PRT Forest Regeneration Income Fund

PRT Forest Regeneration Income Fund

February 27, 2009 17:34 ET

PRT Announces Results for Fourth Quarter of 2008

VICTORIA, BRITISH COLUMBIA--(Marketwire - Feb. 27, 2009) - PRT Forest Regeneration Income Fund (the "Fund") (TSX:PRT.UN) today announced results for its fourth quarter and year ended December 31, 2008. The Fund's interim financial report is enclosed as part of this release.

For the year ended December 31, 2008, the Fund reported operating earnings of $4,093,000 and Cash Available for Distribution of $3,602,000 ($0.38 per unit) as compared to $9,659,000 and $7,492,000 ($0.78 per unit) respectively for 2007. Operating Earnings and Cash Available for Distribution decreased year-over-year due to approximately 20% lower seedling volumes in 2008. 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. Standardized Distributable Cash - a comparable measure of cash flow prepared under guidance issued by the Canadian Institute of Chartered Accountants - totaled $0.69 per unit in 2008, as compared to $0.93 per unit in 2007.

Net earnings for the year were impacted by a $4.1 million write-down of property, plant and equipment and intangibles related to the previously announced closure of the Maple Ridge, BC nursery. Earnings were also impacted by a $19.2 million write-down of goodwill recorded in the third quarter. Both items are non-cash charges which will not directly affect operations, financial obligations, or cash available for distribution. Accordingly the Fund reported a loss of $23,191,000 ($2.41 per unit) for the year, as compared to a net loss of $7,528,000 ($0.78 per unit) for the year ended December 31, 2007. Excluding these write-downs and other non-recurring charges, the net earnings for the period would have been $447,000 ($0.05 per unit), which is in line with management's expectations given consideration for the current cyclical downturn in the forest industry and the general economic environment.

For the three months ended December 31, 2008, the Fund reported a net loss of $4,191,000 ($0.44 per unit) and Cash Available for Distribution of $1,235,000 or $0.13 per unit. Aggregate results, excluding the fixed asset impairment charge and other non-recurring charges, totaled earnings of $268,000 ($0.03 per unit).

Revenues in the year decreased by $10.7 million or 22%, with lower contract volumes being the primary cause, which was attributed to the current downturn in the forest industry. Production margins also declined due to lower economies of scale with the reduced volume. Selling, general and administration costs were lower than 2007 due to cost reduction efforts and the one time effect of proxy solicitation costs in the prior year.

President and CEO, Rob Miller, commented, "2008 was a challenging year for PRT, but we adapted well with improved contract delivery performance, good cost control, and continuing innovation in products and processes. These factors are essential to managing our business successfully through the current cycle.

However, the deepening economic downturn and continuing weak housing markets will cause our 2009 order book to decline further, perhaps by 20% or more. In anticipation of this weakness we suspended distributions for 2009, and will focus on maintaining market share, a positive cash flow and a manageable debt load through this cycle. This will leave us in the best possible position to take advantage of increased seedling demand once forestry markets recover.

We remain confident that this downturn has been caused by cyclical rather that secular factors in the forest industry. We see substantial opportunities for PRT beyond the current economic cycle, and expect that seedling markets will improve as house construction recovers and returns to more typical levels. US housing starts are well below their long term trend line and higher starts are supported by projected demographics. In addition, there is large and growing reforestation backlog in British Columbia caused by the mountain pine beetle, and an increasing awareness of the importance of forests in fighting climate change and providing energy alternatives. These present unique opportunities to expand and diversify our markets, while levering off our core expertise in seedling propagation. By focusing on maintaining our core operational capabilities, managing our balance sheet, and developing new markets we will maximize long-term value creation for unitholders."

Management's Discussion and Analysis for the Fund is available at

About the Fund

PRT is the largest producer of container grown forest seedlings in North America, with 14 nursery locations which produced approximately 170 million seedlings in 2008. 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 March 2, 2009 at 11:00 AM PST, 2:00 PM EST. To participate in this conference, please call 1-877-407-8031 or 201-689-8031.

Persons unable to attend the conference call may listen to a recorded version by dialing 1-877-660-6853, account # 286, and the conference ID# 313574. This option is available through March 9, 2009. A recorded web cast version of the call may also be accessed from the Fund's website at

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; the outlook for the forest industry, US housing markets, and future reforestation programs; 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, our ability to grow and supply products in accordance with defined specifications, customer credit risks, and other risks identified from time to time in the Fund's annual report, and annual information return. 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 on 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.

Consolidated Balance Sheets (unaudited)

As at December 31 As at December 31
2008 2007

Current assets
Cash $ 192 $ 672
Accounts receivable 6,976 8,976
Inventories 2,369 2,236
Prepaid expenses and deposits 199 496
Unbilled revenue 4,065 4,159
$ 13,801 $ 16,539

Investment 265 305
Property, plant and equipment (note 4) 35,152 42,840
Property, plant and equipment held for
sale (note 4) 420 797
Intangible assets 631 897
Goodwill (note 5) - 19,175

$ 50,269 $ 80,553


Current liabilities
Operating line $ 6,055 $ 9,340
Accounts payable and accrued
liabilities 4,051 3,444
Distribution payable to Unitholders 192 672
Current portion of long-term debt 262 1,517
$ 10,560 $ 14,973

Long-term debt 5,482 4,219

Future income taxes 326 1,490
$ 16,368 $ 20,682

Unitholders' Equity

Capital contributions (note 8) $ 90,249 $ 90,249

Cumulative earnings 15,811 39,002
Unit option grants 25 -
Cumulative distributions declared (72,184) (69,380)
$ 33,901 $ 59,871
$ 50,269 $ 80,553

Consolidated Statements of Earnings, Comprehensive Income and Cumulative
Earnings (unaudited)
($000's except per unit amounts and number of units outstanding)

Three months ended Year ended
December 31 December 31
2008 2007 2008 2007

Revenue $ 9,932 $ 11,429 $ 38,789 $ 49,486

Costs of production $ 6,178 $ 7,001 $ 24,891 $ 29,316
Selling, general and
administration 2,977 2,775 9,909 10,624
Gain on foreign exchange (47) (6) (104) (113)

Earnings before the
following $ 824 $ 1,659 $ 4,093 $ 9,659

Interest 124 230 843 965
Depreciation 920 1,091 3,684 4,151
Amortization of intangibles 67 67 267 267
Equity in loss (earnings)
of investee (52) (21) 39 76
Gain on disposal of
property, plant and
equipment (67) (429) (21) (381)
Long-lived asset impairment
charges (note 4) 4,112 - 4,112 -
Exit activity charges
(note 6) 247 - 251 170
Goodwill impairment
(note 5) - 13,200 19,175 13,200
Contract cancellation cost - 360 - 360
Loss in excess of insurance
coverage (note 7) 100 - 100 -

Loss before income taxes $ (4,627) $ (12,839) $ (24,357) $ (9,149)

Recovery of income taxes 436 1,002 1,166 1,621

Net earnings (loss) and
comprehensive income $ (4,191) $ (11,837) $ (23,191) $ (7,528)

Cumulative earnings -
beginning of period 20,002 50,839 39,002 46,530

Cumulative earnings - end
of period $ 15,811 $ 39,002 $ 15,811 $ 39,002

Basic and diluted earnings
(loss) per Trust Unit $ (0.44) $ (0.01) $ (2.41) $ (0.78)

Weighted average number of
Trust Units outstanding 9,603,116 9,603,116 9,603,116 9,603,064

Consolidated Statements of Cash Flows (unaudited)

Three months ended Year ended
December 31 December 31
2008 2007 2008 2007

Cash flows from operating
Net loss $ (4,191) $ (11,837) $ (23,191) $ (7,528)
Items not affecting cash
Depreciation and
(excluding seedling
containers) 921 1,091 3,685 4,151
Seedling container
depreciation included
in costs of production 388 362 1,316 1,376
Amortization of intangibles 67 67 267 267
Provision for recovery of
future income taxes (454) (1,235) (1,184) (1,874)
Gain on sale of property,
plant and equipment (67) (429) (21) (381)
Equity in loss (earnings)
of investee (51) (21) 40 76
Unrealized loss (gain) on
foreign exchange 180 88 285 (84)
Unrealized loss on interest
rate swaps 81 22 122 8
Long-lived asset impairment
charges 4,112 - 4,112 -
Stock Option grant 13 - 25 -
Goodwill impairment - 13,200 19,175 13,200
$ 999 $ 1,308 $ 4,631 $ 9,211

Net change in non-cash
working capital balances (3,543) (3,848) 3,034 1,062

$ (2,544) $ (2,540) $ 7,665 $ 10,273

Cash flows from financing
Distributions paid to
Unitholders $ (576) $ (2,017) $ (3,284) $ (8,595)
Proceeds of long-term debt - - - 174
Repayment of long-term debt (63) (187) (549) (1,256)
Increase (decrease) in
operating line 3,194 3,972 (3,284) (105)
Issuance of Trust Units - - - 16

$ 2,555 $ 1,768 $ (7,117) $ (9,766)

Cash flows from investing
Proceeds from loans to
investee $ - $ 20 $ - $ 20
Purchase of property,
plant and equipment $ (65) $ (168) $ (1,054) $ (1,314)
Proceeds on sale of
property, plant and
equipment 4 676 26 739
$ (61) $ 528 $ (1,028) $ (555)

Decrease in cash $ (50) $ (244) $ (480) $ (48)

Cash - beginning of period 242 916 672 720

Cash - end of period $ 192 $ 672 $ 192 $ 672

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.

Notes to Consolidated Financial Statements

(in thousands of dollars except per unit amounts)

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 and losses in the Statement of Earnings, Comprehensive Income and Cumulative Earnings as "Foreign exchange (gain) loss", and identifies unrealized gains and losses on the translation of foreign currency cash balances and non-cash monetary items as "Unrealized loss (gain) 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, 2008 and 2007, as well as its results of operations and cash flow for the three months ended December 31, 2008 and 2007, and the year ended December 31, 2008 and 2007.

2. Accounting Policy Developments

The Fund has adopted the following new standards issued by the CICA:

Section 1535 - Capital Disclosures: This section establishes standards for disclosing information about an entity's capital and how it is managed. Under this standard, there is a requirement to disclose information about the Company's objectives, policies and processes for managing its capital.

Section 3031 - Inventories: This section prescribes the accounting treatment for inventories and provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Portions of this section do not affect the Fund as section 3031 does not apply to the measurement of inventories held by producers of agricultural and forest products to the extent that they are measured at net realizable value in accordance with well-established practices in those industries.

Section 3064 - Goodwill and Intangible Assets: This section supersedes Sections 3062 and 3450, and primarily addresses intangible assets and treatment of research and development costs.

3. 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.

4. Property, plant and equipment, and property held for sale

In October 2008, the Fund announced that it will close its seedling nursery facility in Maple Ridge, BC. The closure will take place in phases and operations are projected to cease in the latter part of 2009. The closure is not presented as discontinued operations considering the continuing involvement of the Fund in seedling nurseries, the transferability of crops between nurseries, and the Company's intention to relocate certain long-lived assets to other nursery locations in future years. In view of the fact that long-lived assets remain in service at December 31, 2008, no capital assets have been classified as held for sale at this time. However, the Company reviews long-lived assets for impairment when events in changes in circumstances indicate that the carrying value of those assets may not be recoverable. As such, in relation to assets not intended to be used in the future at other sites, at December 31, 2008 the Company recorded an impairment charge of $3,851 on assets located at the Maple Ridge site of which $3,109 related to property, plant and equipment and $743 related to intangibles. Additionally, the Company recorded an impairment charge of $261 on property held for sale at the Nevada location.

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. Exit activities are substantially complete and no further exit activity costs are expected. 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, December 31,
2008 2007
Land $ 251 $ 252
Buildings 15 294
Growing facilities 71 99
Equipment 83 152
$ 420 $ 797

5. 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 fair value, as evidenced by its unit trading price and other indicators. After making a preliminary adjustment to the carrying value of goodwill at December 31, 2007 for an estimated impairment, management completed its evaluation of goodwill impairment as part of its annual impairment test for 2008. As a result of the further declines in the Fund's unit price and other factors, management determined that the remaining value of goodwill had been impaired and recorded a goodwill impairment charge of $19,175 at August 31, 2008. This impairment is a non-cash charge and has no impact on cash available for distribution. During our ongoing evaluation no impairment to the value of other identifiable intangible assets or property, plant and equipment has been identified, except as disclosed in note 4 to these financial statements.

6. Exit activity charges

In October 2008, the Fund announced that it will close its seedling nursery facility in Maple Ridge, BC and cease operations in the latter part of 2009 in order to improve production costs. Production that would otherwise have been located at the Maple Ridge nursery site will be absorbed by the Company's other nursery sites. It is expected that the exit activities will be completed during 2011.

Anticipated exit expenditures related to the Maple Ridge site are as follows:

Total anticipated Amounts incurred Amounts incurred
expenditures in the year to date
Legal $ 50 $ 48 $ 48
Employee costs 420 183 183
Decommissioning Activities 1,841 13 13
Dismantling and relocation
of long-lived assets 1,111 - -
$ 3,422 $ 244 $ 244

The above table excludes costs associated with the disposal of capital assets from the Maple Ridge site (see note 4), but does include the cost of relocating plant and equipment to other nursery sites.

Exit expenditures related to the Nevada site for dismantling and transportation of assets to other sites amounted to $7 (2007 - $170).

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

7. Unusual Items - Loss in excess of insurance coverage

In late December 2008 the Company suffered damage to greenhouses at its two lower mainland nurseries as a result of unusually heavy snowfall. The loss is insured at replacement cost subject to an insurance deductible of $100 which has been charged to earnings in the period.

8. Capital contributions

Capital contributions and units outstanding are:

Capital Contributions Three months ended Year ended
($000's) December 31 December 31
2008 2007 2008 2007
Capital Contributions -
Beginning of period $ 90,249 $ 90,249 $ 90,249 $ 90,233
Units issued under ESOP
program - - - 16
Capital Contributions - End
of period $ 90,249 $ 90,249 $ 90,249 $ 90,249

Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
Units outstanding -
Beginning of period 9,603,116 9,603,116 9,603,116 9,601,216
Units issued under ESOP
program - - - 1,900
Units outstanding - End of
period 9,603,116 9,603,116 9,603,116 9,603,116

The Fund has a Unit option plan whereby the Trustees of the Fund may, from time to time, grant options to purchase Units to eligible officers, employees and consultants of the Fund or any subsidiary, and to directors of any subsidiary. The aggregate number of Units reserved under the plan is 560,572. The maximum term of any option is ten years. The exercise price of an option cannot be less than the average of the Unit price at the close of business on the five trading days preceding the grant date.

During the quarter ended December 31, 2008 there were 107,000 Unit options granted to directors of PRT at an exercise price of $1.26 per unit. During the quarter ended September 30, 2008 there were 248,600 Unit options granted to eligible officers and employees at an exercise price of $3.65 per unit. No other Units have been previously issued under the Unit option plan. The Fund has applied the fair value method of accounting for Unit option grants. The fair value of each option granted was estimated using the Black-Scholes option pricing model with the weighted average assumptions below. As no Unit options were granted prior to 2008, no weighted average assumptions are shown for 2007.

Weighted Average Assumptions
December 31,
Risk-free interest rate 2.8%
Expected life (years) 6.0
Expected volatility 42.3%
Dividend yield 8.0%
Number of options granted 355,600
Fair value of each option granted $ 0.43

The compensation cost for the 107,000 Unit options granted in the quarter ended December 31, 2008 was $28. The compensation cost for the 248,600 Unit options granted in the quarter ended September 30, 2008 was $148. For both grants the compensation cost is being amortized against earnings over the three-year vesting period of the underlying options. An expense of $13 has been recognized in net earnings for the three months and $25 for the year ended December 31, 2008, with a corresponding credit to capital contributions.

During the three months ended December 31, 2008, no Unit options were eligible for exercise.

9. Distributions to Unitholders

As of December 31, 2008 the Fund declared distributions to Unitholders from current year operations of $2,804 (2007 - $8,547). Per unit distributions declared on account of current year operations are as follows:

Record Payment Taxable Taxable
Date Date Interest Non-Taxable Dividend Total
01/31/2008 02/15/2008 $0.04363 $ 0.00237 $ - $0.04600
02/29/2008 03/14/2008 $0.04363 $ 0.00237 $ - $0.04600
03/31/2008 04/15/2008 $0.01763 $ 0.00237 $ - $0.02000
04/30/2008 05/15/2008 $0.01763 $ 0.00237 $ - $0.02000
05/30/2008 06/13/2008 $0.01763 $ 0.00237 $ - $0.02000
06/30/2008 07/15/2008 $0.01763 $ 0.00237 $ - $0.02000
07/31/2008 08/15/2008 $0.01763 $ 0.00237 $ - $0.02000
08/29/2008 09/15/2008 $0.01763 $ 0.00237 $ - $0.02000
09/30/2008 10/15/2008 $0.01763 $ 0.00237 $ - $0.02000
10/31/2008 11/14/2008 $0.01763 $ 0.00237 $ - $0.02000
11/28/2008 12/15/2008 $0.01763 $ 0.00237 $ - $0.02000
12/31/2008 01/15/2009 $0.00597 $ 0.00237 $0.01166 $0.02000

Total $0.25190 $ 0.02844 $0.01166 $0.29200

10. Capital Structure Financial Policies - summary review of the Fund's objectives, policies and processes for managing its capital structure

The Fund's objectives when managing capital are: (i) to maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and (ii) to manage capital in a manner which considers the interests of equity (Unit) holders and obligations to debt holders.

In the management of capital, the Fund includes Unitholders Equity, Long-term Debt (including any associated hedging assets or liabilities), short term bank indebtedness (Operating Line), cash and temporary investments in the definition of capital.

The Fund manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Fund may adjust the amount of distributions paid to unitholders, issue new units, issue new debt, retire existing debt, or issue new debt to replace existing debt with different characteristics.

PRT is subject to certain externally imposed capital requirements as related to both the Operating Line and Long-term Debt. These obligations require the Company to report to the lender on certain covenants including margin requirements monthly for the Operating Line, and the following key ratios reported quarterly for Long-term Debt:

1. Ratio of principal, interest, and other monies payable on loans and the notes issued under the Trust Deed to EBITDA less cash taxes and sustaining capital expenditures and adjusted by a notional "Fund for Debt Service" not to exceed 1:1;

2. Ratio of total debt (excluding the Notes issued under the Trust Deed) to EBITDA less cash taxes and sustaining capital expenditures not to exceed 3.5:1;

3. Working capital ratio not less than 1:1; and

4. Tangible net worth not less than $17 million.

The Company is in compliance with all externally imposed capital requirements as at December 31, 2008.

11. Segmented information - geographic areas

The Company recorded revenues from customers located in the United States in the amount of $6,587 and $2,590 in the year and the three months, respectively, ended December 31, 2008 ($4,832 and $1,030 in the year and the three months ended December 31, 2007). In addition, as at December 31, 2008 the Fund's total capital assets located in the USA amounted to $3,247 (December 31, 2007 - $3,448).

12. Comparative figures

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

Mailing Office PRT Forest Regeneration Income Fund
Pacific Regeneration Technologies Board of Trustees
Inc. Colin A.C. Dobell
#101 - 1006 Fort Street John G. Taylor, CA
Victoria, BC Stuart E. Wolfe
Canada, V8V 3K4 Robert K. Withers
Tel: 250-381-1404 J. Mark Gardhouse
Fax: 250-381-0252 Robert A. Miller, CA

Registrar and Transfer Agent
Computershare Investor Services Pacific Regeneration Technologies
Board of Directors and Officers
Colin A.C. Dobell, Chairman &
World Wide Web Director Robert A. Miller, President & CEO &
John G. Taylor, CA, Director
Market Information Stuart E. Wolfe, Director
Stock symbol: PRT.UN Robert K. Withers, Director
Stock Exchange: Toronto J. Mark Gardhouse, Director
Antony A. Pollard, V.P. Finance &
Administration, CFO & Secretary
Investor Relations Herb Markgraf, V.P. Marketing
Tel: 250-381-1404 ext. 229 Robert Maxwell, V.P. Production
Toll free: 1-866-553-8733 John Kitchen, V.P. Business
Email: Development

Contact Information

  • PRT Forest Regeneration Income Fund
    Tony Pollard
    1-866-553-8733 ext. 229