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General Donlee Income Fund Reports First Quarter 2005 Results
Toronto, Canada, May 13, 2005 - General Donlee Income Fund (TSX: GDI.UN) today
announced its financial results for the first quarter ended March 31, 2005.
Financial Highlights
The following summary of financial data reflects the interim consolidated
results of operations of the Fund for the three-month period ended March 31,
2005, including comparative results for the same period in 2004.
<<
Three-Month Period Ended
-------------------------
($ millions, except unit and March 31, March 31,
per unit amounts, unaudited) 2005 2004
------------ -----------
Operations
----------
Sales 8.1 8.9
Gross profit 1.4 2.2
Net earnings (loss) (0.4) 0.6
Net earnings (loss) per unit(a) $ (0.042) $ 0.069
Distributions
-------------
Distributable cash(1) 0.5 1.5
Distributable cash per unit(a,1) $ 0.052 $ 0.163
Cash distributions paid 0.2 1.6
Cash distributions paid per unit(a) $ 0.025 $ 0.175
(a) Based on 8,947,000 units outstanding.
(1) See note 1 in Distributions section for definition of
Distributable Cash.
Overall Performance
Operating results for the first quarter ended March 31, 2005 compared to
the first quarter in 2004 reflect lower sales in the Company's aerospace and
power generation division, due primarily to the U.S. Navy and power generation
projects in 2004; however, shipments from the industrial products division
increased over the prior year. Some engineering challenges with certain
military products resulted in planned shipments being deferred likely until
the third quarter. The improvement in the level of shipments in the industrial
products division is a result of some of the operational issues being resolved
with the appointment in the first quarter of a new interim general manager.
Since the Fund commenced operations in May 2002, market conditions have
been extremely challenging. The fallout of September 11, 2001 has severely
impacted the aerospace business, the capital equipment markets have been in
the down part of the cycle and the strengthened Canadian dollar versus the
U.S. dollar has further negatively impacted gross margins. Despite these
conditions, the Fund continues to generate reasonable cash flows and to pay a
modest cash distribution to Unitholders each month, without impairing its
balance sheet.
There is more than adequate working capital to support the Company's
on-going current operations and the consolidated net debt to equity ratio of
the Fund is low with modest interest requirements. With the expected pick-up
in the aerospace products division and a strong effort in the industrial
products division to restore margins, when markets do recover, General Donlee
should be in a good position to take advantage of the opportunities.
Conference Call
General Donlee Income Fund invites interested investors, analysts and
financial media to attend a conference call to be held on Friday, May 13,
2005, at 3:00 p.m. ET, to review the results for the three-month period
ended March 31, 2005. Please access the conference call by dialing toll free
1-800-814-4857 or, in the Toronto area, 416-640-4127. The Webcast of the
conference call will be available at: www.generaldonlee.com on the
Presentations page in the Investor Relations section of our Web site or at
www.newswire.ca/en/webcast/viewEvent.cgi?eventID=1121560.
Management's Discussion and Analysis
The following is a discussion of the Interim Consolidated Financial
Statements of General Donlee Income Fund (the "Fund") for the first quarter
ended March 31, 2005. It provides an overview of the results of operations and
the financial condition of the Fund. Comparisons are supplied for the first
quarter ended March 31, 2004. The Interim Consolidated Financial Statements
have been prepared in accordance with Canadian generally accepted accounting
principles and are reported in Canadian dollars. The following discussion
should be read in conjunction with the audited Consolidated Financial
Statements of General Donlee Income Fund, including notes thereto, and
Management's Discussion and Analysis for the year ended December 31, 2004.
These financial reports and the audited Consolidated Financial Statements,
including notes, for the year ended December 31, 2004, are available on
General Donlee Income Fund's Website at www.generaldonlee.com or on
www.Sedar.com.
Company Profile
General Donlee Income Fund (the "Fund") is a trust established to hold
the securities of General Donlee Limited ("General Donlee" or the "Company").
General Donlee is a leading diversified manufacturer of precision-machined
products for the military, commercial and general aerospace industries, and
also a specialist in the manufacture of precision-machined products for the
industrial products and power generation industries. The Fund was established
on March 14, 2002 and commenced operations on May 3, 2002, when it completed
an initial public offering and purchased all of the outstanding shares of a
predecessor company of General Donlee Limited.
General Donlee's operating strategy focuses on targeting niche markets
for products that are aligned with its sophisticated manufacturing
capabilities and skilled workforce. Management believes that the future growth
of the Company is dependent on its ability to leverage these resources into
long-term contracts for complex machining programs.
Results of Operations
Financial Summary
The Interim Consolidated Financial Statements of the Fund include the
operations of the aerospace and power generation products division and the
industrial products division of General Donlee. Fund sales for the first
quarter ended March 31, 2005 totaled $8.1 million, down from the $8.9 million
recorded in the comparable quarter in 2004. In the first quarter of 2005, the
Fund incurred a net loss of $0.4 million. In the first quarter of 2004, the
Fund earned $0.6 million.
Sales
Total Fund sales for the quarter ended March 31, 2005 were $8.1 million,
a decrease of $0.8 million, compared to the similar period in 2004.
First Quarter Incr/
($ millions) 2005 2004 (Dec)
-------------------------
Aerospace and power 4.1 5.3 (1.2)
generation products
Industrial products 4.0 3.6 0.4
-------------------------
8.1 8.9 (0.8)
-------------------------
Aerospace and Power Generation Products Division
In the first quarter of 2005, the aerospace and power generation
division's net decline in sales compared to the same period in the prior year
can be attributed as follows:
($ millions) Increase/
(decrease)
----------
Military aerospace (1.0)
Commercial aerospace 0.8
Industrial 0.2
Power generation (1.2)
----------
(1.2)
----------
The major sales decline in the military segment reflects completion of a
U.S. Navy contract for catapult barrels in early 2004. The major decline in
the power generation segment reflects the completion of the Bruce power
contract in early 2004. The volume increase in the commercial aerospace
segment reflects the apparent pickup in that sector.
Industrial Products Division
In the first quarter ended March 31, 2005, the industrial products
division's sales of gears, splines and assemblies were $4.0 million, an
increase of $0.4 million over the same period in 2004. The industrial products
division continues to wait for an upturn in the capital goods markets it
serves, however, trends remain relatively flat. The increased shipments in the
first quarter reflect the shipment of delayed orders from the year 2004.
Corporate
In the first quarter of 2005, the Canadian dollar was on average 7%
higher versus the U.S. dollar for the quarter ended March 31, 2004, which had
an adverse impact on consolidated sales of approximately $0.3 million,
excluding the impact of foreign exchange forward contracts.
The sales order backlog at March 31, 2005 totaled $45.1 million, a
decrease of 5% compared to the $47.7 million total at December 31, 2004. The
aerospace and power generation division accounts for approximately 93% of the
total backlog, while the industrial products division, which has a shorter
product cycle, accounts for the balance. The proportion contributed by the
industrial products division is similar to last year. The backlog decline in
the quarter reflects an excess of production compared with new orders received
in the quarter. The impact of foreign currency is immaterial.
Gross Profit
Gross profit for the first quarter ended March 31, 2005 declined from the
level earned in the similar period in 2004.
2005 2004
Gross % of Gross % of
($ millions) Profit Sales Profit Sales
---------------- ----------------
Quarter ended March 31 1.4 16.8% 2.2 24.3%
The lower gross profit percentage level for the first quarter 2005
relative to the 2004 level is the result of adverse product mix, reduced
margins in the industrial products segment due to rising steel prices and
operational difficulties, a higher Canadian dollar versus the U.S. dollar and
under-utilization of certain machine centres in both divisions' facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter ended
March 31, 2005 were $0.9 million or 11.6% of sales, and included Fund costs of
$0.2 million. Selling, general and administrative expenses for the first
quarter ended March 31, 2004, were $0.7 million or 8.3% of sales, including
Fund costs of $0.2 million. The increase in costs was the result of one-time
employment related costs in the industrial products division in the current
quarter.
Interest Expense
Interest expense was $0.1 million on the $9.7 million term loan for the
quarter ended March 31, 2005. Interest expense for the quarter ended March 31,
2004 was $0.1 million.
Foreign Exchange Loss
Foreign exchange loss reflects mainly the net impact of the Company's
foreign exchange forward contracts which, when marked-to-market at March 31,
2005, produced a foreign exchange loss of $0.04 million. Foreign exchange loss
for the first quarter ended March 31, 2004 was $0.1 million.
The Company enters into foreign exchange forward contracts to minimize
its exposure to fluctuations in foreign currency exchange rates. These
derivative products do not qualify for hedge accounting treatment, therefore,
the contracts are recorded on the consolidated balance sheet at fair value
with a corresponding gain or loss recorded in earnings. As exchange rates
fluctuate, foreign exchange gains and losses vary from period to period.
Amortization
First Quarter
($ millions) 2005 2004
------ ------
Property, plant and equipment(a) 0.5 0.4
Other assets 0.7 0.7
------ ------
1.2 1.1
------ ------
(a) Included in cost of sales
The value of the contracted sales agreements (Other assets) that were
acquired in May 2002 will be fully amortized at the end of April 2005
resulting in an expected reduction in amortization expense of $0.4 million in
the second quarter of 2005.
Gain on Disposal of Property, Plant and Equipment
A gain of $0.03 million was recognized in the first quarter of 2004 as a
result of the sale of a grinder that was replaced by a new grinder in the
industrial products division.
Goodwill
Effective June 30, 2002, the Fund adopted the CICA accounting standard
set out in Section 3062 "Goodwill and Other Intangible Assets". Under this
standard goodwill is no longer amortized, but instead is tested for
impairment.
Income Taxes
At December 31, 2004 the Company had non-capital loss carry forwards and
other undeducted items totaling $3.4 million (2003 - $6.2 million), for which
no benefit has been recognized in the consolidated financial statements.
Income earned by the Fund that is distributed annually to Unitholders is not
subject to taxation in the Fund but is taxed at the individual Unitholder
level.
Net Earnings (Loss)
The net loss of the Fund for the quarter ended March 31, 2005 was
$0.4 million. For the comparable quarter ended March 31, 2004, the net
earnings of the Fund were $0.6 million. The following table outlines the
components contributing to these consolidated results.
First Quarter
($ millions) 2005 2004
------ ------
Aerospace and power generation
products 0.1 0.5
Industrial products (0.3) 0.3
Fund (0.2) (0.2)
------ ------
(0.4) 0.6
Quarterly Financial Information
-------------------------------------------------------------------------
2005 2004 2004 2004
($000, except per First Fourth Third Second Rolling
unit amounts) Quarter Quarter Quarter Quarter 12 months
-------------------------------------------------------------------------
Total sales 8,063 8,063 6,264 6,989 29,379
-------------------------------------------------------------------------
Net earnings (loss)
before goodwill charge (372) 558 (13) 25 198
-------------------------------------------------------------------------
Net earnings (loss) (372) 558 (9,663) (13,475) (22,952)
-------------------------------------------------------------------------
Net earnings (loss)
before goodwill per unit
(basic and diluted) $(0.042) $0.062 $(0.001) $0.003 $0.022
-------------------------------------------------------------------------
Net earnings (loss) per
unit (basic and
diluted) $(0.042) $0.062 $(1.080) $(1.506) $(2.566)
-------------------------------------------------------------------------
Distributable cash(1) 465 969 591 361 2,386
-------------------------------------------------------------------------
Cash distributions 226 226 782 1,228 2,462
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2004 2003 2003 2003
($000, except per First Fourth Third Second Rolling
unit amounts) Quarter Quarter Quarter Quarter 12 months
-------------------------------------------------------------------------
Total sales 8,940 9,372 9,161 7,282 34,755
-------------------------------------------------------------------------
Net earnings before
goodwill charge 614 1,151 1,565 382 3,712
-------------------------------------------------------------------------
Net earnings (loss) 614 1,151 1,565 (19,618) (16,288)
-------------------------------------------------------------------------
Net earnings before
goodwill per unit
(basic and diluted) $0.069 $0.129 $0.175 $0.043 $0.416
-------------------------------------------------------------------------
Net earnings (loss) per
unit (basic and diluted) $0.069 $0.129 $0.175 $(2.193) $(1.820)
-------------------------------------------------------------------------
Distributable cash(1) 1,455 2,063 2,595 (a)2,485 8,598
-------------------------------------------------------------------------
Cash distributions 1,566 1,567 2,461 2,721 8,315
-------------------------------------------------------------------------
(a) Includes pre-funded $1,000 cash reserve.
General Donlee's business operations are cyclical. The most significant
factors leading to variations in operating results are economic conditions,
aerospace and business capital spending levels, the level of the Canadian
dollar versus foreign currencies, the reliance on customers' orders and the
time required to manufacture and ship to the customer. The Company's products
are required to be produced to customer requirements and sales revenue is
recognized only when products are completed and shipped. Accordingly,
fluctuations in customer demand and the timing of shipments contribute to
variability in the Company's sales.
Foreign Exchange
The Company has entered into foreign exchange forward contracts to seek
to reduce exposure to currency rate fluctuations. As at March 31, 2005, the
Company had foreign currency forward exchange contracts outstanding to sell
U.S. $6.5 million at an average exchange rate of CDN $1.2713 per U.S dollar
(U.S. $0.7866 per Canadian dollar), maturing from April 2005 to April 2006.
Balance Sheet
Consolidated working capital at March 31, 2005 was $10.6 million. At
December 31, 2004, working capital totaled $10.2 million. The current ratio at
March 31, 2005 was 3.6:1.0 which is up from 3.1:1.0 at December 31, 2004.
The consolidated net debt to equity ratio was 0.33:1.00 at March 31, 2005
(total debt net of cash), down from the December 31, 2004 level of 0.35:1.00
as $0.3 million of term loan was repaid in the first quarter of 2005.
Units Outstanding
Upon completion of the initial public offering in May 2002, the Fund had
8,947,000 units outstanding. During 2002, 2003 and 2004, no units have been
issued or retired, and as at March 31, 2005, there are 8,947,000 units
outstanding. There have been no options granted on the Fund's units. The units
are listed for trading on the Toronto Stock Exchange under the symbol GDI.UN.
Liquidity
Cash flow generated by the Company is required to fund capital
expenditures, distributions to Fund Unitholders, and third party bank
interest, as well as other ongoing operational requirements.
Cash Flow From Operating Activities
During the quarter ended March 31, 2005, cash provided by operating
activities was $1.1 million. This was comprised of cash flows from operations
of $0.9 million, while non-cash working capital items contributed
$0.2 million, reflecting decreases in accounts receivable and prepaid expenses
partially offset by increases in work-in-process inventory and lower accounts
payable. For the quarter ended March 31, 2004, cash provided from operating
activities was $0.7 million, comprised of $2.0 million from operations, while
non-cash working capital required $1.3 million.
Distributions
Distributable Cash(1)
For the quarter ended March 31, 2005, distributable cash(1) was
$0.5 million or $0.052 per unit. For the quarter ended March 31, 2004,
distributable cash(1) was $1.5 million or $0.163 per unit.
The following table shows the calculation of distributable cash(1)
reflecting cash flows from operations and cash requirements for capital
expenditures.
Quarter Quarter
Ended Ended
Mar. 31, Mar. 31,
2005 2004
--------- ---------
Cash flows from operating activities before
changes in non-cash working capital balances
related to operations 905 2,014
Add (deduct) items not affecting cash:
Derivative contracts (159) (262)
Employee future benefits 33 (82)
Gain on disposal of equipment 0 31
--------- ---------
779 1,701
Term loan repayment (300) -
Purchases of property, plant and equipment
(net of proceeds from disposal and loan) (14) (246)
----------------------
Distributable cash(1) 465 1,455
--------- ---------
--------- ---------
Cash distributions paid to unitholders 226 1,566
--------- ---------
Net earnings (loss) per unit $(0.042) $0.069
--------- ---------
Distributable cash(1) per unit $0.052 $0.163
--------- ---------
Cash distributions paid per unit $0.025 $0.175
--------- ---------
(1) Distributable cash is not a defined term under Canadian generally
accepted accounting principles (GAAP), but is determined by the Fund
as cash flow from operating activities before non-cash working
capital items adjusted to remove non-cash items including derivative
contracts and employee future benefits and further reduced by
purchases of property, plant and equipment not funded and repayment
of long-term bank debt (the latter factor is an addition to the
definition this quarter). Management believes that this liquidity
measure is a useful supplemental measure of performance as it
provides investors with an indication of the amount of cash available
for distribution to Unitholders. Investors are cautioned, however,
that distributable cash should not be construed as an alternative to
using net earnings as a measure of profitability or to using the
statements of cash flows. Further, the Fund's method of calculating
distributable cash may not be comparable to measures used by other
companies or trusts.
Cash Distributions
Total cash distributions paid by the Fund in the quarter ended March 31,
2005 amounted to $0.2 million or $0.025 per unit. The $0.1 million
distribution for the month of March 2005 was paid April 29, 2005, and is not
included in the preceding quarterly figure. The distribution for December 2004
of $0.1 million, paid on January 30, 2005, is included.
For the quarter ended March 31, 2004 cash distributions amounted to
$1.6 million or $0.175 per unit.
Details of the cash distributions paid for the three months ended
March 31, 2005 are:
Period Record Date Payment Date Per Unit Total
------ ----------- ------------ -------- -----
($ 000)
December(04) January 27 January 30 $0.0084 75
January February 24 February 27 0.0084 75
February March 28 March 31 0.0084 76
-------- -----
Year-to-date $0.0252 226
-------- -----
Monthly distributions are usually paid on or about the last day of the
month, for the prior month, with a record date typically three business days
earlier. The Company's credit facilities have not been and are not intended to
be used to make distributions.
Tax Status of Cash Distributions in 2005
The Fund is the sole registered holder of $82.95 million of notes, issued
by the Company, bearing interest at 15.82% per annum ($13.1 million annually).
The interest earned on the notes is currently the only material source of
income to the Fund. As a result of the decline in General Donlee's
profitability caused by, among other things, weak business conditions and the
stronger Canadian dollar during 2005, the Fund has formally waived during the
quarter a total of $2.8 million of unpaid interest (2004 - $1.7 million). The
unpaid back interest for the first quarter of 2005 will therefore not be
recoverable by the Fund, and the Company is not in default under the note
indenture.
Capital Resources
Credit Facilities
During the quarter the Company negotiated a renewed credit facility
totaling $16.8 million, which became effective during March 2005. The facility
includes a $9.7 million non-amortizing term loan, a $3.0 million operating
loan facility, a $4.0 million operating lease facility and a $0.1 million
corporate credit card facility. The term loan expires April 30, 2008, the
operating loan facility is renewable annually and the operating lease will be
amortized over 5 years. The financial covenants have been revised to
correspond with the increased facility.
During the quarter the original $10.0 million non-amortizing term
facility was reduced to $9.7 million and was fully drawn at March 31, 2005.
The $3.0 million operating credit facility, the $4.0 million operating lease
and the $0.1 million corporate credit card facility were not utilized at
March 31, 2005.
The Company has three key financial loan covenants governing its credit
facilities. These financial covenants are: a fixed charge coverage covenant; a
senior debt financial covenant; and an annual cash distributions covenant. At
March 31, 2005, the Company was compliant with these key financial loan
covenants.
Additions to Property, Plant and Equipment
Additions to property, plant and equipment were $0.01 million for the
quarter ended March 31, 2005.
Management has reviewed the future capital needs and the Company expects
to have minimal capital expenditures during the year 2005, which will be
financed from operating cash flow. There is no major capital project included
in this expected level of spending. It is possible that strategically
desirable or economically justifiable projects may be considered during the
year and Management and the Board will make its evaluation at that time.
Contractual Obligations
($ 000) Payment Due by Period
1 Year 1-3 4-5 Over
------ --- --- ----
Total or less Years Years 5 Years
----- ------- ----- ----- -------
Bank debt 9,700 0 0 9,700 0
----------------------------------------------
Total contractual
obligations 9,700 0 0 9,700 0
----------------------------------------------
The $9.7 million non-amortizing term loan matures on April 30, 2008. The
interest rate on the non-amortizing term loan is Canadian bank prime plus
1/4 %.
The asset relating to employee future benefits reflects the accounting
for the actuarial determination that a shortfall in the funding of future
pension benefits was estimated as a result of the triennial review completed
as at December 31, 2003. The results of the triennial review require the
Company to make special payments over the next five years to deal with a
pension deficiency, currently estimated for solvency purposes at
$1.45 million. The required payment for 2005 in respect of the deficiency is
estimated at $0.4 million. In addition, another actuarial review is required
as of December 31, 2004, as the actuarially estimated asset to solvency
liability ratio of the plans is approximately 76% as at December 31, 2003.
This review will be completed in the second quarter of 2005.
Off-Balance Sheet Arrangements
The Fund has off-balance sheet arrangements, which include a pension plan
and a foreign exchange forward contracts program (as detailed in Foreign
Exchange section).
Transactions with Related Parties
The Company did not have any material transactions with related parties
during the first quarter of 2005 or since the inception of operations in
May 2002.
Proposed Transactions
Although the Fund from time to time assesses acquisition opportunities
that would fit its strategy and sphere of expertise, there is no proposed
acquisition being considered at present. There is also no part of the
operations that is being considered for disposal at this time.
Critical Accounting Assumptions
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates. The major items
incorporating estimates or assumptions by Management are discussed below.
Valuation of Work-in-Process Inventories
Work-in-process is valued on an average cost basis which involves
determining the total labour hours required to arrive at the last operation
completed. The labour hours are then multiplied by the Company labour and
overhead rates to arrive at a dollar cost. All purchases of raw material and
outside process costs, which have been incurred to reach this stage of
completion, are also added to the value of the labour and overhead to arrive
at the work-in-process inventory value.
Provision for Slow Moving, Scrap or Obsolete Inventories
A review of all inventories on hand is completed to identify all parts
which may not be categorized as saleable in the immediate future, as a result
of being surplus or defective. A realizable value is then determined for the
parts and a provision is taken against inventories.
Allowance for Doubtful Accounts
An allowance for uncollectible accounts is provided for, based on a
selection of specific amounts due from customers which may be deemed as
uncollectible.
Amortization of Property, Plant and Equipment
Amortization is calculated on a straight-line basis over the estimated
useful lives of the assets. The Company uses a 10-year life for buildings, a
10-year life for production equipment, a 5-year life for office furniture and
equipment and a 3-year life for computer equipment.
Values of Pension Obligations and Assets
Pension assets are valued at fair value. Assumptions supplied by the
actuary and Management for the discount rate, expected long-term rate of
return on plan assets, salary escalation rate, and retirement ages of
employees are used to account for the defined benefit pension plans.
Amount of Pension Costs Charged to Earnings
The cost of pension benefits earned by employees is actuarially
determined using the projected credit benefit method pro-rated based on
services in accordance with the recommendations of the Canadian Institute of
Chartered Accountants. For the quarter ended March 31, 2005, the Company made
contributions to the pension fund of $0.2 million, which included the
$0.1 million to partially fund the deficiency and $0.1 million for regular
contributions.
Impairment of Intangible and Goodwill Assets
The Fund applies the recommendations of the Canadian Institute of
Chartered Accountants on accounting for goodwill and other intangible assets.
In accordance with the standard, goodwill is not amortized and is tested
annually for impairment in value or more frequently if required. To perform
this annual impairment test the Company must estimate the fair value of the
divisions using a combination of the present value of future cash flows
approach, a multiple of earnings approach and the market capitalization
approach.
Fair Values of Acquired Assets and Liabilities on the Acquisition Date
The acquisition of assets and liabilities has been accounted for by the
purchase method. The purchase price has been allocated to assets and
liabilities based on the book values from the predecessor company, with the
difference between the purchase price and net assets of the predecessor
company received being recorded as Other assets and Goodwill.
New Accounting Policies
The Fund has had no major changes in accounting policies since its
inception in May 2002. The key accounting policies followed are outlined in
Note 2 of the Fund's audited Consolidated Financial Statements and Notes as at
December 31, 2004.
Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and accrued liabilities and long-term debt, the amounts of
which are included in the Fund's balance sheet as at March 31, 2005. There
have not been any significant changes to the nature of these financial
instruments since December 31, 2004.
Business Risks and Uncertainties
Sales
The Company is dependent on the military, commercial and general
aerospace industries. Although the military business remains relatively solid,
recent economic conditions within the commercial airline industry have meant
that uncertainty has entered the market for the industry's manufacturers and
suppliers. The downturn in the commercial airline industry has particularly
affected the wide-body aircraft market, whereas General Donlee manufactures
most of its aerospace components for the business and regional jet and narrow-
body commercial aircraft and military markets. In most instances, these sales
are supported by long-term contracts with a history of very few cancellations.
The most serious competition comes from the in-house capabilities of its
aerospace customers.
The Company is also dependent on industrial manufacturers. A further
slowdown could adversely affect the Company's sales to industrial producers.
Further deterioration in the condition of these customers or the loss of
business to foreign competition could affect the Company's future sales
volumes.
Key Customers
Although the Company has a reasonably diversified customer base and
strong, stable relationships, the loss of a large customer could have an
adverse effect on the Company. For the year ended December 31, 2004, 78% of
the Company's sales were to 10 of its customers. The two largest customers,
one from each of the aerospace and power generation products division and the
industrial products division, accounted for 15% and 27% of total sales,
respectively. In the quarter ended March 31, 2005, a similar pattern existed
with 82% of total sales made to 10 of its customers with the two largest
accounting for 15% and 30% of total sales, respectively. In the third quarter
of 2004, a change in the sourcing relationship occurred with the largest
customer of the industrial products division. Going forward, this change is
expected to have an adverse impact on the cash flow generated by the Company.
In addition, termination by one or both of such customers of their
relationship with the Company could have a material adverse effect upon its
results.
Raw Material Costs
The Company's business exposes it to potential unrecoverable raw material
costs in certain instances. Although some long-term contracts allow for
materials cost escalation, not all do. In most cases, the raw materials that
the Company uses are not available on futures or forwards markets. The Company
attempts to commit with its suppliers to lock in forward pricing on
significant items where possible.
Product Liability
The Company's businesses expose it to potential product liability risks
that are inherent in the development, manufacture and sale of aerospace,
industrial and power generation products. Although the Company maintains what
Management believes to be suitable product liability insurance, there can be
no assurance that it will be able to maintain such insurance on acceptable
terms or that any such insurance will provide adequate protection against
potential liabilities. Insufficient insurance coverage in the event of a
significant claim could have a material adverse effect on the Company's
business, financial condition and results of operations.
Bank Financing
General Donlee's operations are dependent on adequate bank financing.
During the first quarter of 2005, General Donlee renewed its existing
financing with a $16.8 million facility that includes a $9.7 million non-
amortizing term loan, an operating line of $3.0 million, a $4.0 million
operating lease facility and a $0.1 million corporate credit card facility.
Foreign Exchange
For 2004, approximately 44% of General Donlee's sales revenue was
denominated in U.S. dollars. It is estimated by Management that a one cent
change in the value of the Canadian dollar, resulting in a weaker U.S. dollar
against the Canadian dollar, would impact gross profit negatively by
approximately $0.1 million per annum. Varying amounts of raw material and
service purchases are denominated in U.S. dollars, providing some natural
offset in our U.S. dollar exposure. General Donlee also seeks to reduce its
U.S. dollar exchange exposure by entering into foreign exchange forward
contracts.
Reliance on Key Personnel and Skilled Workforce
General Donlee's operation is dependent on the abilities, experience and
efforts of its Management and highly skilled workforce. While General Donlee
has entered into employment agreements with certain members of its Management,
the business prospects of the Company could be adversely affected if any of
these people are unable or unwilling to continue their employment with General
Donlee.
Outlook
Aerospace industry forecasts for 2005 and 2006 are somewhat more
optimistic than has been the case over the last few years. General Donlee has
started to see higher volumes in its commercial and military aerospace
segments and this has been reflected in General Donlee's sales order backlog
which remains strong at March 31, 2005.
At March 31, 2005, General Donlee's sales order backlog totaled
$45.1 million, which compares to $47.7 million at the 2004 year end. Most of
this backlog is accounted for by the aerospace and power generation division,
due to the longer term nature of its contracts.
The aerospace and power generation division is experiencing some pick up
in activity in the aerospace segment, however the power generation area
remains inactive. While market conditions continue to be challenging, we are
somewhat optimistic that that the aerospace and power generation business will
improve in step with improving industry forecasts. The industrial products
division has been impacted by weak conditions in the capital equipment
markets. In the near term in the industrial products business, we plan to
focus on operational improvements and to further develop our precision
grinding capabilities.
Forward-Looking Information
As with all forward-looking statements, caution must be exercised to
ensure that appropriate interpretation is made. Certain forward-looking
statements are based on information currently available to management, but are
subject to a number of uncertainties and risks that could cause actual results
to differ materially from the results discussed in the forward-looking
statements. These uncertainties and risks include, but are not limited to:
dependence on commercial aircraft sales and defence procurement; dependence on
power generation sales and sales to the industrial sector; production rates;
shipping schedules and timing of deliveries; dependence on key customers;
dependence on third party suppliers and manufacturers; raw material costs;
competition; satisfying product specifications; product liability and warranty
claims; environmental and other government regulation; quality certification
requirements; hedging effects; interest and foreign exchange rates; leverage
and restrictive debt covenants; continued availability of credit facilities;
regulatory requirements; reliance on key personnel and our skilled workforce;
changes in accounting policies; the ability to obtain orders, contract awards
and terminations; input costs; and domestic and international economic
conditions. In addition, these forward-looking statements relate to the date
on which they are made. Although the forward-looking statements contained
herein are based upon what Management believes to be reasonable assumptions,
the Fund cannot assure Unitholders that actual results will be consistent with
these forward-looking statements, and the Fund disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Further information can
be found in the disclosure documents filed by General Donlee Income Fund with
the securities regulatory authorities, available at www.sedar.com or through
the Fund's Website at www.generaldonlee.com.
SEDAR Filings
In addition to filing the audited annual and unaudited interim
consolidated financial statements (including the notes thereto) with
www.sedar.com, General Donlee Income Fund files its Annual and Interim
Management's Discussion and Analysis, its Annual Information Form and its
Notice of Annual Meeting and the Management Information Circular.
Consolidated Interim Financial Statements
The following unaudited Interim Consolidated Financial Statements have
not been reviewed by the Fund's auditors.
General Donlee Income Fund
Consolidated Balance Sheets
As at March 31, 2005 and December 31, 2004
($ 000, except unit and per unit amounts)
(unaudited)
March 31 Dec. 31
2005 2004
------------- -------------
ASSETS
Current:
Cash 665 183
Accounts receivable 5,275 5,938
Inventory 8,305 8,115
Prepaid expenses 71 263
Derivative contracts 421 580
------------- -------------
14,737 15,079
Property, plant and equipment 9,399 9,895
Goodwill 16,507 16,507
Other assets 298 849
Employee future benefits 109 76
------------- -------------
41,050 42,406
------------- -------------
------------- -------------
LIABILITIES
Current:
Accounts payable and accrued liabilities 3,340 3,879
Customer deposits 807 726
Current portion of long-term debt - 300
------------- -------------
4,147 4,905
Long-term debt 9,700 9,700
------------- -------------
13,847 14,605
------------- -------------
UNITHOLDERS' EQUITY
Trust units 83,021 83,021
Deficit (55,818) (55,220)
------------- -------------
27,203 27,801
------------- -------------
41,050 42,406
------------- -------------
------------- -------------
General Donlee Income Fund
Consolidated Statements of Operations and Deficit
For the periods ended March 31, 2005 and 2004
($ 000, except unit and per unit amounts)
(unaudited)
Three-Month Three-Month
Period Ended Period Ended
Mar. 31/05 Mar. 31/04
------------- -------------
Sales 8,063 8,940
Cost of sales 6,706 6,765
------------- -------------
Gross profit 1,357 2,175
------------- -------------
Expenses:
Selling, general and administrative 937 746
Interest 113 115
Foreign exchange loss 38 85
Amortization of other assets 641 646
------------- -------------
1,729 1,592
------------- -------------
Earnings (loss) before undernoted item (372) 583
Gain on disposal of property, plant and
equipment - (31)
------------- -------------
Net earnings (loss) for period (372) 614
Deficit at beginning of period (55,220) (29,452)
Distributions paid to unitholders (226) (1,566)
------------- -------------
Deficit at end of period (55,818) (30,404)
------------- -------------
Net earnings (loss) per trust unit -
Basic and diluted (8,947,000 units) $ (0.042) $ 0.069
------------- -------------
------------- -------------
Distributions per trust unit -
Basic and diluted (8,947,000 units) $ 0.025 $ 0.175
------------- -------------
------------- -------------
General Donlee Income Fund
Consolidated Statements of Cash Flows
For the periods ended March 31, 2005 and 2004
($ 000, except per unit amounts)
(unaudited)
Three-Month Three-Month
Period Ended Period Ended
Mar. 31/05 Mar. 31/04
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the period (372) 614
Add (deduct) items not affecting cash:
Amortization of property, plant & equipment 510 441
Amortization of other assets 641 646
Gain on disposal of property, plant and
equipment - (31)
Derivative contracts 159 262
Employee future benefits (33) 82
------------- -------------
905 2,014
Net change in non-cash working capital
items related to operating activities 207 (1,351)
------------- -------------
Cash provided by operating activities 1,112 663
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (14) (197)
Proceeds from disposal of property, plant
and equipment - 64
Deferred finance charges (90) -
Restricted cash - (1,147)
------------- -------------
Cash used in investing activities (104) (1,280)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances of long-term debt - 1,475
Repayment of long-term debt (300) -
Distributions paid (226) (1,566)
------------- -------------
Cash used in financing activities (526) (91)
------------- -------------
Net increase (decrease) in cash during the
period 482 (708)
Cash at beginning of period 183 2,486
------------- -------------
Cash at end of period 665 1,778
------------- -------------
------------- -------------
The notes to the above financial statements should be read in conjunction
with these statements. A full set of interim consolidated financial statements
and notes are available on the Financial Reports page of our website at
www.generaldonlee.com and also at www.sedar.com.
Please do not forget to join us for the webcast of our first quarter
conference call on Friday, May 13, 2005 at 3:00 p.m. The dial-in numbers are
toll free 1-800-814-4857 outside Toronto and 416-640-4127 in the Toronto area.
A telephone replay will be available from 6:00 p.m. on May 13 until May 20,
2005 and may be accessed by calling toll free 1-877-289-8525 outside Toronto
and 416-640-1917 in Toronto using the access code 2112350 followed by the
number sign. The archive of the Webcast will be available after 6:00 p.m. on
May 13, 2005. A transcript of the call will also be available on our Website.
For further information:
Gerald Thain
Chief Financial Officer,
tel: 416.743.4417
email: gthain@generaldonlee.com
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