PRT Forest Regeneration Income Fund
TSX : PRT.UN

PRT Forest Regeneration Income Fund

May 07, 2007 16:20 ET

PRT Announces Results for First Quarter and Temporary Distribution Change

VICTORIA, BRITISH COLUMBIA--(CCNMatthews - May 7, 2007) - PRT Forest Regeneration Income Fund (TSX:PRT.UN) today announced results for its first quarter ended March 31, 2007. The Fund's interim financial report is enclosed as part of this release.

For the three months ended March 31, 2007, the Fund reported net earnings of $1,478,000 ($0.15 per unit) and distributable cash flow of $2,160,000 ($0.23 per unit). Net earnings decreased by $0.03 per unit due to the lower order volumes in 2007, as well as costs associated with closure of PRT's Nevada nursery site. Distributable cash flow remained in line with the prior year with lower volumes being offset by improved production margins, lower overhead and sustaining capital spending, and unrealized exchange impacts.

The Fund reported that revenues decreased by 8.5% in the quarter, to $11.7 million. This was attributed to lower seedling contract volumes in 2007, and later timing of contract revenue recognition, partially offset by increased non-contracted seedling sales.

Production expenditures in the quarter declined with the lower seedling contract volumes and improved production cost efficiencies, particularly with lower energy costs this year. Selling, general and administrative expenses were also lower, due to expenditure timing shifts and reduced insurance costs.

President and CEO, John Kitchen, commented, "We believe we are off to a solid start in 2007, and are confident of our ability to reduce the impact of the short-term decline in BC seedling demand this year. There continues to be a growing backlog in reforestation due to the Mountain Pine Beetle and other problems, and we are solidly positioned to take advantage of this opportunity once additional funding is directed to silviculture."

Temporary Distribution Change

The Fund's Trustees announced that the Fund expects to incur costs estimated at $500,000 related to its previously announced review and evaluation of the proposal by CA Bancorp and PRT Management Inc. to change the strategic direction of the Fund, and related to costs for proxy solicitation activities for the Fund's Annual General Meeting. To finance these expenditures, the Trustees have elected to make a temporary reduction in the monthly distribution from $.075 to $0.07 per unit. This will be effective with the May distribution, which will be declared with a record date of May 31, 2007, and a payment date of June 15, 2007. The reduction will continue for the balance of the current year. Circumstances permitting, 2008 distributions are expected to return to the usual level of $0.075 per unit per month.

About the Fund

PRT is the largest producer of container grown forest seedlings in North America, operating 15 nurseries, and managing millions of seedlings annually. 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 a conference call to further discuss the matters contained in this press release. The call will take place on Tuesday, May 8, 2007 at 11:00 AM PST, 2:00 PM EST. To participate in this conference, please call 1-866-585-6398.

Persons unable to attend the conference call may listen to a recorded version by dialing 1-866-245-6755, and the passcode is 802038. This option is available until May 15, 2007. A recorded web cast version of the call may also be accessed from the Fund's website at http://www.prtgroup.com/financial/.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for customer orders and silviculture spending, the timing and amount of costs and expenditures, the outlook for energy costs and other production cost improvements, our expectations for monthly distributions to Unitholders, and other statements that are not historical fact. Risks and uncertainties include, but are not limited to, future commodity prices and exchange rates, agricultural risks, the outlook for the forest industry, and other risks identified from time to time in the Fund's annual report, annual information return, and prospectus. These risks and uncertainties may cause actual results to differ materially from the expectations expressed herein. As such, readers are cautioned to not to place undue reliance in forward-looking statements.

Forward-looking statements are based on current expectations and neither the Fund nor PRT assumes any obligation to update such information to reflect later events or developments, except as required by law.

First Quarter Report

Management's Discussion and Analysis

We are pleased to present the 2007 first quarter report for the PRT Forest Regeneration Income Fund. The Fund's operating results are highly seasonal, which is due to variations in activity levels throughout the year in completing annual seedling contracts, as well as the seasonal nature of silviculture services. This makes year-over-year quarterly comparisons (after adjusting for acquisitions) more relevant than sequential comparisons. The first quarter's activities typically include sowing of new crops for the current year growing season, and completion of harvesting of some prior year crops.

This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for future order volumes, pricing, operating costs and other expenditures; the outlook for future energy prices; plans and opportunities for capital spending; and other statements contained in this discussion that are not historical fact. 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. Risks and uncertainties include, but are not limited to, agricultural risks and crop yields, future commodity prices, exchange rate risks, the outlook for the forest industry, the risk that acquisitions may not be integrated as planned, the impact of proposed changes to income trust taxation, and other risks identified from time to time in the Fund's annual report, annual information return, prospectus, and other filing documents. These documents are available in electronic form at www.sedar.com, or by contacting the Fund directly. 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. Readers are cautioned not to place undue reliance on forward-looking statements.

Operating Results - first quarter of 2007 compared to first quarter of 2006

Year-over-year earnings in 2007 are down somewhat, mainly due to the impact of lower contract volumes in the current year.

Revenues in the quarter were $1.1 million lower than the same period of 2006. This was primarily due to a decline in seedling contract volumes this year, largely related to a temporary market slowdown in BC. In addition, revenue recognition was slightly later this quarter as a result of a slight change in 2007 crop mix towards later season crops.

Partially offsetting these factors were earned revenue contributions from 2006 contracts that were not completed until the first quarter of 2007, and strong non-contracted seedling sales. In 2007, PRT expects to produce approximately 202 million seedlings under contract, as compared to approximately 225 million in 2006.

Production costs declined overall with the lower volume and with lower energy costs, improving to 58.4% of revenues, as compared to 59.4% last year. Margins also improved with stronger non-contracted seedling sales, and a decrease in the proportion of certain lower margin products. Energy costs were lower on a volume adjusted basis in the current period. This was impacted by the mix of crops, including more orders with later season sowing dates, and by lower commodity prices. PRT has contracted forward approximately 60% of its anticipated natural gas needs for 2007, as a way to reduce exposure to commodity price swings.

Selling, general and administration costs were lower in the quarter, reflecting lower insurance costs and certain timing shifts.

Interest costs decreased over the same period last year as a result of lower operating line requirements due to a better working capital position, and lower term debt balances.

Depreciation and amortization charges were higher in 2007, due to revisions to the estimated useful life of certain assets on leased property.

During the quarter, PRT announced its intention to close its Nevada nursery facility to improve crop reliability and economies of scale. Expenditures to dismantle and relocate production assets totalled $0.1 million and were classified as "Exit activity charges" in the financial statements. These costs are expected to be funded from an anticipated gain on the sale of the Nevada real estate assets.

With the lower volumes and costs associated with the Nevada closure, pre-tax earnings declined to $1.1 million from $1.7 million in the first quarter of 2006.

The tax recovery in the quarter was higher than the same period in 2006, reflecting the lower earnings in the current period and tax rate differentials.

The Fund determines distributable cash flow as cash flow from operating activities before changes in non-cash working capital items adjusted for seedling container depreciation (which provides a reserve for seedling container replacement), sustaining capital expenditures, long-term debt repayments from operating cash flow, gains or losses on asset sales, and such other reserves as the board of PRT may consider appropriate. Certain expense items, which are incurred as part of earnings enhancing capital projects, may be excluded from the determination of distributable cash flow if the overall project return meets the Company's internal investment hurdle rates and will be funded from external sources, such as term debt or equity financing. For example, 2007 costs associated with the closure of the Nevada nursery site will be funded from the expected gain on the eventual sale of the property, and therefore have been excluded from this calculation, as the funds and expenditures did not arise from or utilize normal course operating cash flows.

The Fund considers distributable cash flow as defined to be a useful measure of the free cash flow from operations available for making unitholder distributions, as it is determined after providing for the maintenance and replacement of PRT's underlying asset base, as well as providing for the financing of expansionary capital spending.

The Fund calculates distributable cash as follows:



In $000's except per unit amounts Three months ended March 31
2007 2006
---------------------------

Cash flow from operating activities $ 5,417 $ 3,781
Less: Changes in non cash working capital ( 2,759) (906)
--------------------------------------------------------------------------
2,658 2,875

Cash flow adjustments:
Seedling container depreciation (336) (359)
Repayment of long term debt from
operating cash flow (222) (185)
Sustaining capital expenditures (68) (128)
Exit activity charges to be funded from
other sources 128 -
--------------------------------------------------------------------------

Distributable cash $ 2,160 $ 2,203
Seasonal shortfall of cash flow to distributions
declared, applied from working capital 289 204
--------------------------------------------------------------------------

Distributions declared $ 2,449 $ 2,407
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Distributable cash per unit $ 0.23 $ 0.23

Distributions per unit declared from
current year's cashflow $ 0.23 $ 0.22

Distributions per unit declared from
prior year's cash flow $ 0.03 $ 0.03


Distributable cash flow for the quarter was comparable to the corresponding period in 2006, with lower order volumes being offset by the combined impacts of improved production margins, lower overhead and sustaining capital spending, and unrealized foreign exchange losses.

Summary of Quarterly Results



------------------------------------------------------------------
2005
------------------------------------------------
January to
December
2nd Q 3rd Q 4th Q 31
------------------------------------------------------------------
Operating
Results

Revenues $ 13,738 $ 6,361 $ 13,160 $ 42,097


Net earnings $ 2,741 $ 356 $ 1,566 $ 6,008

Per Unit(1) $ 0.36 $ 0.05 $ 0.20 $ 0.79

Distributable
cash $ 3,718 $ 105 $ 2,417 $ 7,456

Per Unit $ 0.49 $ 0.01 $ 0.32 $ 0.98


Distributions
declared $ 1,660 $ 1,661 $ 1,805 $ 6,786

Per Unit $ 0.22 $ 0.22 $ 0.22 $ 0.88
------------------------------------------------------------------

--------------------------------------------------------------------------
2006 2007
--------------------------------------------------------
January to
December
1st Q 2nd Q 3rd Q 4th Q 31 1st Q
--------------------------------------------------------------------------
Operating
Results

Revenues $ 12,808 $ 17,767 $ 8,804 $ 12,195 $ 51,574 $ 11,714


Net earnings $ 1,697 $ 3,298 $ 294 $ 2,076 $ 7,365 $ 1,478

Per Unit(1) $ 0.18 $ 0.34 $ 0.03 $ 0.22 $ 0.77 $ 0.15

Distributable
cash $ 2,203 $ 4,619 $ 90 $ 2,187 $ 9,099 $ 2,160

Per Unit $ 0.23 $ 0.48 $ 0.01 $ 0.23 $ 0.95 $ 0.23


Distributions
declared $ 2,407 $ 2,158 $ 2,159 $ 2,160 $ 8,884 $ 2,449

Per Unit $ 0.25 $ 0.23 $ 0.23 $ 0.22 $ 0.93 $ 0.26
--------------------------------------------------------------------------
Note 1: Basic and Fully Diluted

The above summarized financial data is presented in Canadian dollars, and
has been prepared in accordance with Canadian generally accepted accounting
principles, with the exception of distributable cash amounts. Distributable
Cash Flow is a term which does not have standardized meaning under Canadian
generally accepted accounting principles, and may not be comparable to
similar measures provided by other reporting entities.


Liquidity and Cash Flow

In the current quarter, the Fund reported a net increase in cash flow from operating activities of $1.6 million relative to the first quarter last year. This is mainly attributable to net reductions in non-cash working capital balances, primarily driven by more current contract billings and collections of accounts receivable, including an early prepayment on a large customer contract.

Distributions paid to Unitholders were comparable in both periods. In the first quarter of 2007, distributions paid totalled $0.255 per unit, consisting of base monthly distributions of $0.225 per unit in plus a top-up distribution of $0.03 per unit declared from 2006 cash flow. Distributions paid in the first quarter of 2006 were marginally lower at $0.249 per unit, as the monthly distribution rate was increased after the first quarter of 2006.

No drawings were made on the term debt facility in the first quarter of either year, as earnings enhancing capital spending was temporarily financed out of working capital. Scheduled loan amortization totalled $0.4 million in both periods. Of the 2007 amount, $0.2 million represents debt which will be refinanced in the second quarter.

With improved operating cash flow in 2007, PRT was able to make a $2.0 million reduction in its operating loan balance, whereas in 2006, approximately $0.1 million was paid down on the facility.

Capital expenditures were $0.5 million lower in the first quarter of 2007, at $0.6 million. This was the result of more modest capital spending needs with decreased production volumes in 2007.



-----------------------------------------------------------------
Payments Due by Period - $'000's
----------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 Year years years 5 years
-----------------------------------------------------------------
Long Term Debt 6,784 778 2,497 3,253 256
-----------------------------------------------------------------
Operating Leases 5,999 868 1,503 1,245 2,383
-----------------------------------------------------------------
Other 346 346 - - -
-----------------------------------------------------------------
-----------------------------------------------------------------

Total Contractual
Obligations 13,129 1,992 4,000 4,498 2,639
-----------------------------------------------------------------


Financial Position

At March 31, 2007, working capital was $2.7 million compared to $3.4 million at the end of 2006, a decline of $0.7 million. This was mainly as a result of applying funds to the 2006 "top-up" distribution, as well as seasonal factors. With existing credit lines, the Fund's working capital position is expected to be adequate relative to its operating needs.

Property, plant and equipment was $46.3 million at March 31, 2007, a net decrease of $1.9 million since December 31, 2006. This decrease is attributable to current period capital expenditures being less than total depreciation charges, and the balance sheet reclassification of assets held for sale at the former Nevada nursery site.

Unitholders' Equity at March 31, 2007 decreased $1.0 million since year end to $75.0 million. This decline was due to distributions declared exceeding net earnings during the period. Distributable cash flow from the Fund is typically higher than reported earnings, since asset lives are often extended with a regular maintenance program, and therefore depreciation charges may exceed required expenditures for asset replacement. In quarterly periods, seasonal variations in PRT's cash flow may also occur relative to its level monthly distribution policy.

Units outstanding at the end of the period totaled 9,603,116, an increase of 1,900 units since year end due to issuances under the Fund's Employee Unit Purchase Plan. During the quarter, the Fund Trustees elected to cause future employee purchases to be made as market based purchases instead of treasury based purchases, due to reduced capital needs.

Accounting Policy Changes

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" and CICA Handbook Section 3865, "Hedges". These new Handbook Sections provide comprehensive requirements for the recognition and measurement 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 sheet 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 sheet 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.

Management has determined that there is no impact to the financial statements as a result of adopting these new standards.

C.A. Bancorp Proposal

On April 3, 2007 Unitholders were advised the 2007 Annual General Meeting had been postponed to June 26 in order to provide the Trustees with sufficient time to seek advice and communicate with Unitholders regarding a proposal by C.A. Bancorp and PRT Management Inc. ("PMI") whereby Bancorp would acquire a 50% interest in PMI and change the strategic direction of the Fund, enabling it to grow in a diversified manner and at a more rapid pace. The Trustees have not been prepared to endorse this change in strategy without amending the incentive arrangements in PMI's management contract in order to better allocate the risks and rewards between the Fund and PMI. This led PMI, backed by three significant investors including Bancorp, to ask the Trustees not to stand for reelection at the Annual General Meeting at which time they would propose a new slate.

The Trustees were advised by counsel that since the election of Bancorp's nominees as Trustees would essentially be a vote to change the strategic direction of the Trust, their fiduciary duties required that they ensure an informed and transparent process that is fair to all Unitholders.

A letter was sent to Unitholders on April 16 articulating the Trustees' interpretation of the Bancorp proposal, the views of the Trustees, and advising Unitholders may be asked at the Annual General Meeting to choose between two slates of trustees.

On May 1, the Fund announced that it had retained CIBC World Markets Inc. to assist the Trustees in assessing the Bancorp proposal and in communicating with Unitholders, and to act generally as financial advisor to the Fund and its Trustees. If re-elected at the Fund's upcoming Annual General Meeting, Trustees intend to further engage CIBC World Markets to conduct a full evaluation of the strategic opportunities available to the Fund, including the Bancorp proposal, to maximize and enhance Unitholder value.

The Trustees are unaware if Bancorp has any specific acquisitions in contemplation or under negotiation in the event of the election of its nominees.

Outlook

The market in 2007 is somewhat weaker as a result of a temporary slowdown in the demand for seedlings. This was due to three main factors:

1. A temporary and unexpected decline in BC market seedling demand. Recent legislative changes to forest tenure policies have resulted in changes in tenure for up to 20% of the provincial crown forest lands, and management believes this may have caused a delay in reforestation activity on some of the affected wood lots.

2. In addition, some customers may be electing to defer silviculture spending as a response to the slowdown in lumber exports due to a commensurate slowdown in the US housing market.

3. A reduction of order volumes due to price increases for 2007 contracts, which were implemented to partially offset increased energy and other production costs.

New contracted seedling volumes are expected to total approximately 202 million trees, representing approximately 2.1 million seedling blocks of production. This is 13% below the contracted block volume in 2006. However, we will supplement revenues with sales of non-contracted seedlings in certain markets. In addition, we will achieve somewhat higher average block revenues, due to the effect of seedling price increases, improved yield, and changes in product mix. These factors are expected to partially offset the impact of reduced contract volumes.

With lower volumes, operating earnings will come under some pressure, but distributable cash from operations is expected to remain above PRT's base distribution level. However, the fees of investment bankers, additional legal and Trustees' fees related to the Bancorp proposal, and additional costs of proxy solicitation will result in increased administrative expense for the Fund in the current year. The Trustees estimate that these costs could amount to $500,000, which will need to be funded from the Fund's available cash flow. This will temporarily impact the Fund's ability to maintain monthly distributions at their current level, and accordingly the Trustees have elected to reduce the monthly distribution declaration for the balance of the year from .075 to $0.07 per unit. Distributions for 2008 are expected to return to their normal level, but this decision will be made in light of circumstances at the time.

Silviculture spending deferrals are likely to be temporary, and management expects demand to increase in subsequent years. This view is supported by the growing reforestation backlog created by mountain pine beetle devastation in BC.

In the mid-term, the underlying fundamentals for the forest seedling industry remain sound, but will vary regionally. On a national level, the long-term demand for seedlings has remained remarkably stable. To take advantage of this, PRT has positioned itself as a market leader in a number of key markets to help reduce the impact of regional market fluctuations, and our past marketing results have benefited from this diversity. We expect this will continue to be the case in the future.

Our current group of 15 nursery locations gives us the scope and capabilities to service a forest industry that is characterized by ever more consolidation. We continue to execute on our strategy to gradually become less energy dependent, and to adopt new growing technologies that can lead to more cost-effective seedling production.

On behalf of the Trustees and Management

Colin A.C. Dobell, Chairman & Trustee

PRT Forest Regeneration Income Fund

John Kitchen, President and CEO

Pacific Regeneration Technologies Inc.

May 7, 2007

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 Balance Sheets (unaudited)
($000's)

As at As at
March 31 December 31
2007 2006
--------------------------------------------------------------------------
ASSETS

Current assets
Cash $ 730 $ 720
Accounts receivable 9,424 10,352
Inventories 1,870 2,247
Prepaid expenses and term deposit 474 639
Unbilled revenue 3,173 3,366
--------------------------------------------------------------------------

15,671 17,324

Property, plant and equipment 46,335 48,208
Property held for sale (note 4) 1,081 -
Investment 365 401
Intangibles 1,097 1,164
Goodwill 32,375 32,375
--------------------------------------------------------------------------

$ 96,924 $ 99,472
--------------------------------------------------------------------------
--------------------------------------------------------------------------

LIABILITIES

Current liabilities
Operating line $ 7,425 $ 9,445
Accounts payable and accrued liabilities 4,019 2,835
Distribution payable to Unitholders 720 720
Current portion of long-term debt 778 905
--------------------------------------------------------------------------
12,942 13,905

Long-term debt 6,006 6,273

Future income taxes 3,001 3,364
--------------------------------------------------------------------------

21,949 23,542
--------------------------------------------------------------------------

UNITHOLDERS' EQUITY

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

Cumulative net earnings 48,007 46,529

Cumulative distributions declared (63,281) (60,832)
--------------------------------------------------------------------------
74,975 75,930
--------------------------------------------------------------------------
$ 96,924 $ 99,472
--------------------------------------------------------------------------
--------------------------------------------------------------------------


PRT FOREST REGENERATION INCOME FUND
Consolidated Statements of Earnings and Cumulative Earnings (unaudited)
($000's)

Three months ended March 31
2007 2006
--------------------------------------------------------------------------

Revenue $ 11,714 $ 12,808
--------------------------------------------------------------------------

Expenses
Costs of production 6,839 7,614
Selling, general and administration 2,275 2,376
Foreign exchange gain (18) (12)
--------------------------------------------------------------------------

Operating earnings before the following 2,618 2,830

Interest expense 248 296
Depreciation 1,027 831
Amortization of intangibles 67 67
Equity in loss of investee 35 52
Exit activity charges (note 6) 128 -
Gain on sale of property, plant and equipment
(13) (75)
--------------------------------------------------------------------------

Earnings before income taxes 1,126 1,659

Recovery of income taxes 352 38
--------------------------------------------------------------------------

Net Earnings 1,478 1,697

Cumulative earnings - beginning of period 46,529 39,164
--------------------------------------------------------------------------

Cumulative earnings - end of period $ 48,007 $ 40,861
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Basic and diluted earnings per Trust Unit $ 0.15 $ 0.18
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Weighted average number of Trust Units
outstanding 9,602,955 9,589,115
--------------------------------------------------------------------------
--------------------------------------------------------------------------


PRT FOREST REGENERATION INCOME FUND
Consolidated Statements of Cash Flows (unaudited)
($000's)

Three Months ended March 31
2007 2006
--------------------------------------------------------------------------

Cash flows from operating activities

Net earnings $ 1,478 $ 1,697
Items not affecting cash
Depreciation (excluding seedling containers) 1,027 831
Seedling container depreciation included
in costs of production 336 359
Amortization of intangibles 67 67
Recovery of future income taxes (362) (40)
Unrealized loss (gain) on foreign exchange 89 (16)
Equity in loss of investee 35 52
Gain on sale of property, plant and equipment (13) (75)
--------------------------------------------------------------------------
2,657 2,875

Net change in non-cash working capital balances 2,760 906
--------------------------------------------------------------------------

5,417 3,781
--------------------------------------------------------------------------

Cash flows from financing activities

Distributions paid to Unitholders (2,449) (2,385)
Issuance of Trust Units 16 32
Repayment of long-term debt (396) (359)
Decrease in operating line (2,020) (59)
--------------------------------------------------------------------------

(4,849) (2,771)
--------------------------------------------------------------------------

Cash flows from investing activities
Purchase of property, plant and equipment (571) (1,037)
Proceeds on sale of property, plant and equipment 13 75
--------------------------------------------------------------------------
(558) (962)
--------------------------------------------------------------------------

Increase in cash 10 48

Cash - beginning of period 720 697

--------------------------------------------------------------------------

Cash - end of period $ 730 $ 745
--------------------------------------------------------------------------
--------------------------------------------------------------------------


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 and the operating results for the interim period presented are not necessarily indicative of the results expected for the full year.

The Company 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 Unitholders' Equity as "Foreign exchange (gain) loss", and identifies unrealized (gains) losses on the translation of 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 March 31, 2007 and December 31, 2006, as well as its results of operations and cash flow for the three months ended March 31, 2007 and March 31, 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" and CICA Handbook Section 3865, "Hedges". These new Handbook Sections provide comprehensive requirements for the recognition and measurement 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 sheet 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 sheet 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.

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

4. Property held for sale

During the period, PRT discontinued production at its Nevada nursery site in order to improve production costs and crop production reliability. Production that would otherwise have been located at the Nevada nursery site will be absorbed by the Company's other nursery sites.

The majority of the Nevada capital assets are being actively marketed and expected to be sold within the current fiscal year. Assets which can be utilized at other nursery sites will not be sold. The following assets have been classified as held for sale, by major category:



Net Book Value ($000's)
March 31, 2007
--------------
Land 398
Buildings 298
Greenhouses/growing facilities 192
Equipment 193
----------------------------------------------

1,081
----------------------------------------------
----------------------------------------------


5. Capital contributions

Capital contributions and units outstanding are:



Capital Contributions ($000's) Three months ended March 31
2007 2006
---------------------------
Capital Contributions - beginning of period $ 90,233 $ 90,090
Units issued under ESOP program 16 32
--------------------------------------------------------------------------
Capital Contributions - end of period $ 90,249 $ 90,122
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Three months ended March 31
2007 2006
---------------------------
Units outstanding - beginning of period 9,601,216 9,587,414
Units issued under ESOP program 1,900 3,208
--------------------------------------------------------------------------
Units outstanding - end of period 9,603,116 9,590,622
--------------------------------------------------------------------------
--------------------------------------------------------------------------


6. Exit activity charges

During the period, PRT discontinued production at its Nevada nursery site in order to improve production costs and crop production reliability. Production that would otherwise have been located at the Nevada nursery site will be absorbed by the Company's other nursery sites. It is expected that the exit activities will be complete during the second quarter of 2007.

Anticipated exit expenditures related to the Nevada site are as follows:



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

Dismantling and transportation
of assets to other sites $ 135 $ 128 $ 128
----------------------------------------
----------------------------------------


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

As of March 31, 2007, the Fund has declared distributions to Unitholders from current year operations of $2,160,701 (2006 - $2,119,300). Per unit distributions declared on account of current year operations are as follows:



Record Payment Taxable Taxable
Date Date Interest Non-Taxable Dividend Total
--------------------------------------------------------------------------
01/31/07 02/15/07 $ 0.07122 $ 0.00238 $ 0.00140 $ 0.07500
02/28/07 03/15/07 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
03/31/07 04/13/07 $ 0.07123 $ 0.00237 $ 0.00140 $ 0.07500
--------------------------------------------------

Total $ 0.21368 $ 0.00712 $ 0.00420 $ 0.22500
--------------------------------------------------
--------------------------------------------------


In addition, on March 31, 2007 the Fund made an additional distribution of $288,093 (March 31, 2006 -$287,719), $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 $1,594,000 in the three months ending March 31, 2007 ($1,654,000 in the three months ending March 31, 2006). In addition, as at March 31, 2007 the Fund's total capital assets located in the USA amounted to $4,804,000 (December 31, 2006 - $4,876,000).

9. Management Agreement and Management Fees

PRT has a Management Agreement with PRT Management Inc. ("PMI") whereby PMI provides management and administration services and strategic advice to PRT, as well as certain individuals to serve in executive positions. The fees under this agreement are 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. Management fees are billed monthly in accordance with PMI's budgeted costs for the period. Management fees included in selling, general and administrative expenses totaled $342,500 for three months ending March 31, 2007 ($391,387 for the three months ending March 31, 2006). PMI's operating results are consolidated into the Fund as a Variable Interest Entity.

10. 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

Web Site
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
Trustees
Colin A.C. Dobell
Allan D. Laird
George C. Stevens, Q.C.

Pacific Regeneration Technologies Inc.
Directors and Officers
Colin A.C. Dobell, Chairman & Director
John Kitchen, President & CEO & Director
Allan D. Laird, Director
George C. Stevens, Q.C., Director
Christopher J. Worthy, Vice Chairman & 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