Associated Brands Income Fund
TSX : ABF.UN

Associated Brands Income Fund

April 26, 2007 08:37 ET

Associated Brands Income Fund Announces First Quarter 2007 Results

TORONTO, ONTARIO--(CCNMatthews - April 26, 2007) - Associated Brands Income Fund (TSX:ABF.UN) (the "Fund" or "Associated Brands") announced today its results for the three months ended March 31, 2007. These results confirmed, as previously announced by the Fund on April 23, 2007, that certain of its subsidiaries were in default under two financial covenants under their credit agreement with a Canadian chartered bank and under a covenant under the exchangeable debentures of Associated Brands Holdings Limited Partnership ("ABHLP").

"While we are encouraged by the continued revenue momentum in the first quarter of 2007, we have been unable to deliver operating margins in-line with our expectations and this, in combination with higher working capital requirements, has resulted in certain subsidiaries of the Fund breaching covenants under the credit agreement and exchangeable debentures of ABHLP. Our manufacturing operating performance is improving but is still not at expected levels, and results remain inconsistent from month-to-month", commented Rob Dougans, President and Chief Executive Officer. "Improved and consistent manufacturing performance is a critical element to achieving a sustained improvement in earnings and will remain a very key focus for management. With the default under these covenants, we will continue our discussions with our bank and the debenture holders with respect to the Fund's ongoing credit relationship with such parties".

The Fund delivered revenue growth in the first quarter of 2007 with case volumes and revenues rising 10.1% and 15.6% respectively compared to last year's first quarter. The increase in revenues in the first quarter of 2007 is attributable to growth in case volumes, new products launched in the later half of 2006, and price increases that were implemented in the second quarter of 2006. Customer sponsored new products introduced in 2006 added $1.8 million in revenues in the first quarter of 2007.

Gross profit for the three months ended March 31, 2007 was $6.5 million or 15.4% of revenue compared to last year's first quarter gross profit of $5.1 million or 13.9% of revenue. Gross profit increased as a percentage of revenue in the first quarter of 2007 as a result of higher volumes and increased sales in certain higher margin products as compared to the gross profit in the quarter ended April 1, 2006 which was negatively impacted by greater revenues of lower margin new products. Although some improvements were made in the first quarter of 2007 with respect to manufacturing costs, the rate and extent of cost improvements was below turnaround plan expectations. Management anticipates that increases in raw material, packaging, transportation and energy costs will pressure margins through the balance of 2007.

Earnings before interest, taxes, depreciation and amortization and non-recurring expenses (EBITDA) in the first quarter of 2007 were $2.2 million compared to $0.8 million in the same period last year. EBITDA was positively impacted by the price increases implemented in the second quarter of 2006, increased revenues of higher margin products and manufacturing cost improvements as compared to the same period in 2006. Selling, general and administrative expenses were higher in the three months ended March 31, 2007 due to costs for the recruitment of certain key positions in late 2006 and early 2007 together with increased broker commissions as a result of increased revenues and an unrealized loss on the change in fair value of commodity future contracts. Partially offsetting these increases was the reduction in costs which were incurred in the three months ended April 1, 2006 related to the nutritional and trans-fat content labelling packaging conversion.

Distributable cash in the first quarter of 2007 was $0.3 million or $0.012 per Fund unit (diluted) compared to a shortfall of $0.3 million or $0.025 per Fund unit for the same period last year. The Fund did not pay cash distributions to Unitholders through the first three months of 2007 and 2006.

Certain of the Fund's subsidiaries were in default as at March 31, 2007 under financial covenants under their credit agreement with a Canadian chartered bank and under the exchangeable debentures of ABHLP. The financial covenant that was breached under the credit agreement required that the Fund maintain its funded debt (which represents all of the Fund's interest bearing bank indebtedness) at a ratio of not more than 3.25 to 1 over its Normalized EBITDA (as defined and calculated under the credit agreement). The financial covenant that was breached under the exchangeable debentures required that the Fund maintain its specified debt (which represents the Fund's funded debt (which has the same meaning as under the credit agreement) and the exchangeable debentures) at a ratio of not greater than 4.75 to 1 over its Normalized EBITDA (which also has the same meaning as under the credit agreement). The ratios under such financial covenants had become more stringent as of March 31, 2007 as compared to previous months in accordance with the respective terms and conditions of such credit agreement and exchangeable debentures. In addition, the default under the financial covenant under the credit agreement resulted in a cross-default under the exchangeable debentures. As a result of these breaches, the Fund's long-term debt with the bank and the debenture holders was reclassified from long-term liabilities to current liabilities on its consolidated financial statements as of March 31, 2007 which resulted in an additional default under the covenant under the credit agreement relating to the Fund's working capital ratio. The defaults under the credit agreement also resulted in a default under the ISDA Master Agreement between a subsidiary of the Fund and the same bank that is the lender under the credit agreement.

The Fund believes that the defaults under the financial covenants are due to an increase in bank indebtedness as at March 31, 2007 resulting from increased inventories to support revenue growth, as well as a lower than internally expected rolling 12 month Normalized EBITDA.

The credit agreement and the terms of the debentures provide the bank and the debenture holders, respectively, with certain rights and remedies during the continuance of a default, including the right to accelerate the debt due under the credit agreement and the debentures, respectively, and the right to realize upon security that has been granted by the Fund's subsidiaries.

"As previously announced in our press release of April 23, 2007, the Fund has notified the bank and the debenture holders of these expected defaults. The Fund has requested that the bank and the debenture holders waive such defaults", commented Rob Dougans, President and Chief Executive Officer.

There can be no assurance that the bank or the debenture holders will not exercise their respective rights and remedies during the continuance of any defaults under the credit agreement or the debentures, as applicable. In addition, if the bank or the debenture holders exercise their rights and remedies, there can be no assurance that a replacement facility can be obtained in order to permit the repayment of indebtedness under the credit agreement or the debentures, as applicable, or that, if such a replacement facility is obtained, it will be obtained at costs, or on terms and conditions, comparable to those of the Fund's current indebtedness.

Funds managed by Torquest Partners Inc. hold 85.1% aggregate principal amount of the outstanding debentures. As previously announced, the Fund and ABOT have agreed to sell their debt and equity interests in the operating subsidiaries of the Associated Brands business to a wholly-owned subsidiary of a fund managed by an affiliate of Torquest Partners Inc., with proceeds of such sale being distributed to unitholders of the Fund by way of the redemption of outstanding units at a cash redemption price of between $0.80 and $0.82 per unit. A special meeting of unitholders of the Fund has been called for May 4, 2007 to consider, and if deemed advisable, approve such transaction and the termination of the Fund and ABOT. If the bank and the debenture holders do not grant waivers for the defaults under the debt agreements as requested by the Fund, then the purchaser under the sale agreement for the Associated Brands operating subsidiaries may claim that a closing condition in its favour under such purchase agreement has not been satisfied and relieves the purchaser of its obligation to complete the sale transaction. There can be no assurance that the purchaser will not make this claim or claim the exercise of any other rights or remedies in respect of the defaults under the debt agreements and in connection with the proposed sale transaction.

"Despite our revenue growth in the first quarter, we are still not satisfied with our overall financial performance and, in particular, the slower than anticipated impact that our turnaround initiatives have had on improving operating margins," Mr. Dougans concluded. "We still have a tremendous amount of hard work ahead of us to ensure that we fully capture the momentum of our revenue growth in our operating margins on a consistent and predictable basis. In addition, we must continue to carefully manage cash and working capital levels to support our growing business."



Financial Highlights:

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Three Months
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Period Ended, March 31, April 1,
($000, except unit and per unit amounts) 2007 2006
(unaudited)
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Revenues 42,412 36,686
Gross Contribution Margin 15.4% 13.9%
EBITDA 2,229 787
Net Loss (495) (1,098)
Net Loss per Unit (diluted) $(0.035) $(0.084)
Distributable Cash (Shortfall) 257 (295)
Distributable Cash (Shortfall) per Fund Unit $0.012 $(0.025)
(diluted)
Distributions Declared per Fund Unit - -
Weighted Average Fund Units Outstanding 14,066,286 13,069,767
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ASSOCIATED BRANDS INCOME FUND (TSX:ABF.UN), through its operating subsidiaries, is a leading North American manufacturer and supplier of private-label dry-blend food products and household products. Since beginning operations in 1985, Associated Brands has grown to become one of the three largest suppliers of a diverse range of private label dry blend food products in North America, producing over eleven million cases annually across multiple product categories currently sold to 45 of the 50 largest North American food retailers. Associated Brands plans to build unitholder value by leveraging its solid presence in the U.S. private label market, expanding its product offerings to current and new customers and adding additional contract manufacturing business, and through accretive acquisitions that meet its strict operating and strategic criteria. More information can be obtained at www.associatedbrands.com.

This press release contains certain forward-looking information and statements. Forward-looking information typically contains statements with words such as "consider", "anticipate", "believe", "expect", "plan", "intend", "may", "will", "likely" or similar words suggesting future outcomes or statements regarding an outlook for, or future changes in, the Fund's financial performance, results of operations or distributions or other expectations, future events or performance. Although the Fund believes that the expectations reflected in these forward-looking statements are reasonable, readers should not place undue reliance on forward-looking information and should be aware that forward looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements of the Fund to differ materially from those suggested by the forward-looking statements. These factors include, but are not limited to, the possible failure to successfully plan and execute business improvement strategies; restrictions and covenants contained in the Fund's credit agreement and under the terms of its exchangeable subordinated debentures and the existence of defaults under such covenants; the possibility that the proposed transaction is not complete due to, among other things, any conditions to closing under the purchase agreement not being satisfied or waived; the absence of long term sales contracts; possible failure to develop new product offerings; operating hazards; sensitivity of sales to weather conditions; product liability; compliance with or changes in environmental, health and safety and other regulations; changes to income tax legislation, possible declines in vertical industry markets (grocery, foodservice, industrial and contract manufacturing); competition; reliance on key personnel; possible labour action; volatility in commodity prices and other input materials prices; foreign exchange exposure; exposure to floating interest rates; exposures under derivative financial instruments; the possible failure to expand into the United States; changes in consumer preferences; and capital expenditures.

The above list of important factors affecting forward-looking information is not exhaustive, and reference should be made to the other risks discussed in the Fund's filings with Canadian securities regulatory authorities. The Fund undertakes no obligation, except as required by law, to update publicly or otherwise any forward-looking information, whether as a result of new information, future events or otherwise, or the above list of factors affecting this information.

Except as outlined below, financial information is in accordance with Canadian generally accepted accounting principles ("GAAP").


As used herein, "EBITDA" means earnings (loss) before interest, income taxes, depreciation, amortization, translation gains and losses arising on all monetary assets and liabilities of the Fund denominated in a foreign currency, goodwill and intangible assets write-down, non-recurring expenses and non-controlling interests. EBITDA is not a recognized measure under GAAP. Management believes that EBITDA is a useful supplemental measure to net earnings (loss), as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes.

Distributable cash is also not a defined term under GAAP. Distributable cash is equal to net earnings before amortization, future income taxes and translation gains and losses arising from all monetary assets and liabilities of the Fund denominated in a foreign currency, less capital expenditures and debt repayments and reserves that the trustees may consider appropriate. Management believes distributable cash is a useful supplemental measure of operating performance, as it provides investors with an indication of cash available for distribution.

Investors should be cautioned that neither EBITDA nor distributable cash should be construed as an alternative to net earnings (loss) 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 and distributable cash may differ from the methods by which other issuers calculate EBITDA and distributable cash and, accordingly, EBITDA and distributable cash may not be comparable to measures used by other issuers.

Associated Brands' First Quarter 2007 unaudited Consolidated Financial Statements and Management's Discussion and Analysis are available on the investor relations page at www.associatedbrands.com and on SEDAR at www.sedar.com.

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