Advanced Fiber Technologies (AFT) Income Fund
TSX : AFT.UN

Advanced Fiber Technologies (AFT) Income Fund

August 03, 2005 18:03 ET

Advanced Fiber Technologies 'AFT' Income Fund Reports Results for the Second Quarter 2005

LENNOXVILLE, QUEBEC--(CCNMatthews - Aug. 3, 2005) - Advanced Fiber Technologies (AFT) Income Fund (TSX:AFT.UN) announces its results for the second quarter ended July 1, 2005.

For the second quarter ended July 1, 2005, sales amounted to $17.9 million, a 16.4% decrease from $21.4 million in the corresponding quarter of last year. Earnings before interest, income taxes, depreciation and amortization were $1.4 million versus $5.1 million in the same quarter of last year. The decrease of $3.7 million in the second quarter of 2005 is due to lower volume in the core business, unfavourable U.S. dollar exchange rate in the Americas and higher manufacturing costs, mostly material related. Cash available for distribution was $0.5 million ($0.03 per unit) compared with $4.0 million ($0.29 per unit) in the second quarter a year ago. The net loss in the second quarter of 2005, after the goodwill impairment of $32.0 million and the intangible assets write-down of $14.2 million, was $47.2 million compared with net earnings of $0.7 million in the same quarter of 2004.

At the end of the quarter, the Fund did not comply with the financial covenants under its Credit Facility and Senior Secured Notes. The Fund will be discussing with its lenders amendments to its Credit Facility and Senior Secured Notes. As required by the Canadian Institute of Chartered Accountants Emerging Issues Committee Abstract of Issues Discussed EIC-59, the Fund has reclassified as a current liability the entire $45 million balance of its Senior Secured Notes, even though no accelerated repayment has been demanded by the lenders. The Fund also recorded a $32.0 million goodwill impairment and a $14.2 million write-down of intangible assets, reflecting the overall difficulty of market conditions. These charges do not impact cash flow but affect the book value of the unit.



Distribution Highlights

(in thousands of dollars except per unit amounts)

Three-month periods ended Six-month periods ended
July 1, July 2, July 1, July 2,
2005 2004 2005 2004
---------------------------------------------------------------------
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Earnings (loss) before
income taxes $(48,477) $853 $(48,134) $324

Plus
Depreciation and
amortization 2,641 2,652 5,382 5,247
Write-down of
intangible assets 14,213 - 14,213 -
Goodwill impairment 32,015 - 32,015 -
Restructuring
charges - 700 - 1,500

Less
Current income
taxes (2) (2) (9) (49)
Maintenance capital
expenditures (360) (173) (577) (279)
Changes in forward
exchange contracts 421 - (176) -
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Distributable cash $451 $4,030 $2,714 $6,743
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Distributable cash
per unit $0.03 $0.29 $0.19 $0.50
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Distributions
declared per unit $0.05 $0.30 $0.20 $0.60
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Average number of
units (in thousands) 13,860 13,859 13,860 13,478
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For the six-month period ended July 1, 2005, sales amounted to $37.7 million, a 5.9% decrease from sales of $40.1 million reported for the comparable period in 2004. For the same period in 2005, the Fund generated EBITDA of $5.3 million after accounting for cost of sales, selling and administrative expenses as well as the realized and unrealized gain on foreign exchange, all of which totalled $32.4 million. For the comparable period of 2004, the Fund generated EBITDA of $8.9 million on the same basis, all of which totalled $31.2 million. As a percentage of sales, EBITDA was 14% of sales for the six-month period ended July 1, 2005, compared with 22% for the corresponding period in 2004.

Cash Distributions

The Fund declared distributions totalling $0.7 million ($0.05 per unit) to its Unitholders during the second quarter ended July 1, 2005 versus $4.2 million ($0.30 per unit) for the same quarter in 2004. During the quarter, the Fund used $0.02 per unit of its reserve which now stands at $0.09 per unit at the end of the quarter. During the quarter, the Fund suspended its monthly cash distributions.

Use of non GAAP measurements

Distributable cash is not a defined term under Canadian generally accepted accounting principles (GAAP), but is determined by the Fund as earnings before income taxes adjusted for non-cash expenses or non-recurring expenses including depreciation, amortization, asset impairments and write-downs and restructuring charges, and reduced by maintenance capital expenditures, net of disposals, current income taxes and changes in forward exchange contracts.

EBITDA, or earnings before interest, income taxes, depreciation and amortization, is not a recognized measure under GAAP. Management believes that, in addition to net earnings, EBITDA is a useful supplemental measure that provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. EBITDA, as defined by the Fund, also excludes restructuring charges and unusual items such as goodwill impairment and write-down of intangible assets. Investors are cautioned, however, that EBITDA should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of the Fund's performance, or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The Fund's method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to measures used by other issuers.



EBITDA Reconciliation

Three-month periods ended Six-month periods ended
(in thousands of July 1, July 2, July 1, July 2,
dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

Net earnings (loss) $(47,185) $666 $(46,838) $(27)

Plus
Depreciation and
amortization 2,641 2,652 5,382 5,247
Write-down of
intangible assets 14,213 - 14,213 -
Goodwill impairment 32,015 - 32,015 -
Restructuring
charges - 700 - 1,500
Provision for income
taxes (1,292) 187 (1,296) 351
Interest expense 959 873 1,815 1,790
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EBITDA $1,351 $5,078 $5,291 $8,861
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Operating Results

Sales for the three-month period ended July 1, 2005 were $17.9 million compared with $21.4 million last year. This sales decrease of $3.5 million included a decrease of $4.3 million or 22% from screening components and an increase of $0.8 million from the Finebar® and Optimum complementary product lines. Direct sales to End-users were $13.9 million (78% of total sales) and sales to Original Equipment Manufacturers (OEMs) were $4.0 million (22% of total sales). For the comparable period of 2004, sales to End-users represented $13.0 million (61% of total sales) and sales to OEMs represented $8.4 million (39% of total sales). Sales to OEMs decreased by $4.4 million, attributable mainly to the fact that most of the OEMs are now manufacturing screen cylinders internally.

Sales for the six-month period ended July 1, 2005 were $37.7 million compared with $40.1 million last year. Direct sales to End-users were $27.7 million (73% of total sales) and sales to OEMs were $10.0 million (27% of total sales). For the comparable period of 2004, sales to End-users represented $23.9 million (60% of total sales) and sales to OEMs represented $16.2 million (40% of total sales). For the first half of 2005, despite a drop in OEM sales, the Fund increased the total number of screen cylinders sold. The number of units sold to end-users increased by 13% during the period. However, the average selling price for a screen cylinder was approximately 8% lower this year, mainly due to unfavourable US$ exchange rate and, to a lesser extent, competition pressure.

After accounting for cost of sales, selling and administrative expenses as well as the realized and unrealized gain on foreign exchange, all of which totalled $16.5 million, the Fund generated EBITDA of $1.4 million during the three-month period ended July 1, 2005. For the comparable period of 2004, the Fund generated EBITDA of $5.1 million after accounting for cost of sales, selling and administrative expenses as well as the realized and unrealized gain on foreign exchange, all of which totalled $16.3 million. As a percentage of sales, EBITDA was 7.6% in the second quarter of 2005 compared with 23.8% in the corresponding quarter of 2004.

The reduction in EBITDA amounted to $3.7 million, of which approximately $2.1 million was due to a reduction in the sales volume of the Fund's core business, $0.7 million to increases in costs of manufacturing, mostly material related, $0.6 million to an unfavourable U.S. dollar exchange rate and $0.3 million to increases in selling costs mostly related to the new complementary product lines. During the quarter, the Fund shipped its first new Optimum screw press, worth approximately $0.5 million, in a segment of the pulp and paper industry where fiber recovery is an important consideration.

For the six-month period ended July 1, 2005, the Fund generated EBITDA of $5.3 million after accounting for cost of sales, selling and administrative expenses as well as the realized and unrealized gain on foreign exchange, all of which totalled $32.4 million. For the comparable period of 2004, the Fund generated EBITDA of $8.9 million after accounting for cost of sales, selling and administrative expenses as well as the realized and unrealized gain on foreign exchange, which together totalled $31.2 million. As a percentage of sales, EBITDA was 14% of sales for the six-month period ended July 1, 2005. For the corresponding period in 2004, EBITDA was 22% of sales.

Goodwill and Intangible Assets Impairment

Business conditions further deteriorated during the second quarter. Lower sales and higher material costs which could not be passed on to customers because of competition in the marketplace, resulted in EBITDA margins which were markedly lower than historical percentages. Our financial performance resulted in the Fund failing to comply with the financial covenants attached to its Credit Facility and Senior Secured Notes. This prompted a goodwill impairment test which took into account the new business conditions and our cost reduction initiatives.

Based on this test, goodwill was estimated at $33.5 million versus a book value of $65.5 million. An impairment charge of $32.0 million was therefore recorded during the quarter. In addition, intangible assets were evaluated and a total write-down of $14.2 million was recorded mostly for the carrying value of customer relationships and unpatented technology. These impairment charges are unusual non-cash expenses and therefore did not reduce EBITDA and distributable cash, which are calculated before unusual items.

Liquidity and Capital Resources

At the end of the quarter, the Fund had cash on hand of $0.1 million, and a revolving line of credit of $10.0 million, which was partially drawn at the end of the quarter. There were no significant changes to either the Credit Facility or the long-term obligations in place at the end of 2004. Both the credit agreement and the Secured Notes indenture include financial covenants that, once breached, prohibit the Fund from making monthly distributions. All these covenants were calculated on the Advanced Fiber Technologies (AFT) Trust consolidated financial statements. The debt to EBITDA ratio stood at 3.39 versus a maximum covenant of 3.0, the current ratio stood at 2.02, before the reclassification to short term of the Senior Secured Notes, versus a minimum covenant of 1.50 and the interest coverage ratio stood at 3.96 versus a minimum covenant of 4.50. The trailing twelve months minimum EBITDA covenant of $16.0 million was also not met at quarter end.

The Fund has arranged to hold discussions with its short term and long term lenders with a view to amending the Credit Facility and Senior Secured Notes to deal with the current situation.

Under the Credit Facility, the non compliance with the financial covenants constitutes an Event of Default and the Fund cannot declare any distribution until the Event of Default is cured. In addition, the short term lender has the right to accelerate repayment of any outstanding loans.

Under the Senior Secured Notes, the non-compliance with the financial covenants constitutes a default that, if not cured within 30 days from a formal notice by the Noteholders, becomes an Event of Default. The Fund cannot declare any distributions until the default is cured. In addition, upon an Event of Default, Noteholders are entitled to the immediate payment of any outstanding capital and accrued interest on the Senior Secured Notes and, if not paid, to the realization of their securities.

Although the outcome of the discussions are not known, they may result in more stringent credit conditions and higher interest rates.

Outlook

"Sales of screening components decreased by 22% or $4.3 million in the quarter due to a step decrease in sales to OEMs", commented Roch Leblanc, CEO of AFT Income Fund. "This sudden drop in sales in one quarter had a very negative impact on our earnings. We believe that these particularly bad results are not representative of our longer term prospects".

"We feel that the pulp and paper industry is still slowing down in most of the regions which, together with our customers' focus on reducing operating costs and improving productivity, confirms the need to intensify our own focus on cost reductions. This implies an important cultural change within AFT towards a lean manufacturing environment without sacrificing product performance. While the results from our design and marketing initiatives have been lower than expected, we remain confident that we will meet our annual objective of $2.0 million contribution to EBITDA in the first part of 2006. Until then, we remain prudent by placing priority on rebuilding the Fund's financial performance and reducing our debt", concluded Mr. Leblanc.

Appointment of a New Trustee

The Fund is pleased to announce the appointment of Byron Corner as a Trustee. Mr. Corner is Chief Investment Officer of Clarke Inc., a publicly traded investment holding company which is a significant unitholder of the Fund.

Forward-looking Information

Forward-looking statements contained herein are based on current expectations and are subject to a number of uncertainties and risks, and actual results may differ materially. These uncertainties and risks include, but are not limited to, the dependence on certain key suppliers, competitive pressures and changes in market activity, risks associated with international operations and foreign exchange, liquidity and debt covenants, legal proceedings, environmental, health and safety and other regulatory requirements. . Further information can be found in the disclosure documents filed by Advanced Fiber Technologies (AFT) Income Fund with the securities regulatory authorities, available at www.sedar.com.

Webcast

Advanced Fiber Technologies (AFT) Income Fund invites interested investors and financial media to access a live webcast of the conference call covering its first quarter results at www.aft-global.com on Thursday, August 4, 2005 at 10:00 a.m.



Advanced Fiber Technologies (AFT) Income Fund
Consolidated Balance Sheets


As at As at
July 1, December 31,
2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(in thousands of dollars) (unaudited) (audited)

Assets

Current assets
Cash and cash equivalents $92 $210
Accounts receivable 12,162 15,453
Inventories 12,082 11,243
Prepaid expenses 918 997
Forward exchange contracts maturing
within twelve months 1,083 1,232
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26,337 29,135

Property, plant and equipment 26,674 28,261

Deferred financing fees 886 1,033

Intangible assets (Note 4) 27,371 44,715

Forward exchange contracts 885 560

Goodwill (Note 3) 33,488 65,503
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$115,641 $169,207
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Liabilities and Unitholders' equity

Current liabilities
Bank loans (Note 5) $2,080 $1,444
Accounts payable and accrued liabilities 10,946 11,724
Cash distributions payable - 693
Income taxes payable 2 204
Current portion of long-term obligations
(Note 5) 45,143 222
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58,171 14,287

Long-term obligations (Note 5) 1,265 46,393

Future income taxes 206 1,511
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59,642 62,191
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Unitholders' equity (Note 6)
Units 129,482 129,482
Cumulative foreign currency translation
adjustment (146) 1,261
Cumulative earnings (losses) (29,283) 17,555
Cumulative distributions (44,054) (41,282)
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55,999 107,016
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$115,641 $169,207
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Advanced Fiber Technologies (AFT) Income Fund
Consolidated Statements of Earnings (Unaudited)

Three-month periods ended Six-month periods ended
July 1, July 2, July 1, July 2,
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(in thousands of
dollars except units
and per unit amounts)

Sales $17,859 $21,368 $37,691 $40,058
Cost of sales,
selling and
administrative
expenses 16,579 16,441 33,307 31,746
Realized and
unrealized gain on
foreign exchange (71) (151) (907) (549)
Restructuring charge - 700 - 1,500
---------------------------------------------------------------------
Earnings before the
under-noted 1,351 4,378 5,291 7,361

Interest expense
- long-term
obligations 778 766 1,574 1,549
Interest expense
- other 181 107 241 241
Amortization of
deferred financing
fees 74 64 147 128
Depreciation of
property, plant and
equipment 1,109 1,193 2,315 2,340
Amortization of
intangible assets 1,458 1,395 2,920 2,779
---------------------------------------------------------------------
Earnings (loss) before
unusual items and
income taxes (2,249) 853 (1,906) 324
Write-down of
intangibles (Note 4) 14,213 - 14,213 -
Goodwill impairment
(Note 3) 32,015 - 32,015 -
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Earnings (loss) before
income taxes (48,477) 853 (48,134) 324

Provision for income
taxes
Current 2 2 9 49
Future (1,294) 185 (1,305) 302
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(1,292) 187 (1,296) 351
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Net earnings (loss) $(47,185) $666 $(46,838) $(27)
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Basic weighted average
number of units
(in thousand of
units) 13,860 13,859 13,860 13,478
Diluted weighted
average number of
units (in thousand
of units) 14,332 14,337 14,175 13,988

Basic earnings (loss)
per unit $(3.40) $0.05 $(3.38) $0.00
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Diluted earnings (loss)
per unit $(3.40) $0.05 $(3.38) $0.00
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Advanced Fiber Technologies (AFT) Income Fund
Consolidated Statements of Unitholders' Equity (Unaudited)

Three-month periods ended Six-month periods ended
July 1, July 2, July 1, July 2,
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(in thousands of
dollars)

Balance, beginning
of period $104,771 $114,562 $107,016 $110,227

Issuance of units - 92 - 9,631
Net earnings (loss) (47,185) 666 (46,838) (27)
Change in cumulative
foreign translation
adjustment (894) 198 (1,407) (383)
Distributions declared (693) (4,157) (2,772) (8,087)
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Balance, end of period $55,999 $111,361 $55,999 $111,361
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Advanced Fiber Technologies (AFT) Income Fund
Consolidated Statements of Cash Flows (Unaudited)

Three-month periods ended Six-month periods ended
July 1, July 2, July 1, July 2,
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
(in thousands of
dollars)

Operating activities

Net earnings (loss) $(47,185) $666 $(46,838) $(27)
Items not affecting
cash
Depreciation of
property, plant
and equipment 1,109 1,193 2,315 2,340
Amortization of
intangible assets
and deferred
financing fees 1,532 1,459 3,067 2,907
Write-down of
intangible assets 14,213 - 14,213 -
Goodwill impairment 32,015 - 32,015 -
Translation
adjustment 134 (454) 134 (579)
Loss on disposition
of property, plant
and equipment 40 - 40 -
Loss (gain) on
forward exchange
contracts 421 - (176) -
Future income taxes (1,294) 185 (1,305) 302
Change in non-cash
working capital items 2,400 403 752 (2,680)
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3,385 3,452 4,217 2,263
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Investing activities
Maintenance capital
expenditures (403) (173) (620) (279)
Expansion/productivity
capital expenditures (409) (269) (680) (285)
Proceeds on disposition
of property, plant and
equipment 3 - 3 -
Acquisition of Optimum
Filtration - - - (5,975)
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(809) (442) (1,297) (6,539)
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Financing activities
Distribution to
Unitholders (1,386) (4,157) (3,465) (8,087)
Repayment of long-term
obligations (69) - (209) (94)
Change in bank loans (1,864) (466) 636 (372)
Issuance of Trust
units - 92 - 10,181
Cost related to
issuing units - - - (550)
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(3,319) (4,531) (3,038) 1,078
---------------------------------------------------------------------
Decrease in cash and
cash equivalents
for the period (743) (1,521) (118) (3,198)

Cash and cash
equivalents,
beginning of period 835 3,537 210 5,214
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Cash and cash
equivalents, end
of period $92 $2,016 $92 $2,016
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Advanced Fiber Technologies (AFT) Income Fund
Notes to the Consolidated Financial Statements (Unaudited)

For the period from January 1, 2005 to July 1, 2005

1. Basis of presentation

In the opinion of management, the accompanying unaudited interim
consolidated financial statements, prepared in accordance with
Canadian generally accepted accounting principles, contain all
adjustments necessary to present fairly the financial position of
Advanced Fiber Technologies (AFT) Income Fund as at July 1, 2005 and
July 2, 2004 as well as its results of operations and its cash flows
for the six-month periods ended July 1, 2005 and July 2, 2004.

While management believes that the disclosures presented are
adequate, these unaudited interim consolidated financial statements
and notes should be read in conjunction with Advanced Fiber
Technologies (AFT) Income Fund's 2004 annual consolidated audited
financial statements and notes. These unaudited interim consolidated
financial statements follow the same accounting policies as the most
recent annual consolidated audited financial statements, except as
noted below.

These interim consolidated financial statements have not been subject
to a review by the Fund's external auditors.

These consolidated financial statements include the accounts of the
Fund and its directly and indirectly wholly owned subsidiaries from
their dates of acquisition. The wholly owned subsidiaries are:
Advanced Fiber Technologies (AFT) Trust, Advanced Fiber Technologies
(AFT) Inc., Advanced Fiber Technologies (AFT) Oy, Poong Nam (AFT)
Ltd., Varkauden Metallikiinteistot Oy and Advanced Fiber Technologies
(AFT) Ltd.

The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis. The going concern basis
of presentation assumes that the Fund will continue in operation for
the foreseeable future and will be able to realize its assets and
discharge its liabilities and commitments in the normal course of
business. There is uncertainty as to whether or not the lenders will
decide to accelerate the repayment of the long-term obligations of
the Fund due to the breach of a number of its debt covenants. As
such, the realization of assets and the discharge of liabilities in
the ordinary course of business are subject to uncertainty.

In this situation, as required by the Canadian Institute of Chartered
Accountants Emerging Issues Committee Abstract of Issues Discussed
EIC-59, the Fund has reclassified as a current liability the entire
$45 million balance of its Senior Secured Notes, and this despite the
fact that no accelerated repayment has been demanded by the lenders.

The unaudited interim consolidated financial statements do not
reflect any other adjustments that would be necessary if the going
concern basis was not appropriate and assume that lenders do not
accelerate the repayment of the long-term obligations. If the going
concern basis was not appropriate for these unaudited interim
consolidated financial statements, significant adjustments would be
necessary in the carrying value of assets and liabilities, the
reported revenues and expenses, and the balance sheet classifications
used. Management's on-going plans with respect to the uncertainties
described above are as follows:

- Continuing discussions with its lenders in respect of its non-
compliance with its debt covenants, repayment terms, waivers and/or
modifications thereto;

- Continuing the restructuring of the operations to reduce costs.

2. Significant accounting policies

Hedging relationships

The Fund uses forward exchange contracts to manage its foreign
exchange risk exposures on foreign currency denominated sales. The
Fund's policy is to not utilize derivative financial instruments for
trading or speculative purposes. Beginning on March 30, 2005, the
Fund formally documents all relationships between hedging instruments
and hedged items. The Fund also formally assesses, both at the
hedge's inception and on an ongoing basis, whether the forward
exchange contracts that are used in hedging transactions are
effective in offsetting changes in cash flows of hedged items.

All forward exchange contracts that qualify for hedge accounting are
recorded in the consolidated balance sheet and changes in fair value
are deferred and recognized over the term of the hedging
relationship. All forward exchange contracts that do not qualify for
hedge accounting, or are not designated as a hedge, are recorded in
the consolidated balance sheet as either an asset or liability with
changes in fair value recognized in earnings.

Beginning on March 30, 2005, the Fund's forward exchange contracts
qualify for hedge accounting. Accordingly, as of that date, the Fund
recorded a mark to market gain of $597,000 that was excluded from
distributable cash. In the future, changes in the fair market value
of forward exchange contracts will be deferred until their
realization.

Intangible assets

As of January 1, 2005, the Fund has reviewed its estimate of the
useful life of certain customer relationships from 20 years to 13
years. This change, which was applied on a prospective basis,
resulted in additional amortization expense for the quarter of
$180,000 and for the year to date of $360,000.

3. Goodwill impairment

During the second quarter 2005, the Fund conducted an impairment test
of goodwill and recorded a decrease in value of $32,015,000 since the
carrying amount of goodwill for each of the economic units above was
estimated to be higher than its fair value, resulting from difficult
overall market conditions. Based on the overall conditions under
which the impairment was recorded, the only future income tax asset
recorded in relation to this impairment was that which was sufficient
to eliminate any future tax liability which had been previously
recorded in relation to these assets.

The following table shows the changes in the carrying amount of
goodwill in the period:


Canada Finland South Korea Total
---------------------------------------------------------------------
Balance at December 31, 2004
and April 2, 2005 43,348 21,635 520 65,503
Impairment (25,668) (6,347) - (32,015)
---------------------------------------------------------------------
Balance at July 1, 2005 17,680 15,288 520 33,488
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---------------------------------------------------------------------

4. Intangible assets

Following the impairment test mentioned in Note 3, the following
write-downs of intangible assets were recorded at the end of the
second quarter of 2005. No future income tax asset was recorded in
relation to these write-downs given the overall conditions under
which they were made.

Patents and license, unpatented technology and know-how

Canada Finland South Korea Total
---------------------------------------------------------------------
Balance at December 31, 2004 12,067 9,984 459 22,510
Amortization in Q1 and Q2
2005 (821) (385) (41) (1,247)
Translation adjustment - (99) - (99)
Write-down in Q2 (4,203) (4,382) - (8,585)
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Balance at July 1, 2005 7,043 5,118 418 12,579
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Customer relationships

Canada Finland South Korea Total
---------------------------------------------------------------------
Balance at December 31, 2004 9,587 11,326 991 21,904
Amortization in Q1 and Q2
2005 (682) (817) (88) (1,587)
Translation adjustment - (112) - (112)
Write-down in Q2 (4,166) (1,462) - (5,628)
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Balance at July 1, 2005 4,739 8,935 903 14,577
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---------------------------------------------------------------------

Non-compete agreement

Canada Finland South Korea Total
---------------------------------------------------------------------
Balance at December 31, 2004 301 - - 301
Amortization in Q1 and Q2 2005 (86) - - (86)
Translation adjustment - - - -
Write-down in Q2 - - - -
---------------------------------------------------------------------
Balance at July 1, 2005 215 - - 215
---------------------------------------------------------------------
---------------------------------------------------------------------

Total intangible assets

Canada Finland South Korea Total
---------------------------------------------------------------------
Balance at December 31, 2004 21,955 21,310 1,450 44,715
Amortization in Q1 and Q2
2005 (1,589) (1,202) (129) (2,920)
Translation adjustment - (211) - (211)
Write-down in Q2 (8,369) (5,844) - (14,213)
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Balance at July 1, 2005 11,997 14,053 1,321 27,371
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---------------------------------------------------------------------

5. Long term obligations and Credit Facility

At the end of the second quarter 2005, the Fund was not in compliance
with the financial covenants under its Credit Facility and Senior
Secured Notes. The Fund will discuss amendments to its loan
covenants with the lenders. In this situation, as required by the
Canadian Institute of Chartered Accountants Emerging Issues Committee
Abstract of Issues Discussed EIC-59, the Fund has reclassified as a
current liability the entire $45 million balance of its Senior
Secured Notes, even though no accelerated repayment has been demanded
by the lenders.

6. Unitholders' equity

During the first quarter of 2005, 60,000 options were granted to two
officers with an exercise price of $6.38 per option. The fair value
of the options granted amounted to $0.68 per option. Options are
granted for a period of 10 years and vest 20% per year over a period
of five years. The fair value of these options was calculated using
the Black-Scholes valuation model and the following assumptions:

Dividend yield 10.36%
Expected volatility 37.5%
Risk-free interest rate 4.6%
Expected life (years) 10

The fair value of these options will be recognized as an expense over
the vesting period of the options. The total expense recorded for
these options in the second quarter of 2005 was $3,000. The
cumulative total expense recorded for these options since they were
granted to the end of the second quarter of 2005 is $3,000.

7. Employee future benefits

The Fund measures its accrued pension obligation and the fair value
of plan assets for accounting purposes as at December 31 of each
year. During the year, the expense recorded is an estimate of values
expected at December 31 as well as any current contributions made in
the period. The pension expense recorded is as follows:

Three-month periods ended Six-month periods ended
July 1, July 2, July 2, July 2,
2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

Current contributions
made 71,964 74,339 134,116 142,976
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Contact Information

  • Advanced Fiber Technologies (AFT) Income Fund
    Normand Potvin
    Chief Financial Officer and Secretary
    (819) 562-4754