  
Net (loss) earnings (12,136 ) 727   4,416   1,581   42,537   48,134   45,127  
Distributions paid 10,042   10,065   20,084   20,130   40,206   40,082   37,728  
(Shortfall) excess of cash flows from operating activities over cash distributions paid (31,901 ) 20,250   (41,284 ) (10,198 ) 29,585   (16,710 ) 50,879  
(Shortfall) excess of net earnings over cash distributions paid $(22,178 ) $(9,338 ) $(15,668 ) $(18,549 ) $2,331   $8,052   $7,399  

During the second quarter, a mark-to-market adjustment of $27.0 million was recorded against cost of sales, mainly as a result of the decline in raw sugar values in the month of March 2010. As a result, net earnings and cash flow from operations were negatively impacted by this adjustment. This, combined with higher values of receivables and inventories, negatively impacted cash flow from operations and therefore resulted in shortfalls for the quarter and year-to-date against cash distributions paid. The shortfall over distributions was financed from available cash balance and short-term borrowings.

Contractual obligations

There are no material changes in the contractual obligations table disclosed in the Management's Discussion and Analysis of the September 30, 2009 Annual Report.

At March 31, 2010, the operating company had commitments to purchase a total of 909,000 metric tonnes of raw sugar, of which only 36,300 metric tonnes had been priced, for a total dollar commitment of $16.7 million.

Capital resources

Lantic has $200.0 million as authorized line of credit available to finance its operation. At quarter's end, $109.4 million had been drawn from the working capital facility due mainly to margin requirements on raw sugar futures as a result of a decline in world raw sugar values in March 2010.

Cash requirements for working capital and other capital expenditures are expected to be paid from available credit resources and from funds generated from operations.

Outstanding securities

Year-to-date, 2,830 trust units have been issued following the conversion of $15,000 of the second series convertible unsecured subordinated debentures ("Second series debentures"), at a conversion price of $5.30 per unit. As at May 4, 2010, there were 87,330,717 trust units outstanding.

Changes in accounting policies and critical accounting estimates

Our accounting policies and critical accounting estimates remain substantially unchanged from those that were disclosed in our Management's Discussion and Analysis of the Annual Report for the year ended September 30, 2009.

International financial reporting standards ("IFRS")

In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual reporting purposes, for fiscal years beginning on or after January 1, 2011. The Fund will be required to begin reporting under IFRS for the quarter ending December 31, 2011 and will be required to prepare an opening balance sheet and provide information that conforms to IFRS for comparative periods presented.

The Fund began planning the transition from current Canadian GAAP to IFRS by establishing a project plan and a project team. The project team is led by senior finance executives that provide overall project governance, management and support. The project team reports quarterly to the Audit Committee the progress made on the project, and discusses key findings and future accounting requirements.

The project plan consists of three phases: the initial assessment, detailed assessment and design, and implementation. The Fund has completed the initial assessment phase, which included the completion of a high level review of the major differences between current Canadian GAAP and IFRS. The initial assessment also included training sessions for project team members and discussions with the Fund's external auditors and advisors.

The Fund is now engaged in the detailed assessment and design phase. The detailed assessment and design phase involves completing a comprehensive analysis of the impact of the IFRS differences identified in the initial assessment phase. The design of solutions to resolve these IFRS differences is progressing according to plan, and set out below are the main areas, identified to date, where changes are expected at this time:

  • Presentation of Financial Statements (IAS 1)
  • First time adoption of IFRS (IFRS1)
  • Income Taxes (IAS 12)
  • Property, Plan and Equipment (IAS 16)
  • Consolidation (IAS 27)
  • Impairment of Assets (IAS 36)

The transition plan remains on-track and the Fund believes it is well positioned to transition to IFRS in accordance with the timelines mandated by the AcSB. The work completed to date suggests that there should be minimal impact on the Fund's business processes, IT systems, disclosure controls and procedures, and internal controls over financial reporting. However, these preliminary conclusions may change as the Fund continues to progress through its transition plan and considers any new IFRS developments leading up to the Fund's changeover date.

The Fund will continue to execute the transition in accordance with its plan, and also continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB as well as regulatory developments as issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.

Risk factors

Risk factors in the Fund's business and operations are discussed in the Management's Discussion and Analysis of our Annual Report for the year ended September 30, 2009. This document is available on SEDAR at www.sedar.com or on our website at www.lantic.ca.

Subsequent events

On April 8, 2010, the Fund issued $50.0 million of fourth series, 5.70% convertible unsecured subordinated debentures ("Fourth series debentures"), maturing on April 30, 2017, with interest payable semi-annually in arrears on April 30 and October 31 of each year, starting October 31, 2010. The debentures may be converted at the option of the holder at a conversion price of $6.50 per trust unit at any time prior to maturity, and cannot be redeemed prior to April 30, 2013.

On or after April 30, 2013 and prior to April 30, 2015, the debentures may be redeemed by the Fund, at a price equal to the principal amount plus accrued and unpaid interest, only if the weighted average trading price of the trust unit, for 20 consecutive trading days, is at least 125% of the conversion price of $6.50. Subsequent to April 30, 2015, the debentures are redeemable at a price equal to the principal amount thereof plus accrued and unpaid interest.

On redemption or at maturity, the Fund will repay the indebtedness of the convertible debentures by paying an amount equal to the principal amount of the outstanding convertible debentures, together with accrued and unpaid interest thereon. The Fund may, at its option, elect to satisfy its obligation to repay the principal amount of the convertible debentures, which are to be redeemed or which have matured, by issuing trust units to the holders of the convertible debentures. The number of trust units to be issued will be determined by dividing $1,000 (one thousand) of principal amount of the convertible debentures by 95% of the weighted average trading price of the trust units on the Toronto Stock Exchange for the 20 consecutive trading days ending on the fifth trading day preceding the date for redemption or the maturity date, as the case may be.

The estimated net proceeds to the Fund from the sale of the Fourth series debentures will be approximately $47.7 million after deducting the Underwriter's fee and estimated expenses of the offering. Such net proceeds will be used, in addition to funds received in the ordinary course of business, to effect the redemption of the Second series debentures of 6.0% on June 29, 2010 further to a notice sent on May 3, 2010.

OUTLOOK

The significant decline in world raw sugar values in the month of March 2010 provided Lantic with the opportunity to sell approximately 20,000 metric tonnes of refined sugar in the U.S. for delivery over the next two quarters. This unexpected sales opportunity was as a result of continued high refined sugar prices in the U.S., due to a current tight supply environment, combined with a sudden decline in world raw sugar values. In making these sales, Lantic can absorb the high U.S. tier duty on refined sugar of approximately $360.00, and still generate a positive contribution to gross margins. More recently, U.S. refined sugar prices declined somewhat thus reducing the possibility of further export sales to the U.S.

As previously reported, poor crop results in Mexico in 2009 allowed Lantic to resume some export sales to Mexico, with volume expected to be approximately 8,000 metric tonnes in fiscal 2010, and continued opportunities for fiscal 2011.

The above export volume will help mitigate the loss of export volume achieved in fiscal 2009 against the U.S. special refined sugar quotas opened in August and October of 2008. No such special quotas are currently open for fiscal 2010, but with estimated inventories to be lower than historical levels, and current tightness in refined sugar supplies, it is possible that the United States Department of Agriculture may open some special refined sugar quotas over the next few months which, as in the past, may benefit Lantic.

In fiscal 2009, the total Canadian nutritive sweetener market decreased by approximately 3% and some of this decrease is now being reflected in Lantic's overall domestic volume. In addition, the high raw sugar values experienced in the first six months of the year made some HFCS substitutable liquid sales customers transfer their production to HFCS.

A total of 30,000 to 32,000 acres are expected to be planted this spring in Taber. Under normal growing and harvesting conditions, this should result in approximately 100,000 of beet sugar for fiscal 2011.

A significant portion of fiscal 2010's natural gas requirement has been hedged at average prices comparable to last year. Any un-hedged volume should benefit from the current low prices of natural gas and therefore increase the adjusted gross margin rate. In addition, some futures positions for fiscal 2011 to 2013 have also been taken. These positions are at prices higher than the current market values, but are at the same or at better levels than what was achieved in fiscal 2009. We will continue to monitor natural gas market dynamics with the objective of minimizing natural gas costs.

In April 2010, the Fund issued Fourth series debentures of 5.70%, maturing on April 30, 2017. The net proceeds estimated at $47.7 million, combined with other cash reserves, will be used to redeem, on June 29, 2010, the Second series debentures of 6.0%. This transaction allows the Fund to extend the term of the debenture being redeemed by over 5 years at a lower rate of interest.

In the current volatile financial environment, return on pension plan assets may vary from historical plan performance. This, combined with the discount rate used in assessing the plan liabilities, may impact pension plan expenses in future years. The actuarial valuation of one of our pension plans is underway, while the others are not required to be completed until December 2010. Following the results of the current actuarial valuation, the Fund's cash contribution levels may increase in the next quarter from those currently made.

The labour contract for Lantic's Vancouver refinery expired at the end of February 2010. Negotiations are underway, and management expects this collective agreement to be renewed at competitive market rates.

Management of Lantic and the Board of Trustees of the Fund are currently working on a plan to convert from the current income trust structure to a more conventional corporate structure. This conversion is expected to take place late in calendar 2010 in order to allow the benefits of the current income trust structure to be maximized for the Unitholders of the Fund. As stated previously, the future cash distributions has not yet been determined, but the intent is to pay dividends or distributions at levels that would provide an after tax distribution equivalent to that currently enjoyed by our Canadian taxable Unitholders.

Rogers Sugar Income Fund
Unaudited Consolidated Balance Sheets
March 31, 2010 and 2009
(In thousands of dollars)
  March 31   September 30   March 31  
  2010   2009   2009  
   
ASSETS            
Current assets:            
  Cash and cash equivalents $270   $5,367   $4,383  
  Accounts receivable 52,979   49,637   48,437  
  Inventories 100,185   75,136   79,244  
  Prepaid expenses 2,442   2,333   2,230  
  Future income taxes 10,830   3,570   4,126  
  Derivative financial instruments (Note 3) 1,237   1,302   3,100  
  167,943   137,345   141,520  
Capital assets 185,189   188,344   191,292  
Defined benefits pension plan assets 17,489   17,931   19,898  
Derivative financial instruments (Note 3) 62   77   455  
Other assets 602   722   1,064  
Goodwill 229,952   229,952   229,952  
  $601,237   $574,371   $584,181  
   
LIABILITIES AND UNITHOLDERS' EQUITY            
Current liabilities:            
  Short-term borrowings $109,399   $70,000   $105,000  
  Accounts payable and accrued liabilities 35,380   37,953   35,330  
  Derivative financial instruments (Note 3) 14,604   10,547   6,673  
  Current capital lease obligation (Note 4) 24   -   -  
  159,407   118,500   147,003  
Employee future benefits 28,891   29,073   31,409  
Derivative financial instruments (Note 3) 10,028   8,988   15,518  
Long-term capital lease obligation (Note 4) 97   -   -  
Convertible unsecured subordinated debentures (Note 8) 132,429   131,387   130,945  
Future income taxes 19,101   19,495   13,262  
  349,953   307,443   338,137  
UNITHOLDERS' EQUITY            
Trust units (Note 5) 559,677   559,662   559,662  
Contributed surplus 4,721   4,712   4,708  
Deficit (313,114 ) (297,446 ) (318,326 )
  251,284   266,928   $246,044  
  $601,237   $574,371   $584,181  
 
 
 
Rogers Sugar Income Fund
Unaudited Consolidated Statements of Operations
For the periods ended March 31, 2010 and 2009
(In thousands of dollars – except per trust unit amounts)
  For the three months ended March 31   For the six months ended March 31  
  2010   2009   2010   2009  
                 
Revenues $143,851   $121,849   $287,307   $260,246  
Cost of sales 155,247   112,520   270,240   236,248  
Gross margin (loss) (11,396 ) 9,329   17,067   23,998  
                 
Expenses:                
  Administration and selling 4,428   5,011   9,174   9,494  
  Distribution 1,672   4,337   3,539   8,531  
  Depreciation and amortization 142   97   285   198  
  6,242   9,445   12,998   18,223  
(Loss) earnings before interest and provision for income taxes (17,638 ) (116 ) 4,069   5,775  
                 
Interest on convertible debentures 1,992   1,993   3,985   3,986  
Amortization of deferred financing costs 882   267   1,149   534  
Short-term interest 549   1,508   1,068   8,048  
  3,423   3,768   6,202   12,568  
Loss before provision for income taxes (21,061 ) (3,884 ) (2,133 ) (6,793 )
(Recovery of) provision for income taxes:                
                 
  Current 838   -   1,105   -  
  Future (9,763 ) (4,611 ) (7,654 ) (8,374 )
  (8,925 ) (4,611 ) (6,549 ) (8,374 )
Net (loss) earnings and other comprehensive income (12,136 ) $727   $4,416   $1,581  
   
Net (loss) earnings per trust unit:                
  Basic $(0.14 ) $0.01   $0.05   $0.02  
  Diluted $(0.14 ) $0.01   $0.05   $0.02  
   
Supplemental disclosure:                
Employee future benefits expense $1,125   $914   $2,246   $ 1,750  
 
 
 
Rogers Sugar Income Fund
Unaudited Consolidated Statements of Changes in Unitholders' Equity
For the six months ended March 31, 2010 and 2009
(In thousands of dollars – except per trust unit amounts)
      For the six months ended March 31, 2010      
  Number of Trust Units   Trust Units   Contributed Surplus Deficit   Total  
Balance, beginning of period 87,327,887   $559,662   $4,712 $(297,446 ) $266,928  
   
Distributions -   -   - (20,084 ) (20,084 )
Stock-based compensation -   -   9 -   9  
Conversion of convertible debentures into trust units (Note 5) 2,830   15   - -   15  
Net earnings -   -   - 4,416   4,416  
Balance, end of period 87,330,717   $559,677   $4,721 $(313,114 ) $251,284  
   
   
               
      For the six months ended March 31, 2009      
  Number of Trust Units   Trust Units   Contributed Surplus Deficit   Total  
Balance, beginning of period 87,552,987   $561,105   $3,950 $(299,777 ) $265,278  
   
Distributions -   -   - (20,130 ) (20,130 )
Stock-based compensation -   -   5 -   5  
Repurchase of trust units (Note 5) (225,100 ) (1,443 ) 753 -   (690 )
Net earnings -   -   - 1,581   1,581  
Balance, end of period 87,327,887   $559,662   $4,708 $(318,326 ) $246,044  
 
 
 
Rogers Sugar Income Fund
Unaudited Consolidated Statements of Cash Flows
For the periods ended March 31, 2010 and 2009
(In thousands of dollars)
  For the three months ended March 31   For the six months ended March 31  
  2010   2009   2010   2009  
  (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
Cash flows from operating activities:                
  Net (loss) earnings $(12,136 ) $727   $4,416   $1,581  
  Adjustments for items not involving cash:                
    Depreciation and amortization 3,393   3,325   6,852   6,651  
    Amortization of deferred financing costs 882   267   1,149   534  
    Future income taxes (9,763 ) (4,611 ) (7,654 ) (8,374 )
    Employee future benefits 137   (193 ) 260   (535 )
    Change in derivative financial instruments 5,833   12,308   5,177   18,901  
    Stock based compensation expenses 6   2   9   5  
    Gain on sale of capital assets -   -   -   (278 )
    Other 28   39   28   95  
  (11,620 ) 11,864   10,237   18,580  
  Changes in non-cash working capital:                
    Accounts receivable (10,818 ) 4,646   (3,342 ) 6,346  
    Inventories 4,622   18,159   (25,049 ) (8,595 )
    Prepaid expense (396 ) 80   (109 ) (156 )
    Accounts payable and accrued liabilities (3,647 ) (4,434 ) (2,937 ) (6,243 )
  (10,239 ) 18,451   (31,437 ) (8,648 )
  (21,859 ) 30,315   (21,200 ) 9,932  
Cash flows from financing activities:                
  Short-term borrowings (repayments) 27,399   (16,000 ) 39,399   12,000  
  Distributions to Unitholders (10,042 ) (10,065 ) (20,084 ) (20,130 )
  Repurchase of trust units -   (585 ) -   (690 )
  17,357   (26,650 ) 19,315   (8,820 )
Cash flows from investing activities:                
  Additions to capital assets (1,900 ) (1,584 ) (3,212 ) (2,486 )
Net change in cash and cash equivalents (6,402 ) 2,081   (5,097 ) (1,374 )
Cash and cash equivalents, beginning of period $6,672   $2,302   $5,367   $5,757  
Cash and cash equivalents, end of period $270   $4,383   $270   $4,383  
Supplemental disclosure:                
  Interest paid on debt 1,008   733   5,858   5,730  
  Income taxes paid 204   1,389   979   1,555  
  Capital assets included in accounts payable and accrued liabilities and capital lease obligation 960   335   960   335  
 
 
 
Rogers Sugar Income Fund
Notes to Interim Unaudited Consolidated Financial Statements
For the three months ended March 31, 2010 and 2009
(In thousands of dollars unless otherwise noted)

Rogers Sugar Income Fund (the "Fund") is an open-ended, limited purpose trust created under the laws of Ontario by an amended and restated declaration of trust dated February 3, 2005 (the "Declaration of Trust"). An unlimited number of trust units may be issued pursuant to the Declaration of Trust.

Note 1: Basis of presentation

These interim unaudited consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). These interim unaudited consolidated financial statements do not include all disclosures required by the Canadian GAAP and therefore should be read in conjunction with the consolidated financial statements and the notes thereto for the most recently prepared annual financial statements for the year ended September 30, 2009. These quarterly consolidated financial statements were not reviewed or audited by our external auditors.

Note 2: Accounting policies

These financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements for the year ended September 30, 2009.

Note 3: Derivative Financial Instruments

Details of recorded gains/losses for the quarter, in marking-to-market all derivative financial instruments and embedded derivatives are noted below. For sugar and natural gas futures contracts (derivative financial instruments), the amounts noted below are netted with the variation margins paid or received to/from brokers at the end of the reporting period. Natural gas forwards and sugar futures have been marked-to-market using published quoted values for these commodities, while foreign exchange forward contracts have been marked-to-market using rates published by the financial institution which is counter-party to these contracts. The fair value of natural gas contracts, foreign exchange forward contracts and interest swap calculation include a credit risk adjustment for the Fund's or counterparty's credit, as appropriate.

  Financial Instrument Assets Financial Instrument Liabilities       Gain / (Loss)  
MARK-TO-MARKET Short-term Long-term Short-term   Long-term                  
              Three months ended   Six months ended  
              March 31   March 31  
              2010   2009   2010   2009  
  Sugar futures contracts and options $1,237 $62 $-   $-   $(25,070 ) $(2,037 ) $(20,065 ) $(8,008 )
  Natural gas futures contracts - - (5,940 ) (8,032 ) (3,524 ) (9,423 ) (3,578 ) (21,080 )
  Foreign exchange forward contracts - - (4,412 ) (221 ) (1,806 ) 963   (1,485 ) 5,334  
  Embedded derivatives - - (2,076 ) (60 ) (1,023 ) (71 ) (948 ) 1,207  
  Interest swap - - (2,176 ) (1,715 ) 518   (394 ) 915   (5,865 )
  $1,237 $62 $(14,604 ) $(10,028 ) $(30,905 ) $(10,962 ) $(25,161 ) $(28,412 )
Charged to:                            
  Cost of sales             (31,423 ) (10,568 ) (26,076 ) (22,547 )
  Interest expenses             518   (394 ) 915   (5,865 )
Total             $(30,905 ) $(10,962 ) $(25,161 ) $(28,412 )

Note 4: Obligations under capital lease

Near the end of the first quarter, the Fund entered into a capital lease for movable warehouse equipment, which substantially transfers all the usage benefits of this movable equipment to the Fund.

This lease has an average interest rate of 5.0%. Future minimum lease payments for obligations under capital lease as at March 31, 2010 are as follows:

  2009 2008
2010 $14 $-
2011 29 -
2012 29 -
2013 29 -
2014 and thereafter 36 -
  137 -
Less interest portion 16 -
  121  
Less current portion 24 -
  $97 $-

For the quarter and year-to-date ended March 31, 2010, a minimal amount of interest has been charged to interest expense.

Note 5: Trust units

During the first quarter of 2010, $15 of the Second series debentures was converted by holders of the securities for a total number of 2,830 trust units. This conversion is a non-cash transaction and therefore is not reflected in this statement of cash flows. During the first six months of fiscal 2009, the Fund repurchased and cancelled 225,100 trust units under its Normal Course Issuer Bid at an average price of $3.064 per trust unit. At March 31, 2010, 87,330,717 trust units were issued and outstanding.

The Fund received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid to purchase 6,345,898 trust units of the Fund, representing 10% of the public float of the Fund, up to $2.0 million principal amount of the Second series, 6.0% debentures, and up to $3.0 million principal amount of the Third series, 5.9% convertible unsecured subordinated debentures ("Third series debentures") of the Fund. The bid started December 7, 2009, and may continue to December 6, 2010.

Note 6: Stock-based compensation plan

On December 23, 2009, 100,000 trust unit options were granted at a price of $4.70 per trust unit. The following table summarizes information about the Unit Option Plan as at March 31, 2010:   

Exercise price per option Outstanding number of options at September 30, 2009 Granted during fiscal 2010 Outstanding number of options at March 31, 2010 Weighted average remaining life Number of options exercisable Weighted average exercise price
$3.61 280,000 - 280,000 5.67 200,000 $3.61
4.33 120,000 - 120,000 5.25 80,000 4.33
4.70 - 100,000 100,000 9.56 - 4.70

The following assumptions were used to estimate the fair values of the fiscal 2010 option at the grant date:

 Risk-free interest rate 2.62% - 3.03%
 Expected life 4 – 6 years
 Expected volatility 32.76% to 34.30%
 Dividend yield 10% 

Note 7: Segmented information

Revenues were derived from customers in the following geographic areas:                   
 

  For the three months ended March 31   For the six months ended March 31  
 
  2010   2009   2010   2009  
  (Unaudited ) (Unaudited ) (Unaudited ) (Unaudited )
Canada $135,746   $98,193   $273,478   $221,712  
United States and Other 8,105   23,656   13,829   38,534  
  $143,851   $121,849   $287,307   $260,246  

Note 8: Subsequent events

On April 8, 2010, the Fund issued $50.0 million of fourth series, 5.70% convertible unsecured subordinated debentures ("Fourth series debentures"), maturing on April 30, 2017, with interest payable semi-annually in arrears on April 30 and October 31 of each year, starting October 31, 2010. The debentures may be converted at the option of the holder at a conversion price of $6.50 per trust unit at any time prior to maturity, and cannot be redeemed prior to April 30, 2013.

On or after April 30, 2013 and prior to April 30, 2015, the debentures may be redeemed by the Fund, at a price equal to the principal amount plus accrued and unpaid interest, only if the weighted average trading price of the trust unit, for 20 consecutive trading days, is at least 125% of the conversion price of $6.50. Subsequent to April 30, 2015, the debentures are redeemable at a price equal to the principal amount thereof plus accrued and unpaid interest.

On redemption or at maturity, the Fund will repay the indebtedness of the convertible debentures by paying an amount equal to the principal amount of the outstanding convertible debentures, together with accrued and unpaid interest thereon. The Fund may, at its option, elect to satisfy its obligation to repay the principal amount of the convertible debentures, which are to be redeemed or which have matured, by issuing trust units to the holders of the convertible debentures. The number of trust units to be issued will be determined by dividing $1,000 (one thousand) of principal amount of the convertible debentures by 95% of the weighted average trading price of the trust units on the Toronto Stock Exchange for the 20 consecutive trading days ending on the fifth trading day preceding the date for redemption or the maturity date, as the case may be.

The estimated net proceeds to the Fund from the sale of the Fourth series debentures will be approximately $47.7 million after deducting the Underwriter's fee and estimated expenses of the offering. Such net proceeds will be used, in addition to funds received in the ordinary course of business, to effect the redemption of the second series convertible unsecured subordinated debentures ("Second series debentures") of 6.0% on June 29, 2010 further to a notice sent on May 3, 2010. As a result, an additional $0.6 million of deferred financing costs relating to the Second series debentures have been expensed during the second quarter.

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