EXHIBIT 99.1
Consolidated Financial Statements
SUPREMEX INCOME FUND
For the 276-day period ended December 31, 2006
All amount expressed in Canadian dollars
1
AUDITORS' REPORT
To the board of trustees of
SUPREMEX INCOME FUND
We have audited the accompanying consolidated balance sheet of SUPREMEX INCOME
FUND (the "Fund") as at December 31, 2006 and the related consolidated
statements of earnings and deficit and cash flows for the 276-day period then
ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. The Fund is not required to have nor were we engaged to
perform an audit of the Fund's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Fund as at
December 31, 2006 and the consolidated results of its operations and its cash
flows for the 276-day period then ended in accordance with Canadian generally
accepted accounting principles.
/s/ Ernst & Young LLP
Montreal, Canada
February 2, 2007 Chartered Accountants
2
SUPREMEX INCOME FUND
CONSOLIDATED BALANCE SHEET
As at December 31, 2006
$
- ---------------------------------------------------------------------------------------------------------
ASSETS (NOTE 11)
CURRENT
Cash 14,251,559
Accounts receivable (note 4) 28,062,695
Income taxes receivable 860,622
Inventories (note 5) 15,193,161
Prepaid expenses 1,565,583
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 59,933,620
- ---------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (note 6) 41,863,507
Accrued pension benefit asset (note 7) 5,723,700
Deferred financing costs, net (note 8) 420,114
Intangible assets, net (note 9) 51,988,032
Goodwill (note 2) 245,063,721
- ---------------------------------------------------------------------------------------------------------
404,992,694
=========================================================================================================
LIABILITIES AND UNITHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities (note 10) 24,574,117
Distribution payable (note 14) 2,999,658
Payable to Cenveo (note 2) 5,509,045
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 33,082,820
- ---------------------------------------------------------------------------------------------------------
Term credit facility (note 11) 75,000,000
Future income tax liabilities (note 12) 18,768,539
Other post-retirement benefits obligation (note 7) 736,200
- ---------------------------------------------------------------------------------------------------------
UNITHOLDERS' EQUITY
Funds units (note 13) 302,237,605
Deferred compensation (note 13) (17,266,761)
Deficit (7,565,709)
- ---------------------------------------------------------------------------------------------------------
277,405,135
- ---------------------------------------------------------------------------------------------------------
404,992,694
=========================================================================================================
Commitments, contingencies and guarantees (note 15)
See accompanying notes
On behalf of the Trustees:
By: (Signed) L.G. Serge Gadbois By: (Signed) Gilles Cyr
------------------------------- -----------------------
Trustee Trustee
3
SUPREMEX INCOME FUND
CONSOLIDATED STATEMENT OF EARNINGS
AND DEFICIT
For the 276-day period ended December 31, 2006
$
- ----------------------------------------------------------------------------------------------------------------
REVENUE 147,223,009
Cost of good sold, selling, general and administrative expenses 114,714,676
- ----------------------------------------------------------------------------------------------------------------
Earnings before the following 32,508,333
- ----------------------------------------------------------------------------------------------------------------
Amortization of property, plant and equipment 2,678,500
Amortization of intangible assets 4,231,968
Amortization of deferred compensation 6,351,877
Gain on disposal of property, plant and equipment (35,442)
Net financing charges (note 11) 3,055,470
- ----------------------------------------------------------------------------------------------------------------
16,282,373
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 16,225,960
Provision for income taxes (recovery) (note 12) (3,205,253)
- ----------------------------------------------------------------------------------------------------------------
NET EARNINGS FOR THE PERIOD 19,431,213
Deficit, beginning of period --
Distribution declared (note 14) (26,996,922)
- ----------------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD (7,565,709)
================================================================================================================
BASIC AND DILUTED NET EARNINGS PER UNIT 0.6206
================================================================================================================
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING (note 13) 31,311,667
================================================================================================================
See accompanying notes
4
SUPREMEX INCOME FUND
CONSOLIDATED STATEMENT OF CASH FLOWS
For the 276-day period ended December 31, 2006
$
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings for the period 19,431,213
Items not affecting cash and cash equivalents
Amortization of property, plant and equipment 2,678,500
Amortization of intangible assets 4,231,968
Amortization of deferred compensation 6,351,877
Amortization of deferred financing costs 97,386
Gain on disposal of property, plant and equipment (35,442)
Future income tax recovery (3,373,901)
Change in other post-retirement benefits obligation (27,400)
Change in accrued pension benefit assets (569,200)
Net change in non-cash working capital balances 13,416,629
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS RELATED TO OPERATING ACTIVITIES 42,201,630
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Business acquisitions, net of cash acquired (note 2) (207,752,714)
Additions to property, plant and equipment (4,468,450)
Proceeds from disposal of property, plant and equipment 389,182
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS RELATED TO INVESTING ACTIVITIES (211,831,982)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of trust units on initial public offering (note 2) 175,000,000
Issuance of trust units at the exercise of the over-allotment
option (note 2) 25,000,000
Issuance of trust units to management (note 2) 23,642
Expenses related to initial issuance of trust units (note 2) (16,309,640)
Financing costs incurred (517,500)
Term credit facility proceed 75,000,000
Repayment of the due to an entity under common control (26,692,327)
Repayment of the note payable to Cenveo (note 2) (23,625,000)
Distribution paid on Fund units (23,997,264)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS RELATED TO FINANCING ACTIVITIES 183,881,911
- ---------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS AND PERIOD END BALANCE 14,251,559
=========================================================================================================
SUPPLEMENTAL INFORMATION
Interest paid 4,180,572
Income taxes paid 12,039
=========================================================================================================
See accompanying notes
5
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Supremex Income Fund (the "Fund") is an unincorporated open-ended trust
established under the laws of the Province of Quebec pursuant to a
declaration of Trust dated February 10, 2006, as may be amended,
supplemented or restated from time to time. The Fund was created to
indirectly acquire and hold all the shares of Supremex Inc. and the net
assets of Cenveo Depew Division ("Supremex"). The Fund remained inactive
until it indirectly acquired Supremex on March 31, 2006 (note 2). The
statements of earnings and cash flows consist of the operations of the
Fund for the 276-day period ended December 31, 2006.
Supremex is a manufacturer and marketer of a broad range of stock and
custom envelopes and related products.
The business of Supremex follows seasonal patterns with the highest
revenue occurring from August to February due to the seasonal advertising
and mailing patterns of its customers whereby higher number of mailings
related to events including the return to school, fund raisers and the
holiday and tax seasons occurs during that period. As a result, revenue
and financial performance for the 276-day period ended December 31, 2006
are not necessarily indicative of the revenue and financial performance
that may be expected for a full year.
2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS
On March 31, 2006, the Fund completed its initial public offering ("IPO")
with the sale of 17,500,000 trust units (the "units") for $10.00 per
unit, for total net proceeds of $165,029,947 after deducting $9,970,053
which represents the underwriters' total fees of $9,625,000 and other
issuance expenses of $5,309,640 less related future income taxes of
$4,964,587.
On March 31, 2006, in conjunction with the IPO, the Fund indirectly
acquired Supremex from Cenveo Corporation and/or its related companies
("Cenveo") for $331,532,962. Consideration paid to Cenveo for the
acquisition was comprised of cash of $212,924,527, units of the Fund with
a value of $89,474,390, a payable for acquired businesses of $5,509,045
for a working capital adjustment and a note payable of $23,625,000.
6
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS - (CONTINUED)
The acquisition was accounted for by the purchase method with the results
of Supremex's operations included in the Fund's earnings from the date of
acquisition. These consolidated financial statements reflect the
allocation of the consideration to the assets acquired and liabilities
assumed based on their fair values as follows:
CENVEO
SUPREMEX DEPEW TOTAL
DIVISION $
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents 5,171,813 5,171,813
Accounts receivable 27,077,695 378,589 27,456,284
Inventories 20,539,428 467,509 21,006,937
Income taxes receivable 6,465,881 6,465,881
Prepaid expenses 1,138,130 28,925 1,167,055
Property, plant and equipment 40,253,650 173,647 40,427,297
Accrued pension benefit asset 5,154,500 5,154,500
Intangible assets 56,220,000 56,220,000
Goodwill 245,063,721 245,063,721
Accounts payable and accrued liabilities (21,371,322) (200,262) (21,571,584)
Due to an entity under common control (26,692,327) (26,692,327)
Future income tax liabilities (27,573,015) (27,573,015)
Post-retirement benefits obligation (763,600) (763,600)
-------------------------------------------------------------------------------------------------------
NET ASSETS ACQUIRED 330,684,554 848,408 331,532,962
=======================================================================================================
CONSIDERATION
Cash 212,924,527
Units 89,474,390
Payable to Cenveo 5,509,045
Note payable to Cenveo 23,625,000
-------------------------------------------------------------------------------------------------------
As part of the acquisition 2,364,228 units valued at $23,642,280 were
issued to management employees of Supremex for a cash consideration of
$23,642 to amend the then existing Management profit sharing plan. These
units are held in escrow and 50% will be released on March 31, 2008, 25%
on March 31, 2009 and 25% on March 31, 2010, subject to earlier release
under certain circumstances or sold to Supremex for a nominal
consideration of $0.01 per unit in the event of the voluntary departure
of the employee or termination by Supremex for cause prior the expiry of
the four year escrow period. The initial value of such units, net of the
cash consideration received, is recorded as deferred compensation and is
recorded as compensation expense over the vesting period.
7
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS - (CONTINUED)
On April 28, 2006 the underwriters exercised in full their over-allotment
option, resulting in the issuance by the Fund of 2,500,000 additional
units at a price of $10 per unit for gross proceeds of $25,000,000 and
net proceeds of $24,090,988 after deducting $909,012 which represents the
underwriters' fees of $1,375,000 less related future income taxes of
$465,988. The net cash proceeds were used by the Fund to repay the note
payable to Cenveo.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles which
require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. By
their nature, these estimates are subject to measurement uncertainty. The
effect on the financial statements of changes in such estimates in future
periods could be material and would be accounted for in the period the
change occurs.
The financial statements have, in management's opinion, been properly
prepared within reasonable limits of materiality and within the framework
of the accounting policies summarized below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Fund
and its subsidiaries. All significant intercompany accounts and
transactions are eliminated upon consolidation. The consolidated
financial statements are for the 276-day period from March 31, 2006, the
date of commencement of operations, to December 31, 2006 inclusive and
accordingly no comparative information is provided.
NET EARNINGS PER UNIT
Net earnings per unit are calculated by dividing net earnings by the
weighted average number of units outstanding during the period. For the
purpose of the weighted average number of units outstanding, units are
determined to be outstanding from the date they are issued. The units
issued relating to the over-allotment option on April 28, 2006 have been
considered issued since March 31, 2006 since there was no contingencies
that would result in these units not being issued.
8
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash less amounts drawn under the
operating revolving credit facility.
INVENTORIES
Raw materials are carried at the lower of cost, determined on a first-in,
first-out basis, and replacement cost. Work in process and finished goods
are carried at the lower of cost, including labour and overhead,
determined on a first-in, first-out basis, and net realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Amortization is
computed under the straight-line method over the following estimated
useful lives:
Buildings and building improvements 10 to 40 years
Leasehold improvements Over the terms of the leases
Machinery and equipment 7 to 15 years
Office equipment 3 to 5 years
Computer equipment 3 years
LONG-LIVED ASSETS
Long-lived assets, including property plant and equipment, are tested for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. Impairment is
assessed when the undiscounted expected future cash flows derived from an
asset are less than its carrying amount. Impairment losses are recognized
for the amount by which the carrying value of an asset exceeds its fair
value. The estimated useful lives of all long-lived assets are
periodically reviewed and revised if necessary.
DEFERRED FINANCING COSTS
Financing costs related to credit facilities are capitalized and
amortized on a straight line basis over the four-year term of the credit
facilities.
9
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are assets acquired that lack physical substance and
that meet the specified criteria for recognition apart from goodwill.
Intangible assets acquired are comprised mainly of customer relationships
and non-compete agreements which are amortized on a straight-line basis
over ten years.
The intangible assets are tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. When the carrying value of customer relationships and the
non-compete agreements is less than its net recoverable value as
determined on an undiscounted basis, an impairment loss is recognized to
the extent that fair values, measured as the discounted cash flows over
the life of the assets when quoted market prices are not readily
available, are below the asset carrying value.
GOODWILL
Goodwill represents the excess of the acquisition cost over the fair
value of net assets of business acquired. Goodwill is tested for
impairment annually or more often if events or changes in circumstances
indicate that it might be impaired. The impairment test consists of a
comparison of the fair value of the reporting unit to which goodwill is
assigned with its carrying amount. Any impairment loss in the carrying
amount compared with the fair value is charged to earnings in the year in
which the impairment occurs. The Fund uses the discounted cash flows
method to determine the fair value of its reporting unit.
REVENUE RECOGNITION
The Fund recognizes revenue when persuasive evidence of an arrangement
exists, product delivery has occurred, pricing is fixed or determinable,
and collection is reasonably assured. In addition, when the customer
requests a bill and hold, revenue is recognized when the customer is
invoiced for goods that have been produced, packaged and made ready for
shipment. These goods are segregated from inventory which is available
for sale, the risk of ownership of the goods is assumed by the customer,
and the terms and collection experience on the related billings are
consistent with all other sales.
The Fund has rebate agreements with certain customers. These rebates are
recorded as reductions of revenue and are accrued using revenue data and
rebate percentages specific to each customer agreement.
10
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
EMPLOYEE FUTURE BENEFITS
The Fund maintains defined benefit pension plans, two of these plans are
hybrid by also having a defined contribution component, covering
substantially all of its employees. The acquired businesses have also
provided in the past post retirement and post employment benefits plans
to a limited number of employees covering health care, dental care and
life insurance coverage.
The Fund accrues its obligations for the defined benefits component of
its pension plans and other post retirements and employment benefits and
related costs, net of plan assets. The cost of pensions and other
retirement benefits earned by employees is actuarially determined, at
least every three years, using the projected benefit method prorated on
service and management's best estimate of plan's investment performance,
salary escalating, retirement age of employees and estimated health care
costs. For the purpose of calculating the expected return on plan assets,
those assets are valued at fair market value. The most recent actuarial
valuations were performed on December 31, 2005.
Past service costs are amortized on a straight-line basis over the
remaining service period of active employees ("EARSL"), which is 15
years. The excess of net actuarial gain or loss over 10% of the greater
of the benefit obligation and the fair value of plan assets is amortized
over the EARSL.
For the defined contribution component of a pension plan, the pension
expense is equal to the contributions paid by the Fund.
INCOME TAXES
The Fund's corporate subsidiaries are subject to corporate income taxes
and use the liability method of accounting for income taxes. Under the
liability method, future income tax assets and liabilities are determined
based on temporary differences between the financial reporting and tax
bases of assets and liabilities and are measured using tax rates
substantially enacted at the balance sheet date. The effect of changes in
income tax rates on future income tax assets and liabilities is
recognized in earnings in the period that the change becomes
substantially enacted.
11
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES - (CONTINUED)
Under the current terms of the Income Tax Act (Canada), the Fund is not
subject to income taxes to the extent that its taxable income in a year
is paid or payable to a unitholder. Accordingly, no provision for current
income taxes for the Fund is made. In addition, the Fund is not subject
to the recommendations of CICA Section 3465, as the Fund is contractually
committed to distribute to its unitholders all or virtually all of its
taxable income and taxable capital gains that would otherwise be taxable
in the Fund. The Fund intends to continue to meet the requirements under
the Income Tax Act (Canada) applicable to such trusts, and there is no
indication that the Fund will fail to meet those requirements.
On October 31, 2006, the Minister of Finance (Canada) announced proposed
changes to the taxation of publicly traded income trusts. The proposed
changes, if enacted, will result in the taxation, at the rate of 31.5%,
of distributions made by the Fund beginning in the year 2011. Even though
there is uncertainty as to the final precise legislation that could
eventually be enacted, the possible impact of the proposed legislation
has been taken into consideration in the year end review for impairment
of goodwill and the Fund concluded that no goodwill impairment was
required. However, the goodwill impairment test involves significant
estimates and assumptions that, by nature, are subject to measurement
uncertainty. The effect of changes in such estimates and assumptions in
future periods could result in a goodwill impairment which could be
significant.
FOREIGN CURRENCY
The Fund follows the temporal method to translate its foreign currency
balances and transactions including its integrated foreign subsidiary.
Under this method, monetary assets and liabilities are translated at the
rates of exchange in effect at balance sheet date and the other items in
the balance sheet and statement of earnings are translated at the
exchange rates in effect at the date of transaction. Exchange gains and
losses are included in net earnings for the year.
FINANCIAL INSTRUMENTS
The Fund uses interest rate swap to hedge the interest rate exposure. The
Funds objective is to offset gains and losses resulting from interest
rate exposure with losses and gains on the derivative contract used to
hedge it. The Fund does not use derivative contracts for speculative
purposes. To qualify as a hedge, the hedge relationship is designated and
formally documented at inception detailing the particular risk management
objective and strategy for the hedge, which includes the item and risk
that is being hedged, as well as how effectives is being hedge. The
derivative used must be highly effective in accomplishing the objective
of offsetting changes in cash flows for the risk being hedged. If a hedge
relationship is found to be ineffective, it not longer qualifies as a
hedge and any excess gain or losses attributable to such ineffectiveness,
as well as subsequent changes in fair value, are recognized in earnings.
12
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FINANCIAL INSTRUMENTS - (CONTINUED)
The Fund has designated its interest rate swap on its variable interest
term credit facility as hedge against the fluctuation in interest expense
due to change in the interest rate. Accordingly, the fair value of this
financial instrument and any changes thereto has not been recorded in the
consolidated financial statements. Gains and losses on financial
instruments that qualify as hedge are recognized at the time the hedged
expenses are incurred.
The fair value of this financial instrument is disclosed in note 17. Such
fair value estimates is not necessarily indicative of the amounts, the
Fund might pay or receive in actual market transactions. Potential
transaction costs have also not been considered in estimating fair value.
4. ACCOUNTS RECEIVABLE
DECEMBER 31,
2006
$
------------------------------------------------------------------------
Trade receivables 22,776,943
Receivable from Cenveo 4,000,000
Others 1,285,752
------------------------------------------------------------------------
28,062,695
========================================================================
5. INVENTORIES
DECEMBER 31,
2006
$
------------------------------------------------------------------------
Raw materials 4,047,692
Work in process 202,059
Finished goods 10,943,410
------------------------------------------------------------------------
15,193,161
========================================================================
13
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 2006
-------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
------------------------------------------------------------------------------------------------------
Land 7,517,895 -- 7,517,895
Buildings and building improvements 10,978,670 262,265 10,716,405
Leasehold improvements 526,713 65,307 461,406
Machinery and equipment 24,913,913 2,228,013 22,685,900
Office equipment 214,225 42,422 171,803
Computer equipment 380,199 70,101 310,098
------------------------------------------------------------------------------------------------------
44,531,615 2,668,108 41,863,507
======================================================================================================
7. POST-RETIREMENT BENEFITS
(a) Pension Plans
The Company maintains three defined benefit pension plans covering
certain salaried and hourly employees who have bargained for such
benefits. Two of these pension plans are hybrid because they also have a
defined contribution component.
The defined benefit and defined contribution plans expenses are as
follows:
$
---------------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
Current service costs 2,066,100
Interest expense 2,534,800
Actual return on plan assets (4,583,100)
Actuarial loss on benefit obligation 2,550,200
Difference between expected return and actual return on
plan assets for the period 1,096,500
Difference between actuarial (gain) loss recognized for the
period and actual actuarial (gain) loss on benefit
obligation for the period (2,550,200)
---------------------------------------------------------------------------------------
Defined benefit plans expense 1,114,300
Defined contribution plan expense 479,000
---------------------------------------------------------------------------------------
PENSION PLANS EXPENSE 1,593,300
=======================================================================================
14
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
7. POST-RETIREMENT BENEFITS - (CONTINUED)
The following table presents the changes in the accrued benefit
obligation and the fair value of plan assets, as well as the funded
status of the defined benefit plans, for the 276-day period ended
December 31, 2006.
$
---------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation, beginning of the period 61,398,400
Service cost 2,528,800
Interest cost 2,534,800
Actuarial losses 2,550,200
Benefits paid (2,426,600)
---------------------------------------------------------------------------
Benefit obligation, end of the period 66,585,600
===========================================================================
$
---------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of the period 66,552,900
Actual return on plan assets 4,583,100
Employees contribution 462,700
Employer contribution 1,683,500
Benefits paid (2,426,600)
---------------------------------------------------------------------------
Fair value of plan assets, end of the period 70,855,600
===========================================================================
Funded status - Plan surplus 4,270,000
Unrecognized actuarial loss 1,453,700
---------------------------------------------------------------------------
Net amount recognized as accrued pension benefit asset 5,723,700
===========================================================================
The assumptions used in computing the net pension cost were as follows:
%
---------------------------------------------------------------------------
Discount rate for projected benefit obligation 5.25
Discount rate for net pension cost 5.50
Expected return on plan assets 7.00
Rate of compensation increase 3.50
---------------------------------------------------------------------------
15
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
7. POST-RETIREMENT BENEFITS - (CONTINUED)
The weighted average plan assets allocation as at December 31 is as
follows:
%
---------------------------------------------------------------------------
Equity securities 53.2
Debt 38.3
Other 8.5
---------------------------------------------------------------------------
Total 100.0
===========================================================================
The pension plans have an investment policy that targets asset
allocations to be as follows: 50% of plan assets to equity securities and
50% to debt securities with a tolerable variation of that allocation.
(b) Post-retirement benefits other than pension
The following tables provide a reconciliation of the change in the
benefit obligation and a statement of the funded status of the plans.
$
---------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation, beginning of period 920,400
Interest cost 36,400
Benefits paid (72,100)
Amortization of experience losses 13,400
---------------------------------------------------------------------------
Benefit obligation, end of period 898,100
---------------------------------------------------------------------------
FUNDED STATUS
Funded status - Plan deficit 898,100
Unrecognized net actuarial losses 161,900
---------------------------------------------------------------------------
NET LIABILITIES 736,200
===========================================================================
Post-employment and other retirement benefits plan are not funded.
The components of post-retirement benefit cost included in the results of
operations, were as follows:
$
---------------------------------------------------------------------------
Interest cost on liability 36,400
Amortization of experience losses 8,300
---------------------------------------------------------------------------
Net periodic post-retirement benefit cost 44,700
===========================================================================
16
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
7. POST-RETIREMENT BENEFITS - (CONTINUED)
The assumptions used in the measurement of the Company's post-retirement
benefit cost were as follows:
%
---------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate for benefit obligation 5.25
Discount rate for net periodic benefit cost 5.50
---------------------------------------------------------------------------
As at December 31, 2006, the assumed health care trend rate for 2006 was
9% progressively declining to reach 4% in 2012.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
ONE-PERCENTAGE-POINT
----------------------------
INCREASE DECREASE
$ $
---------------------------------------------------------------------------
2006
Effect on total of service and interest cost
components in 2006 1,500 (1,400)
Effect on post-retirement benefit obligation
as at December 31, 2006 38,100 (36,900)
---------------------------------------------------------------------------
8. DEFERRED FINANCING COSTS
DECEMBER 31, 2006
-----------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
------------------------------------------------------------------------------------------------------
Deferred financing costs 517,500 97,386 420,114
======================================================================================================
9. INTANGIBLE ASSETS
DECEMBER 31, 2006
-----------------------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
$ $ $
------------------------------------------------------------------------------------------------------
Customer relationships 55,465,000 4,175,136 51,289,864
Non-compete agreements 755,000 56,832 698,168
------------------------------------------------------------------------------------------------------
56,220,000 4,231,968 51,988,032
======================================================================================================
17
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITES
DECEMBER 31,
2006
$
---------------------------------------------------------------------------
Trade payables 7,438,333
Trade payables to Cenveo 673,269
Accrued liabilities 16,462,515
---------------------------------------------------------------------------
24,574,117
===========================================================================
The Fund has $4 million of third party accrued liability relating to
transactions with Cenveo which is included in accrued liabilities as at
December 31, 2006 and which will be reimbursed by Cenveo if and when it
is required to be paid. Accordingly, a receivable of $4 million from
Cenveo has been recorded in the Fund's financial statements and is
included in accounts receivable.
11. SECURED CREDIT FACILITIES
The Fund has senior secured credit facilities consisting of a revolving
operating credit facility of up to $40 million and a term credit facility
of $75 million. Both facilities bear interest at a floating rate based on
the Canadian prime rate, U.S. base rate, LIBOR or bankers' acceptance
rates plus an applicable margin to those rates.
The revolving operating credit facility may be used for general corporate
purposes, working capital requirements and permitted acquisitions. Both
facilities mature on March 31, 2010 and there are no scheduled repayments
of principal required prior to maturity.
Amounts drawn under revolving and term credit facilities are as follows:
DECEMBER 31,
2006
$
---------------------------------------------------------------------------
Revolving credit facility --
Term credit facility 75,000,000
---------------------------------------------------------------------------
75,000,000
===========================================================================
As at December 31, 2006, the interest rates on the revolving and term
credit facilities were 6.0% and 5.6% respectively. The Fund entered into
an interest swap agreement for its term credit facility to pay a fixed
rate of 5.426% until March 31, 2007, 5.663% form April 1, 2007 to March
31, 2008, 5.866% from April 1, 2008 to March 31, 2009 and 6.067% from
April 1, 2009 to March 31, 2010 (see note 17).
18
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
11. SECURED CREDIT FACILITIES - (CONTINUED)
Under the terms of the credit facilities, the Fund is required, amongst
other conditions, to meet certain covenants. The Fund was in compliance
of these covenants as at December 31, 2006.
The credit facilities are collateralized by hypothec and security
interest covering all present and future assets of the Fund and its
subsidiaries.
Net financing charges
276-DAY PERIOD
ENDED
DECEMBER 31, 2006
$
---------------------------------------------------------------------------
Interest on secured credit facilities 3,155,919
Other interest (197,835)
Amortization of deferred financing costs 97,386
---------------------------------------------------------------------------
3,055,470
===========================================================================
12. INCOME TAXES
(a) Future income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The tax effects of temporary differences that give rise to significant
portions of future tax assets and liabilities are as follows:
DECEMBER 31,
2006
$
---------------------------------------------------------------------------
FUTURE INCOME TAX LIABILITIES (ASSETS)
Intangible assets 16,217,589
Property, plant and equipment 4,684,295
Accrued pension benefit asset 1,785,500
Other 1,514,707
Post-retirement benefits obligation (229,656)
Non-capital losses (939,747)
Initial public offering expenses (4,264,149)
---------------------------------------------------------------------------
18,768,539
===========================================================================
The goodwill related to Supremex acquisition is not deductible for tax
purposes.
19
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
12. INCOME TAXES - (CONTINUED)
(b) The income taxes expense differs from the expenses that would be
obtained by applying the combined Canadian income tax (federal and
provincial) as a results of the following:
276-DAY PERIOD
ENDED
DECEMBER 31, 2006
$
---------------------------------------------------------------------------
Earnings before income taxes 16,225,960
---------------------------------------------------------------------------
Income taxes at combined federal and provincial
statuary rate of 33.43% 5,424,338
Impact of interest expense of Supremex paid to the
Fund, eliminated on consolidation (9,320,208)
Effect of change in enacted tax rates (1,422,122)
Impact of amortization of deferred compensation not
deductible for tax purposes 2,123,432
Non deductible expenses and other (10,693)
---------------------------------------------------------------------------
Provision of income taxes (recovery) (3,205,253)
===========================================================================
Provision for income taxes (recovery) is as follow:
---------------------------------------------------------------------------
Current 168,648
Future (3,373,901)
---------------------------------------------------------------------------
Provision for income taxes (recovery) (3,205,253)
===========================================================================
On May 2, 2006, Canadian Federal budget announced several general
corporate income tax rate reductions, which will gradually be reduced
from 22.12% to 19% in 2010 which was enacted on June 22, 2006. In
addition, during the second quarter of 2006 other provincial tax rate
reductions became enacted. As a result, at the end of the second quarter,
the Fund has reassessed its future income tax assets and liabilities in
light of the new enacted tax rates.
20
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
13. UNITHOLDERS' EQUITY
FUND UNITS
The Fund Declaration of Trust provides that an unlimited number of units
may be issued. Each unit is transferable and represents an equal
undivided beneficial interest in any distributions from the Fund and in
the net assets of the Fund. All units are of the same class with equal
rights and privileges, except that Cenveo, pursuant to the Fund
Declaration of Trust, may designate one trustee as long as they own not
less than 10% of the total units issued. Each unit entitles the holder to
participate equally in all allocations and distributions and to one vote
at all meetings of unitholders for each whole unit held.
The Fund units are redeemable at any time at the option of the holder at
the lesser of 90% of the weighted average price of the Fund unit during
the last ten trading days of the units on an open market and the closing
market price on the redemption date. All redemptions are subject to a
maximum of $50,000 in cash redemptions by the Fund at any particular
month. Redemptions in excess of this amount will be paid by way of a
distribution in specie of the assets of the Fund.
NUMBER AMOUNT
$
------------------------------------------------------------------------------------------------------
FUND UNITS
Issued on IPO 17,500,000 175,000,000
Issued at the exercise of the over-allotment option 2,500,000 25,000,000
Issued to employees 2,364,228 23,642,280
Issued to Cenveo in consideration of businesses acquired 8,947,439 89,474,390
------------------------------------------------------------------------------------------------------
31,311,667 313,116,670
Issuance costs, net of future income taxes of $5,430,575 -- (10,879,065)
------------------------------------------------------------------------------------------------------
BALANCE AS AT DECEMBER 31, 2006 31,311,667 302,237,605
======================================================================================================
EMPLOYEES UNITS
As part of the acquisition 2,364,228 units valued at $23,642,280 were
issued to management employees of Supremex for a cash consideration of
$23,642 to amend the then existing Management profit sharing plan. These
units are held in escrow and 50% will be released on March 31, 2008, 25%
on March 31, 2009 and 25% on March 31, 2010, subject to earlier release
under certain circumstances or sold to Supremex for a nominal
consideration of $0.01 per unit in the event of the voluntary departure
of the employee or termination by Supremex for cause prior the expiry of
the four year escrow period. Employees are allowed to distribution
declared on these units. The initial value of such units, net of the cash
consideration received, is recorded as deferred compensation and is
recorded as compensation expense over the vesting period.
21
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
13. UNITHOLDERS' EQUITY - (CONTINUED)
OVER-ALLOTMENT OPTION
On April 28, 2006, the underwriters exercised in full their
over-allotment option, resulting in the issuance by the Fund of 2,500,000
additional units on the same terms as the initial public offering.
In addition, as consideration for the business acquisitions, the Fund
issued a note payable which was repaid with the net proceeds of the
over-allotment option.
BASIC AND DILUTED NET EARNINGS
The number of units used in the determination of the basic weighted
average number of units outstanding includes the 2,500,000 units relating
to the over-allotment option as if they would have been issued since
March 31, 2006 since there were no contingencies that would result in
these units not being issued.
14. DISTRIBUTION
The Fund makes monthly distributions of its available cash to unitholders
of record on the last business day of each month, payable on or about the
15th day of the following month. Distributions to unitholders are
recorded on an accrual basis. The December distribution in the amount of
$2,999,658 was declared and accrued in December 2006 and paid to
unitholders on January 15, 2007. Distributions for the period from April
1, 2006 to December 31, 2006 are as follows:
Per unit Distribution
Period Record date Payment date $ $
-------------------------------------------------------------------------------------------------------
April 2006 April 28, 2006 May 15, 2006 0.0958 2,999,658
May 2006 May 31, 2006 June 15, 2006 0.0958 2,999,658
June 2006 June 30, 2006 July 17, 2006 0.0958 2,999,658
July 2006 July 31, 2006 August 15, 2006 0.0958 2,999,658
August 2006 August 31, 2006 September 15, 2006 0.0958 2,999,658
September 2006 September 30, 2006 October 16, 2006 0.0958 2,999,658
October 2006 October 31, 2006 November 15, 2006 0.0958 2,999,658
November 2006 November 30, 2006 December 15, 2006 0.0958 2,999,658
December 2006 December 31, 2006 January 15, 2007 0.0958 2,999,658
-------------------------------------------------------------------------------------------------------
0.8622 26,996,922
-------------------------------------------------------------------------------------------------------
22
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
15. COMMITMENTS, CONTINGENCIES AND GUARANTEES
(a) OPERATING LEASE AND OTHER COMMITMENTS
The Fund has entered into operating leases mainly for buildings. The
minimum lease payments required under such leases by fiscal years and
thereafter are as follows:
$
-----------------------------------------------------------------------
2007 2,144,489
2008 1,684,682
2009 1,323,051
2010 1,049,524
2011 551,711
-----------------------------------------------------------------------
Total 6,753,457
=======================================================================
As at December 31, 2006, the Fund also had firm commitment to
purchase machinery and equipment amounting to approximately $700,000
which will be paid in 2007.
(b) CONTINGENCIES
In the normal course of its operations, the Fund is exposed to
various claims, disputes and legal proceedings. These disputes often
involve numerous uncertainties and the outcome of the individual
cases is unpredictable. According to management, their resolution
should not have a significant negative impact on the Fund's financial
position.
One of the Fund's subsidiaries is being investigated by the Canadian
Competition Bureau for alleged price maintenance by certain of its
customers. Management believes that it is unlikely that this
investigation would result in any material liability to the Fund.
In addition to the price maintenance investigation, the Competition
Bureau has also indicated its interest in broadening the inquiry, or
starting a new inquiry, to investigate whether price fixing or market
sharing took place in the 1980's and 1990's in respect of the supply
of envelopes market in Canada. While Competition Bureau activity is
continuing, management is presently not able to assess or predict the
scope or outcome of the current inquiry or any new inquiry that may
be commenced and the impact, if any, of such proceedings on the
Fund's financial position.
The Fund exposure toward the above matters is mitigated by the fact
that the acquisition agreement of the Fund businesses contains
representations and warranties and related indemnities for any
liabilities arising before September 30, 2008 from Cenveo in favour
of the Fund.
23
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
15. COMMITMENTS, CONTINGENCIES AND GUARANTEES - (CONTINUED)
(c) GUARANTEES
In the normal course of business, the Fund has entered into
agreements that contain features which meet the definition of a
guarantee. These agreements may require the Fund to compensate the
counterparties for costs and losses incurred as a result of various
events including breaches of representations and warranties, loss of
or damages to property, claims that may arise while providing
services and environmental liabilities. These agreements provide for
indemnification and guarantees to counterparties as follows:
OPERATING LEASES
The Fund has general indemnity clauses in many of its real estate
leases whereby it, as lessee, indemnifies the lessor against
liabilities related to the use of the leased property. These leases
mature at various dates through December 2011. The nature of the
agreements varies based on the contracts and therefore prevents the
Fund from estimating the total potential amount it would have to pay
to lessors. Historically, Supremex has not made any significant
payments under such agreements, has insurance coverage for certain of
the obligations undertaken, and, as at December 31, 2006, the Fund
has not recorded any liability associated with these
indemnifications.
BUSINESS DISPOSALS
As a result of the sale of business operations, shares or net assets,
Supremex may occasionally agree to provide indemnity against claims
from previous business activities. The nature of these
indemnifications prevents the Fund from estimating the maximum
potential liability that it could be required to pay to guarantee
parties. Historically, Supremex has not made any significant
indemnification payments, and, as at December 31, 2006 the Fund has
not recorded any liability associated with these indemnifications.
16. SEGMENTED INFORMATION
The Fund currently operates in one business segment being the
manufacturing and sale of envelopes. The Fund's net assets amounted to
$402,750,989 in Canada and $2,241,705 in United States as at December 31,
2006. The Fund's revenue amounted to $124,269,011 in Canada and
$22,953,998 in the United States for the 276-day period ended December
31, 2006.
24
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
17. FINANCIAL INSTRUMENTS
Interest rate and foreign exchange risk
The Fund is exposed to interest rate risk on its secured credit
facilities. The Fund has entered into an interest swap agreement for the
full amount of its term credit facility to pay a fixed rate of 5.426%
until March 31, 2007, 5.663% from April 1, 2007 to March 31, 2008, 5.866%
from April 1, 2008 to March 31, 2009, and 6.067% from April 1, 2009 to
March 31, 2010. As described in note 3, the Fund accounts for this
financial instrument as a hedge. As of December 31, 2006, the
mark-to-market on the Fund's interest rate swap is a loss of $914,708.
The Fund operates in Canada and in the United States which give rise to a
risk that its earnings and cash flows may be adversely impacted by
fluctuations in the exchange rate between the US and Canadian dollar. In
the recent past, purchases and capital expenditures in US dollars were
similar to the revenue earned in US dollars which have limited the Fund's
foreign exchange exposure. Cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities include balances
denominated in US dollars at the end of the period.
Fair value
The carrying value of the accounts receivable, accounts payable and
accrued liabilities and payable to Cenveo are a reasonable estimate of
their fair value because of their short maturity.
The fair value of the secured credit facilities approximates their
carrying value based on market rates available to the Fund for financial
instruments with similar risks, term and maturity.
Credit risk and customer concentration
The Fund performs ongoing credit evaluation of customer and provisions
have been set-up for potential credit losses. As at December 31, 2006, no
customer accounted for over 10% of total accounts receivable or revenues.
25
SUPREMEX INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
18. RELATED PARTY TRANSACTIONS
The Fund had the following transactions with Cenveo which were conducted
in the normal course of business and recorded at the exchange value:
276-DAY PERIOD
ENDED
DECEMBER 31, 2006
$
--------------------------------------------------------------------------
Revenue 6,252,219
Purchases of raw materials 1,418,337
--------------------------------------------------------------------------
26