HALIFAX, Nov. 13 /CNW/ - (TSX:CLR.UN):
- Trustees and Directors have commenced a strategic review process to
consider alternatives available to maximize unitholder value.
- Sales increased by 13% to $90.6 million versus $79.9 million in
Q3 2006.
- Net earnings of $9.3 million versus $8.5 million in Q3 2006.
- Distributable cash generated in the third quarter was $5.8 million in
2007 as compared to $10.4 million in 2006.
The results for the third quarter of 2007 demonstrated a significant
improvement in profit margin over the first half of the year, however
distributable cash continued to be weaker than 2006 and expectations due to:
- Exchange fluctuations - The US dollar depreciated significantly during
the quarter, negatively impacting margins by $5.1 million as compared
to the rates received in the third quarter of 2006.
- Weaker than anticipated scallop market - While the scallop market was
more active in the third quarter than it had been earlier in the year,
its growth was at a slower pace than anticipated.
- Further vessel disruptions - The clam fleet experienced further vessel
disruptions in the third quarter due to required maintenance on both
vessels currently in operation. The impact of these disruptions will be
reflected in the fourth quarter results.
In its second quarter 2007 report to unitholders, Clearwater's management
had indicated that anticipated improvements in the results in the second half
of the year may be impacted by certain external factors. As indicated
previously, over the course of the third quarter, Clearwater's results were
impacted by all of the challenges management had identified.
"Despite the challenges in the third quarter, Clearwater was able to
improve its sales margins over the first half of the year. We recognize that
the current levels of inventory, specifically scallop inventory, remain high
and we are evaluating our inventory management strategies to reduce inventory
to more normalized levels," said Colin MacDonald, Chief Executive Officer
("CEO") of Clearwater. "We fully expect our margins and sales volumes to
improve."
Clearwater's sales and gross profit year-to-date 2007 were $225.0 million
and $49.9 million as compared to $231.6 million and $67.4 million,
respectively, in 2006. Net earnings year-to-date 2007 were $25.1 million
versus $20.5 million in 2006. A number of significant factors impacted the
year-to-date 2007 results including:
- Scallops - During the third quarter, market conditions improved over
their levels in the first half of 2007, however the improvement was
slower than had been anticipated. Clearwater benefited from improved
catch rates allowing them to remain competitive and to offset the
pricing impacts of the softer market conditions. However, due to a
combination of strong catch rates and lower than anticipated sales
volumes, the level of scallop inventories remain high. Clearwater is
currently reviewing its inventory management strategy to manage the
inventory levels with the goal of normalizing inventory levels during
2008. We expect that our sales in the fourth quarter will be comparable
to 2006 levels but margins will be lower due to a different sales mix.
- Clam business - With the loss of the clam vessel, the Atlantic Pursuit,
in December 2006 and the delay in upgrading the fleet in the clam
division, the volume of product available for sale in our clam business
has been limited to date in 2007.
We are currently in the process of converting a vessel from our shrimp
fleet into a clam vessel. The conversion is expected to cost
approximately $15 million and delivery is expected in the second
quarter 2008. This investment in new harvesting capacity will result in
growth in sales volumes and greater harvesting efficiencies, which will
serve to boost the profitability of the clam business over the next
several years.
The impact of removing this vessel from the shrimp fleet is expected to
be immaterial as we expect to be able to generate comparable earnings
from alternative arrangements such as leasing the quota for a royalty.
Looking forward, clam sales volumes are expected to continue to reflect
the impacts of these factors until the new clam vessel is received in
2008. We have communicated these disruptions in supply to our customers
and we have put transition plans in place to manage the shortage of
volumes expected for the balance of the year and in 2008.
- Foreign exchange - Earnings have been impacted by cash and non-cash
foreign exchange. Clearwater incurred a net cash expense of
$8.9 million year-to-date in 2007 versus income of $10.2 million in
2006, a change of $19.1 million.
In addition, the Canadian dollar strengthened by 15% against the
US dollar during the year, with most of this increase occurring
subsequent to July. The impact of the fluctuations significantly
impacted sales and margins negatively in 2007 by $8.2 million
year-to-date when current effective rates are compared to those of
2006.
The total impact of exchange on the income statement is $17.1 million
(net cash expense of $8.9 million plus the $8.2 million impact on
sales). While we maintain a currency management program to mitigate
the risk of exchange fluctuations, the significant devaluation of the
US dollar and the strengthening of the Canadian dollar against other
significant currencies such as the Euro and Sterling have impacted
the results.
The Fund also announced today that the Trustees have initiated a process
for identifying and considering strategic alternatives available to maximize
unitholder value. In addition, in light of the strategic review, the Trustees
have elected to continue distributions for the month of November.
Tom Traves, Chairman of the Trustees, speaking on behalf of the Fund,
said " While the Trustees remain confident in the business and its prospects
in the long term, the Trustees believe that it is appropriate to review
alternatives to maximize value for our unitholders in light of Clearwater's
weak financial performance over the last nine months, the ongoing challenges
facing the Fund in maintaining distributions and the Canadian government's
legislation to tax income trusts. Clearwater continues to be onside on all of
its banking covenants and this decision was not made at the request of any of
its lenders. The Trustees intend to diligently consider a range of
alternatives and will be retaining appropriate advisors to assist in this
process. There can be no assurance that the review process will result in a
decision regarding any transaction or that it will be completed in any
specific time frame."
Clearwater Fine Foods Inc. ("CFFI") has advised the Fund that it is
supportive of the strategic review process being undertaken. Stan Spavold,
Executive Vice President of CFFI, stated "Clearwater has and will continue to
be a long term strategic investment for CFFI and we continue to believe in the
long term prospects of the business. We look forward to working with the Fund
and its financial advisors in reviewing options which will benefit all
unitholders." CFFI holds units of the Fund and CSLP, representing a 47%
interest in the Clearwater business.
Distributions (Please refer to the definitions and reconciliation section
of the MD&A for reconciliation between cash flows from operations to
distributable cash.)
Clearwater has declared distributions of $23.7 million year-to-date in
2007 compared to $7.9 million in the same period of 2006. Clearwater generated
$0.5 million of distributable cash year-to-date in 2007 compared to
$35.1 million in the first nine months of 2006. In determining the payment of
distributions Clearwater considers the financial results, on-going capital
expenditure requirements, leverage and expectations regarding future earnings.
Future earnings can be impacted by a number of factors including, but not
limited to, total allowable catch levels, selling prices, weather, exchange
rates and fuel costs.
The impact of the factors discussed above on year-to-date earnings
translated into a reduction of distributable cash generated in the first nine
months by $34.6 million as compared to 2006. We recognize that it will be a
significant challenge to eliminate the net distributable cash shortfall
position generated in the first nine months of the year. However, given that
the fourth quarter is traditionally a strong quarter, assuming there will be
no further additional vessel disruptions and significant negative impacts from
foreign exchange, management expects the fourth quarter to improve over the
third quarter of 2007. However, even with stronger results in the fourth
quarter, we will payout more than 100% of our distributable cash generated in
2007. The Trustees will continue to monitor the distribution policy on a
monthly basis having regard to the strategic review being conducted and the
most appropriate course of action when considering the long-term needs of the
unit holders.
Sales levels of scallops, which are one of our more profitable species,
experienced a decrease in revenue of 9% compared to the prior year, primarily
due to lower selling prices and a different product mix. This contributed
significantly to the negative variance in gross margins. While the scallop
market was soft in the first half of the year, it began to gain momentum in
the third quarter and we continue to expect improvements going forward for the
remainder of the year.
Lobster sales year-to-date have increased by 2% compared to the prior
year. Clearwater continues to realize the benefits of its' new raw lobster
product and the application of technology that provides a more effective
method to sort and grade our live lobster, improving margins. In addition, in
January 2007, Clearwater purchased an additional offshore lobster licence and
related assets, which based on recent TAC levels, should provide a return on
investment in the 15-20% range and increase our lobster volumes by
approximately 3%.
Clam sales, volumes and gross profits were impacted by the loss of the
Atlantic Pursuit, for which an insurance claim of $3.9 million has been
received and included in other income. Continued vessel disruptions resulted
in higher vessel costs and lower harvest volumes in 2007. This will impact the
sales volumes in the fourth quarter.
On June 25, 2007, the new clam vessel that was to have been delivered in
the third quarter capsized prior to Clearwater taking possession of the
vessel. In the third quarter we agreed to a cash settlement of $46 million, to
cover construction costs invested by Clearwater, with the shipyard that had
been constructing the vessel: $28 million of which has been collected to date
with balance fully secured through letters of credit and an assignment of
insurance proceeds. This accident will delay the growth we had expected to see
in the clam portion of our business, which represents approximately 20% of
annual sales until we are able to bring a replacement vessel into use.
Summary
In summary, Clearwater's year-to-date 2007 gross profit was significantly
impacted by a soft scallop market, considerable depreciation in the US dollar,
and vessel disruptions in the clam business. The efficiencies in the scallop,
lobster and shrimp businesses have helped mitigate the impacts of restricted
harvest capacity in the clam business and negative impact from foreign
exchange. As we move forward, we will continue to focus on areas we can
control, in order to ensure we are as well positioned as possible to deliver
stronger unitholder returns.
"At Clearwater, our decades of experience in the seafood industry mean we
are well attuned to external variables that can have an impact on our business
- and in this quarter, we experienced a number of them," said Clearwater CEO
Colin MacDonald. "While our results for the third quarter show the effects of
factors such as currency fluctuations and market conditions, they also
demonstrate how we employ our sound business strategies to keep our focus on
long-term unitholder value. In a quarter that presented Clearwater with a
number of challenges, our management team was able to increase our sales and
improve profitability. It is this discipline and focus on long-term results
that consistently enable us to ride out these challenges, and return to our
traditional levels of performance."
For an analysis of Clearwater and Clearwater Seafoods Income Fund's (the
"Fund") results for the quarter, please see management's discussion and
analysis included with this report.
FINANCIAL HIGHLIGHTS AND SIGNIFICANT ITEMS
-------------------------------------------------------------------------
Key Financial Figures
Clearwater
13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
($000's except September 29, September 30, September 29, September 30,
unit amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Sales $ 90,555 $ 79,939 $ 224,961 $ 231,600
Net earnings $ 9,323 $ 8,507 $ 25,111 $ 20,548
Basic and
diluted net
earnings
per unit $ 0.18 $ 0.16 $ 0.48 $ 0.39
-------------------------------------------------------------------------
Cash flows
from operating
activities $ 5,667 $ 17,814 $ (1,931) $ 39,757
-------------------------------------------------------------------------
Distributable
cash(1) $ 5,793 $ 10,362 $ 486 $ 35,114
Distributions
paid or
payable(1) $ 7,875 $ 7,918 $ 23,692 $ 7,918
Distributions
paid per unit
per month $ 0.05 $ 0.05 $ 0.05 $ 0.05
Weighted
Average Units
outstanding
Limited
Partnership
Units 52,648,140 52,788,843 52,648,140 52,788,843
Fully diluted 61,872,612 56,863,003 61,872,612 56,848,058
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund
13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
($000's except September 29, September 30, September 29, September 30,
unit amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Net earnings
(loss) $ 3,737 $ 4,647 $ (21,685) $ 12,085
Basic and
diluted net
earnings
(loss) per
unit $ 0.13 $ 0.16 $ (0.75) $ 0.41
-------------------------------------------------------------------------
Cash flows
from operating
activities $ 4,366 $ 4,389 $ 13,171 $ 4,389
-------------------------------------------------------------------------
Distributable
cash(1) $ 4,366 $ 4,411 $ 13,171 $ 4,411
Distributions
paid or
payable $ 4,366 $ 4,411 $ 13,171 $ 4,411
Weighted
Average Units
outstanding
Trust Units(2) 29,270,607 29,407,626 29,270,607 29,407,626
Special Trust
Units 23,381,217 23,381,217 23,381,217 23,381,217
-------------------------------------------------------------------------
1. Please refer to the Distributable Cash definition in the MD&A for
detailed reconciliations of these amounts. The Fund receives
distributions from Clearwater and in turn distributes them to its
unitholders. As such, distributable cash for the Fund is equal to the
distributions received and paid.
2. Clearwater's Partnership Agreement provides that as long as Clearwater
Fine Foods Incorporated ("CFFI") owns more than 45% of the special
trust and regular voting units of the Fund on a fully diluted basis,
they have the right to appoint 4 of the 7 directors of CS ManPar Inc.
CFFI currently owns 47.1% and therefore the Fund has the right to
nominate the majority of the board of directors. Therefore the Fund
does not consolidate the results of Clearwater's operations but rather
accounts for the investment using the equity method. Due to the
limited amount of information that this would provide on the
underlying operations of Clearwater, the financial highlights of
Clearwater are also enclosed.
Licence value
Clearwater's fishing licences are recorded at historic cost. To
understand the value of these licences you should also consider the value
placed on the licences by the Fund at the time of its investment in Clearwater
as follows:
In (000's)
-------------------------------------------------------------------------
Clearwater book value of licenses $107,165
-------------------------------------------------------------------------
Purchase price discrepancy allocated to licences
(186,314/55.32% of total) $336,794
-------------------------------------------------------------------------
Fair value estimate $443,959
-------------------------------------------------------------------------
Foreign Exchange Sensitivity
In excess of 80% of Clearwater's sales are denominated in currencies
other than the Canadian dollar, whereas the majority of expenses as well as
all of its cash distributions are in Canadian dollars. As a result,
fluctuations may have a material impact on Clearwater's financial results and
the amount of cash available for distribution to unitholders. Using 2006
actual sales as a base, a change in one penny in the foreign exchange would
impact revenue and earnings by:
-------------------------------------------------------------------------
Currency Change Canadian dollar impact
on revenue and margins
-------------------------------------------------------------------------
US dollars $0.01 $ 1,100,000
-------------------------------------------------------------------------
Euro $0.01 $ 781,000
-------------------------------------------------------------------------
Sterling $0.01 $ 89,000
-------------------------------------------------------------------------
Yen One twentieth of penny $ 1,500,000
-------------------------------------------------------------------------
Colin MacDonald
Chief Executive Officer
Clearwater Seafoods Limited Partnership
November 13, 2007
2007 THIRD QUARTER CONFERENCE CALL AND WEBCAST
Clearwater will review its third quarter financial results via conference
call on Wednesday, November 14, 2007 at 8:00 a.m. Eastern Time (9:00 a.m.
Atlantic). The call will be chaired by Colin MacDonald, Clearwater's Chief
Executive Officer, and he will be joined by Robert Wight, the Chief Financial
Officer. You can access the call by dialling 866-250-4877 or 416-646-3097. A
replay will be available through November 21, 2007 at 877-289-8525 or
416-640-1917 using pass code 21250964 (pound key). To listen to the web cast
of this event, please enter
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2054360 in
your web browser.
ABOUT CLEARWATER
Clearwater is recognized for its consistent quality, wide diversity and
reliable delivery of premium seafood, including scallops, lobster, clams,
coldwater shrimp, crab and groundfish.
Since its founding in 1976, Clearwater has invested in science, people,
technology, resource ownership and resource management to preserve and grow
its seafood resource. This commitment has allowed it to remain a leader in the
global seafood market.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
This Management's Discussion and Analysis ("MD&A") was prepared effective
November 13, 2007.
The Audit Committee and the Board have reviewed and approved the contents
of this MD&A as well as the related 2007 third quarter news release.
This MD&A should be read in conjunction with the interim and annual
financial statements, and the annual information form, which are available on
Sedar at www.sedar.com as well as Clearwater's website, www.clearwater.ca.
Clearwater has established and maintains disclosure controls and
procedures, as defined under the rules adopted by the Ontario Securities
Commission in multilateral instrument 52-109, over financial reporting. The
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated
the design of Clearwater's disclosure controls and procedures as of September
29, 2007 and have concluded that such procedures are adequate and effective to
provide reasonable assurance that the material information relating to
Clearwater and its consolidated subsidiaries would be made known to them by
others within those entities to allow for accurate and complete disclosures in
interim filings.
COMMENTARY REGARDING FORWARD-LOOKING STATEMENTS
This Report may contain forward-looking statements. Such statements
involve known and unknown risks, uncertainties, and other factors outside
management's control including, but not limited to, total allowable catch
levels, selling prices, weather, exchange rates and fuel costs that could
cause actual results to differ materially from those expressed in the
forward-looking statements. The Fund does not assume responsibility for the
accuracy and completeness of the forward-looking statements and does not
undertake any obligation to publicly revise these forward-looking statements
to reflect subsequent events or circumstances.
OVERVIEW
Clearwater is the largest publicly traded shellfish company in North
America and is widely recognized for its consistent quality, wide diversity,
and reliable delivery of premium seafood, including scallops, lobster, clams,
coldwater shrimp, crab and groundfish. Our key competitive advantages include
our ownership of significant quotas in key species, our innovations in
harvesting and processing technologies, and our vertical integration, which
allows Clearwater to manage marketing, sales and distribution in-house. Since
its founding in 1976, Clearwater has invested in science, people, technology,
resource ownership and resource management to preserve and grow its seafood
resource. This commitment has allowed Clearwater to remain a leader in the
global seafood market.
"Clearwater's results for the third quarter and year-to-date reflect the
impacts of external factors like currency fluctuations and market conditions,"
said CEO Colin MacDonald. "However, they also demonstrate how we employ sound
business strategies to keep our focus on long-term unitholder value. In a
quarter that challenged Clearwater in a number of areas, our management team
provided improved sales and profitability. This discipline and focus on
long-term results consistently enables us to ride out temporary challenges,
and will enable us to return to our traditional levels of performance."
EXPLANATION OF YEAR-TO-DATE RESULTS
The results of operations of the Fund are entirely related to
Clearwater's performance; therefore the commentary below is on the
operations of Clearwater.
The statements of earnings disclosed below reflect the unaudited
year-to-date earnings of Clearwater for the 39-week periods ended
September 29, 2007 and September 30, 2006 in thousands of Canadian dollars.
The prior year has been restated to reflect the impact of the new accounting
policy for refits, adopted in fiscal 2007 and applied retroactively. Please
refer to the critical accounting policies section of the MD&A for further
details.
-------------------------------------------------------------------------
2007 2006
------------ ------------
Sales $ 224,961 $ 231,600
Cost of goods sold 175,106 164,194
------------ ------------
49,855 67,406
22.2% 29.1%
Administration and selling 28,622 27,329
(Gain) loss on disposal and other, net (3,727) 2,198
Other expense (income) (746) (4,760)
Insurance claim (3,997) -
Foreign exchange income (20,805) (10,807)
Bank interest and charges 687 696
Interest on long-term debt 11,205 9,888
Depreciation and amortization 8,628 11,198
Reduction in foreign currency
translation account 1,790 1,697
------------ ------------
21,657 37,439
Earnings before income taxes and
minority interest 28,198 29,967
Income taxes (458) 4,690
------------ ------------
Earnings before minority interest 28,656 25,277
Minority interest 3,545 4,729
------------ ------------
Net earnings $ 25,111 $ 20,548
------------ ------------
------------ ------------
-------------------------------------------------------------------------
Net Earnings
Net earnings increased by $4.6 million year-to-date 2007, due primarily
to the impact of foreign exchange offset by a lower gross margin and other
income.
In (000's) 2007 2006 Change
-------------------------------------------------------------------------
Net earnings $ 25,111 $ 20,548 $ 4,563
-------------------------------------------------------------------------
Explanation of changes in earnings:
Higher unrealized foreign exchange and derivative income 29,167
Higher gain on disposal and other, net 5,925
Lower income tax expense 5,148
Higher realized foreign exchange and derivative expense (19,169)
Lower gross profit, net of insurance claim of $3,997 (13,554)
Lower other income (4,014)
All other 1,060
-------------------------------------------------------------------------
$ 4,563
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales to customers year-to-date by product category were as follows:
In (000's) 2007 2006 Change %
-------------------------------------------------------------------------
Scallops $ 76,015 $ 83,582 $ (7,567) (9)%
Lobster 54,708 53,795 913 2 %
Clams 36,484 45,966 (9,482) (21)%
Coldwater shrimp 36,093 26,046 10,047 39 %
Groundfish and other 7,004 10,787 (3,783) (35)%
Crab 14,803 5,678 9,125 161 %
Hedging program (146) 5,746 (5,892) (103)%
-------------------------------------------------------------------------
$ 224,961 $ 231,600 $ (6,639) (3)%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales levels of scallops, which are one of our more profitable species,
experienced a decrease in revenue of 9% compared to the prior year, primarily
due to lower selling prices and a different product mix. This contributed
significantly to the negative variance in gross margins. While the scallop
market was soft in the first half of the year, it began to gain momentum in
the third quarter and we continue to expect improvements going forward for the
remainder of the year.
Lobster sales year-to-date have increased by 2% compared to the prior
year. We continue to realize the benefits of our new raw lobster product and
the application of technology that provides a more effective method to sort
and grade our live lobster, improving margins. In addition, in January 2007,
Clearwater purchased an additional offshore lobster licence and related
assets, which based on recent TAC levels, should provide a return on
investment in the 15-20% range and increase our lobster volumes by
approximately 3%.
Clam sales, volumes and gross profits were impacted by the loss of the
Atlantic Pursuit, for which an insurance claim of $4.0 million has been
received and included in other income. Continued vessel disruptions have
resulted in higher vessel costs and lower harvest volumes in 2007. This will
impact the sales volumes in the fourth quarter. Looking forward, clam sales
and volumes are expected to continue to reflect the impacts of these factors
until the clam fleet is updated in 2008. In order to mitigate impacts to our
customers and maintain our relationships with them, we have communicated these
disruptions in supply and have put plans in place to manage the shortage of
volumes expected for the balance of the year and a portion of 2008.
On June 25, 2007, the new clam vessel that was to have been delivered in
the third quarter capsized prior to Clearwater taking possession of the
vessel. In the third quarter we agreed to a cash settlement of $46 million, to
cover construction costs invested by Clearwater, with the shipyard that had
been constructing the vessel: $28 million has been collected to date with the
remaining balance fully secured through letters of credit and an assignment of
insurance proceeds. Although disappointing, this accident will not impact the
current year's distributable cash; it will however, delay the growth we had
expected to see in the clam portion of our business, which represents
approximately 20% of annual sales, until we are able to bring a replacement
vessel into use.
We are currently in the process of converting a vessel from our shrimp
fleet into a clam vessel. The conversion is expected to cost approximately
$15 million and delivery is expected in the second quarter 2008. This
investment in new harvesting capacity will result in growth in sales volumes
and greater harvesting efficiencies, which will serve to boost the
profitability of the clam business over the next several years. The impact of
removing this vessel from the shrimp fleet is expected to be immaterial as we
expect to be able to generated comparable earnings from alternative
arrangements such as leasing the quota for a royalty.
Coldwater shrimp sales were higher year-to-date in 2007 than the same
period in the prior year primarily due to a 37% increase in volumes as the
prior year had incurred disruptions due to a scheduled refit.
Groundfish and crab sales were both impacted by a labour dispute in Glace
Bay, Nova Scotia that began in March 2006 and was resolved in the second
quarter of 2007. The plant is now operating on a seasonal basis producing
crab, which has translated into greater sales volumes of crab compared to the
prior year. The disruption impacted groundfish sales during the dispute, but
did not have a material impact on earnings as the licences were rented
generating royalty income.
Foreign exchange decreased the value of sales and margins by
approximately $8.2 million year-to-date in 2007 compared to the rates received
in the comparable period for 2006. Higher effective rates on the Euro and
Pound Sterling were offset by a lower exchange rate on the US Dollar.
2007 year-to-date 2006 year-to-date
Currency % sales Rate % sales Rate
-------------------------------------------------------------------------
US Dollars 48.6% 1.092 41.1% 1.192
Euros 16.0% 1.469 25.6% 1.427
Japanese Yen 9.1% 0.010 9.9% 0.010
UK pounds 6.7% 2.175 5.6% 2.062
Canadian dollar
and other 19.6% 17.8%
-------------------------------------------------------------------------
100.0% 100.0%
-------------------------------------------------------------------------
Subsequent to the end of the third quarter, Clearwater entered into an
agreement to lease certain groundfish quota for a two-year period at a cost of
$2 million.
In summary, sales and gross profits were lower year-to-date as compared
to the same period in 2006, primarily due to softer market conditions for
scallops, clam vessel disruptions and foreign exchange. This resulted in
overall gross profits that were $17.6 million lower than those reported in the
comparable period in 2006.
Administration and selling costs increased by approximately $1.3 million
as compared to the prior year. We have been investing and expect to continue
to invest further in developing markets for our products in Asia and have
incurred costs to improve our processes such as our sales management
information systems. In addition, in the first nine months of 2007 we have
expensed fees and costs of approximately $800,000 related to potential
acquisition activities.
Gain on disposal and other, net is greater than the prior year result.
The 2007 figure includes a gain of approximately $4 million on the sale of
non-core fishing quotas, and an amount of approximately $350,000 related to
recovery of accounts receivable previously provided for. This is offset by a
write down of approximately $750,000 of equipment related to the clam
business. The 2006 amount included a gain of approximately $1.2 million on the
sale of non-core fishing quotas offset by a provision related to a plant
previously operated in North Sydney totalling approximately $3.1 million.
Other expense (income) is lower in 2007 mainly due to lower royalties and
export rebate. In the third quarter of 2007, approximately $0.7 million of the
export rebate receivable was written down due to changes in the rules for the
government rebate program in Argentina. As well, quota rental and royalties
were lower when compared to the prior year as 2006 included the revenue
related to the license rental for the quota related to the Glace Bay plant
when it was not in operation.
Other expense (income) detail: 2007 2006
-------------------------------------------------------------------------
Investment income $ (1,087) $ (991)
Export rebate 103 (1,271)
Quota rental and royalties (63) (2,082)
Other 301 (416)
-------------------------------------------------------------------------
$ (746) $ (4,760)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The insurance claim relates to one of Clearwater's clam vessels, the
Atlantic Pursuit, which was damaged extensively on December 5, 2006 when it
was struck by a large wave. This was an older vessel and scheduled to be
retired from the fleet later in the year, however, as a result of the damage
incurred was retired from service early. An agreement was reached with
Clearwater's insurers during the first quarter and as a result a gain of
approximately $4.0 million was recorded. The vessel has a nominal book value
and management intends to dispose of the vessel.
Foreign exchange and derivative contracts resulted in a gain of
$20.8 million year-to-date in 2007 as compared to $10.8 million in the
equivalent period in 2006. The 2007 figure includes approximately
$29.7 million of unrealized exchange gains. Clearwater does not account for
its foreign exchange contracts as accounting hedges and therefore must record
the mark-to-market value of the contracts each quarter, adjusting for non-cash
impacts of foreign exchange on the outstanding contracts. From a cash
perspective, the business incurred an outlay of $8.9 million of cash from
foreign exchange management year-to-date in 2007 versus $10.2 million in cash
receipts generated in 2006 - a change of $19.1 million. As our derivative
contracts mature or are settled, gains and losses that would otherwise impact
operating margins are included as foreign exchange and derivative income.
Please refer to note 3 in the financial statements for a detailed listing of
outstanding contracts at period end and their fair values. As of September 29,
2007, the mark-to-market valuation was a net liability of $0.5 million versus
a liability of $27.0 million at December 31, 2006. Subsequent to quarter-end
foreign exchange derivative contracts with a fair value as at September 29,
2007 of $9.7 million were closed out for net cash proceeds of $11.9 million.
Over the longer term, the changing Canadian dollar will continue to
impact Clearwater, as approximately 80% of our sales are denominated in
foreign currencies. Clearwater therefore maintains an active currency
management program to provide a degree of certainty to future Canadian dollar
cash flows with respect to sales.
Clearwater's foreign exchange management program, which is used to hedge
our foreign exchange exposure, involves the use of foreign exchange forward
contracts supplemented by the use of foreign exchange options. Income
generated from forward exchange derivative contracts are recognized as
realized foreign exchange and derivative income when the contract is settled,
until that time, the fluctuations are recorded as unrealized foreign exchange
and derivative income. Proceeds generated from derivative option contracts are
included in realized foreign exchange and derivative income when the option is
written. Whether or not a derivative option contract will result in a gain or
loss, depends on whether spot rates exceed contract rates at the time of
maturity. To the extent that contracts are exercised, it will serve to mute or
delay the impact of a fluctuating exchange rate environment on Clearwater's
financial results.
Schedule of foreign exchange and derivative contract income:
In (000's) 2007 2006
-------------------------------------------------------------------------
Realized loss (gain)
Foreign exchange and derivative income 6,859 (11,268)
Other realized 2,069 1,026
-------------------------------------------------------------------------
8,928 (10,242)
-------------------------------------------------------------------------
Unrealized (gain) loss
Balance sheet translation (4,785) (7,382)
Mark-to-market on exchange derivative
contracts (21,135) 4,444
Mark-to-market on interest and
currency swap contracts (3,813) 2,373
-------------------------------------------------------------------------
(29,733) (565)
-------------------------------------------------------------------------
Total gain $ (20,805) $ (10,807)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bank interest and interest on long-term debt increased as in 2006
$1.9 million of interest was capitalized. This was partially offset by the
change in the method of accounting for an inflation indexed bond. Prior to
2007, interest expense included an estimate of the assumed inflation rate on
the Icelandic bond. The estimated change in the liability associated with
inflation indexing is included in foreign exchange and derivative contract
expense for 2007.
Depreciation and amortization is lower compared to 2006 primarily due to
a lower depreciable asset base in 2007, due in part to the write down of the
North Sydney plant and equipment at the end of the second quarter of 2006.
The reduction in foreign currency translation account is a non-cash
adjustment related to a reduction of Clearwater's net investment in its
subsidiary in Argentina.
Income taxes have decreased compared to the prior year partially due to
lower net earnings in taxable entities along with a higher amount of future
tax recovery related to the clam business.
Minority interest relates to earnings from Clearwater's investment in its
subsidiaries in Argentina and Newfoundland and Labrador. It was lower
year-to-date in 2007 than in 2006 due to lower net earnings in these
businesses.
LIQUIDITY AND CAPITAL RESOURCES
Earnings before interest, tax, depreciation and amortization (EBITDA) and
leverage are not recognized measures under Canadian GAAP and therefore are
unlikely to be comparable to similar measures presented by other companies.
Management believes that in addition to net income and cash provided by
operating activities, EBITDA is a useful supplemental measure from which to
determine the Fund's ability to generate cash available for debt service,
working capital, capital expenditures, income taxes and distributions. In
addition, as EBITDA and leverage are measures frequently analyzed for public
companies, we have calculated the amount in order to assist readers in this
review. EBITDA should not be construed as an alternative to net earnings
determined in accordance with GAAP as an indicator of performance, as a
measure of liquidity, or as a measure of cash flows and management does not
use this measure as a performance measure of earnings. Please refer to the
section on definitions and reconciliations for calculation of the EBITDA and
leverage referred to in this document.
Capital Structure
Clearwater's capital structure includes a combination of equity and
various types of long-term debt. Clearwater's objective when managing its
capital structure is to obtain the lowest cost of capital available, while
maintaining flexibility and reducing exchange and refinancing risk as
appropriate.
Management believes that available credit will be sufficient to meet
Clearwater's cash requirements. We use leverage, in particular senior
revolving and term debt, to lower our cost of capital. Clearwater maintains
some flexibility in its capital structure, as the amount of capital available
to Clearwater is a function of earnings that can be impacted by known and
unknown risks, uncertainties, and other factors outside management's control
including, but not limited to, total allowable catch levels, selling prices,
weather, exchange rates, fuel and other input costs, as well as capital
expenditures and distributions paid. We maintain flexibility in our capital
structure by regularly reviewing forecasts of future results and making any
required changes on a timely basis. These changes can include early repayment
of debt, repurchasing units, issuing new debt or equity, extending the term of
existing debt, selling assets to repay debt and if required, limiting
distributions paid. Refinancing risk is reduced by staggering the maturities
of debt instruments and a policy whereby maturing debt agreements are
revisited and updated or replaced as required in advance of maturity dates.
As at September 29, 2007, the Fund owns 55.32% (December 31, 2006 -
55.71%) of the outstanding partnership units of Clearwater. However, as
Clearwater Fine Foods Incorporated ("CFFI") maintained the right to nominate
the majority of the board of directors of Clearwater at the time of the
initial investment by the Fund, the assets and liabilities at acquisition have
been recorded using the book values as recorded by CFFI.
As at September 29, 2007, the Fund and Clearwater had similar
equity/convertible debt structures as illustrated in the table below:
Fund Clearwater
-------------------------------------------------------------------------
Units
Publicly Listed Trust Units 28,949,895
Class A Partnership Units 28,949,895
Units Held solely by Clearwater Fine Foods
Incorporated
Special Trust Units 23,381,217
Class B Partnership Units 23,381,217
-------------------------------------------------------------------------
52,331,112 52,331,112
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Convertible debentures/Class C Partnership
Units
Convertible debentures $ 43,005,000
Class C Partnership Units $ 43,005,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Convertible debentures/Class D Partnership
Units
Convertible debentures $ 44,463,000
Class D Partnership Units $ 44,463,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Clearwater also has other debt, and as a result its total capital
structure is as follows as of September 29, 2007 and December 31, 2006:
In (000's) 2007 2006
-------------------------------------------------------------------------
a. Equity - Partnership units $ 171,942 $ 173,079
b. Convertible debt, Class C units, due in 2010 43,005 46,430
c. Convertible debt, Class D units, due in 2014 44,463 -
d. Non-amortizing debt
Term notes, due in 2008 - 2013 82,269 86,308
Bond payable, due in 2010 50,127 46,795
Term loan, due in 2091 3,500 3,500
-------------------------------------------------------------------------
135,896 136,603
-------------------------------------------------------------------------
e. Amortizing debt
Marine mortgage 4,771 5,584
Other loans 1,544 1,643
-------------------------------------------------------------------------
6,315 7,227
Total capital $ 401,621 $ 363,339
-------------------------------------------------------------------------
-------------------------------------------------------------------------
a. Equity consists of Class A Limited Partnership units, Class B General
Partnership units, Class C Partnership units and Class D Partnership
units. Both Class A and Class B units are equally eligible for any
distributions that are declared by Clearwater. The Class B Partnership
units were issued concurrent with Special Trust Units that were issued
by the Fund solely to provide voting rights to Clearwater Class B
Partnership units held by CFFI.
b. Convertible debt - In June 2004, 4,081,633 Class C units were issued
by Clearwater (indirectly) to the Fund concurrently with the issue by
the Fund of $50 million of convertible debentures ($45 million in
principal outstanding as at September 29, 2007 when accounting for
buybacks) to fund capital projects. The Class C units are non-voting,
redeemable and retractable at a price of $12.25 per unit. These units
exist under an agreement whereby they will be converted, redeemed or
retracted in a manner that corresponds to any conversion, redemption
or repurchase of the convertible debentures of the Fund and in a
manner that ensures that the distributions on the Class C units will
be able to (indirectly) fund the ongoing interest payments on the
convertible debentures. The Class C units are classified in accordance
with their component parts: the value ascribed to the holders' option
to convert to units, $882,000 on issuance, was classified as equity
and the remaining portion of the units was classified as debt. As
noted previously, Clearwater has repurchased some of this debt such
that at September 29, 2007, the face value of the debt outstanding was
$45 million, $43 million net of financing charges and option to
convert (December 31, 2006 - $47 million, net of option to convert,
with no netting against financing charges). The convertible debentures
issued by the Fund are unsecured and subordinated, bear interest at
7%, and are due on December 31, 2010. They are convertible at any time
up to maturity at the option of the holder into trust units of the
Fund at a conversion price of $12.25 per trust unit. The debentures
pay interest semi-annually in arrears on June 30 and December 31. The
debentures are not redeemable before December 31, 2007. Subject to
regulatory approval, the Fund may satisfy its obligation to repay the
principal amount of the debentures on redemption or at maturity, in
whole or in part, by delivering that number of trust units equal to
the amount due divided by 95% of the market price of the trust units
at that time, plus accrued interest in cash.
c. Convertible debt - On March 9, 2007, 7,372,881 and on April 10, 2007,
an additional 769,831 Class D units were issued for proceeds of
$48 million. Class D units were issued by Clearwater (indirectly) to
the Fund concurrently with the issue by the Fund of $48 million of
convertible debentures, $44 million net of financing charges and
option to convert, to fund potential acquisitions. The Class D units
are non-voting, redeemable and retractable at a price of $5.90 per
unit. These units exist under an agreement whereby they will be
converted, redeemed or retracted in a manner that corresponds to any
conversion, redemption or repurchase of the convertible debentures of
the Fund and in a manner that ensures that the distributions on the
Class D units will be able to (indirectly) fund the ongoing interest
payments on the convertible debentures. The Class D units are
classified in accordance with their component parts: the value
ascribed to the holders' option to convert to units, $1,579,000, has
been classified as equity and the remaining portion of the units has
been classified as debt. The convertible debentures issued by the Fund
are unsecured and subordinated, bear interest at 7.25%, and are due on
March 31, 2014. They are convertible at any time up to maturity at the
option of the holder into trust units of the Fund at a conversion
price of $5.90 per trust unit. The debentures pay interest semi-
annually in arrears on March 31 and September 30. The debentures are
not redeemable before March 31, 2010. Subject to regulatory approval,
the Fund may satisfy its obligation to repay the principal amount of
the debentures on redemption or at maturity, in whole or in part, by
delivering that number of trust units equal to the amount due divided
by 95% of the market price of the trust units at that time, plus
accrued interest in cash.
d. Non-amortizing debt - In addition to the convertible debentures and
Class C and D Partnership units, Clearwater has additional primary
debt facilities. These facilities include approximately $82 million in
five and ten year notes in Canadian and U.S. dollars from a syndicate
of five institutional lenders (with US $20 million available to be
drawn at market rates until late 2007) and 2,460 million ISK in five-
year bonds. The 2,460 million ISK bonds yield 6.7%, are adjusted for
changes in the Icelandic consumer price index (CPI), mature in 2010
and are unsecured. These bonds have been fully swapped into Canadian,
U.S., Euro and Pound Sterling debt with floating interest rates. The
bond is recorded in long-term debt at $39.1 million along with
$5.6 million of accrued interest and $5.5 million of accrued CPI, both
of which are completely offset by swap contracts. The mark-to-market
adjustment related to the bond as of September 29, 2007 is an asset of
$0.6 million.
During the second quarter, Clearwater renegotiated the terms and
maturity of its $60 million revolving term debt facility from a
syndicate of banks. This facility was not drawn upon at September 29,
2007. This facility, which matures and is renewable in May 2009 is
part of a master netting agreement and was in a cash position of
$14 million as at September 29, 2007.
As part of its strategy to manage its capital structure, the Fund filed a
normal course issuer bid by which it can acquire up to $4.8 million principal
amount of 2007 convertible debentures and $4.5 million principal amount of
2004 convertible debentures in the 12-month period ending August 2008. This is
accompanied by a similar agreement by Clearwater to repurchase Class C
Partnership units. Under a previously filed normal course issuer bid that
expired August 2007, a total of $5 million of the Class C units have been
repurchased ($3 million in fiscal 2006, $1 million in the first quarter of
2007, and $1 million in the third quarter of 2007) and cancelled and the
proceeds were used to repurchase and cancel an equivalent amount of
convertible debentures.
The Board of Trustees believes that repurchase of the Fund's units, from
time to time, may represent an attractive opportunity to realize additional
unitholder value and that the purchase of units would be an appropriate and
desirable use of the Fund's available resources. Therefore, on January 24,
2007, the Fund received approval for a normal course issuer bid which will
enable it to purchase, from time to time, up to 2.5 million outstanding trust
units, which amount represents less than 10% of the public float. Any such
purchases of units would be made during the 12-month period commencing on
January 24, 2007, and in accordance with the requirements of the TSX. The
units will be purchased by the Fund for cancellation and will be accompanied
by a similar repurchase of units by Clearwater. Purchases will be made at
market prices through the facilities of the TSX, and will be funded out of the
Fund's available cash and through borrowings under its existing credit
facility (subject to receiving the approval of its lenders). Year-to-date, the
Fund repurchased and cancelled 457,900 units at a cost of approximately
$2,235,000. The transactions resulted in decreasing the unit value outstanding
by $4,647,000 and increasing contributed surplus by $2,412,000.
Clearwater is in compliance with all of the non-financial and financial
covenants associated with its debt facilities. These covenants include, but
are not limited to, leverage ratios against earnings (excluding most
significant non-cash items and non-recurring items from earnings) and fixed
charge ratios that can limit the amount of distributions paid and the amount
of debt outstanding. In addition, the debt related to these facilities takes
priority over the securities in Clearwater held by the Fund. Due to the items
previously noted that impacted year-to-date results in 2007, earnings were
unusually low, and in turn, leverage has increased as at September 29, 2007
when compared to December 31, 2006. Clearwater will continue to monitor and
manage debt levels based on business needs and opportunities.
CASH FLOWS
Summarized cash flow information in (000's)
For the 13 and 39 week periods ending September 29, 2007 and
September 30, 2006. See statements of cash flows for more detail.
13 weeks ended 39 weeks ended
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flow from
operations (before
change in working
capital) $7,860 $13,249 $6,255 $41,880
Investing, Financing,
and change in
non-cash working
capital
Change in non-cash
working capital (2,193) 4,565 (8,186) (2,123)
Other investing
activities 129 (638) 243 266
Capital expenditures
(net of proceeds
on sale) 4,092 (980) (5,683) (15,906)
Distributions
to unitholders (7,875) (7,918) (23,692) (7,918)
Distributions to
minority partner (502) (2,133) (3,490) (4,551)
Purchase of units (1,147) - (2,235) -
Other 3 761 (363) 857
----------------------------------------------------
(7,493) (6,343) (43,406) (29,375)
Decrease (Increase)
in long-term debt,
net of cash $ 367 $6,906 $(37,151) $12,505
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During 2007, funded debt (net of cash balances) has increased by
approximately $37 million.
Cash flows generated by Clearwater along with its banking facilities are
used to fund current operations, seasonal working capital demands, capital
expenditures, other commitments and distributions to unitholders. Due to the
seasonality in Clearwater's business, sales and gross profit are typically
higher in the second half of the calendar year than in the first half of the
year. Inventories reach a seasonal peak in the summer due to better weather
for harvesting, resulting in seasonal demands on working capital. Due to the
market conditions, the level of scallop inventory continues to be higher than
normal; as a result a significant portion of working capital is included in
the inventory value. Management recognizes the significant level of scallop
inventory and through its inventory management strategy plans to reduce
inventory to more normalized levels in 2008.
CAPITAL EXPENDITURES
Capital expenditures were $11.5 million year-to-date (2006 -
$17.7 million). Of this amount, $9.2 million (2006 - $16.5 million) was
considered return on investment (ROI) capital and $2.3 million (2006 -
$1.2 million) was maintenance capital. ROI and maintenance capital are tracked
on a project-by-project basis; there are no ROI projects as of September 29,
2007. Significant expenditures that are expected to have an average return in
excess of average cost of capital are classified as ROI, and expenditures that
have less than the average cost of capital are classified as maintenance.
Maintenance capital has historically been approximately $3 million annually.
During the third quarter, Clearwater reached an agreement with the
shipyard that had been constructing the new clam vessel that capsized in June
2007, for a cash settlement of $46 million of which $28 million has been
collected to date. The balance is fully secured through letters of credit and
an assignment of insurance proceeds. We are currently in the process of
converting a vessel from our shrimp fleet into a clam vessel. The conversion
is expected to cost approximately $15 million and delivery is expected in the
second quarter 2008. This investment in new harvesting capacity will result in
growth in sales volumes and greater harvesting efficiencies, which will serve
to boost the profitability of the clam business over the next several years.
The impact of removing this vessel from the shrimp business is expected to be
immaterial as we expect to be able to generate comparable amounts of earnings
from alternative arrangements such as leasing the quota for a royalty.
Clearwater is reviewing its options with regards to the vessel status in
Argentina and plans to perform a major refit on one of its vessels, increasing
the life of the vessel and delaying the need to replace a vessel by
approximately two years.
DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS
(Please refer to the definitions and reconciliation section of the MD&A
for the reconciliation between cash flows from operations to distributable
cash.)
Distributable cash does not have any standardized meaning prescribed by
Canadian Generally Accepted Accounting Principles (GAAP) and therefore is
unlikely to be comparable to similar measures presented by other companies.
This provides guidance to readers seeking to assess the sustainability of
distributions by comparing distributions paid to the amount of distributable
cash. As distributable cash is a measure frequently analyzed for income
trusts, we have calculated the amount in order to assist readers in this
review. However, distributable cash should not be construed as an alternative
to net earnings determined in accordance with GAAP as an indicator of
performance, as a measure of liquidity, or as a measure of cash flows, and
management does not use this measure as a performance measure of earnings.
Management uses the distributable cash as a measure of cash generated by
Clearwater available for distribution to unitholders without eroding
Clearwater's production capacity.
In the third quarter of 2007, Clearwater generated $5.8 million of
distributable cash (2006 - $10.4 million). Year-to-date, Clearwater generated
$0.5 million of distributable cash (2006 - $35.1 million) and declared
distributions of $23.7 million (2006 - $7.9 million). Please refer to the
distributable cash reconciliation included in this document for detailed
reconciliations of these amounts.
As discussed above, the more significant factors that impacted earnings
in 2007 year-to-date include soft scallop market conditions, clam vessel
disruptions and foreign exchange. The impact of these factors reduced
distributable cash generated year-to-date in 2007 by $34.6 million as compared
to the same period in 2006.
When determining the level of distribution payment, the Trustees consider
the financial results, on-going capital expenditure requirements, leverage and
expectations regarding future earnings. Future earnings can be impacted by a
number of factors including, but not limited to, total allowable catch levels,
selling prices, weather, exchange rates and fuel costs. An update on those
factors is as follows.
- Current financial results -2007 to date has been impacted by market
conditions, clam vessel disruptions and foreign exchange, with these
factors reducing distributable cash generated year-to-date by
$34.6 million as compared to the equivalent period in 2006.
As of the third quarter of 2007, EBITDA and distributable cash,
excluding the impact of non-cash foreign exchange, have declined
compared to 2006 with the rolling four quarters EBITDA and
distributable cash being $33 million and $7 million respectively as
compared to $65 million and $42 million for 2006.
- Capital expenditures - Clearwater currently has one significant capital
project in process; the conversion of a vessel for its clam fleet. This
will cost approximately $15 million and be completed in the second
quarter of 2008.
Clearwater has spent approximately $85 million on its fleet in the past
five years. This has allowed it to implement changes to improve
profitability through the use of new technology and a younger fleet.
For greater details on Clearwater's strategy for capital replacement, a
5-year history of capital expenditures as well as information on
Clearwater's strategy in maintaining its assets, please refer to the
Capability to Deliver Results section in the 2006 annual report
available on our website at www.clearwater.ca.
- Leverage - Due to the items previously noted that impacted 2007's
results year-to-date and higher debt levels with the new convertible
debenture issue, leverage has increased compared to December 31, 2006.
However, it is important to note that Clearwater's lending covenants
exclude large non-cash items from EBITDA calculations and certain
subordinated debt. Clearwater is in compliance with all of the non-
financial and financial covenants associated with its debt facilities.
Please see the Definitions and Reconciliations section at the end of
this report for the calculation of leverage.
- Expectations regarding future earnings - Management expects the fourth
quarter to continue to show improvement compared to the first half of
the year as the market for scallops continues to strengthen and the
through the realization of exchange gains on currency contracts.
The Fund also announced today that the Trustees have initiated a process
for identifying and considering strategic alternatives available to maximize
unitholder value. In addition, in light of the strategic review, the Trustees
have elected to continue distributions for the month of November.
Tom Traves, Chairman of the Trustees, speaking on behalf of the Fund,
said "While the Trustees remain confident in the business and its prospects in
the long term, the Trustees believe that it is appropriate to review
alternatives to maximize value for our unitholders in light of Clearwater's
weak financial performance over the last nine months, the ongoing challenges
facing the Fund in maintaining distributions and the Canadian government's
legislation to tax income trusts. Clearwater continues to be onside on all of
its banking covenants and this decision was not made at the request of any of
its lenders. The Trustees intend to diligently consider a range of
alternatives and will be retaining appropriate advisors to assist in this
process. There can be no assurance that the review process will result in a
decision regarding any transaction or that it will be completed in any
specific time frame."
Clearwater Fine Foods Inc. ("CFFI") has advised The Fund that it is
supportive of the strategic review process being undertaken. Stan Spavold,
Executive Vice President of CFFI, stated "Clearwater has and will continue to
be a long term strategic investment for CFFI and we continue to believe in the
long term prospects of the business. We look forward to working with The Fund
and its financial advisors in reviewing options which will benefit all
unitholders." CFFI holds units of the Fund and CSLP, representing a 47%
interest in the Clearwater business.
Clearwater has a large depreciable asset base and some of the business
units are incorporated. As a result, not all of our distributions are taxable
to unitholders. The following table summarizes the history of the taxation of
distributions.
-------------------------------------------------------------------------
Return of Dividend Other
Taxation year capital income income
-------------------------------------------------------------------------
2002 62% 4% 34%
-------------------------------------------------------------------------
2003 45% 20% 35%
-------------------------------------------------------------------------
2004 62% 3% 35%
-------------------------------------------------------------------------
2005 52% - 48%
-------------------------------------------------------------------------
2006 32% - 68%
-------------------------------------------------------------------------
2007 25% 75% -
-------------------------------------------------------------------------
Summary of distributable cash and other key figures
-------------------------------------------------------------------------
13 weeks 39 weeks year year
ended ended ended ended
September 29, September 29, Dec 31, Dec 31,
($000's) 2007 2007 2006 2005
-------------------------------------------------------------------------
Cash flow from
operations $ 5,667 $ (1,931) $ 44,648 $ 36,142
Net earnings $ 9,323 $ 25,111 $ 1,463 $ 19,873
Distributions paid
or payable $ 7,875 $ 23,692 $ 15,837 $ 27,367
Distributable cash $ 5,793 $ 486 $ 42,351 $ 27,205
(Shortfall) excess
of distributable
cash over
distributions
paid or payable $ (2,082) $ (23,206) $ 26,514 $ (162)
(Shortfall) excess
of cash flows
from operating
activities over
distributions paid (2,208) (25,623) 28,811 8,775
(Shortfall) excess
of net income over
cash distributions
paid 1,448 1,419 (14,374) (7,494)
Cash on hand was used to fund the distributions year-to-date. The funding
of future distributions will be through an expected increase in cash flow
generated from operating activities, the absence of vessel disruptions and a
measure of stability in exchange rates. When considering the ability of
Clearwater to maintain its current distribution level, as mentioned above, the
Trustees consider current financial conditions, capital expenditures, leverage
and expectations for future earnings.
In July 2007, the Canadian Institute of Chartered Accountants ("CICA")
released guidance on the calculation and disclosure for distributable cash in
which it requires a calculation of "Standardized Distributable Cash" and
allows a calculation of "Adjusted Standardized Distributable Cash". Adjusted
Standardized Distributable Cash is consistent with the calculation we have
always provided and therefore for the purposes of our report we refer to it as
"distributable cash". Both calculations have been provided in the definitions
and reconciliations sections of the MD&A. The CICA guidance also provides a
number of recommendations on various disclosures. The calculation of
distributable cash is in compliance with the guidance, however management
believes it would be premature to attempt to adopt all disclosure requirements
until such time as greater guidance is provided. The CICA plans to issue a
companion document, which will contain more guidance. Management plans to
review that document when it is issued.
EXPLANATION OF THIRD QUARTER RESULTS
Consolidated Operating Results for the thirteen weeks comprising the
third quarter, in thousands of Canadian dollars. The prior year has been
restated to reflect the impact of the new accounting policy for refits,
adopted in fiscal 2007 and applied retroactively. Please refer to the critical
accounting policies section of the MD&A for further details.
The results of operations of the Fund are entirely related to
Clearwater's performance and therefore the commentary below is on the
operations of Clearwater. The statements of earnings disclosed below reflect
the unaudited interim earnings of Clearwater for the 13-week periods ended
September 29, 2007 and September 30, 2006.
-------------------------------------------------------------------------
2007 2006
Sales $ 90,555 $ 79,939
Cost of goods sold 68,553 56,991
-------------------------------------------------------------------------
Gross profit 22,002 22,948
24.3% 28.7%
Administration and selling 8,616 9,708
Loss (gain) on disposal of licences and other,
net (3,425) (733)
Other expense (income) 1,348 (1,063)
Insurance claim (79) -
Foreign exchange and derivative income (3,747) (3,139)
Bank interest and charges 260 259
Interest on long-term debt 4,743 3,052
Depreciation and amortization 2,743 3,525
Reduction in foreign currency translation
account 1,790 -
-------------------------------------------------------------------------
12,249 11,609
Earnings before income taxes and minority
interest 9,753 11,339
Income taxes (1,071) 1,329
-------------------------------------------------------------------------
Earnings before minority interest 10,824 10,010
Minority interest 1,501 1,503
-------------------------------------------------------------------------
Net earnings $ 9,323 $ 8,507
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings
Net earnings increased by $0.8 million in the third quarter of 2007.
2007 2006 Change
-------------------------------------------------------------------------
Net earnings $ 9,323 $ 8,507 $ 816
-------------------------------------------------------------------------
Explanation of changes in
earnings:
Lower other income (2,411)
Higher interest on long-term
debt (1,691)
Higher gain on disposal and
other, net 2,692
Lower income tax expense 2,400
All other (174)
-------------------------------------------------------------------------
$ 816
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales to customers for the quarter by product category were as follows:
2007 2006 Change %
-------------------------------------------------------------------------
Scallops $ 29,098 $ 29,211 $ (113) -%
Lobster 19,400 19,185 215 1%
Clams 15,491 16,212 (721) (4%)
Coldwater shrimp 13,430 10,484 2,946 28%
Groundfish and other 2,968 2,066 902 44%
Crab 10,168 1,405 8,763 624%
Hedging program - 1,376 (1,376) (100%)
-------------------------------------------------------------------------
$ 90,555 $ 79,939 $ 10,616 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Scallop sales are consistent in the third quarter of 2007 compared to the
same period in the prior year, indicating improvement in market conditions,
which had been soft in the first half of 2007. While in previous quarters,
scallop sales had been lower than they had been in the prior year comparable
period; management expects sales for the balance of the year to be comparable
to 2006 for the scallop business, with lower margins due to a different
product mix and lower selling prices.
Lobster sales are relatively consistent with the prior year. We continue
to realize the benefits of our new raw lobster product and the application of
technology that provides a more effective method to sort and grade our live
lobster providing improvements in margins. In addition, in January 2007,
Clearwater purchased an additional offshore lobster licence and related
assets, which based on recent TAC levels, should provide a return on
investment in the 15-20% range and increase our lobster volumes by
approximately 3%.
Clam sales in the third quarter were consistent with the result in the
same period in the prior year as lower volumes were offset with higher selling
prices and a more profitable product mix. The loss of the Atlantic Pursuit and
continued vessel disruptions resulted in significantly lower harvest and sales
volumes in the third quarter of 2007. The impact of these disruptions will
continue to be felt in the fourth quarter as well. Volumes are expected to
continue to be lower until the clam fleet is expanded.
Coldwater shrimp sales are higher than the prior year primarily due to an
increase in volumes. In addition, the fleet experienced lower catching costs
which improved margins.
Crab sales were significantly impacted by a labour dispute in Glace Bay,
Nova Scotia that began in March 2006 and was resolved in the second quarter of
2007. The plant is now operating on a seasonal basis producing crab, which has
translated into greater sales volumes of crab compared to the prior year.
There is no hedging income in 2007. Due to the increasing complexity of
applying accounting standards, Clearwater stopped designating its foreign
exchange derivative contracts as hedges for accounting purposes as of April 2,
2006. This has had the impact of reducing sales and margins compared to the
prior year, as gains or losses on derivative contracts are included below the
gross profit line as opposed to being included in sales.
In summary, sales for the quarter were $10.6 million greater than in
2006, as higher sales from crab and shrimp were only slightly offset by the
change in hedging income.
Foreign exchange reduced sales and margins by approximately $5.1 million
in the third quarter of 2007 when compared to the rates received in the third
quarter of 2006.
2007 2006
Currency % sales Rate % sales Rate
-------------------------------------------------------------------------
US Dollars 50.5% 1.046 40.4% 1.160
Japanese Yen 8.6% 0.010 11.9% 0.010
Euros 17.5% 1.434 24.0% 1.446
UK pounds 6.2% 2.109 6.4% 2.100
Canadian dollar
and other 17.2% 17.3%
-------------------------------------------------------------------------
100.0% 100.0%
-------------------------------------------------------------------------
Clearwater maintains an active hedging program to provide a higher degree
of certainty to future Canadian dollar cash flows. For additional detail
please refer to the year-to-date analysis as well as note 3 in the financial
statements.
Administration and selling costs are lower in the quarter than they were
in the similar quarter of the previous year as the bonus expense is lower in
2007.
Loss (gain) on disposal of licences and other, net includes a gain on
sale of non-core fishing licenses of approximately $4.1 million in 2007 and
$0.8 million in 2006.
Other income is lower in 2007 mainly due to a lower export rebate. In the
third quarter of 2007, approximately $0.7 million of the export rebate
receivable was written down due to changes in the rules for the government
rebate program in Argentina. As well, quota rental and royalties were lower
when compared to the prior year as 2006 included the revenue related to the
licence rental for the quota related to the Glace Bay plant when it was not in
operation.
Other expense (income) detail for the quarter
In (000's) 2007 2006
-------------------------------------------------------------------------
Export rebate $ 573 $ (413)
Investment expense (income) 15 (214)
Quota rental and royalties - (767)
Other 760 331
-------------------------------------------------------------------------
$ 1,348 $ (1,063)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign exchange and derivative contract income was $3.7 million in 2007
versus $3.1 million in 2006. From a cash perspective, the business generated
$0.4 million of cash from foreign exchange management in 2007 versus
$2.1 million in 2006.
Foreign exchange and derivative contract
detail for the quarter in (000's) 2007 2006
-------------------------------------------------------------------------
Realized loss (gain)
Foreign exchange derivatives (923) (2,959)
Other realized 490 895
-------------------------------------------------------------------------
(433) (2,064)
-------------------------------------------------------------------------
Unrealized (gain)/loss
Foreign exchange on balance sheet (4,088) 3,274
Mark-to-market on foreign exchange derivative
contracts (164) 396
Mark-to-market on interest and currency swap
contracts 938 (4,745)
-------------------------------------------------------------------------
(3,314) (1,075)
-------------------------------------------------------------------------
Total exchange gain $ (3,747) $ (3,139)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bank interest and interest on long-term debt increased as in 2006
$765,000 million of interest was capitalized. This increase was partially
offset by a change in the method of accounting for an inflation indexed bond
was partially offset by the new convertible debentures issued in the first
quarter of 2007. Prior to 2007, interest expense included an estimate of the
assumed inflation rate on the Icelandic bond. The estimated change in the
liability associated with inflation indexing is included in foreign exchange
and derivative contract expense for 2007.
Depreciation and amortization is lower compared to the third quarter of
2006 primarily due to a lower depreciable asset base in 2007.
The reduction in foreign currency translation account is a non-cash
adjustment related to a reduction of Clearwater's net investment in its
subsidiary in Argentina.
Income taxes have decreased compared to the prior year partially due to
lower net earnings in taxable entities along with a higher amount of future
tax recovery related to the clam business.
OUTLOOK
The long-term outlook for Clearwater is strong, based on the Clearwater's
numerous competitive advantages, including our ownership of significant quotas
in key species, our innovations in harvesting and processing technologies, and
our vertical integration, which allows Clearwater to manage marketing, sales
and distribution in-house. While the Clearwater's results for the third
quarter and year-to-date reflect the impacts of external factors like currency
fluctuations and market conditions, they also illustrate how Clearwater
employs sound business strategies to keep our focus on long-term unitholder
value. In a quarter that presented the Company with a number of challenges, we
were nevertheless able to increase our sales and improve profitability. The
discipline and focus on long-term results that enabled us to accomplish this
are the same characteristics that will permit Clearwater to ride out the
temporary challenges and return to our traditional levels of performance.
The factors that impacted earnings so far this year - scallop market
conditions, foreign exchange and clam vessel disruptions - reduced
distributable cash generated year-to-date by $34.6 million as compared to
2006. However, the quarterly results continue to strengthen, and we expect
this improvement to continue into the fourth quarter. Management believes that
with continued strengthening of market conditions for the scallop business,
the absence of further vessel disruptions in the fourth quarter and an
increase in realized foreign exchange income we will continue to generate
positive cash flows.
The Fund also announced today that the Trustees have initiated a process
for identifying and considering strategic alternatives available to maximize
unitholder value. In addition, in light of the strategic review, the Trustees
have elected to continue distributions for the month of November.
Tom Traves, Chairman of the Trustees, speaking on behalf of the Fund,
said "While the Trustees remain confident in the business and its prospects in
the long term, the Trustees believe that it is appropriate to review
alternatives to maximize value for our unitholders in light of Clearwater's
weak financial performance over the last nine months, the ongoing challenges
facing the Fund in maintaining distributions and the Canadian government's
legislation to tax income trusts. Clearwater continues to be onside on all of
its banking covenants and this decision was not made at the request of any of
its lenders. The Trustees intend to diligently consider a range of
alternatives and will be retaining appropriate advisors to assist in this
process. There can be no assurance that the review process will result in a
decision regarding any transaction or that it will be completed in any
specific time frame."
Clearwater Fine Foods Inc. ("CFFI") has advised The Fund that it is
supportive of the strategic review process being undertaken. Stan Spavold,
Executive Vice President of CFFI, stated "Clearwater has and will continue to
be a long term strategic investment for CFFI and we continue to believe in the
long term prospects of the business. We look forward to working with The Fund
and its financial advisors in reviewing options which will benefit all
unitholders." CFFI holds units of the Fund and CSLP, representing a 47%
interest in the Clearwater business.
With the loss of the clam vessel under construction, the improvements
that were anticipated to provide additional profit within the clam business
throughout 2008 will be delayed and realized in the later part of 2008.
Management continues to believe there is strong potential for growth in the
clam business, and is in the process of converting the replacement for the
vessel so as to bolster the clam fleet as quickly as possible.
At Clearwater, we recognize that the seafood industry is characterized by
an inherent variability - and we have become a leader in this business over
the course of decades by recognizing how to mitigate the impacts of short-term
challenges. In the months ahead, we will continue to work to mitigate the
impacts of external variables on our business - and will pursue our long-term
strategies to deliver unitholder value.
CRITICAL ACCOUNTING POLICIES
Clearwater's critical accounting policies are those that are important to
the portrayal of Clearwater's financial position and operations and require
management to make judgments based on underlying estimates and assumptions
about future events and their effects. Underlying estimates and assumptions
are based on historical experience and other factors that are believed by
management to be reasonable under the circumstances. These estimates and
assumptions are subject to change as new events occur, as more experience is
acquired, as additional information is obtained, and as the operating
environment changes. Refer to the annual report for a complete listing of
critical accounting policies and estimates used in the preparation of the
consolidated financial statements.
Impact of recently adopted accounting policies
Due to the increasing complexity of applying accounting standards, as
well as the requirement to adopt the Comprehensive Income accounting standard
in the future, Clearwater no longer designated contracts as hedges for
accounting purposes, effective April 2, 2006. As a result, it recorded the
fair value of these contracts as an asset ($1.9 million at April 1, 2006) with
the offsetting gain deferred and amortized at that time. From that point
forward, all contracts were marked-to-market each reporting period and any
gains or losses, both realized and unrealized, were included in foreign
exchange income.
During the course of the quarter, Clearwater reviewed all new accounting
standards issued by the CICA in order to determine the impact of the new
standards, if any.
Impact of accounting policies adopted this year-to-date:
Financial instruments and comprehensive income
Effective January 1, 2007, Clearwater adopted the new CICA Handbook
Standards relating to financial instruments. These new standards have
been adopted on a prospective basis with no restatement of prior period
financial statements.
(a) Financial Instruments
Section 3855, "Financial Instruments - Recognition and Measurement"
provides guidance on the recognition and measurement of financial
assets, financial liabilities and non-financial derivatives. This new
standard requires that all financial assets and liabilities be
classified as one of the following: held-for-trading, held-to-
maturity, loans and receivables, available-for-sale or other
financial liabilities. The initial and subsequent recognition depends
on their initial classification.
Held-for-trading assets are carried at fair value with transaction
costs expensed immediately and gains and losses recognized in net
earnings in the period in which they arise. Held-to-maturity
financial assets and loans and receivables are initially recognized
at their fair values and subsequently measured at amortized cost
using the effective interest rate method, with gains and losses
recognized in net earnings in the period in which they arise.
Available-for-sale assets are carried at fair value with gains and
losses recognized in comprehensive income. Other financial
liabilities are initially measured at cost or at amortized cost
depending on the nature of the instrument and are subsequently
measured at amortized cost using the effective interest rate
method, with gains and losses recognized in net earnings in the
period in which they arise.
The standard requires Clearwater to make certain elections, upon
initial adoption of the new rules, regarding the accounting model
to be used to account for each financial instrument. The following
is a summary of the accounting model Clearwater has elected to
apply to each of its significant categories of financial
instruments outstanding as of January 1, 2007:
Cash Held-for-trading
Accounts receivable Loans and receivables
Derivative financial instruments Held-for-trading
Accounts payable and accrued liabilities Other liabilities
Long-term debt Other liabilities
Due to joint venture partner Other liabilities
Commodity contracts Held-for-trading
As a result of the adoption of this section, Clearwater reflected
the following adjustments as of January 1, 2007:
- $71,000 was adjusted to the opening retained earnings for
January 1, 2007. This related to long-term debt.
- A presentational reclassification of amounts previously
recorded in "Cumulative foreign currency translation account"
to "Accumulated other comprehensive income".
Deferred financing costs related to debt are no longer presented as
other assets on the balance sheet but are now netted against the
debt. This change in accounting policy resulted in a decrease of
$2.8 million in the amount of long-term debt as of January 1, 2007.
(b) Comprehensive Income
Section 1530, "Comprehensive Income" requires separate disclosure of
comprehensive income and its components in the financial statements.
Other comprehensive income includes the exchange gains and losses
arising from the translation of the financial statements of self-
sustaining foreign operations. The effect of exchange rate variations
on the translation of Clearwater's net assets of self-sustaining
foreign operations has been recorded as "Other comprehensive income
(loss), net of tax".
Refit accruals
In September 2006, the Financial Accounting Standards Board in the United
States issued FASB AUG AIR-1, Accounting for Planned Major Maintenance
Activities. This standard, which is effective January 1, 2007, amends the
guidance for planned major maintenance activities; specifically, it precludes
the use of the previously acceptable "accrue in advance" method, the method
previously used by Clearwater.
In the absence of specific guidance in Canada on this topic, we believe
it appropriate to follow FASB AUG AIR-1 and therefore adopted this standard on
January 1, 2007. As a result of adopting this standard, we have reduced
opening refit accruals by $4.9 million, reduced future tax assets by $295,000,
increased future tax liability by $260,000 and reduced the opening deficit by
$4.3 million. This change in policy will result in more variability in
earnings as refit expenses were previously amortized over a period of years
and now will be expensed as incurred. This policy has been applied
retroactively. As a result, $3.0 million has been expensed year-to-date in
2007 ($3.0 million in 2006). In 2006, annual refit costs were approximately
$3.3 million. Management expects the annual refit costs for 2007 to be in line
with the prior year.
As a result of adopting this standard, comparative figures for 2006 have
been restated. We have made the following adjustments:
January 1, Sept 30,
2007 2006
13 weeks
ended
Balance Sheet
Reduction in accounts payable and accrued
liabilities $ 4,849 $ 4,576
Reduction in other long-term assets (295) (250)
Increase in future income taxes liability (260) (429)
Reduction in deficit $ 4,294 $ 3,897
Income statement
Decrease in cost of goods sold - 529
Increase in future tax expense - 128
Increase in net earnings - 401
Future Income Tax and other
The Fund recorded a future income tax expense of $34 million in the
second quarter of 2007, accounting for the largest change in the Fund's net
income (loss) quarter-over-quarter and on a year-to-date basis in 2007
relative to the prior year. The second quarter expense reflects the impact of
the trust tax legislation. With the June 2007 substantive enactment of Bill
C-52, a new 31.5 per cent tax will be applied to distributions from Canadian
public trusts starting in 2011. As a result, the Fund recorded a $34 million
future income tax expense and corresponding future income tax liability
related to the differences between the accounting and tax basis of the Fund's
and underlying partnership's assets. Prior to this legislation, the Fund did
not record future income taxes, as it was not subject to income tax. While net
income in the second quarter of 2007 was reduced significantly by this future
income tax adjustment, there was no impact on cash from operating activities.
On October 30, 2007, the Canadian Federal Government announced changes to the
tax rates that will reduce the proposed tax applied to distributions for
Canadian public income trusts from 31.5 per cent to 29.5% in 2011 and 28.5%
for 2012 and beyond.
Impact of standards to be adopted in the future
Inventory
The CICA has issued a new standard on inventories, which provides more
guidance on the determination of cost (it will now require an allocation of
overheads), allows reversal of impairment losses, and provides additional
disclosures. The implementation date is January 1, 2008. Management is in the
process of implementing changes to comply with the new standard on January 1,
2008.
SUMMARY OF QUARTERLY RESULTS
The following financial data provides historical data for the ten most
recently completed quarters. Please note that only the first, second and third
quarters of 2006 have been restated for the change in refit policy.
(In 000's except
per unit amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------
Fiscal 2007
Sales $ 59,095 $ 75,311 $ 90,555
Net earnings 3,668 12,120 9,323
Basic earnings
per unit 0.07 0.23 0.18
Fiscal 2006
Sales $ 70,349 $ 81,312 $ 79,939 $ 84,136
Net earnings
(loss) 1,634 10,407 8,507 (19,130)
Basic earnings
per unit 0.03 0.22 0.16 (0.39)
Fiscal 2005
Sales $ 67,359 $ 69,712 $ 93,548 $ 84,220
Net earnings 1,645 1,371 12,136 4,721
Basic earnings
per unit 0.03 0.03 0.23 0.09
Clearwater's business is seasonal in nature, with sales typically higher
in the second half of the calendar year than the first half of the year, a
trend illustrated in the results above.
Net earnings also reflect some growth in 2005 and 2006, but have been
impacted by changes in foreign exchange rates. The impact of the foreign
exchange rates is clearly seen in the volatility of earnings in the quarterly
results, and in particular in the fourth quarter of 2006, which included large
non-cash losses related to foreign exchange derivatives.
For a more detailed analysis of each quarter's results, please refer to
our quarterly reports and our annual reports.
DEFINITIONS AND RECONCILIATIONS
Distributable Cash
Distributable cash does not have any standardized meaning prescribed by
Canadian Generally Accepted Accounting Principles (GAAP) and therefore is
unlikely to be comparable to similar measures presented by other companies.
Management believes that distributable cash is a useful supplemental measure
as it provides an indication of cash available for distribution to readers
seeking to assess the sustainability of distributions by comparing
distributions paid to the amount of distributable cash. In addition, as
distributable cash is a measure frequently analyzed for income trusts we have
calculated the amount in order to assist readers in this review. Distributable
cash should not be construed as an alternative to net earnings determined in
accordance with GAAP as an indicator of performance, as a measure of liquidity
or as a measure of cash flows and management does not use this measure as a
performance measure of earnings. Management uses the distributable cash as a
measure of cash generated by Clearwater available for distribution to
unitholders without eroding Clearwater's production capacity.
We calculate distributable cash by starting with the actual cash from
operating activities. From that we add or deduct as appropriate actual changes
in working capital and gains/losses on disposals of property, plant, equipment
and licences. Finally, we deduct the actual amount of our minority partners
share in EBITDA, interest and taxes and the amount spent on capital
expenditures that management has designated as being for maintenance rather
than growth.
This reconciliation has been prepared using reasonable and supportable
assumptions, all of which reflect Clearwater's planned courses of action given
management's judgement about the most probable set of economic conditions. Any
adjustments based on forward-looking information may vary from actual results,
perhaps materially.
Distributable cash generated was $0.5 million year-to-date in 2007
compared to $35.1 million generated in the first nine months of 2006. In
determining the payment of distributions, Clearwater considers the financial
results, on-going capital expenditure requirements, leverage and expectations
regarding future earnings. Future earnings can be impacted by a number of
factors including, but not limited to, total allowable catch levels, selling
prices, weather, exchange rates and fuel costs.
As discussed above, factors including market conditions, foreign exchange
and clam vessel disruptions impacted earnings year-to-date in 2007. These
impacts also translated into a reduction of distributable cash generated by
$34.6 million as compared to 2006.
13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
September 29 September 30, September 29, September 30,
($000's) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flow from
operating
activities $ 5,667 $ 17,814 $ (1,931) $ 39,757
Add (deduct):
Capital
expenditures per
cash flow (1,073) (1,878) (11,571) (17,741)
-------------------------------------------------------------------------
Standardized
Distributable
Cash 4,594 15,936 (13,502) 22,016
Change in non-cash
working capital A 2,193 (5,094) 8,186 1,773
Minority share
EBITDA, int.,
taxes B (674) (1,793) (2,844) (5,918)
Adjustment for ROI
capital C - 1,328 9,191 16,469
Gain (loss) on
disposal P,P,E /
licences D (320) (15) (545) 774
-------------------------------------------------------------------------
Distributable
cash $ 5,793 $ 10,362 $ 486 $ 35,114
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions E $ 7,875 $ 7,918 $ 23,692 $ 7,918
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A. Change in non-cash working capital is excluded as changes in working
capital are, for the most part, due to seasonality and tend to
reverse over the year and are financed using Clearwater's debt
facilities. Changes in this item depend on variables including, but
not limited to, supply and demand, collectibility of accounts and
timing of payments. Due to the seasonal nature of the seafood
industry, inventories tend to build up over the summer months due to
more favourable fishing conditions, as well as during seasonal buys
for product such as lobster.
B. Minority share in EBITDA, interest and taxes represents cash flows
attributable to the minority interest in certain non-wholly owned
subsidiaries. It is the calculated minority partners' interest in
the earnings before interest, taxes, depreciation and amortization
of the subsidiaries less their proportionate share of the interest
and taxes. The adjustment is based on the actual results of minority
interest entities and can fluctuate based on the results from the
particular businesses.
C. Proportionate maintenance capital represents capital expenditures
that are related to sustaining existing assets rather than expansion
or productivity improvement. The adjustment includes all capital
expenditures with the exception of those projects designated as ROI
projects based on achieving at least a 20% return on investment -
such projects are disclosed in the capital expenditure section of
the MD&A. The amount can vary and may relate to actual and expected
spending and future benefit when determining if the project is a
maintenance project or ROI project. For additional information
please refer to the 2006 annual report.
D. Gains (losses) on property, plant and equipment are added back
(deducted) as during the course of operating the business Clearwater
will typically realize gains and losses from the turnover of assets,
which occurs frequently due to Clearwater's focus on innovation.
This includes gains and losses in the investing section of the
Statement of Cash Flows along with any other minor adjustments not
significant to disclose separately. The amount can vary and may
relate to actual spending.
E. There were no distributions for the first and second quarter of
2006.
Clearwater's business is seasonal in nature, with the result that lower
amounts of distributable cash are generated in the first half of the
year as compared to the latter half.
Gross Profit
Gross profit consists of sales less harvesting, production, distribution,
and manufacturing costs.
Earnings before interest, tax, depreciation and amortization (EBITDA)
Non-cash foreign exchange losses and gains have been backed out of the
calculation of EBITDA due to the variability in non-cash gains and losses.
Earnings before interest, tax, depreciation and amortization (EBITDA) is
not a recognized measure under Canadian GAAP, and therefore is unlikely to be
comparable to similar measures presented by other companies. Management
believes that in addition to net income and cash provided by operating
activities, EBITDA is a useful supplemental measure from which to determine
the Fund's ability to generate cash available for debt service, working
capital, capital expenditures, income taxes and distributions. In addition, as
EBITDA is a measure frequently analyzed for public companies, we have
calculated the amount in order to assist readers in this review. EBITDA should
not be construed as an alternative to net earnings determined in accordance
with GAAP as an indicator of performance, as a measure of liquidity, or as a
measure of cash flows and management does not use this measure as a
performance measure of earnings.
Reconciliation of four quarters ended September 29, 2007 and four
quarters ended December 31, 2006 EBITDA
Four Four
quarters quarters
ended ended
September 29, December 31,
($000's) 2007 2006
-------------------------------------------------------------------------
Net earnings $ 5,981 $ 1,463
Add:
Minority interest 4,449 5,633
Income taxes (900) 3,853
Reduction in foreign currency translation 2,462 2,369
Foreign exchange and derivative loss (income)
unrealized (6,137) 23,030
Depreciation and amortization 12,196 14,766
Interest on long-term debt 14,427 13,110
Bank interest and charges 944 953
-------------------------------------------------------------------------
EBITDA $ 33,422 $ 65,177
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Leverage
Leverage is not a recognized measure under Canadian GAAP, and therefore
is unlikely to be comparable to similar measures presented by other companies.
Management believes leverage to be a useful term when discussing liquidity. In
addition, as leverage is a measure frequently analyzed for public companies we
have calculated the amount in order to assist readers in this review. Leverage
should not be construed as an indicator of performance, as a measure of
liquidity or as a measure of cash flows, and management does not use this
measure as a performance measure of earnings.
Leverage is calculated by dividing the current and preceding three
quarters' EBITDA by the total debt on the balance sheet adjusted for cash
reserves, cash and currency hedges for the Icelandic debt for the period.
September 29, December 31,
($000's) 2007 2006
-------------------------------------------------------------------------
EBITDA (as per
previous table) $ 33,422 $ 65,177
Total debt (per below) 207,004 187,619
Leverage 6.2 2.9
Debt per balance
sheet 229,679 190,260
Adjust ISK
denominated bond to
swapped value:
Less Icelandic
bond (50,127) (46,795)
Estimated payment
for Icelandic
bond
(excluding CPI) 44,307 (5,820) 47,004 209
------------------------ ------------------------
Reduce cash by
unreserved cash
Less cash balance (16,855) (10,850)
Add cash reserve
for new vessels - (16,855) 8,000 (2,850)
----------------------------------------------------
Net debt for
leverage 207,004 187,619
-------------- --------------
Estimated payment for Icelandic bond when considering currency swaps
September 29, 2007 Current
Currency in (000's) Amount rate Canadian $
-------------------------------------------------------------------------
Canadian $ 25,000 1.000 $ 25,000
US $ 9,708 0.9963 9,672
Euro 2,500 1.4166 3,541
Sterling 3,000 2.0313 6,094
-------------------------------------------------------------------------
$ 44,307
-------------------------------------------------------------------------
December 31, 2006 Current
Currency in (000's) Amount rate Canadian $
-------------------------------------------------------------------------
Canadian $ 25,000 1.000 $ 25,000
US $ 9,708 1.1653 11,313
Euro 2,500 1.5377 3,844
Sterling 3,000 2.2824 6,847
-------------------------------------------------------------------------
$ 47,004
-------------------------------------------------------------------------
CLEARWATER SEAFOODS INCOME FUND
Consolidated Balance Sheets
(In thousands of dollars)
(unaudited)
September 29, December 31,
2007 2006
(as revised
note 1(c))
-------------------------------------------------------------------------
Assets
Current Assets
Distributions and interest receivable
from Clearwater Seafoods Limited
Partnership $ 2,277 $ 1,486
Investment in Clearwater Seafoods
Limited Partnership (note 2) 364,873 321,645
-------------------------------------------------------------------------
$ 367,150 $ 323,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Distributions and interest payable $ 2,251 $ 1,470
Convertible debentures (note 3) 91,186 46,430
Future income taxes (note 4) 34,000 -
Unitholders' Equity
Trust units (note 5) 296,180 299,282
Contributed surplus 2,412 -
Deficit (58,879) (24,051)
-------------------------------------------------------------------------
239,713 275,231
$ 367,150 $ 323,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Subsequent event (note 8)
CLEARWATER SEAFOODS INCOME FUND
Consolidated Statements of Earnings and Deficit
13 and 39 week periods ended September 29, 2007 and September 30, 2006
(In thousands 13 weeks ended 39 weeks ended
of dollars) 2007 2006 2007 2006
(unaudited) (as revised note 1(c)) (as revised note 1(c))
-------------------------------------------------------------------------
Equity in net
earnings of
Clearwater
Seafoods
Limited
Partnership $ 5,932 $ 4,675 $ 14,618 $ 12,145
Loss on investment (2,047) - (2,047) -
-------------------------------------------------------------------------
Interest income 1,782 872 4,371 2,627
Interest expense (1,930) (900) (4,627) (2,711)
Future income
taxes (note 4) - - (34,000) -
-------------------------------------------------------------------------
Net earnings (loss) 3,737 4,647 (21,685) 12,061
Deficit at
beginning of
period as
previously stated (58,301) (11,682) (26,453) (19,343)
Transitional
adjustment for
the application
of new financial
instrument
sections by
equity investee
(note 1 (a)) - - (40) -
Application of
new refit policy
by equity
investee
(note 1 (c)) - 1,948 2,402 2,195
-------------------------------------------------------------------------
Deficit at
beginning of
period restated (58,301) (9,734) (24,091) (17,148)
Distributions
paid during the
period (4,366) (4,411) (13,171) (4,411)
Adjustment for
cancellation of
convertible
debentures 51 17 68 17
-------------------------------------------------------------------------
Deficit at end
of period $ (58,879) $ (9,481) $ (58,879) $ (9,481)
-------------------------------------------------------------------------
Basic and diluted
net earnings (loss)
per trust unit $ 0.13 $ 0.16 $ (0.75) $ 0.39
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CLEARWATER SEAFOODS INCOME FUND
Consolidated Statement of Comprehensive Income (Loss)
13 and 39 week periods ended September 29, 2007 and September 30, 2006
(In thousands
of dollars) 13 weeks ended 39 weeks ended
(unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Net earnings
(loss) $ 3,737 $ 4,647 $ (21,685) $ 12,061
-------------------------------------------------------------------------
Other comprehensive
income, net of tax
unrealized gains
and losses on
translating
financial
statements of
self-sustaining
foreign operations 147 (105) 532 4
-------------------------------------------------------------------------
Comprehensive
income (loss) $ 3,884 $ 4,542 $ (21,153) $ 12,065
-------------------------------------------------------------------------
CLEARWATER SEAFOODS INCOME FUND
Consolidated Statements of Cash Flows
13 and 39 week periods ended September 29, 2007 and September 30, 2006
(In thousands
of dollars) 13 weeks ended 39 weeks ended
(unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flows (used in)
from operating
activities
Net earnings $ 3,737 $ 4,647 $ (21,685) $ 12,061
Items not
involving cash
Equity in net
earnings of
Clearwater
Seafoods
Limited
Partnership,
net of cash
distributions
received of
$4,366,
39 weeks
$13,171
(2006 -
$ 4,411,
39 weeks -
$ 4,411) (1,567) (286) (1,447) (7,756)
Future income
taxes - - 34,000 -
Loss on
investment 2,047 - 2,047 -
Other 149 28 256 84
-------------------------------------------------------------------------
4,366 4,389 13,171 4,389
-------------------------------------------------------------------------
Cash flows
(used in) from
financing
activities
Repurchase of
convertible
debentures (1,000) (991) (2,000) (991)
Repurchase of
Class A units (1,147) - (2,235) -
Issuance of
convertible
debentures - - 48,042 -
Distributions
to unitholders (4,366) (4,411) (13,171) (4,411)
-------------------------------------------------------------------------
(6,513) (5,402) 30,636 (5,402)
-------------------------------------------------------------------------
Cash flows
(used in) from
investing
activities
Redemption of
Class A units 1,147 - 2,235 -
Redemption of
Class C units 1,000 1,013 2,000 1,013
Purchase of
Clearwater
Class D units - - (48,042) -
-------------------------------------------------------------------------
2,147 1,013 (43,807) 1,013
-------------------------------------------------------------------------
Increase
(decrease)
in cash - - - -
Cash -
beginning
of period - - - -
Cash -
end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CLEARWATER SEAFOODS INCOME FUND
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of dollars)
(unaudited)
1. BASIS OF PRESENTATION
Clearwater Seafoods Income Fund (the "Fund") is a limited purpose,
open-ended trust established under the laws of the Province of Ontario. The
Fund was created to acquire and indirectly hold the securities of Clearwater
Seafoods Limited Partnership ("Clearwater").
The unaudited interim period consolidated financial statements have been
prepared by the Fund in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). The preparation of financial data is based on accounting
policies and practices consistent with those used in the preparation of the
audited annual consolidated financial statements except as described in 1 (a)
and 1 (b). These unaudited interim period consolidated financial statements do
not contain all the disclosures required in annual audited financial
statements by Canadian GAAP and accordingly should be read together with the
audited annual consolidated financial statements and the accompanying notes
included in the Fund's 2006 Annual Report.
These consolidated financial statements consolidate the accounts of the
Fund and its subsidiary, Clearwater Seafoods Holdings Trust ("CSHT"). CSHT
owns 55.32% (December 31, 2006 - 55.71%) of the units of Clearwater. However,
as the Fund does not have the right to nominate the majority of the board of
directors, it does not consolidate the results of Clearwater's operations but
rather accounts for the investment using the equity method. Under this method,
the cost of the investment is increased by the Fund's proportionate share of
Clearwater's earnings and reduced by any distributions paid to the Fund by
Clearwater and amortization of the purchase price discrepancy. Due to the
limited amount of information that this provides on the underlying operations
of Clearwater, the financial statements of Clearwater are also enclosed.
(a) Effective January 1, 2007, the Fund adopted the new CICA Handbook
Standards relating to financial instruments. These new standards have
been adopted on a prospective basis with no restatement of prior
period financial statements.
Section 3855, "Financial Instruments - Recognition and Measurement"
provides guidance on the recognition and measurement of financial
assets, financial liabilities and non-financial derivatives. This new
standard requires that all financial assets and liabilities be
classified as one of the following: held-for-trading, held-to-
maturity, loans and receivables, available-for-sale or other
financial liabilities. The initial and subsequent recognition depends
on their initial classification.
Held-for-trading assets are carried at fair value with transaction
costs expensed immediately and gains and losses recognized in net
earnings in the period in which they arise. Held-to-maturity
financial assets and loans and receivables are initially recognized
at their fair values and subsequently measured at amortized cost
using the effective interest rate method, with gains and losses
recognized in net earnings in the period in which they arise.
Available-for-sale assets are carried at fair value with gains and
losses recognized in comprehensive income. Other financial
liabilities are initially measured at cost or at amortized cost,
depending upon the nature of the instrument, and are subsequently
measured at amortized cost using the effective interest rate method,
with gains and losses recognized in net earnings in the period in
which they arise.
The standard requires the Fund to make certain elections, upon
initial adoption of the new rules, regarding the accounting model to
be used to account for each financial instrument. The following is a
summary of the accounting model the Fund has elected to apply to each
of its significant categories of financial instruments outstanding as
of January 1, 2007:
Distribution and interest receivable Loans and receivables
Distribution and interest payable Other liabilities
Convertible debentures Other liabilities
As a result of the adoption of this section, the following
adjustments have been made as of January 1, 2007 (reflecting their
equity interest in adjustments made by Clearwater):
- Investment in Clearwater Seafoods Limited Partnership was increased
by $40,000 and
- Deficit was reduced by $40,000. This related to the amortization of
the deferred financing charges associated with the convertible
debentures.
(b) Comprehensive Income
Section 1530, "Comprehensive Income" requires separate disclosure of
comprehensive income and its components in the financial statements.
Other comprehensive income includes the exchange gains and losses
arising from the translation of the financial statements of self-
sustaining foreign operations. The effect of exchange rate variations
on the translation of Clearwater's net assets of self-sustaining
foreign operations has been recorded as "Other comprehensive income
(loss), net of tax".
(c) In September 2006, the Financial Accounting Standards Board in the
United States issued FASB AUG AIR-1, Accounting for Planned Major
Maintenance Activities. This standard, which is effective January 1,
2007, amends the guidance for planned major maintenance activities;
specifically it precludes the use of the previously acceptable
"accrue in advance" method, the method used by Clearwater in the
past. In the absence of specific guidance in Canada on this topic, we
believe it appropriate to follow FASB AUG AIR-1 and therefore have
adopted this standard on January 1, 2007. As a result of adopting
this standard, comparative figures for 2006 have been restated. The
Fund made the following adjustment as a result:
13 weeks 39 weeks
ended ended
January 1, September 30, September 30,
2007 2006 2006
Increase in investment in
Clearwater
Seafoods Limited Partnership $ 2,402 $ 2,155 $ 2,155
Reduction in opening deficit 2,402 1,948 2,195
Increase (decrease) in equity
in net earnings of Clearwater
Seafoods Limited Partnership - 223 (24)
-------------------------------------------------------------------------
2. INVESTMENT IN CLEARWATER SEAFOODS LIMITED PARTNERSHIP
The investment in Clearwater Seafoods Limited Partnership consists of the
following:
September 29, December 31,
2007 2006
-------------------------------------------------------------------------
Investment in Class A Partnership units,
at cost $ 293,808 $ 298,454
Investment in Class C Partnership units 45,000 47,000
Investment in Class D Partnership units 48,041 -
Add: Cumulative equity in net earnings 95,246 80,242
Less: Cumulative distributions received (117,222) (104,051)
-------------------------------------------------------------------------
$ 364,873 $ 321,645
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The majority of Clearwater's underlying assets consists of licences that
enable Clearwater to harvest various species of seafood. These licences have
indefinite lives, are not amortized and are tested for impairment annually, or
more frequently if events or changes in circumstances indicate that the asset
might be impaired. The Fund analyzes the carrying value of its investment in
Clearwater as if it had consolidated Clearwater with the Fund. This assessment
of the investment in Clearwater may not reflect the current market value of
the business as it includes various long-term assumptions related to
Clearwater's operations.
Included in equity in net earnings for the quarter is a recovery of
$795,000, 39 weeks - $705,000 (quarter ended September 30, 2006 an expense of
- $40,000, 39 weeks - $721,000) for amortization and other adjustments
relating to purchase price discrepancies recognized by the Fund in accounting
for its investment in Clearwater using the equity method.
During 2007 Clearwater repurchased 457,900 Class A Units from the Fund
for $2,235,000 (2006 - nil). Clearwater also repurchased $2 million Class C
units from the Fund for $2,000,00 (2006 - $3,000,000). The net loss on the
sale of the units by the Fund to Clearwater was $2,047,000. There was no gain
or loss on the disposal of the Class C units.
In March 2007, 7,372,881 Class D units were issued concurrently by
Clearwater with the issue by the Fund of $43.5 million of Convertible
Debentures and an additional $4.5 million in April and are held by the Fund
through CSHT. The Class D units are redeemable and retractable at a price of
$5.90 per unit.
Details of the allocation of the excess of the Fund's cost over the
historical cost of the assets recorded by Clearwater are as follows:
September 29, December 31,
2007 2006
-------------------------------------------------------------------------
Intangible assets
Licences - indefinite lives 186,314 189,260
Customer relationships and other 466 518
Goodwill 14,018 14,240
Long-term liabilities 409 504
Cumulative foreign currency translation
account (5,330) (6,254)
------------- --------------
$ 195,877 $ 198,268
------------- --------------
------------- --------------
3. CONVERTIBLE DEBENTURES
On June 15, 2004, the Fund completed an offering for $50 million of 7%
convertible unsecured subordinated debentures, which are due December 31,
2010. The convertible debentures are convertible at any time up to maturity at
the option of the holder into trust units of the Fund at a conversion price of
$12.25 per trust unit. The debentures pay interest semi-annually in arrears on
June 30 and December 31, commencing December 31, 2004. The debentures are not
redeemable before December 31, 2007. On and after December 31, 2007, but
before December 31, 2008, the debentures may be redeemed at the option of the
Fund provided that the market price of the trust units is not less than 125%
of the conversion price. On and after December 31, 2008, the debentures may be
redeemed at the option of the Fund at a price equal to their principal amount
plus accrued interest. Subject to regulatory approval, the Fund may satisfy
its obligation to repay the principal amount of the debentures on redemption
or at maturity, in whole or in part, by delivering that number of trust units
equal to the amount due divided by 95% of the market price of the trust units
at that time, plus accrued interest in cash. The convertible debentures are
classified in accordance with their component parts: the value ascribed to the
holder's option to convert to units has been classified as equity and the
remaining portion of the convertible debenture has been classified as debt.
The Fund filed a normal course issuer bid by which it can acquire up to
$5 million principal amount of convertible debentures in the 12-month period
commencing August 2006. Any repurchase at the Fund level would be accompanied
by a similar repurchase of Class C Partnership units by Clearwater. During the
year ended December 31, 2006, $3 million of the Class C units were repurchased
by Clearwater and cancelled with the proceeds used to repurchase and cancel an
equivalent amount of convertible debentures. During the first quarter of 2007,
an additional $1 million of the Class C units were repurchased by Clearwater
and cancelled with the proceeds used to repurchase and cancel an equivalent
amount of convertible debentures. During the third quarter of 2007, an
additional $1 million of the Class C units were repurchased by Clearwater and
cancelled with the proceeds used to repurchase and cancel an equivalent amount
of convertible debentures. The principal outstanding as at September 29, 2007
was $45 million.
On March 9, 2007, the Fund completed an offering for $43.5 million of
7.25% convertible unsecured subordinated debentures, which are due March 31,
2014. On April 11, 2007 the Fund's syndicate exercised the over-allotment
option in the amount of $4,542,000 principal amount of convertible unsecured
subordinated debentures. The convertible debentures are convertible at any
time up to maturity at the option of the holder into trust units of the Fund
at a conversion price of $5.90 per trust unit. The debentures pay interest
semi-annually in arrears on March 31 and September 30, commencing
September 30, 2007. The debentures are not redeemable before March 31, 2010.
On and after March 31, 2010, but before March 31, 2012, the debentures may be
redeemed at the option of the Fund provided that the market price of the trust
units is not less than 125% of the conversion price. On and after March 31,
2012, the debentures may be redeemed at the option of the Fund at a price
equal to their principal amount plus accrued interest. Subject to regulatory
approval, the Fund may satisfy its obligation to repay the principal amount of
the debentures on redemption or at maturity, in whole or in part, by
delivering that number of trust units equal to the amount due divided by 95%
of the market price of the trust units at that time, plus accrued interest in
cash. The convertible debentures are classified in accordance with their
component parts: the value ascribed to the holders' option to convert to units
has been classified as equity and the remaining portion of the convertible
debenture has been classified as debt.
On June 2, 2007, $1,000 of the convertible debentures was converted into
169 Class A units at a price of $5.90 per unit resulting in a principal
outstanding as at September 29, 2007 of $48,041,000.
The estimated fair value of the Fund's convertible debentures at
September 29, 2007 was $85,346,810 based on the quoted market value of the
debentures Clr.db and Clr.db.a on the Toronto Stock Exchange.
4. FUTURE INCOME TAXES
In June 2007, Bill C-52 Budget Implementation Act, 2007 was substantively
enacted by the Canadian federal government, which contains legislation to tax
publicly traded trusts in Canada. As a result, a new 31.5 per cent tax will be
applied to distributions from Canadian public income trusts. The new tax is
not expected to apply to Clearwater Seafoods Income Fund until 2011 as a
transition period applies to publicly traded trusts that existed prior to
November 1, 2006. As a result of this substantive enactment of trust
legislation, the Fund recorded a $34 million future income tax expense and
future income tax liability in the second quarter of 2007. The future income
tax adjustment represents the taxable temporary differences of Clearwater
Seafoods Income Fund tax effected at 31.5 per cent, which is the rate that
will be applicable in 2011 under the current legislation and the Fund's
current structure. The Fund continues to review its current structure in light
of this new tax on trusts, and intends to evaluate alternatives so that the
best structure is in place for unitholders. On October 30, 2007, the Canadian
Federal Government announced changes to the tax rates that will reduce the
proposed tax applied to distributions from Canadian public income trusts from
31.5 per cent to 29.5% in 2011 and 28.5% for 2012 and beyond.
5. TRUST UNITS AND SPECIAL TRUST UNITS
The Declaration of Trust provides that an unlimited number of units and
an unlimited number of Special Trust Units may be issued. Each unit is
transferable and represents an equal undivided beneficial interest in any
distributions of the Fund and in the net assets of the Fund in the event of
termination or winding up of the Fund. All units have equal rights and
privileges. Each unit entitles the holder thereof to participate equally in
the distributions and to one vote at all meetings of unitholders for each
whole unit held. The issued units are not subject to future calls or
assessments. Units are redeemable at any time at the option of the holder at
amounts related to market price at the time, subject to a maximum of $50,000
in aggregate cash redemptions by the Fund in any particular month. This
limitation may be waived at the discretion of the Trustees of the Fund.
Redemption in excess of this amount, assuming no waiving of the limitation,
shall be paid by way of a distribution in specie of assets of the Fund, namely
notes of Clearwater Seafoods Holdings Trust.
The Special Trust Units have been issued solely to provide voting rights
to Clearwater Class B units ("CSLP Exchangeable Units"). Special Trust Units
were issued in conjunction with the CSLP Exchangeable Units and cannot be
transferred separately from them. Special Trust Units entitle the holders
thereof to the number of votes at any meeting of unitholders of the Fund equal
to the number of units which may be obtained upon exchange of the CSLP
Exchangeable Units to which they relate and do not otherwise entitle the
holder to any rights with respect to the Fund's property or income.
Special
Trust Total $
Units Units (in 000's)
-------------------------------------------------------------------------
Balance December 31, 2006 29,407,626 23,381,217 $ 298,454
Equity component of
Convertible Debentures 828
-------------------------------------------------------------------------
Balance December 31, 2006 299,282
Cancellation of Class A units (457,900) - (4,647)
Issuance of Class A units 169 1
-------------------------------------------------------------------------
28,949,895 23,381,217 294,636
Equity component of Convertible
Debentures 7.25% 1,579
Equity component of Convertible
Debentures repurchased 7% (35)
-------------------------------------------------------------------------
Balance September 29, 2007 $ 296,180
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 29, 2007 there were in total 52,331,112 units outstanding
(52,788,843 - December 31 2006).
On January 24, 2007, the Fund received approval for a normal course
issuer bid which enables it to purchase, from time to time, up to 2.5 million
outstanding trust units (the "Units"), which amount represents less than 10%
of the public float. Any such purchases of Units would be made during the
12-month period commencing on January 24, 2007 and in accordance with the
requirements of the TSX. Any Units purchased by the Fund will be cancelled and
will be accompanied by a similar repurchase of units by Clearwater.
During the first nine months of 2007, the Fund purchased and cancelled
457,900 units at a cost of $2,235,000 which reduced the equity component of
the units by $4,647,000 and created contributed surplus of $2,412,000.
6. GUARANTEES
The Fund guarantees Clearwater's term credit facility (see note 5(g) to
Clearwater's financial statements). The guarantee is limited to the value of
the convertible debentures and the value of the units held in Clearwater. As
of September 29, 2007 and December 31, 2006 there were no balances outstanding
on the term credit facility.
7. SEASONALITY
Due to the seasonal nature of Clearwater's business, earnings are
typically higher in the second half of the calendar year than the first half
of the year.
8. SUBSEQUENT EVENT
The Fund announced on November 13, 2007 that the Trustees have initiated
a process for identifying and considering strategic alternatives available to
maximize unit holder value. The strategic review is in response to
Clearwater's weak financial performance over the last 9 months, the ongoing
challenges facing the Fund in maintaining distributions and the Canadian
government's legislation to tax income trusts. The Trustees anticipate
retaining a financial advisor in due course to assist it in this process.
While a range of alternatives may be considered, there can be no assurance
that the review process will result in a decision regarding any transaction or
that it will be completed in any specific time frame. In addition, this
process may result in a transaction that results in a lower value than the
current carrying value of The Fund's investment in Clearwater.
CLEARWATER SEAFOODS LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31,
(In thousands 2006
of dollars) September 29, (as revised -
(unaudited) 2007 note 2(c))
-------------------------------------------------------------------------
Assets
Current Assets
Cash $ 16,855 $ 10,850
Accounts receivable 49,646 59,388
Inventories 69,733 53,669
Derivative financial instruments (notes 2(a)
and 3(b)) 10,424 -
Vessel settlement (note 4(a)) 43,000 -
Prepaids and other 5,732 6,122
----------------------------
195,390 130,029
Other long-term assets 7,062 9,563
Property, plant and equipment (note 4(a)) 103,920 156,816
Licences 107,165 102,714
Goodwill 10,378 10,378
----------------------------
$ 423,915 $ 409,500
----------------------------
----------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 30,214 $ 32,995
Derivative financial instruments (notes 2(a)
and 3(b)) 10,970 27,002
Distributions payable 2,617 2,639
Income taxes payable 476 5,481
Current portion of long-term debt (note 5) 1,123 868
----------------------------
45,400 68,985
Long-term debt (note 5) 228,556 189,392
Future income taxes 6,044 8,569
Due to joint venture partner 2,085 2,280
Minority interest 2,313 2,258
Unitholders' Equity
Partnership units (note 6) 171,942 173,079
Deficit (21,379) (22,742)
Contributed surplus 446 -
Accumulated other comprehensive loss
(notes 2(b) and 8) (11,492) (12,321)
----------------------------
139,517 138,016
$ 423,915 $ 409,500
----------------------------
----------------------------
See accompanying notes to consolidated financial statements
Subsequent event (note 11)
CLEARWATER SEAFOODS LIMITED PARTNERSHIP
Consolidated Statements of Earnings and Deficit
13 and 39 week periods ended September 29, 2007 and September 30, 2006
(In thousands of dollars) 13 weeks ended 39 weeks ended
(unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Sales $ 90,555 $ 79,939 $ 224,961 $ 231,600
Cost of goods sold 68,553 56,991 175,106 164,194
-------------------------------------------------------------------------
Gross profit 22,002 22,948 49,855 67,406
Administration and
selling 8,616 9,708 28,622 27,329
(Gain) loss on
disposal of
licences and other (3,425) (733) (3,727) 2,198
Other expense
(income)(note 7) 1,348 (1,063) (746) (4,760)
Insurance claim
(note 4(b)) (79) - (3,997) -
Foreign exchange
and derivative
contracts
(note 3(c)) (3,747) (3,139) (20,805) (10,807)
Bank interest and
charges 260 259 687 696
Interest on
long-term debt 4,743 3,052 11,205 9,888
Depreciation and
amortization 2,743 3,525 8,628 11,198
Reduction in
foreign currency
translation
account(note 8) 1,790 - 1,790 1,697
-------------------------------------------------------------------------
12,249 11,609 21,657 37,439
Earnings before
the undernoted 9,753 11,339 28,198 29,967
Income taxes (1,071) 1,329 (458) 4,690
-------------------------------------------------------------------------
Earnings before
minority interest 10,824 10,010 28,656 25,277
Minority interest 1,501 1,503 3,545 4,729
-------------------------------------------------------------------------
Net earnings $ 9,323 $ 8,507 $ 25,111 $ 20,548
-------------------------------------------------------------------------
Deficit at
beginning of
period as
previously
reported (22,845) (248) (27,054) (12,734)
Transitional
adjustment for
the application
of new financial
instruments
section(note 2(b)) - - (71) -
Application of new
refit policy
(note 2(c)) - 3,496 4,292 3,941
-------------------------------------------------------------------------
(Deficit) retained
earnings at
beginning of
period restated (22,845) 3,248 (22,833) (8,793)
Distributions paid
(note 6) (7,875) (7,918) (23,692) (7,918)
Adjustment for
cancellation of
Class C Units 18 17 35 17
-------------------------------------------------------------------------
(Deficit) retained
earnings end of
period $ (21,379) $ 3,854 $ (21,379) $ 3,854
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
net earnings per
unit $ 0.18 $ 0.16 $ 0.48 $ 0.39
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CLEARWATER SEAFOODS LIMITED PARTNERSHIP
Consolidated Statement of Comprehensive Income
13 and 39 week periods ended September 29, 2007 and September 30, 2006
(In thousands of dollars)
13 weeks ended 39 weeks ended
(unaudited) 2007 2006 2007 2006
-------------------------------------------------------------------------
Comprehensive Income
Net earnings $ 9,323 $ 8,507 $ 25,111 $ 20,548
Other
comprehensive
income (loss),
net of tax
unrealized gains
and losses on
translating
financial
statements of
self-sustaining
foreign operation 267 (190) 961 7
-------------------------------------------------------------------------
Comprehensive
income $ 9,590 $ 8,317 $ 26,072 $ 20,555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other
comprehensive loss
Balance beginning
of period $ (13,015) $ (13,585) $ (12,321) $ (15,085)
Reduction in
cumulative
foreign currency
translation
account(note 8) 1,790 - 1,790 1,697
Unrealized gain
(loss) on
translation of
self sustaining
foreign operation
(note 2(b)) (267) 190 (961) (7)
-------------------------------------------------------------------------
Balance end of
period $ (11,492) $ (13,395) $ (11,492) $ (13,395)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CLEARWATER SEAFOODS LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
13 and 39 week periods ended September 29, 2007 and September 30, 2006
(In thousands of dollars)
13 weeks ended 39 weeks ended
2007 2006 2007 2006
(unaudited) (as revised - note 2(c)) (as revised - note 2(c))
-------------------------------------------------------------------------
Cash flows from
(used in)
operating
activities
Net earnings $ 9,323 $ 8,507 $ 25,111 $ 20,548
Items not
involving cash:
Depreciation and
amortization 2,743 3,525 8,628 11,198
Unrealized
foreign
exchange on
long-term debt (4,088) 3,274 (4,785) (7,382)
Unrealized
inflation and
interest on
long-term debt 769 1,198 2,361 3,571
Future income
taxes (recovery)
expense (1,990) 353 (2,711) (325)
Reduction in
foreign
currency
translation
account 1,790 - 1,790 1,697
Minority interest 1,501 1,503 3,545 4,729
Unrealized
foreign exchange
on currency
option contracts (164) 396 (21,135) 4,444
Unrealized loss
on currency and
interest swap
contracts 938 (4,745) (3,813) 2,373
Loss (gain) on
disposal and
other, net (2,962) (762) (2,736) 1,027
-------------------------------------------------------------------------
7,860 13,249 6,255 41,880
Change in non-cash
operating working
capital (2,193) 4,565 (8,186) (2,123)
-------------------------------------------------------------------------
5,667 17,814 (1,931) 39,757
Cash flows from
(used in)
financing
activities
Proceeds from
long-term debt 300 - 46,035 -
Reduction of
long-term debt (53) (320) (879) (1,487)
Other 3 191 (363) 287
Purchase of Class
C units (1,000) (991) (2,000) (991)
Purchase of Class
A units (1,147) - (2,235) -
Investment by
partner - 570 - 570
Distributions to
minority partners (502) (2,133) (3,490) (4,551)
Distributions to
unitholders (7,875) (7,918) (23,692) (7,918)
-------------------------------------------------------------------------
(10,274) (10,601) 13,376 (14,090)
Cash flows from
(used in)
investing
activities
Increase in other
long-term assets 129 (638) 243 266
Purchase of
property, plant,
equipment,
licences and
other (1,073) (1,878) (11,571) (17,741)
Proceeds on
disposal of
property, plant,
equipment,
licences and
other 5,165 898 5,888 1,835
-------------------------------------------------------------------------
4,221 (1,618) (5,440) (15,640)
Increase (decrease)
in cash (386) 5,595 6,005 10,027
Cash - beginning
of period 17,241 14,158 10,850 9,726
-------------------------------------------------------------------------
Cash - end of
period $ 16,855 $ 19,753 $ 16,855 $ 19,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary
cash flow
information
Interest paid $ 3,532 $ 2,327 $ 10,685 $ 9,627
Income taxes
paid $ 298 $ 879 $ 7,002 $ 1,650
See accompanying notes to consolidated financial statements
CLEARWATER SEAFOODS LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of dollars)
(unaudited)
1. BASIS OF PRESENTATION
Clearwater Seafoods Limited Partnership ("Clearwater") is a limited
partnership that acquired the seafood business of Clearwater Fine Foods
Incorporated ("CFFI") on July 30, 2002.
The unaudited interim period consolidated financial statements have been
prepared by Clearwater in accordance with Canadian Generally Accepted
Accounting Principles ("GAAP"). The preparation of financial data is based on
accounting policies and practices consistent with those used in the
preparation of the audited annual consolidated financial statements except as
disclosed in note 2 below. These unaudited interim period consolidated
financial statements do not contain all the disclosures required in annual
audited financial statements by Canadian GAAP, and accordingly should be read
together with the audited annual consolidated financial statements and the
accompanying notes included in Clearwater Seafoods Income Fund's (the "Fund")
2006 Annual Report.
As CFFI maintained the right to nominate the majority of the board of
directors both before and after the acquisition of its seafood business by
Clearwater the acquisition was accounted for using the book values of the
assets and liabilities as recorded by CFFI.
Due to the seasonal nature of the business, gross profit is typically
higher in the second half of the calendar year than the first half of the
year.
2. CHANGES IN ACCOUNTING POLICIES
(a) Financial Instruments
Effective January 1, 2007, Clearwater adopted the new CICA Handbook
Standards relating to financial instruments. These new standards have
been adopted on a prospective basis with no restatement of prior period
financial statements.
Section 3855, "Financial Instruments - Recognition and Measurement"
provides guidance on the recognition and measurement of financial assets,
financial liabilities and non-financial derivatives. This new standard
requires that all financial assets and liabilities be classified as one
of the following: held-for-trading, held-to-maturity, loans and
receivables, available-for-sale or other financial liabilities. The
initial and subsequent recognition depends on their initial
classification.
Held-for-trading assets are carried at fair value with transaction
costs expensed immediately and gains and losses recognized in net
earnings in the period in which they arise. Held-to-maturity financial
assets and loans and receivables are initially recognized at their fair
values and subsequently measured at amortized cost using the effective
interest rate method, with gains and losses recognized in net earnings
in the period in which they arise. Available-for-sale assets are
carried at fair value with gains and losses recognized in comprehensive
income. Other financial liabilities are initially measured at cost or
at amortized cost, depending upon the nature of the instrument, and are
subsequently measured at amortized cost using the effective interest
rate method, with gains and losses recognized in net earnings in the
period in which they arise.
The standard requires Clearwater to make certain elections, upon
initial adoption of the new rules, regarding the accounting model to be
used to account for each financial instrument. The following is a
summary of the accounting model Clearwater has elected to apply to each
of its significant categories of financial instruments outstanding as
of January 1, 2007:
Cash Held-for-trading
Accounts receivable Loans and receivables
Derivative financial instruments Held-for-trading
Vessel settlement Loans and receivables
Accounts payable and accrued liabilities Other liabilities
Long-term debt Other liabilities
Due to joint venture partner Other liabilities
Commodity contracts Held-for-trading
As a result of the adoption of this section, Clearwater reflected the
following adjustments as of January 1, 2007:
- $71,000 was adjusted to the opening retained earnings for
January 1, 2007. This related to the amortization of the deferred
financing charges associated with the long-term debt.
- A reclassification of amounts previously recorded in "Cumulative
foreign currency translation account" to "Accumulated other
comprehensive income".
Deferred financing costs related to debt are no longer presented as
other assets on the balance sheet but are now netted against the
debt. This change in accounting policy resulted in a decrease of
$2.8 million in the amount of long-term debt as of January 1, 2007.
(b) Comprehensive Income
Section 1530, "Comprehensive Income" requires separate disclosure of
comprehensive income and its components in the financial statements.
Other comprehensive income includes the exchange gains and losses
arising from the translation of the financial statements of self-
sustaining foreign operations. The effect of exchange rate variations
on the translation of Clearwater's net assets of self-sustaining
foreign operations has been recorded as "Other comprehensive income
(loss), net of tax".
(c) Refits
In September 2006, the Financial Accounting Standards Board in the
United States issued FASB AUG AIR-1, Accounting for Planned Major
Maintenance Activities. This standard, which is effective January 1,
2007, amends the guidance for planned major maintenance activities;
specifically it precludes the use of the previously acceptable
"accrue in advance" method, the method used by Clearwater in the
past.
In the absence of specific guidance in Canada on this topic, we
believe it appropriate to follow FASB AUG AIR-1 and therefore have
adopted this standard on January 1, 2007. As a result of adopting
this standard, comparative figures for 2006 have been restated. We
have made the following adjustments:
January 1, September 30,
2007 2006
Balance Sheet
Reduction in accounts
payable and accrued liabilities $ 4,849 $ 4,576
Reduction in other long-term assets (295) (250)
Increase in future income taxes liability (260) (429)
Reduction in deficit $ 4,294 $ 3,897
13 weeks 39 weeks
ended ended
September 30, 2006
Income statement
Decrease in cost of goods sold 529 351
Increase in future tax expense 128 395
Increase (decrease) in net earnings 401 (44)
(d) Impact of standards to be adopted in the future:
Inventory
The CICA has issued a new standard on inventories, which provides more
guidance on the determination of cost including the allocation of
overheads and the reversal of impairment losses as well as the
requirement to provide additional disclosures. The implementation date is
January 1, 2008. Management is currently reviewing the impact of this new
standard and will disclose the impact on December 31, 2007 inventories
in the fourth quarter earnings report
3. FOREIGN EXCHANGE AND DERIVATIVE CONTRACTS
(a) Clearwater enters into derivative financial instruments to manage
underlying fair value and cash flow risks associated with foreign
currency and interest rates.
At September 29, 2007 and December 31, 2006, Clearwater had
outstanding forward contracts as follows (as converted to Canadian
dollars at contracted rates):
Average Fair Value
Notional Exchange Asset
Currency Amount Rate Maturity (Liability)
-------------------------------------------------------------------------
United States dollar
September 29,
2007 Sell forwards 15,500 1.056 2007 1,195
Sell forwards 45,000 1.088 2008 4,125
December 31,
2006 Sell forwards 55,500 1.136 2007 (1,526)
Buy forwards 14,000 1.120 2007 544
Euro
September 29,
2007 Sell forwards 1,000 1.449 2007 27
Sell forwards 8,000 1.455 2008 277
Buy forwards 15,000 1.432 2008 (187)
December 31,
2006 Sell forwards 9,550 1.442 2007 (913)
Sterling
September 29,
2007 Sell forwards 5,450 2.269 2007 1,308
Buy forwards 3,000 2.133 2007 (301)
Sell forwards 15,000 2.163 2008 2,192
December 31,
2006 - - - -
Yen
September 29,
29, 2007 Sell forwards 300,000 0.010 2007 499
Sell forwards 300,000 0.011 2008 522
December 31,
2006 - - - -
At September 29, 2007 and December 31, 2006, Clearwater had written the
following foreign currency option and expandable forward contracts (as
converted to Canadian dollars at contracted rates):
Fair Value
Notional Exchange Asset
Currency Amount Range Maturity (liability)
-------------------------------------------------------------------------
United States dollar
September 29, 2007
Option 55,000 1.049 - 1.149 2007 (3,324)
Expandable 12,000 1.131 - 1.145 2007 -
Option 125,000 1.016 - 1.123 2008 (7,068)
Expandable 12,000 - 30,000 1.106 2008 1,194
Reverse
knock outs 41,000 1.183 2008 (36)
December 31, 2006
Option 160,000 1.1003 - 1.252 2007 (5,435)
Option hedge 20,000 1.135 - 1.180 2007 90
Expandable 500 - 72,000 1.131 - 1.202 2007 (1,931)
Japanese Yen
September 29, 2007
Option 1,000,000 0.009 2007 (10)
Option 3,000,000 0.008 - 0.009 2008 (1,659)
December 31, 2006
Option 2,000,000 0.009 - 0.010 2007 (189)
Euro
September 29, 2007
Option 23,000 1.430 - 1.486 2007 (55)
Option 23,000 1.534 - 1.550 2008 (12)
December 31, 2006
Option 55,000 1.390 - 1.585 2007 (6,466)
Sterling
September 29, 2007 - - - -
December 31, 2006
Option 25,700 2.013 - 2.101 2007 (5,995)
If Clearwater had settled these contracts prior to maturity, at
September 29, 2007, it would have made a net payment of $1,313,000. The
contracts outstanding at December 31, 2006, if settled would have led to a net
payment of $21,821,000. The liability or asset recorded is included in
derivative financial instruments, and the resulting loss or gain is included
in income.
Subsequent to the end of the third quarter 2007, Clearwater closed out
contracts that had a fair value of $ 9.7 million as at September 29, 2007 for
net proceeds of $11.9 million.
(b) Summary of net liability position for derivative contracts:
-------------------------------------------------------------------------
Forward, option and expandable contracts $ 1,313
Interest rate contracts (670)
Commodity contracts (97)
-------------------------------------------------------------------------
Net liability position $ 546
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Portion disclosed on balance sheet as derivative
financial instrument asset $ 10,424
Portion disclosed on balance sheet as derivative
financial instrument liability 10,970
-------------------------------------------------------------------------
Net liability position $ 546
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c)
13 weeks ended 39 weeks ended
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Realized (gain)
loss
Foreign exchange
and derivative
income $ (923) $ (2,959) $ 6,859 $ (11,268)
Other 490 895 2,069 1,026
-----------------------------------------------------------------------
(433) (2,064) 8,928 (10,242)
Unrealized
(gain) loss
Foreign exchange
on long-term
debt (4,088) 3,274 (4,785) (7,382)
Mark-to-market
on option
contracts (164) 396 (21,135) 4,444
Mark-to-market
on interest and
currency swaps 938 (4,745) (3,813) 2,373
-------------------------------------------------------------------------
(3,314) (1,075) (29,733) (565)
-----------------------------------------------------------------------
Total gain $ (3,747) $ (3,139) $ (20,805) $ (10,807)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(d) Credit risk
Clearwater is exposed to credit risk in the event of non-performance
by counter parties to its derivative financial instruments, but does
not anticipate non-performance by any of the counter parties as
Clearwater only deals with highly rated financial institutions.
Clearwater has significant accounts receivable from customers
operating in Canada, United States, Europe and Asia. Clearwater has a
policy of utilizing a combination of credit reporting agencies,
credit insurance, letters of credit and secured forms of payment to
mitigate customer specific credit risk and country specific credit
risk.
(e) Interest rate risk
As indicated in the note entitled "Long-Term Debt", Clearwater uses
cross currency and interest rate swaps to hedge its exposures to
changes in foreign currencies and interest rates. The terms of the
swap agreements related to the Icelandic bonds also effectively hedge
the changes in the CPI. These agreements do not qualify for hedge
accounting. Although Clearwater has no intention of settling these
contracts prior to maturity, at September 29, 2007, if it settled
these contracts it would have received a net payment of $670,000
(December 31, 2006 - made a net payment of $4,605,000). The liability
is included in derivative financial instruments and the resulting
non-cash loss is included in income. See note 5(d) for additional
information relating to the swaps.
(f) Commodity contracts
On January 19, 2007, Clearwater entered into a crude oil option for
13,000 barrels per month effective for the period from March 1, 2007
to August 31, 2007 with a strike price of US $60 per barrel. If the
contracts outstanding at December 31, 2006 were settled, Clearwater
would have made a payment of $553,000.
On June 27, 2007, Clearwater entered into a natural gas option for
20,000 MMBTU per month, effective for the period from September 1,
2007 to February 29, 2008 with a strike price of US $8.40 per MMBTU.
Although Clearwater has no intention of settling the contract prior
to maturity, if it settled the contract it would have received a
payment of $97,000.
4. Vessel claims
(a) On June 25, 2007, a new clam vessel that was to have been delivered
in the third quarter capsized. In the third quarter, we agreed to a
settlement of Canadian $46 million with the yard that had been
constructing the vessel. This agreement is fully secured through
letters of credit and an assignment of insurance proceeds. During the
third quarter, a payment of $3 million was applied against the
receivable, and subsequent to the third quarter a payment of
$25 million was received with the balance of the payment expected
prior to December 31, 2007.
(b) On December 5, 2006, one of Clearwater's factory freezer clam
vessels, the Atlantic Pursuit, was struck by a large wave that caused
extensive damage as it was riding out a winter storm on the
Southeastern Grand Banks. This was an older vessel and scheduled to
be retired from the fleet later in 2007 but as a result of the
extensive damage incurred was retired early. An agreement was reached
with Clearwater's insurers during the first quarter and as a result a
gain of approximately $4.0 million has been recorded.
5. LONG-TERM DEBT
September 29, Dec. 31,
2007 2006
-------------------------------------------------------------------------
Notes payable (a)
Canadian $ 62,520 $ 63,000
United States dollars 19,749 23,308
Class C Partnership Units (b) 43,005 46,430
Class D Partnership Units (c) 44,463 -
Bond payable (d) 50,127 46,795
Marine mortgage, due in 2017 (e) 4,771 5,584
Term loan, due in 2091 (f) 3,500 3,500
Other loans 1,544 1,643
-------------------------------------------------------------------------
229,679 190,260
Less current portion 1,123 868
-------------------------------------------------------------------------
$ 228,556 $ 189,392
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Notes payable, senior secured notes issued in four series:
- $43,000,000 Canadian Series A Notes issued in 2003, bearing
interest at 6.4% payable semi-annually, maturing December 8, 2008,
net of financing costs.
- $15,000,000 U.S. Series B Notes issued in 2003, bearing interest at
5.65% payable semi-annually, maturing December 8, 2008, net of
financing costs.
- $20,000,000 Canadian Series C Notes issued in 2003, bearing
interest at 7.23% payable semi-annually, maturing December 8, 2013,
net of financing costs.
- $5,000,000 U.S. Series D Notes issued in 2005, bearing interest at
6.12% payable semi-annually, maturing December 8, 2013, net of
financing costs. Clearwater has an additional
$20,000,000 U.S. available to draw on this facility until
December 31, 2007.
The notes are secured by mortgages and charges on all of the
present and future property and assets of Clearwater and certain of
its wholly owned subsidiaries, the interests of the Fund in
Clearwater Seafoods Holdings Trust ("CSHT") and all the issued
shares of CS ManPar Inc., the general partner of Clearwater. The
security arrangement is guaranteed by an inter-creditor agreement
with the banking syndicate members participating in the term credit
facility disclosed in section (g) of this note.
(b) In June 2004, 4,081,633 Class C units were issued concurrently with
the issue by the Fund of $50 million of Convertible Debentures and
are held by the Fund through CSHT. The Class C units are redeemable
and retractable at a price of $12.25 per unit and are due
December 31, 2010. These units exist under an agreement whereby they
will be converted, redeemed or retracted in a manner that corresponds
to any conversion, redemption or repurchase of the Convertible
Debentures of the Fund and in a manner that ensures that the
distributions on the Class C units will be able to fund the ongoing
interest payments on the Convertible Debentures. The Class C units
are classified in accordance with their component parts: the value
ascribed to the holders' option to convert to Class A units has been
classified as equity and the remaining portion of the units has been
classified as debt. Interest on the debt is calculated by applying an
interest rate of approximately 8.56% to the outstanding debt
component. The difference between actual cash payments, which will
approximate 7.02%, and interest expense is added to the debt
component of the units.
The Fund filed a normal course issuer bid by which it can acquire up
to $5 million principal amount of convertible debentures in the 12-
month period commencing August 2006. Any repurchase at the Fund level
would be accompanied by a similar repurchase of Class C Partnership
units by Clearwater. During the year ended December 31, 2006,
$3 million of the Class C units were repurchased and cancelled with
the proceeds used to repurchase and cancel an equivalent amount of
convertible debentures. During the first quarter of 2007, an
additional $1 million of Partnership units were repurchased and
cancelled with proceeds used by the Fund to repurchase and cancel an
equivalent amount of convertible debentures. During the third quarter
of 2007, an additional $1 million of Partnership units were
repurchased and cancelled with proceeds used by the Fund to
repurchase and cancel an equivalent amount of convertible debentures.
The principal outstanding as at September 29, 2007 was $45 million.
(c) In March 2007, 7,372,881 Class D units were issued concurrently with
the issue by the Fund of $43.5 million of Convertible Debentures and
are held by the Fund through CSHT. The Class D units are redeemable
and retractable at a price of $5.90 per unit and are due on March 14
2014. These units exist under an agreement whereby they will be
converted, redeemed or retracted in a manner that corresponds to any
conversion, redemption or repurchase of the Convertible Debentures of
the Fund and in a manner that ensures that the distributions on the
Class D units will be able to fund the ongoing interest payments on
the Convertible Debentures. The Class D units are classified in
accordance with their component parts: the value ascribed to the
holders' option to convert to Class A units has been classified as
equity and the remaining portion of the units has been classified as
debt. Interest on the debt is calculated by applying an interest rate
of approximately 8.89% to the outstanding debt component. The
difference between actual cash payments, which will approximate
7.27%, and interest expense is added to the debt component of the
units.
On April 10, 2007, an additional 769,831 Class D units were issued
for proceeds of $4.5 million bringing the total amount to
$48,042,000. Class D units were issued concurrently with the issue by
the Fund of $4.5 million of Convertible Debentures and are held by
the Fund through CSHT. The Class D units are redeemable and
retractable at a price of $5.90 per unit.
On June 2, 2007, $1,000 of the convertible debentures was converted
into 169 Class A units at a price of $5.90 per unit resulting in a
principal outstanding as at September 29, 2007 of $48,041,000.
(d) Senior unsecured bond in the amount of 2,460,000,000 ISK due
September 27, 2010 at a fixed rate of 6.7% accrued annually and paid
at maturity. Both the bond and the interest are adjusted for changes
in the Icelandic Consumer Price Index ("CPI"). Clearwater has entered
into a number of swap agreements to economically fix the currency and
CPI exposure associated with the debt. There are also interest rate
swap agreements in place.
Clearwater has no intention to unwind the above contracts, however
the agreements do not qualify for hedge accounting and therefore the
gains and losses related to the fair value of these hedges are taken
into income during the period.
The swap agreements have effectively resulted in the following:
- $25,000,000 Canadian dollar liability with an effective interest
rate of 8.65%
- $5,000,000 U.S. dollar liability with an effective interest rate
of 9.15%
- $4,707,502 U.S. dollar liability with an effective interest rate
of 8.51%
- 3,000,000 Pound Sterling liability with an effective interest rate
of 9.19%
- 2,500,000 Euro liability with an effective interest rate of 7.94%
Interest expense on the bond is recorded using the effective interest
rate method that takes into account estimated future Icelandic
inflation rates. Interest accrued is $5.6 million year-to date
(December 2006 - $3.5 million). As previously noted interest exposure
on this bond has been hedged and the cash payment on the related
swaps was $3.0 million (December 2006 - $3.8 million).
September 29, December 31,
2007 2006
-------------------------------------------------------------------------
Principal $ 39,054 $ 40,369
Accrued interest 5,581 3,470
Accrued CPI 5,492 2,956
-------------------------------------------------------------------------
$ 50,127 $ 46,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(e) Marine mortgage payable in the principal amount of CDN $4,032,000
(December 31, 2006 - $4,549,000), DKK 16,480,000 (December 31, 2006 -
DKK 17,871,000) and YEN 277,826,000 (December 31, 2006 - 297,671,000)
bearing interest at UNIBOR plus 1% payable semi-annually, 50% of
which represents Clearwater's proportionate share. Principal payments
are required annually with CDN $776,000, DKK 2,087,000 and
YEN 29,767,000 due in 2008-2012, CDN $152,000 due in 2013, ]
DKK 2,087,000 and YEN 29,767,000 due in 2013-2014, DKK 1,871,000 due
in 2015, YEN 29,767,000 due in 2015-2016 and YEN 9,923,000 due in
2017, 50% of which represents Clearwater's proportionate share. The
loan matures in 2017 and is secured by a first mortgage over the
related vessel and covenants concerning certain fishing licences.
(f) Term loan, payable in 2091. In connection with this loan Clearwater
makes a royalty payment of $275,000 per annum in lieu of interest.
(g) Clearwater also has a revolving term debt facility of $60 million
from a syndicate of banks (which was not drawn upon at September 29,
2007 or December 31, 2006). The facility, which matures and is
renewable in May 2009 is part of a master netting agreement that was
in a cash position of $14 million as at September 29, 2007.
Clearwater's debt facilities contain various non-financial and
financial covenants. They include, but are not limited to, leverage
ratios and fixed charge ratios (which exclude most significant non-
cash items and non-recurring items from earnings) that can limit
distributions paid and the amount of allowable debt outstanding. In
addition, payments related to these debt facilities take priority
over payments on securities held in Clearwater by the Fund.
Clearwater is in compliance with all debt covenants as at
September 29, 2007.
Principal repayments required in each of the next five years are
approximately as follows:
Year 1 1,123
Year 2 58,639
Year 3 934
Year 4 94,002
Year 5 2,068
6. PARTNERSHIP UNITS
Clearwater is authorized to issue an unlimited number of Class A limited
partnership units, an unlimited number of Class B general partnership units,
issuable in series, an unlimited number of Class C limited partnership units
and an unlimited number of Class Y general partnership units, issuable in
series. Each unit (other than the Class Y units) entitles the holder thereof
to one vote, except in certain situations as described pursuant to the Limited
Partnership Agreement governing Clearwater. Each issued Class B unit is
accompanied by a Special Trust Unit issued by the Fund entitling the holder to
receive notice of, to attend and to vote at meetings of unitholders of the
Fund.
In June 2004, 4,081,633 Class C units in the amount of $50 million were
issued concurrently with the issue by the Fund of $50 million of Convertible
Debentures and are held by the Fund through CSHT. The Class C units are
non-voting, redeemable and retractable at a price of $12.25 per unit. These
units exist under an agreement whereby they will be converted, redeemed or
retracted in a manner that corresponds to any conversion, redemption or
repurchase of the Convertible Debentures of the Fund and in a manner that
ensures the distributions on the Class C units will be able to fund the
ongoing interest payments on the Convertible Debentures. Class C Partnership
units are classified in accordance with their component parts: the value
ascribed to the holders' option to convert to units has been classified as
equity and the remaining portion of the units has been classified as debt.
In March 2007, 7,372,881 Class D units were issued concurrently with the
issue by the Fund of $43.5 million of Convertible Debentures and are held by
the Fund through CSHT. The overallotment was exercised on April 10, 2007 and
769,831 additional Class D units were issued concurrently with the issue by
the Fund of $4.5 million additional Convertible Debentures and are held by the
Fund through CSHT. The Class D units are redeemable and retractable at a price
of $5.90 per unit. These units exist under an agreement whereby they will be
converted, redeemed or retracted in a manner that corresponds to any
conversion, redemption or repurchase of the Convertible Debentures of the Fund
and in a manner that ensures that the distributions on the Class D units will
be able to fund the ongoing interest payments on the Convertible Debentures.
The Class D units are classified in accordance with their component parts: the
value ascribed to the holders' option to convert to Class A units has been
classified as equity and the remaining portion of the units has been
classified as debt.
On January 24, 2007, the Fund received approval for a normal course
issuer bid which will enable it to purchase, from time to time, up to
2.5 million outstanding trust units (the "Units"), which amount represents
less than 10% of the public float. Any such purchases of Units would be made
during the 12-month period commencing on January 24, 2007 and in accordance
with the requirements of the TSX. The Units will be purchased by the Fund for
cancellation and will be accompanied by a similar repurchase of units by
Clearwater. On March 30, 2007, the Fund purchased and cancelled 50,100 Class A
units. During the second quarter of 2007, the Fund purchased and cancelled
167,300 Class A units. During the third quarter of 2007, the Fund purchased
and cancelled 240,500 Class A units. The total units purchased under this plan
since January 24, 2007 is 457,900.
Class A Class B
Units Units $ (in 000's)
-------------------------------------------------------------------------
Balance December 31, 2006 29,407,626 23,381,217 $ 172,251
Cancellation of Class A Units (457,900) - (2,682)
Issuance of Class A
Units(note 5(c)) 169 - 1
-------------------------------------------------------------------------
Subtotal 28,949,895 23,381,217 169,570
Equity component of
Class C Units 828
Cancellation of $2 million
Class C Units (35)
Equity component of
Class D Units 1,579
-------------------------------------------------------------------------
Balance September 29, 2007 $ 171,942
-------------------------------------------------------------------------
As at September 29, 2007 there were in total 52,331,112 units outstanding
(52,788,843 - December 31, 2006).
Distributions paid for the three-month period ended September 29, 2007
were $7,875,000 (2006 - $7,918,000) and year-to-date were $23,692,000 (2006 -
$7,918,000). All of the Partnership's distributions are discretionary.
As CFFI controlled Clearwater's seafood business both before and after
the initial public offering, the acquisition of the seafood business by
Clearwater was accounted for using the book values of the assets and
liabilities as recorded by CFFI. The excess of the capital contributions of
$267,728,000 over book values of the assets of $180,553,000, being
$87,195,000, was debited to share capital.
7. OTHER EXPENSE (INCOME)
13 weeks ended 39 weeks ended
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Investment income $ 15 $ (214) $ (1,087) $ (991)
Export rebate 573 (413) 103 (1,271)
Quota rental and
royalties - (767) (63) (2,082)
Other (income)/
expense 760 331 301 (416)
-------------------------------------------------------------------------
$ 1,348 $ (1,063) $ (746) $ (4,760)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. CUMULATIVE FOREIGN CURRENCY TRANSLATION ACCOUNT
The reduction in the foreign currency translation account is a non-cash
adjustment, which relates to the reduction of Clearwater's net investment in
its 80% owned subsidiary in Argentina. The cumulative translation account
largely arose because of the significant devaluation of the peso in Argentina
versus the Canadian dollar in 2001. It is Clearwater's desire to continue to
manage its exposure to Argentine pesos by repatriating its capital as quickly
as possible while not impairing local operations. Dividends declared have
resulted in a reduction in Clearwater's net investment in that subsidiary and
accordingly, a proportionate share of the cumulative translation account has
been recognized in earnings. Clearwater anticipates that continued payment of
dividends from the subsidiary in Argentina may result in additional reduction
of the cumulative translation account in the future. The cumulative
translation account is included in the accumulated other comprehensive income
section of the balance sheet and the remaining balance at September 29, 2007
is $11,492,000 (December 31, 2006 - $12,321,000).
9. RELATED PARTY TRANSACTIONS
Clearwater had the following transactions and balances with CFFI, the
controlling shareholder of Clearwater, during the third quarter and
year-to-date periods of 2007 and 2006.
13 weeks ended 39 weeks ended
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Transactions
Charged by CFFI for
rent and other
services, net of
rent and IT services
charged to CFFI (8) (21) 188 122
September 29, 2007 December 31, 2006
-------------------------------------------------------------------------
Balances
Distribution and
other payable to CFFI 1,126 665
In addition Clearwater was charged approximately $21,800 for vehicle
leases in the third quarter of 2007 (2006 - $30,700) and year-to-date $82,800
(2006 - $105,800) and approximately $61,100 for other services in the third
quarter (2006 - $36,000) and $97,500 year-to-date (2006 - $27,900) by
companies controlled by a relative of an officer of Clearwater.
These transactions are in the normal course of operations and have been
recorded at the exchange amount.
10. SEGMENTED INFORMATION
(a) General information
Clearwater operates primarily within one industry that being the
harvesting, procurement, processing and sale of seafood with no
separately reportable business segments. The products are sold
primarily to customers in the United States, Europe, Asia, and
Canada.
(b) Net sales to customers by product category
13 weeks ended 39 weeks ended
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Scallops $ 29,098 $ 29,211 $ 76,015 $ 83,582
Lobster 19,400 19,185 54,708 53,795
Clams 15,491 16,212 36,484 45,966
Coldwater shrimp 13,430 10,484 36,093 26,046
Crab 10,168 1,405 14,803 5,678
Groundfish and
other 2,968 2,066 7,004 10,787
Hedging program - 1,376 (146) 5,746
-------------------------------------------------------------------------
$ 90,555 $ 79,939 $ 224,961 $ 231,600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Geographic information
13 weeks ended 39 weeks ended
Sept 29, Sept 30, Sept 29, Sept 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Sales
United States $ 32,631 $ 22,527 $ 79,951 $ 62,651
Europe
France 10,339 14,401 22,224 49,326
Denmark 4,745 2,191 14,503 9,024
UK 6,371 6,473 15,327 16,626
Other 6,101 4,436 18,224 11,532
Asia
Japan 9,068 9,934 20,331 22,701
Other 6,456 7,167 17,911 20,800
Canada 14,442 11,077 34,624 32,111
Other, including
hedging program 402 1,733 1,866 6,829
-----------------------------------------------------------------------
$ 90,555 $ 79,939 $ 224,961 $ 231,600
-----------------------------------------------------------------------
-----------------------------------------------------------------------
September 29, 2007 December 31, 2006
--------------------- --------------------
Property, plant, equipment,
licences and goodwill
Canada $ 203,093 $ 251,282
Argentina 17,500 18,024
Other 870 602
----------- ------------
$ 221,463 $ 269,908
----------- ------------
----------- ------------
11. SUBSEQUENT EVENTS
(a) The Fund announced on November 13, 2007 that the Trustees have
initiated a process for identifying and considering strategic
alternatives available to maximize unit holder value. The strategic
review is in response to Clearwater's weak financial performance over
the last 9 months, the ongoing challenges facing the Fund in
maintaining distributions and the Canadian government's legislation
to tax income trusts. The Trustees anticipate retaining a financial
advisor in due course to assist it in this process. While a range of
alternatives may be considered, there can be no assurance that the
review process will result in a decision regarding any transaction or
that it will be completed in any specific time frame. In addition,
this process may result in a transaction that implies a different
value for The Fund's investment in Clearwater.
(b) Clearwater entered into an agreement to convert one of its existing
shrimp fishing vessels into a clam fishing vessel at an approximate
cost to convert the vessel of $15 million
Further information can be found in the disclosure documents filed by
Clearwater Seafoods Income Fund with the securities regulatory authorities
available at www.sedar.com or at its website (www.clearwater.ca).
%SEDAR: 00018023E
For further information: Robert Wight, Chief Financial Officer, Clearwater,
(902) 457-2369; Tyrone Cotie, Director of Corporate Finance and Investor
Relations, Clearwater, (902) 457-8181