PRT Forest Regeneration Income Fund
TSX : PRT.UN

PRT Forest Regeneration Income Fund

February 28, 2008 14:53 ET

PRT Announces 2007 Fourth Quarter Results and Distribution Change

VICTORIA, BRITISH COLUMBIA--(Marketwire - Feb. 28, 2008) - PRT Forest Regeneration Income Fund (TSX:PRT.UN) today announced results for its fourth quarter and year ended December 31, 2007. The Fund's interim financial statements are enclosed as part of this release.

For the year ended December 31, 2007, the Fund reported Operating Earnings of $9,659,000 and Cash Available for Distribution of $7,492,000 ($0.78 per unit), as compared to prior year Operating Earnings of $11,229,000 and Cash Available for Distribution of $9,099,000 ($0.95 per unit). Operating Earnings and Cash Available for Distribution decreased year-over-year due to lower seedling volumes in 2007, and the effect of one-time costs incurred during the year for proxy solicitation and a strategic review. Operating Earnings and Cash Available for Distribution are terms which do not have standardized meaning under Canadian generally accepted accounting principles, and may not be comparable to similar measures provided by other reporting entities.

Net earnings for the year were reduced by a $13.2 million non-cash goodwill impairment charge, resulting from the recent decline in the Fund's unit price, and accordingly the Fund reported a loss of $7,528,000 ($0.78 per unit) for the year, as compared to net earnings of $7,365,000 ($0.77 per unit) for 2006. Standardized Distributable Cash - a comparable measure of cash flow prepared under guidance issued by the Canadian Institute of Chartered Accountants - totaled $0.93 per unit in 2007, as compared to $1.09 per unit in 2006.

For the three months ended December 31, 2007, the Fund reported Operating Earnings of $1,659,000 and Cash Available for Distribution of $1,370,000 ($0.14 per unit). These results were lower than the same period in 2006 due to the impact of lower contract volumes in 2007, higher labour and maintenance costs, and one time costs related to the strategic review. Standardized Distributable Cash for the quarter was a deficit of $0.28 per unit (2006 - deficit of $0.30 per unit) reflecting a normal seasonal increase in working capital.

Annual revenues decreased by 4%, to $49,486,000 with the lower contract volumes in 2007. However, this factor was partially offset by higher revenues for tree planting and other services.

Margins for the year increased slightly as a result of product mix changes and lower energy costs as well as modest price increases. Selling, general and administrative expenses were higher with the one-time impacts of the strategic review and proxy solicitation costs.

President and CEO, John Kitchen commented, "This past year has been challenging for any company associated with the forest products industry, but we have generally managed well through increasingly difficult conditions. We also completed some significant initiatives, including clarifying our strategy for the future, and internalizing our management structure. These are investments in our long-term success."

"In the mid-term we see some deepening challenges in our markets resulting from the current forest industry cycle. Our customers continue to respond to the triple effect of sharply lower US housing starts, a weak US dollar, and low lumber prices by curtailing logging activity and implementing mill closures. This has reduced their short term need for seedlings even beyond our initial expectations, and our current outlook is for demand reductions at the higher range of our previous guidance, at 20% or more. We have experienced unprecedented late reductions in major customer orders this year. This will put significant pressure on our cash flow and margins, and prudent actions are warranted to maintain a healthy balance sheet through this cycle."

"Despite the poor short-term market outlook, we are optimistic for demand beyond 2009, as some economic forecasts predict a strong recovery in the forest sector, and as demand for tree seedlings grows in response to environmental concerns. Recent announcements by the BC Government to battle climate change with funding for increased tree planting are encouraging in this regard. It is very important that we maintain our capability and readiness to respond to those future market opportunities as we work through the current cycle."

Management's Discussion and Analysis for the Fund is available at www.sedar.com

Distribution Reduction

In light of further weakness in the market outlook for 2008, the Board of Trustees and Management believe it is prudent to reduce monthly distributions from the Fund to bring them in line with the anticipated reduction in PRT's operating cash flow. Accordingly, the Fund will reduce its expected monthly distribution from $0.046 to $0.02 per month ($0.55 to $0.24 per year annualized), effective with the March 2008 distribution declaration. The Board will continue to monitor results throughout the year and may adjust distributions to keep them in line with current cash flow expectations.

About PRT

PRT is the largest producer of container grown forest seedlings in North America, operating 15 nurseries located in Canada and the United States. Units of the Fund are listed for trading on the Toronto Stock Exchange under the trading symbol PRT.UN.

Conference Call and Taped Replay

The Fund will host an open conference call to further discuss these results, on Friday, February 29, 2008 at 2:00 p.m. (EST). The toll-free dial-in phone number is 1-866-585-6398. To access a recording of the call at a later time, please dial 1-866-245-6755, Playback Conference ID # 171812. The recording will be available until March 6, 2008.

PRT will also web cast the conference call on the Internet, available from our web site at www.prtgroup.com. The web cast will also be archived and available for listening at a later date.

Forward Looking Statements

Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. These statements include statements relating to estimated future production volumes, prices and revenues, as well as the financial impact of the volume and price changes. Words such as "anticipate", "expect", "potential", "intends", "opportunity", "believes", "may", "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially.

There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements, including, but not limited to, our potential inability to successfully execute our sales and marketing strategies or achieve planned cost reduction measures.

Forward-looking statements are based on current expectations and the company assumes no obligation to update such information to reflect later events or developments, except as required by law.



PRT Forest Regeneration Income Fund
Consolidated Balance Sheets (unaudited)
($000's)

As at As at
December 31 December 31
2007 2006
-------------------------

Assets

Current assets
Cash $ 672 $ 720
Accounts receivable 8,976 10,352
Inventories 2,236 2,247
Prepaid expenses and deposits 496 639
Unbilled revenue 4,159 3,676
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$ 16,539 $ 17,634

Property, plant and equipment 42,840 48,208
Property, plant and equipment held for sale
(note 4) 797 -
Investment 305 400
Intangibles 897 1,164
Goodwill 19,175 32,375
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$ 80,553 $ 99,781
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Liabilities

Current liabilities
Operating line $ 9,340 $ 9,445
Accounts payable and accrued liabilities 3,444 3,145
Distribution payable to Unitholders 672 720
Current portion of long-term debt 1,517 905
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$ 14,973 $ 14,215

Long-term debt 4,219 6,273

Future income taxes 1,490 3,363
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$ 20,682 $ 23,851
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Unitholders' Equity

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

Cumulative net earnings 39,002 46,530

Cumulative distributions declared (69,380) (60,833)
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$ 59,871 $ 75,930
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$ 80,553 $ 99,781
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PRT Forest Regeneration Income Fund
Consolidated Statements of Earnings and Cumulative Earnings (unaudited)
($000's)


Three months ended Year ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------

Revenue $ 11,429 $ 12,195 $ 49,486 $ 51,574
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Expenses
Costs of production $ 7,001 $ 7,016 $ 29,316 $ 30,881
Selling, general and
administration 2,775 2,497 10,624 9,489
Foreign exchange loss (gain) (6) 37 (113) (25)
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Operating earnings before
the following $ 1,659 $ 2,645 $ 9,659 $ 11,229

Interest expense 230 213 965 1,054
Depreciation 1,091 882 4,151 3,409
Amortization of intangibles 67 66 267 266
Equity in loss (earnings)
of investee (21) 14 76 129
Gain on sale of property,
plant and equipment (429) (1) (381) (91)
Exit activity charges - - 170 -
Goodwill impairment (note 10) 13,200 - 13,200 -
Management contract
cancellation cost 360 - 360 -
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Earnings (loss) before
income taxes $ (12,839) $ 1,471 $ (9,149) $ 6,462

Recovery of income taxes 1,002 605 1,621 903
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Net earnings (loss) and
comprehensive income
(loss) $ (11,837) $ 2,076 $ (7,528) $ 7,365

Cumulative earnings
- beginning of the period 50,839 44,453 46,530 39,165
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Cumulative earnings
- end of period $ 39,002 $ 46,529 $ 39,002 $ 46,530
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Basic and diluted earnings
(loss) per unit $ (1.23) $ 0.22 $ (0.78) $ 0.77
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Weighted average number
of units outstanding 9,603,116 9,599,516 9,603,064 9,594,184
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REVIEW OF INTERIM FINANCIAL STATEMENTS

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

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

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



PRT Forest Regeneration Income Fund
Consolidated Statements of Cash Flows (unaudited) ($000's)

Cash flows from investing
activities
Proceeds from loans to
investee $ 20 $ - $ 20 $ -
Purchase of property, plant
and equipment (168) (199) (1,314) (2,567)
Proceeds on sale of property,
plant and equipment 676 6 739 96
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$ 528 $ (193) $ (555) $ (2,471)
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Increase (decrease)
in cash $ (244) $ (104) $ (48) $ 23

Cash - beginning
of period 916 824 720 697

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Cash - end of period $ 672 $ 720 $ 672 $ 720
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PRT Forest Regeneration Income Fund

Notes to Financial Statements

1. Significant accounting policies

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

The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

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

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

2. Seasonality of operating results

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

3. Changes in accounting policies

Effective January 1, 2007, the Fund adopted CICA Handbook Section 1530, "Comprehensive Income", CICA Handbook Section 3251, "Equity", CICA Handbook Section 3855, "Financial Instruments - Recognition and Measurement", CICA Handbook Section 3862, "Financial Instruments - Disclosure", CICA Handbook Section 3855, "Financial Instruments - Presentation", and CICA Handbook Section 3865, "Hedges". These new Handbook Sections provide comprehensive requirements for the recognition, measurement, disclosure and presentation of financial instruments, as well as standards on when and how hedge accounting may be applied. Handbook Section 1530 also introduces a new component of equity referred to as comprehensive income.

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

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

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

4. Property held for sale

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

Certain of Nevada capital assets which could be utilized at other nursery sites were transferred and will not be sold. The remaining assets were either sold during the period or are being actively marketed for sale. The following assets have been classified as held for sale, by major category:



Net Book Value ($000's)

December 31,
2007
------------
Land $ 252
Buildings 294
Growing facilities 99
Equipment 152
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$ 797
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5. Capital contributions

Capital contributions and units outstanding are:

Capital Contributions ($000's) Three months ended Twelve months ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------
Capital Contributions
- Beginning of period $ 90,249 $ 90,197 $ 90,233 $ 90,090
Units issued under
ESOP program - 36 16 143
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Capital Contributions
- End of period $ 90,249 $ 90,233 $ 90,249 $ 90,233
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Three months ended Twelve months ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------
Units outstanding
- Beginning of period 9,603,116 9,597,433 9,601,216 9,587,414
Units issued under
ESOP program - 3,783 1,900 13,802
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Units outstanding
- End of period 9,603,116 9,601,216 9,603,116 9,601,216
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6. Exit activity charges

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

Exit expenditures related to the Nevada site were as follows:



($000's) Total expected Amounts incurred Amounts incurred
expenditures in the period to date
--------------------------------------------------

Dismantling and
transportation of
assets to other sites $ 170 $ - $ 170
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The above table excludes costs associated with the disposal of capital assets from the Nevada nursery site (see note 4), but does include the cost of relocating equipment and other assets to other nursery sites.

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

7. Distribution to Unitholders

During the year ended December 31, 2007 the Fund declared distributions to Unitholders from current year operations of $8,546,773 (2006 - $8,884,529). Per unit distributions declared on account of current year operations are as follows:



Record Payment Taxable Non- Taxable
Date Date Interest Taxable Dividend Total
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01/31/2007 02/15/2007 $ 0.07122 $ 0.00238 $ 0.00140 $ 0.07500
02/28/2007 03/15/2007 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
03/30/2007 04/13/2007 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
04/30/2007 05/15/2007 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
05/31/2007 06/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
06/29/2007 07/13/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
07/31/2007 08/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
08/31/2007 09/14/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
09/30/2007 10/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
10/31/2007 11/15/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
11/30/2007 12/14/2007 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
12/31/2007 01/15/2008 $ 0.06599 $ 0.00237 $ 0.00164 $ 0.07000
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Total $ 0.81283 $ 0.02845 $ 0.01872 $ 0.86000
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In addition, on March 31, 2007 the Fund made a special distribution of $288,093 (March 31, 2006 - $287,719), or $0.03 per unit, in respect of additional distributable cash flow available from PRT's 2006 operating results, to Unitholders of record on March 15, 2007.

8. Segmented information - geographic areas

The Company recorded revenues from customers located in the United States in the amount of $4,832,000 and $1,030,000 in the twelve months and three months ending December 31, 2007 respectively ($5,037,000 and $967,000 in the twelve months and three months ending December 31, 2006 respectively). In addition, as at December 31, 2007 the Fund's total capital assets located in the USA amounted to $3,448,000 (December 31, 2006 - $4,876,000).

9. Management Agreement and Management Internalization

PRT had a management agreement with PRT Management Inc. ("PMI") whereby PMI provided management and administration services and strategic advice to PRT, as well as certain individuals to serve in executive positions. The fees under this agreement were reviewed and set annually, at a level necessary to achieve reimbursement, without profit, of PMI's internal costs and out of pocket expenses incurred in providing these services.

On November 1, 2007, a wholly owned subsidiary of PRT purchased 100% of the outstanding shares of PMI and internalized the management agreement. Prior to November 1, 2007, PMI's operating results were consolidated into the Fund as a Variable Interest Entity. Management fees included in selling, general and administrative expenses totaled $1,585,000 and $521,000 for the twelve months and three months ended December 31, 2007 ($1,365,000 and $457,000 and for the twelve months and three months ended December 31, 2006).

The total cash consideration paid to complete the acquisition was $457,000. The excess of the purchase price over identifiable assets acquired has been charged to earnings in the current period as Management Contract Cancellation Cost.

10. Goodwill

Under Canadian GAAP, goodwill is not amortized but is subject to an annual impairment test which management performs every August; this test is referenced to the Fund's unit trading price. Subsequent to the annual impairment test for 2007, management announced reduced distributions to unitholders for 2008; these reductions are largely a result of lower forecasted revenue and cash flow generation for 2008.

The announcement resulted in a decline in the Fund's unit value. As a result management determined that the recorded value of goodwill exceeded fair value and recorded an estimated goodwill impairment charge of $13.2 million. This impairment is a non-cash charge and has no impact on distributable cash. During our annual and subsequent impairment testing, no impairment to the value of other identifiable intangible assets or property, plant and equipment was identified. Management will complete the evaluation of goodwill impairment in 2008, and any adjustment to the estimated loss based on the completion of the measurement of the impairment loss will recognized in the subsequent reporting period.

11. Comparative figures

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



INFORMATION

Mailing Office
Pacific Regeneration Technologies Inc.
#101 - 1006 Fort Street
Victoria, BC
Canada, V8V 3K4
Tel: 250-381-1404
Fax: 250-381-0252

Registrar and Transfer Agent
Computershare Investor Services

World Wide Web
www.prtgroup.com

Market Information
Stock symbol: PRT.UN
Stock Exchange: Toronto

Investor Relations
Tel: 250-381-1404 ext. 227
Toll free: 1-866-553-8733
Email: investor_relations@prtgroup.com

PRT Forest Regeneration Income Fund
Board of Trustees
Colin A.C. Dobell
Allan D. Laird
George C. Stevens, Q.C.
John G. Taylor, CA

Pacific Regeneration Technologies Inc.
Board of Directors and Officers
Colin A.C. Dobell, Chairman & Director
John Kitchen, President & CEO & Director
Allan D. Laird, Director
George C. Stevens, Q.C., Director
Gerry Bellerive, CA Director
Robert A. Miller, V.P. Finance & Administration, CFO & Secretary
Herb Markgraf, V.P. Business Development
Robert Maxwell, V.P. Production


Contact Information

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