Colabor Group Inc.

Colabor Group Inc.

October 07, 2009 15:00 ET

Colabor Group Inc.: Conversion to a Corporation While Maintaining an Annual Dividend of $1.08/share

BOUCHERVILLE, QUEBEC--(Marketwire - Oct. 7, 2009) - Colabor Group Inc. (TSX:GCL) reports its results for its third quarter ended September 12 of the year ending December 31, 2009.

On August 25, 2009, Colabor Income Fund (the "Fund") converted to a corporation, as described further in this release.

Highlights of the 2009 Third Quarter Compared to 2008:


  • Conversion to a corporation through the acquisition, from Conjuchem Inc., of about $130M in tax losses for $5M, i.e. $0.038 per dollar of tax losses.
  • Slight increase in EBITDA despite an $11.6M or 4% drop in sales;
  • EBITDA on sales ratio up from 3.47% in 2008 to 3.62%.
  • Net earnings rose $2.4M.

Highlights of the First Three Quarters of 2009 compared to 2008:

  • Sales up 9.4%
  • EBITDA increased 11.8%
  • Net earnings rose $3.6M.


Corporate arrangement resulting in the creation of Colabor Group Inc.

The Fund is an unincorporated, open-ended, limited purpose trust that was established under the laws of the Province of Quebec under a Declaration of Trust dated May 19, 2005. The Fund's units were traded on the Toronto Stock Exchange under the symbol CLB.UN.

On July 8, 2009, the Fund announced its intention to convert from an income trust structure to a corporation (the "Conversion"). In order to effect the Conversion, on that date, Colabor entered into an arrangement agree ment (the "Arrangement Agreement") with ConjuChem Biotechnologies Inc. ("ConjuChem") in order to conclude the Conversion pursuant to a statutory plan of arrangement of ConjuChem (the "Plan of Arrangement") under Section 192 of the Canada Business Corporations Act ("CBCA") and the Conversion was completed on August 25, 2009, further to the approval of the unitholders of the Fund, which was obtained at a special meeting held on August 19, 2009.

Rationale and Benefits of the Conversion

Recent amendments to the federal income tax rules relating to specified investment flow-through trusts ("SIFTs") allow for the conversion of a trust to a corporation to be effected on a tax deferred basis if completed prior to 2012.

Key benefits for the Fund of implementing the Conversion include:

  • Greater access to equity capital markets and widening of potential investor base in light of the decreasing importance of the public business income trust market;
  • GCL will have an estimated equivalent of about $130 million in tax losses following the Conversion;
  • The Plan of Arrangement provides for an effective and efficient method to convert from an income trust to a corporation under existing legislation; and
  • The Conversion resulted in a simplified capital structure, as a result of the elimination of a remaining minority interest in Colabor LP, and a more efficient corporate structure that will reduce overhead and administrative costs.

Other elements considered included the fact that GCL expects to be able to pay a quarterly dividend that will, on a quarterly basis, equal the Fund's pre-conversion cash distribution, the absence of negative tax impacts from the Conversion given the Fund's current tax status, and, lastly, the Conversion is tax deferred such that no income tax will be payable by the Fund or its unitholders as a result of the Conversion.

Details of the Conversion

Following implementation of the Arrangement, the Fund's unitholders received one common share of GCL for every trust unit of the Fund held on the effective date of the Conversion. Furthermore, the exchangeable Colabor LP units held by Colabor Investments Inc. were acquired by GCL pursuant to the Arrangement in consideration of GCL common shares; Colabor Investments Inc., holds in the aggregate, 26% of GCL common shares following the acquisition of its exchangeable units. The elimination of the remaining minority interest in Colabor LP resulted in a simplified capital structure and an increase of approximately $50M of the market capitalization of GCL compared to the previous market capitalization of the Fund.

After the Conversion, outstanding convertible debentures of the Fund, amounting to $49M, became convertible into common shares of GCL on the same terms and conditions as were applicable to their conversion into trust units of the Fund prior to the Conversion.

Following completion of the Conversion, GCL indirectly owns and operates the existing businesses of Colabor LP and its subsidiaries, and the existing trustees of the Fund and management of Colabor LP became the directors and management of GCL.

It is expected that GCL will make its first dividend payment to its shareholders in January 2010 for the period from the completion of the Arrangement to December 31, 2009.

Complete details of the terms of the Plan of Arrangement are set out in the Arrangement Agreement and the Fund's Information Circular about the Plan of Arrangement dated July 21, 2009, which the Fund filed on the SEDAR Internet site at

Results of Operations

The results of operations should be read taking the following into account:

  • As a result of the conversion to a corporation on August 25, 2009, the consolidated earnings preparation method has changed;
  • Results subsequent to the Bruce Edmeades acquisition are only included since March 17, 2008 for the 2008 cumulative period, but are included since January 1 for the 2009 period;
  • Results subsequent to the Bertrand, distributeur en alimentation acquisition are only included since April 28, 2008 for the 2008 cumulative period, but are included since January 1 for the 2009 period;
  • The 2009 cumulative period includes 255 days compared to 250 days in 2008.
Consolidated Earnings (in thousands of dollars, except per unit amounts, unaudited)    
  2009-09-12 2008-09-06    
  (84 days) (84 days) Variance 
  $  $  $% 
Sales 276,841 100.00% 288,446 100.00% (11,605)-4.02% 
Earnings before financial expenses, amortization and income taxes10,026 3.62% 10,014 3,47% 12 0.12% 
Financial expenses 1,404 0.51% 1,813 0.63% (409)-22.56% 
Amortization of property, plant and equipment983 0,36% 975 0,34% 8 0.82% 
Amortization of intangible assets2,179 0.79% 1,633 0,57% 546 33.44% 
  4,566 1.66% 4,421 1.54% 145 3.28% 
  5,460 1.96% 5,593 1.93% (133)-2.38% 
Restructuring and conversion to corporation expenses  2,125 0.77%    2,125               N/A 
Earnings before income taxes and non-controlling interest3,335 1.20% 5,593 1,94% (2,258)-40.37% 
Income taxes Current(1,642)-0.59% 1,224 0.42% (2,866)-234.15% 
Future(1,008)-0.36% 297 0.10% (1,305)-439.39% 
  (2,650)-0.95% 1,521 0.52% (4,171)-274.23% 
Earnings before non-controlling interest5,985 2.15% 4,072 1,42% 1,913 46.98% 
Non-controlling interest 1,275 0.46% 1,761 0.61% (486)-27.60% 
Net earnings 4,710 1.69% 2,311 0.81% 2,399 103.81% 
Basic and diluted net earnings per unit$0.30  $0.16     
  2009-09-12 2008-09-06    
  (255 days) (250 days) Variance 
  $  $  $% 
Sales 817,508 100.00% 747,196 100.00% 70,312 9.41% 
Earnings before financial expenses, amortization and income taxes 27,727 3.39% 24,797 3.32% 2,930 11.82% 
Financial expenses 4,391 0.54% 4,864 0.65% (473)-9.72% 
Amortization of property, plant and equipment2,739 0,34% 2,496 0.33% 243 9.74% 
Amortization of intangible assets6,556 0.80% 5,093 0.68% 1,463 28.73% 
  13,686 1.68% 12,453 1.66% 1,233 9.90% 
  14,041 1.71% 12,344 1.66% 1,697 13.75% 
Restructuring and conversion to corporation expenses  2,125 0.26%  0.00% 2,125              N/A 
Earnings before income taxes and non-controlling interest11,916 1.46% 12,344 1.65% (428)-3.47% 
Income taxesCurrent202 0.02% 2,543 0.34% (2,341)-92.06% 
 Future44 0.01% 1,490 0.20% (1,446)-97.05% 
  246 0.03% 4,033 0.54% (3,787)-93.90% 
Earnings before non-controlling interest11,670 1.43% 8,311 1.11% 3,359 40.42% 
Non-controlling interest 4,001 0.49% 4,262 0.57% (261)-6.12% 
Net earnings 7,669 0.94% 4,049 0.54% 3,620 89.40% 
Basic and diluted net earnings per unit$0.52  $0.33     


Sales (in thousands of dollars, unaudited)       
  (84 days)     
  Comparable sales Sales attributable to acquisitions Total sales Comparable sales
    (84 days) Variance
  $ $ $$ $%
Wholesale Segment          
 Retail30,101    30,101 29,350  751 2.6%
 Foodservice86,189    86,189 78,958  7,231 9.2%
  116,290    116,290 108,308  7,982 7.4%
 Inter-segment elimination(21,761)   (21,761)(16,152) (5,609)N/A
  94,529    94,529 92,156  2,373 2.6%
Distribution Segment         
 Foodservice 182,312    182,312 196,290  (13,978)-7.1%
  276,841    276,841 288,446  (11,605)-4.0%
  (255 days)           
  Comparable sales Sales attributable to acquisitions Total sales Comparable sales    
     2009-09-12 2008-09-06    Variance 
     (adjusted) (250 days) Variance (Total sales) 
  $ $ $ $ $ $% $% 
Wholesale Segment                
 Retail88,468    88,468  86,733  86,169  564 0.7% 2,299 2.7% 
 Foodservice254,268    254,268  249,282  218,636  30,646 14.0% 35,632 16.3% 
  342,736    342,736  336,015  304,805  31,210 10.2% 37,931 12.4% 
 Inter-segment elimination(49,087) (17,108) (66,195) (48,125) (27,183) (20,942)N/A (39,012)N/A 
  293,649  (17,108) 276,541  287,890  277,622  10,268 3.7% (1,081)-0.4% 
Distribution Segment                
 Foodservice452,364  88,603  540,967  443,494  469,574  (26,080)-5.6% 71,393 15.2% 
  746,013  71,495  817,508  731,384  747,196  (15,812)-2.1% 70,312 9.4% 

Wholesale Segment

For the 84-day period, net of inter-segment eliminations, sales of the Wholesale Segment were up $2,373,000, which represents overall organic growth of 2.6%, an interesting growth rate, despite the current economic situation. Considering that inter-segment eliminations of $21,761,000 are sales by the Wholesale Segment to the Summit and Bertrand divisions, which are foodservice divisions, it can be concluded that retail and foodservice each grew by 2.6%.

In the cumulative period, the 255-day period in 2009 was reduced to 250 days, the same number of days as in the 2008 period, and shows overall organic growth of 3.7%, with foodservice and retail contributing 5% and 0.7%, respectively.


Organic growth in this Segment is primarily attributable to the conclusion of a major distribution agreement, in the 4th quarter of 2008, between an affiliated-wholesaler and an integrated oil company.


Although half of this quarter was characterized by poor weather conditions, organic growth in sales to foodservice affiliated-wholesalers remained steady at 2.6% for the quarter and contributed to maintaining 5% growth for the cumulative period.

In light of the significant downturn of the Canadian economy in the first three quarters of 2009, organic growth in this segment is a clear indication that affiliated-wholesalers are continuing to increase their market share over their competitors.

Distribution Segment

The Distribution Segment experienced a very difficult third quarter, with a 7.1% decline in sales for the quarter and a cumulative decrease of 5.6% in comparable sales from 2008.

The decline was primarily attributable to the Summit Division. Not only does this division operate in Ontario, the Canadian province hardest hit by the current economic recession, where all restaurant, fast food, cafeteria and independent restaurant segments are affected, it also suffered from the repercussions of poor weather in the first half of the quarter, which considerably reduced sales.

The drop in sales in the Bertrand division was less pronounced. It may be recalled that 2008 marked the 400th anniversary of the founding of Québec City and there is no doubt that tourism activity is not as strong this year.

Earnings Before Financial Expenses, Amortization and Income Taxes (EBITDA)

Gross Profit and Synergies

Gross profit:

Gross profit is composed of the following items:

  • Wholesale Segment: Profit on gross warehouse sales only, which consists primarily of a profit margin on private brand-name products and profit on inventory held. No profit margin is recognized on direct sales. Income is attributed on such sales for purposes of rebates from suppliers only.

Distribution Segment: Product acquisition cost with a percentage mark-up that is market-driven or negotiated in current agreements.

Rebates from suppliers

A significant portion of Colabor's gross profit is derived from rebates from suppliers. These rebates consist of: (i) agreements with suppliers relating principally to distribution agreements, central billing, truck load allowance and other incentives, (ii) rebates received from suppliers based on buying volumes, (iii) cash discounts on purchases based on terms of sale, and (iv) net advertising funds received in connection with promotional activities.

Despite weak sales in the Distribution Segment, as described above, the Company managed to maintain and slightly increase its EBITDA thanks to a reorganization of its operations and by reducing some expenses. As a percentage of sales, EBITDA was 3.62%, compared to 3.47% for the same quarter last year.

The increase is attributable to the following:

  • Organic growth was maintained in the Wholesale Segment which generated superior agreements with suppliers.
  • Summit purchases from certain suppliers are now billed under the Wholesale Segment, which increases the profitability of supplier agreements, as such agreements tend to be more significant when negotiated by the Wholesale Segment.
  • Since the start of the year, each division has reviewed its operations, which has led to a reduction in certain types of expenses.
  • The Bertrand acquisition, which has already made it possible to generate a number of purchasing synergies.
  • Profitability of the Cambridge distribution centre, operated by Summit and acquired from Bruce Edmeades, operated at a loss in 2008.

Restructuring and Conversion to a Corporation Expenses

As described under the Conversion section, the Fund converted to a corporation on August 25, 2009. A number of expenses were incurred for this transaction, in particular, legal and accounting fees and the cost of registering on financial markets. Additional expenses were incurred to streamline the organization's overall legal structure.

The Company's management decided to expense these expenses in accordance with EIC-170, Conversion of an Unincorporated Entity to an Incorporated Entity, published by the Canadian Institute of Chartered Accountants.

Income Taxes

The acquisition of the assets of Summit Food Service Distributors Inc. by the Fund was finalized and carried out on January 8, 2007. Since this transaction was considered an "undue expansion" by the Department of Finance in its ruling rendered at the end of 2007, the Fund became taxed immediately in 2007 instead of in 2011.

As explained under the Conversion section, on August 25, 2009, the Fund became a corporation as a result of a Plan of Arrangement with Biotechnologies ConjuChem Inc., and acquired approximately $130M in tax losses for $5M.

Since the start of the year, the Company had recorded income taxes, however, subsequent to the above transaction, it recognized a current and future income taxes recovery to immediately benefit from the loss-carryforwards acquired in the ConjuChem transaction.

Non-controlling Interest

Additionally, in connection with the conversion to a corporation described in the Conversion section above, unitholders who had a non-controlling interest in the Fund converted their exchangeable Colabor LP units into shares of the Company and the Company therefore recorded the carrying amount of the non-controlling interest in capital stock.

The $1.275M recognized for the quarter is included in the period from June 9, 2009 to the conversion date of August 25, 2009 and, for the cumulative period, the amount is $4M.

No additional expenses will be recognized in earnings thereafter.

Balance Sheets

Consolidated Balance Sheets    
(in thousands of dollars)    
   2009-09-12  2008-12-31 
   $  $ 
Current assets    
   Accounts receivable 94,643   80,804  
   Inventory 65,368   73,233  
   Prepaid expenses 2,317   1,664  
   Future income taxes 7,951    
  170,279   155,701  
Deferred financing expenses 195   279  
Share investment in a private company, at cost 6,159   6,159  
Property, plant and equipment  13,492   15,029  
Intangible assets 136,763   143,319  
Goodwill 72,317   69,574  
Future income taxes 7,791    
   406,996   390,061  
Current liabilities    
   Bank overdraft 3,956   7,714  
   Accounts payable and accrued liabilities 78,317   85,945  
   Income taxes payable 1,413   1,855  
   Balances of purchase price payable 10,081   10,103  
   Distributions payable 1,011   1,307  
   Distributions payable to holders of exchangeable Colabor LP units 353   456  
   Rebates payable 10,622   15,166  
   Deferred revenue 1,469   1,115  
   Deferred credit 6,928    
   Instalments on long-term debt 682   707  
   114,832   124,368  
Bank loan 76,092   47,501  
Balance of purchase price payable   3,750  
Long-term debt 491   942  
Debentures 46,410   45,725  
Accrued benefit liability for employee benefits 772   772  
Deferred credit 24,031    
Future income taxes   17,414  
Non-controlling interest   29,713  
   262,628   270,185  
Capital stock 143,018   135,323  
Option to convert debentures 2,314   2,315  
Contributed surplus 284   349  
Units held for the long-term incentive plan (1,248)  (875) 
Deficit   (17,236) 
   144,368   119,876  
   406,996   390,061  

As a result of the conversion to acorporation, the recognition and presentation of certain balance sheet itemswas modified.

The main changes were:

  • Recognition of afuture income tax asset and deferred credit:

Since theCompany is virtually certain it will recover some $130M in tax losses acquiredin connection with the Plan of Arrangement with ConjuChem, an income tax assetand the offsetting deferred credit were recognized on a current and long-termbasis to reflect the recovery period of these assets.

  • Future incometaxes previously displayed in long-term liabilities have been offset by futureincome tax assets.
  • Thenon-controlling interest reported under long-term liabilities has been fullyeliminated by transferring this interest to capital stock.
  • The deficit wastotally eliminated through a reduction of capital stock further to a decisionof the Board of Directors. The accounting treatment resulted because theaccrued deficit resulted from distributions to unitholders in excess of theFund's net earnings, since the Fund's cash distributions were greater than itsnet earnings under the income fund structure, which provided a return ofcapital.

Cash Flow

Consolidated Cash Flows (in thousands of dollars)       
  2009-09-12 2008-09-06 2009-09-12 2008-09-06 
  (84 days) (84 days) (255 days) (250 days) 
  (unaudited) (unaudited) (unaudited) (unaudited) 
  $ $ $ $ 
Net earnings4,710  2,311  7,669  4,049  
Non-cash items        
 Amortization of property, plant and equipment983  975  2,739  2,496  
 Amortization of intangible assets2,179  1,633  6,556  5,093  
 Amortization of deferred financing expenses29  29  84  72  
 Non-controlling interest1,275  1,761  4,001  4,262  
 Future income taxes(1,008) 297  44  1,490  
 Compensation cost from long-term incentive plan122  96  351  258  
 Amortization of transaction costs related to debentures231  210  699  624  
  8,521  7,312  22,143  18,344  
Changes in operating assets and liabilities        
 Accounts receivable2,674  (5,012) (13,839) (20,753) 
 Income taxes  350    (518) 
 Inventory4,487  5,079  7,865  1,352  
 Prepaid expenses398  (936) (653) (2,107) 
 Accounts payable and accrued liabilities1,168  (766) (7,628) 17,417  
 Income taxes payable(2,930)   (442) (605) 
 Rebates payable(7,449) (6,226) (4,544) (3,294) 
 Deferred revenue(105) 1,082  354  1,442  
  (1,757) (6,429) (18,887) (7,066) 
Cash flows from operating activities 6,764  883  3,256  11,278  
Business acquisition      (70,424) 
Transaction with ConjuChem(5,000)   (5,000)   
Payment of balances of purchase price(2,500)   (6,515)   
Property, plant and equipment(335) (428) (1,202) (878) 
Cash flows from investing activities(7,835) (428) (12,717) (71,302) 
Bank loan5,652  4,607  28,591  38,591  
Financing expenses      (225) 
Distributions paid to unitholders(2,614) (3,921) (10,456) (8,783) 
Distributions paid on exchangeable Colabor LP units(913) (1,369) (3,651) (3,651) 
Repayment of long-term debt(126) (146) (476) (406) 
Purchase of units held by the Fund for long-term incentive plan    (789) (575) 
Issue of trust units      38,022  
Unit and debenture issue expenses      (1,150) 
Cash flows from financing activities1,999  (829) 13,219  61,823  
Net change in bank overdraft928  (374) 3,758  1,799  
Bank overdraft, beginning of period(4,884) (7,600) (7,714) (9,773) 
Bank overdraft, end of period(3,956) (7,974) (3,956) (7,974) 

Credit Facilities

The Company has entered into a three-year agreement with a banking syndicate for operating credit facilities for an authorized amount of $100M secured by a first ranking hypothec on the Company's assets.

Under the terms of the credit agreement, the Fund is required to maintain (i) a prescribed ratio of total debt (excluding the debentures) to EBITDA less than 3.00:1.00 and (ii) a prescribed ratio of EBITDA to interest expenses greater than 3.50:1.00.

Based on the banking syndicate's method of calculation, the debt/EBITDA ratio is 1.92:1.00 and the interest coverage ratio is 6.36:1.00 times for the quarter.

During the quarter, the operating credit increased $5.7M to $76.1M. Cash in the amount of $5M was used to pay ConjuChem on the conversion to a corporation and $2.5M to repay a balance of sale price.


On September 15, 2009, the Fund made a final distribution to unitholders of record on August 31 on a prorata basis for the number of days in the period of August 1 to August 24 calculated on the previous monthly distribution of $0.0897 per unit.

Following its conversion to a corporation, Colabor will now make quarterly dividend payments. The next dividend will be calculated on an annual basis of $1.08 per share for the period of August 25 to December 31, 2009 and will be paid on January 15, 2010 to shareholders of record on December 31, 2009.

In management's opinion, cash flows from operating activities and the funds from operating credits are sufficient to support planned capital expenditures, working capital requirements, quarterly dividends of $0.27 per share and will comply with the banking syndicate's ratio requirements.

Standardized Distributable Cash

Management has decided that, in light of the conversion to a corporation, it is no longer appropriate to report distributable cash, which is a measure of profitability applicable to an income fund.

Subsequent Event

On October 6, the Company's management was informed of the loss as of February 2010 of an important distribution agreement served by the Summit division with a fast-food chain. For the twelve months ended on September 12, 2009, sales to this customer totalled $135,735,000 or 11 % of sales of $1,216,414,000. EBITDA generated by this contract was $900,000 or 2 % of its EBITDA of $43,199,000.

The Company's management is to re-evaluate the operations of the Summit division and evaluate certain business opportunities that could help replace this contract.

Additional Information

The Company's MD&A and financial statements will also be available on SEDAR ( following publication of this News Release. Additional information about Colabor Income Fund may also be found on SEDAR as well as on the Company' Internet site at (currently under reconstruction).

About Colabor

Colabor is a wholesaler and distributor of food and non-food products serving the retail (grocery stores, convenience stores, etc.) and food-service (cafeterias, restaurants, hotels, restaurant chains, etc.) markets.


This News Release may contain forward-looking statements reflecting the opinions or present expectations of Colabor Group Inc. concerning their performance as well as their respective business activities and future events. These statements are subject to a number of risks, uncertainties and assumptions. Actual results or events may differ.

Contact Information

  • Colabor Group Inc.
    Mr. Gilles C. Lachance
    President and Chief Executive Officer
    450-449-0026 ext. 265
    Fax: 450-449-6180


    Colabor Group Inc.
    Mr. Michel Loignon, CA
    Vice-President & Chief Financial Officer
    450-449-0026 ext. 235
    Fax: 450-449-6180