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General Donlee Income Fund Reports Second Quarter 2005 Results
Toronto, Canada, Aug 15, 2005 - General Donlee Income Fund (TSX: GDI.UN) today
announced its financial results for the second quarter ended June 30, 2005.
Sales for the period were $8.8 million and net earnings were $0.9 million.
Distributable cash(1) for the second quarter totaled $1.6 million, or $0.179
per unit. Distributions paid in the second quarter totaled $0.2 million or
$0.025 per unit.
Financial Highlights
The following summary of financial data reflects the interim consolidated
results of operations of the Fund for the three-month and six-month periods
ended June 30, 2005:
<<
Three Months Ended Six Months Ended
------------------ ------------------
($ millions, except unit and June 30, June 30, June 30, June 30,
per unit amounts, unaudited) 2005 2004 2005 2004
-------- -------- -------- --------
Sales $ 8.8 $ 7.0 $ 16.9 $ 15.9
Gross profit 2.0 1.7 3.4 3.9
Net earnings before
goodwill charge 0.9 nil 0.5 0.6
Net earnings before charge
per unit(a) $ 0.098 $ 0.003 $ 0.056 $ 0.072
Net earnings (loss) 0.9 (13.5) 0.5 (12.9)
Net earnings (loss) per unit(a) $ 0.098 $ (1.506) $ 0.056 $ (1.437)
Distributable cash(1) 1.6 0.4 2.1 1.8
Distributable cash per unit(a) $ 0.179 $ 0.040 $ 0.231 $ 0.203
Cash distributions paid 0.2 1.2 0.5 2.8
Cash distributions paid
per unit(a) $ 0.025 $ 0.137 $ 0.050 $ 0.312
(a) based on 8,947,000 units.
During the second quarter of 2005 results for the aerospace and power
generation division showed some pick up, solely in the commercial and general
aerospace segment. The improvement was in line with the industry. Planned
military shipments were delayed, likely toward the end of the third quarter,
due to engineering challenges. Shipments in the industrial products division
improved in the second quarter, primarily reflecting the completion of delayed
shipments from 2004. The capital goods markets remained in a flat trend.
Conference Call
General Donlee Income Fund invites interested investors, analysts and
financial media to attend a conference call to be held Tuesday, August 16,
2004, at 10:00 a.m. EST, to review the results for the three-month period
ended June 30, 2005. Please access the conference call by dialing toll free
1-800-814-4860 or, in Toronto, 416-640-4127. A live Webcast of the conference
call will also be available at: www.generaldonlee.com by accessing the
Presentations page in the Investor Relations section of our Web site or at
www.newswire.ca/en/webcast/viewEvent.cgi?eventID=1198120. The
archive of the Webcast will be available at the same address as above and the
telephone replay will be available toll free at 1-877-289-8525 or, in Toronto
at 416-640-1917, both using the access code 21132926 followed by the number
sign.
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"),
which 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.
Management's Discussion and Analysis
Management's Discussion and Analysis of the interim consolidated
financial statements provides an overview of the results of operations for the
three- and six-month periods ended June 30, 2005. Comparisons are supplied for
the similar three- and six-month periods ended June 30, 2004. The following
information should be read in conjunction with the attached unaudited interim
consolidated financial statements (including the notes thereto), as well as
additional information that may be obtained from the audited consolidated
financial statements for the year ended December 31, 2004. The financial
report for the three- and six-month periods ended June 30, 2005, including a
full set of financial notes, is available on General Donlee Income Fund's Web
site at www.generaldonlee.com or on www.Sedar.com.
Overall Performance
Sales for the first six months of 2005 compared to the same period in
2004 reflect a 6% increase. Sales in the Company's aerospace and power
generation products division were marginally lower compared to the same period
in 2004, due primarily to engineering challenges with certain military
products which resulted in planned shipments for the first six months being
deferred, likely until the third quarter. In the industrial products division,
shipments in the first six months of 2005 increased 17% over the same period
in the prior year. 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 and
a concentrated effort to ship products on a timely basis.
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 has continued to generate positive 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. The consolidated net debt to equity ratio of the
Fund is low with modest interest requirements. With the pick-up in the
aerospace and power generations products division expected to continue and a
strong effort in the industrial products division to further restore margins,
when markets do recover, General Donlee expects to be in a good position to
take advantage of the opportunities.
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. The Fund's consolidated sales
for the second quarter ended June 30, 2005 totaled $8.8 million, up
$1.8 million or 26% from the $7.0 million recorded in the comparable quarter
in 2004. For the six months to-date in 2005, total sales were $16.9 million,
up $1.0 million or 6% from the $15.9 million in the comparable period last
year. On a sequential basis, sales in the second quarter of 2005 were 9%
higher than in the first quarter of 2005.
In the second quarter of 2005, the Fund recorded net earnings of
$0.9 million. In the second quarter of 2004 the Fund broke even before
recording a goodwill impairment charge of $13.5 million. Net loss in the
second quarter of 2004 totalled $13.5 million after the goodwill impairment
charge. For the six-month period ended June 30, 2005 the Fund earned
$0.5 million. In the comparable six-month period for 2004, the Fund incurred a
net loss of $12.9 million, reflecting a non-cash goodwill impairment charge of
$13.5 million and earnings from operations of $0.6 million.
Sales
Total Fund sales for the quarter ended June 30, 2005 were $8.8 million,
an increase of $1.8 million, compared to the similar period in 2004. For the
six-month period ended June 30, 2005, sales were $16.9 million, an increase of
$1.0 million, compared to the similar period last year.
Second Year-to-
Quarter date
----------- Incr/ ----------- Incr/
($ millions) 2005 2004 (Dec) 2005 2004 (Dec)
-------------------- --------------------
Aerospace and power
generation products 4.5 3.5 1.0 8.6 8.8 (0.2)
Industrial products 4.3 3.5 0.8 8.3 7.1 1.2
-----------------------------------------
8.8 7.0 1.8 16.9 15.9 1.0
-----------------------------------------
Aerospace and Power Generation Products Division
For the second quarter and year-to-date periods ended June 30, 2005, the
aerospace and power generation division's net increase in sales compared to
the same period in the prior year can be attributed as follows:
($ millions) Increase/(Decrease)
-------------------
Second Quarter Year-to-Date
-------------- ------------
Military aerospace (.1) (1.1)
Commercial aerospace 1.3 2.1
Industrial 0.0 0.2
Power generation (0.2) (1.4)
----- -----
1.0 (0.2)
----- -----
In the second quarter of 2005, the volume increase in the commercial
aerospace segment reflects increased orders.
For the six months to June 30, 2005, military shipments that had been
scheduled for the first quarter have been deferred likely until the third
quarter, as a result of engineering challenges. Commercial aerospace business
remains strong, whereas, activity in the power generation segment continues to
be substantially below the level of last year.
Industrial Products Division
In the second quarter ended June 30, 2005, the industrial products
division's sales of gears, splines and assemblies were $4.3 million, an
increase of $0.8 million, or 23% over the same period in 2004. The increased
shipments in the quarter reflect the balance of the delayed orders from the
year 2004.
The division's sales for the six months ended June 30, 2005 were
$8.3 million, an increase of $1.2 million, or 17% over the same period last
year, reflecting the shipment of the delayed orders from 2004. The industrial
products division continues to wait for an upturn in the capital goods markets
it serves, with current trends remaining relatively flat.
Foreign Currency
In both the second quarter and year-to-date periods ended June 30, 2005,
the Canadian dollar was on average 8% higher versus the U.S. dollar for the
comparable periods in 2004, which had adverse impacts on consolidated sales of
approximately $0.3 million and $0.6 million respectively. These levels exclude
the impact of foreign exchange forward contracts.
Backlog
The sales order backlog at June 30, 2005 totaled $43.4 million, a
decrease of 9% compared to the $47.7 million total at December 31, 2004. The
aerospace and power generation division accounts for approximately 94% of the
total backlog, while the industrial products division, which has a shorter
product cycle, accounts for the balance. The proportion contributed by the
industrial products division is similar to last year. The backlog decline in
the period reflects an excess of shipments compared with new orders received
in the period. The impact of foreign currency rate changes is minimal.
Gross Profit
Gross profit for the second quarter ended June 30, 2005 has improved over
the same quarter for 2004, however the six-month period ended June 30, 2005 is
still below the similar period in 2004.
2005 2004
---- ----
Gross % of Gross % of
($ millions) Profit Sales Profit Sales
------ ----- ------ -----
Quarter ended June 30 2.0 22.7% 1.7 23.7%
Six months ended June 30 3.4 19.9% 3.9 24.3%
The gross profit percentage level for the three months ended June 30,
2005 is significantly improved over the 16.8% level achieved in the first
quarter of the year. It reflects increased operating efficiencies, as some of
the operational issues have been resolved in the industrial products division.
In addition sales volume increases and product mix in the aerospace and power
generation division contributed to an improved gross margin level. The lower
gross profit percentage level for the six months ended June 30, 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 (as discussed in
the Foreign Currency section above) and under-utilization of certain machine
centres in the industrial products division.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended
June 30, 2005 were $0.9 million or 9.7% of sales, and included Fund costs of
$0.3 million. Selling, general and administrative expenses for the same period
ended June 30, 2004, were $0.8 million or 11.4% of sales, and included Fund
costs of $0.2 million.
Selling, general and administrative expenses for the six-month period
ended June 30, 2005 were $1.8 million, or 10.6% of sales, and included Fund
costs of $0.5 million. Selling, general and administrative expenses for the
six-month period ended June 30, 2004 were $1.6 million or 9.9% of sales, and
included Fund costs of $0.4 million.
Interest Expense
Interest expense was $0.1 million on the $9.7 million term loan for the
quarter ended June 30, 2005. Interest expense for the same period ended
June 30, 2004 was $0.1 million. Interest expense for the six-month period
ended June 30, 2005 was $0.2 million, approximately equal to the total for the
six-month period ended June 30, 2004.
Foreign Exchange (Gain) Loss
Foreign exchange gain reflects mainly the net impact of the Company's
foreign exchange forward contracts which, when marked-to-market at June 30,
2005, produced a foreign exchange gain of $0.1 million in the second quarter
of 2005. Foreign exchange loss for the second quarter ended June 30, 2004 was
$0.1 million. Foreign exchange gain on the Company's foreign exchange forward
contracts for the six-month period ended June 30, 2005 was $0.03 million.
Foreign exchange loss during the six-month period ended June 30, 2004 was
$0.2 million.
The Company enters into foreign exchange forward contracts to seek to
minimize its exposure to fluctuations in foreign currency exchange rates.
These derivative products do not qualify for hedge accounting treatment;
therefore, the contracts are recorded on the consolidated balance sheet at
fair value with a corresponding gain or loss recorded in earnings. As
exchange rates fluctuate, foreign exchange gains and losses vary from period
to period.
Amortization
Second Quarter Year-to-date
-------------- --------------
($ millions) 2005 2004 2005 2004
---- ---- ---- ----
Property and equipment (a) 0.5 0.5 1.0 0.9
Other assets 0.2 0.6 0.9 1.3
--- --- --- ---
0.7 1.1 1.9 2.2
-------------------------------------------------------------------------
(a) Included in cost of sales
The value of the contracted sales agreements (Other assets) that were
acquired in May 2002 are now fully amortized at the end of April 2005,
resulting in a reduction in amortization expense of $0.4 million for 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.
During the second quarter of 2004, the Fund recorded a non-cash
impairment charge of $13.5 million. Allocation of the impairment charge was
$10.35 million against the aerospace and power generation products division
and $3.15 million against the industrial products division.
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)
Net earnings of the Fund for the quarter ended June 30, 2005 were
$0.9 million. For the comparable quarter ended June 30, 2004, the net loss of
the Fund was $13.5 million after the goodwill impairment charge. For the
six-month period ended June 30, 2005, net earnings were $0.5 million, which
compared to a net loss of $12.9 million after the goodwill impairment charge
of $13.5 million for the six-month period ended June 30, 2004. The following
table outlines the earnings components that contributed to these consolidated
results.
Second Quarter Year-to-date
-------------- ------------
2004(a) 2004(a)
------------- -------------
Before After Before After
($ millions) 2005 G/W G/W 2005 G/W G/W
------ ------ ------ ------ ------ -----
Aerospace and power
generation products 0.8 0.5 (9.9) 0.8 0.9 (9.5)
Industrial products 0.4 (0.3) (3.4) 0.2 0.1 (3.0)
Fund (0.3) (0.2) (0.2) (0.5) (0.4) (0.4)
------ ------ ------ ------ ------ -----
0.9 0.0 (13.5) 0.5 0.6 (12.9)
------ ------ ------ ------ ------ -----
(a) G/W equals goodwill
Quarterly Financial Information
-------------------------------------------------------------------------
($000, except 2005 2005 2004 2004
per unit amounts) Second First Fourth Third Rolling
Quarter Quarter Quarter Quarter 12 months
-------------------------------------------------------------------------
Total sales 8,823 8,063 8,063 6,264 31,213
-------------------------------------------------------------------------
Net earnings
(loss) before
goodwill charge 878 (372) 558 (13) 1,051
-------------------------------------------------------------------------
Net earnings (loss) 878 (372) 558 (9,663) (8,599)
-------------------------------------------------------------------------
Net earnings
(loss) before
goodwill per unit
(basic and
diluted) $ 0.098 $ (0.042) $ 0.062 $ (0.001) $ 0.117
-------------------------------------------------------------------------
Net earnings (loss)
per unit (basic
and diluted) $ 0.098 $ (0.042) $ 0.062 $ (1.080) $ (0.962)
-------------------------------------------------------------------------
Distributable cash(1) 1,602 465 969 591 3,627
-------------------------------------------------------------------------
Cash distributions 225 226 226 782 1,459
-------------------------------------------------------------------------
-------------------------------------------------------------------------
($000, except 2004 2004 2003 2003
per unit amounts) Second First Fourth Third Rolling
Quarter Quarter Quarter Quarter 12 months
-------------------------------------------------------------------------
Total sales 6,989 8,940 9,372 9,161 34,462
-------------------------------------------------------------------------
Net earnings before
goodwill charge 25 614 1,151 1,565 3,355
-------------------------------------------------------------------------
Net earnings (loss) (13,475) 614 1,151 1,565 (10,145)
-------------------------------------------------------------------------
Net earnings before
goodwill per unit
(basic and
diluted) $ 0.003 $ 0.069 $ 0.129 $ 0.175 $ 0.376
-------------------------------------------------------------------------
Net earnings (loss)
per unit (basic
and diluted) $ (1.506) $ 0.069 $ 0.129 $ 0.175 $ (1.133)
-------------------------------------------------------------------------
Distributable cash(1) 361 1,455 2,063 2,595 6,474
-------------------------------------------------------------------------
Cash distributions 1,228 1,566 1,567 2,461 6,822
-------------------------------------------------------------------------
General Donlee's business operations have proven to be 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, 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 June 30, 2005, the
Company had foreign currency forward exchange contracts outstanding to sell
U.S. $9.4 million at an average exchange rate of CDN $1.2471 per U.S dollar
(U.S. $0.8019 per Canadian dollar), maturing from July 2005 to December 2006.
Balance Sheet
Consolidated working capital at June 30, 2005 was $11.9 million. At
December 31, 2004, working capital totaled $10.2 million. The current ratio at
June 30, 2005 was 3.2:1.0, which is up from 3.1:1.0 at December 31, 2004.
The consolidated net debt to equity ratio was 0.31:1.00 at June 30, 2005
(total debt net of cash), down from the December 31, 2004 level of 0.35:1.00.
In the first quarter of 2005, $0.3 million of the term loan was repaid.
Units Outstanding
Upon completion of the initial public offering in May 2002, the Fund had
8,947,000 units outstanding. To-date since May 2002, no units have been issued
or retired, and as at June 30, 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 Unitholders of the Fund, and third party bank
interest, as well as other ongoing operational requirements. There is more
than adequate working capital to support the Company's on-going current
operations. The consolidated net debt to equity ratio is low and the Company
has an available operating credit facility of $3.0 million.
Cash Flow From Operating Activities
During the quarter ended June 30, 2005, cash provided by operating
activities was $0.7 million. This was comprised of cash flows from operations
of $1.7 million, while non-cash working capital items required $1.0 million,
reflecting increases in prepaid expenses and work-in-process inventory,
partially offset by decreases in accounts receivable and increases in accounts
payable. The increase in prepaid expenses reflects the annual renewal of the
Company's insurance polices and the increase in work-in-process inventory
reflects the investment in material and labour and overhead as a result of the
delay in the military shipment, as discussed above and increased production
levels in the aerospace and power generation division. Higher accounts payable
reflect the increased raw material purchasing activity required by increased
production levels.
For the quarter ended June 30, 2004, cash provided from operating
activities was $1.5 million, comprised of $1.2 million from operations, while
non-cash working capital items contributed a further $0.3 million. This
working capital increase reflected lower accounts receivable partially offset
by higher inventories.
During the six-month period ended June 30, 2005, cash provided by
operating activities was $1.8 million. This was comprised of cash flows from
operations of $2.6 million, while non-cash working capital items required
$0.8 million, reflecting increases in prepaid expenses and work-in-process
inventory, partially offset by decreases in accounts receivable and increases
in accounts payable. For the six-month period ended June 30, 2004, cash
provided from operating activities was $2.1 million, comprised of $3.2 million
from operations, while non-cash working capital items required $1.1 million,
principally due to reduced accounts payable.
Distributions
Distributable Cash(1)
For the quarter June 30, 2005, distributable cash(1) was $1.6 million or
$0.179 per unit. For the quarter ended June 30, 2004, distributable cash(1)
was $0.4 million or $0.040 per unit.
For the six-month period ended June 30, 2005, distributable cash(1) was
$2.1 million or $0.231 per unit. For the six-month period ended June 30,
2004, distributable cash(1) was $1.8 million or $0.203 per unit.
The following table shows the calculation of distributable cash(1)
reflecting cash flows from operations and cash requirements for capital
expenditures.
Six-Month
Quarter Ended Period Ended
------------- ------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------- -------- -------- --------
Cash provided by
operating activities 737 $ 1,485 1,849 $ 2,148
Net changes in non-cash
working capital items 958 (320) 751 1,031
-------- -------- -------- --------
Cash provided by
operating activities 1,695 1,165 2,600 3,179
Add (deduct) items
not affecting cash:
Derivative contracts (139) (184) (298) (446)
Employee future benefits 46 131 79 49
Gain on disposal of equipment 0 0 0 31
-------- -------- -------- --------
1,602 1,112 2,381 2,813
Term loan repayment 0 0 (300) 0
Advance of long-term debt (capital) 1,475
Repayment of long-term debt
(capital) (441)
Restricted cash applied 1,147
Purchases of property,
plant and equipment
(net of proceeds from disposal) 0 (1,898) (14) (2,031)
-------- -------- -------- --------
Distributable cash(1) 1,602 361 2,067 1,816
-------- -------- -------- --------
-------- -------- -------- --------
Cash distributions
paid to Unitholders 225 1,228 451 2,794
-------- -------- -------- --------
Net earnings (loss) per unit $ 0.098 $(1.506) $ 0.056 $(1.437)
-------- -------- -------- --------
Distributable cash(1) per unit $ 0.179 $ 0.040 $ 0.231 $ 0.203
-------- -------- -------- --------
Cash distributions paid per unit $ 0.025 $ 0.137 $ 0.050 $ 0.312
-------- -------- -------- --------
(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 adjusted to remove changes in
non-cash working capital 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. 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 June 30,
2005 amounted to $0.2 million or $0.025 per unit. The $0.1 million
distribution for the month of June 2005 was paid July 29, 2005, and is not
included in the preceding quarterly figure. For the six-month period ended
June 30, 2005, cash distributions paid to Unitholders were $0.5 million or
$0.050 per unit.
For the quarter ended June 30, 2004 cash distributions amounted to
$1.2 million or $0.137 per unit. For the six-month period ended June 30, 2004,
cash distributions paid to Unitholders were $2.8 million or $0.312 per unit.
Details of the cash distributions paid for the six months ended June 30,
2005 are:
Period Record Date Payment Date Per Unit Total
------ ----------- ------------ -------- -----
($ 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
------- ---
First quarter sub-total $0.0252 226
------- ---
March April 26 April 29 0.0084 75
April May 26 May 31 0.0084 75
May June 27 June 30 0.0084 75
------- ---
Second quarter sub-total $0.0252 225
------- ---
Year-to-date total $0.0504 451
------- ---
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
second quarter defaults related to a total of $2.6 million of unpaid interest
(2004 - $2.2 million). Year-to-date in 2005, the Trustees have formally waived
$5.4 million of unpaid interest (2004 - $3.9 million). The unpaid back
interest for the second quarter and year-to-date to June 30, 2005 will
therefore not be recoverable by the Fund, and the Company is not in default
under the note indenture.
Outlook for Future Distributions
In October 2004, the Fund reported in a press release that the largest
customer of the industrial products division had terminated a sourcing
agreement with a view to increasing its overseas outsourcing of components.
After discussions with the customer it was hoped that the division would
receive substitute volumes of parts and components that were not intended to
be sourced overseas. However, Management at that time warned that the time
lag, the margins and the engineering-related costs between losing the
production to overseas sourcing and the anticipated substitute volume was
unknown and was at that time expected to have a negative impact on General
Donlee's sales and margins in the short to mid-term. In actual fact, a
substantial volume of components were displaced from the industrial products
division and switched to overseas outsourcing. Substitute orders have been
received from the customer amounting to approximately the same sales value as
those lost, however, the change in production mix has had some adverse impact
on the division's margins, as was expected. Current discussions with the
customer lead Management to expect that further components may be removed from
the industrial products division's production mix however, at this time there
has been no indication from the customer the extent to which sales revenue
might be impacted adversely or that there will be any substitute production
allocated to our division.
In attempting to assess the changes in the relationship with this major
customer and the mid to longer-term impact on the Fund's sales revenue,
margins and cash flow, Management expects that the Fund should be in a
position to continue to distribute the current annual level of $0.10 per unit
(or higher amounts) for the foreseeable future. Management bases this opinion
on the pick up in sales and cash flow generation in the aerospace and power
generation division that is occurring in 2005, which is more than offsetting
the adverse impact in the industrial products division.
Capital Resources
Credit Facilities
During the first quarter, the Company negotiated a renewed credit
arrangement 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 first quarter of 2005, the original $10.0 million non-
amortizing term facility was reduced to $9.7 million and was fully drawn at
June 30, 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 June 30, 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 June 30, 2005, the Company was compliant with these key financial loan
covenants.
Additions to Property, Plant and Equipment
Additions to property, plant and equipment were nil for the quarter ended
June 30, 2005 and $0.01 million for the six-month period ended June 30, 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. Management is currently evaluating the
acquisition of a large capacity multi-functional machining-centre which would
be funded by the operating lease facility. The purchase of this equipment is
contingent on formalizing a 3-year contract with an existing customer in the
aerospace and power generation segment. If this project were to proceed,
Management believes the expenditure of funds would be primarily in the year
2006, financed by the $4.0 million operating lease facility.
Contractual Obligations
($ 000) Payment Due by Period
Total 1 Year 1-3 4-5 Over
----- ------ --- --- ----
or less Years Years 5 Years
------- ----- ----- -------
Bank debt 9,700 0 9,700 0 0
------------------------------------------
Total contractual obligations 9,700 0 9,700 0 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 actuarial review completed
as at December 31, 2004. The results of the review require the Company to make
special payments over the next five years to deal with a pension deficiency,
consisting of a going concern deficiency of $0.7 million and a solvency
deficiency of $1.9 million. The required payment for 2005 in respect of the
total deficiency is estimated at $0.5 million. In addition, another actuarial
review is required as of December 31, 2005, as the actuarially estimated asset
to solvency liability ratio of the plan is approximately 76% as at
December 31, 2004.
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 the Foreign
Exchange section).
Transactions with Related Parties
The Fund did not have any material transactions with related parties
during the second quarter of 2005 or since the inception of the Fund's
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 consolidated 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 period. 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 June 30, 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. For the six months ended June 30, 2005 the Company made
contributions to the pension fund of $0.4 million, which included $0.2 million
to partially fund the deficiency and $0.2 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 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 June 30, 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 the Company's 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 in-house or 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. Of the two largest customers,
one from the aerospace and power generation products division represented 15%
of total sales and one from the industrial products division which accounted
for 27% of total Company sales. In the six-month period ended June 30, 2005, a
similar pattern existed with 79% of total sales made to 10 of its customers.
Of the two largest customers, one from the aerospace and power generation
products division represented 16% of total sales and one from the industrial
products division accounted for 30% of total sales. In the third quarter of
2004, a change in the sourcing relationship occurred with the largest customer
of the industrial products division. This change has had an adverse impact on
the cash flow generated by the Company; however, at this point, it is very
difficult to quantify the future impact. In addition, termination or reduction
by one or both of such customers of their relationship or volume of business
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.
General Donlee's ability to make repayments of the principal or interest
on, or to refinance, its indebtedness will depend on its future operating
performance and cash flow, which are subject to prevailing economic
conditions, prevailing interest rate levels, and financial, competitive,
business and other factors, many of which are beyond its control.
The Company's credit facility contains three financial covenants that
limit the discretion of General Donlee with respect to certain business
matters. The covenants include a fixed charge covenant, a senior debt covenant
and an annual cash distributions covenant. A failure to comply with the
obligations in the Company's credit facility could result in an event of
default, which if not cured or waived, could permit acceleration of the
relevant indebtedness. These covenants place restrictions on, among other
things, the ability of the Company to incur additional indebtedness, to pay
interest to the Fund, to declare and pay distributions, to create liens or
other encumbrances, to make payments, investments, loans and guarantees and to
sell or otherwise dispose of assets and merge or consolidate with another
entity.
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
increase 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 June 30, 2005.
At June 30, 2005, General Donlee's sales order backlog totaled
$43.4 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 relatively inactive. While market conditions continue to be
challenging, we are cautiously optimistic 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 in order to seek to
generate higher gross profit margins.
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) on
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 Management Information Circular.
Consolidated Interim Financial Statements
The following unaudited Interim Consolidated Financial Statements have
not been reviewed by the Fund's auditors.
The notes to the following Interim Consolidated Financial Statements
should be read in conjunction with these statements. A full set of Interim
Consolidated Statements and notes are available on www.sedar.com or on the
Fund's Website www.generaldonlee.com in the Investor Relations section under
the heading Financial Statements.
General Donlee Income Fund
Interim Consolidated Balance Sheets
As at June 30, 2005 and December 31, 2004
(unaudited)
(in thousands of dollars, except unit and per unit amounts)
-------------------------------------------------------------------------
June 30, December 31,
2005 2004
-------------------------------------------------------------------------
(audited)
Assets
Current
Cash and cash equivalents $ 1,177 $ 183
Accounts receivable 5,102 5,938
Inventory 10,212 8,115
Prepaid expenses 474 263
Derivative contracts 282 580
-------------------------------------------------------------------------
17,247 14,219
Property, plant and equipment 8,891 9,895
Goodwill 16,507 16,507
Other assets 82 849
Future income taxes 155 76
-------------------------------------------------------------------------
$ 42,882 $ 42,406
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities $ 4,545 $ 3,879
Customer deposits 781 726
Current portion of long-term debt - 300
-------------------------------------------------------------------------
5,326 4,905
-------------------------------------------------------------------------
Long term debt 9,700 9,700
-------------------------------------------------------------------------
15,026 14,605
-------------------------------------------------------------------------
Unitholders' Equity
Trust units 83,021 83,021
Deficit (55,165) (55,220)
-------------------------------------------------------------------------
27,856 27,801
-------------------------------------------------------------------------
$ 42,882 $ 42,406
-------------------------------------------------------------------------
-------------------------------------------------------------------------
General Donlee Income Fund
Interim Consolidated Statements of Operations and Deficit
For the Period Ended June 30, 2005
(unaudited)
(in thousands of dollars, except unit and per unit amounts)
-------------------------------------------------------------------------
Three-Month Three-Month Six-Month Six-Month
Period Period Period Period
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Sales $ 8,823 $ 6,989 $ 16,886 $ 15,929
Cost of sales 6,824 5,371 13,530 12,052
-------------------------------------------------------------------------
Gross profit 1,999 1,618 3,356 3,877
-------------------------------------------------------------------------
Expenses
Selling, general and
administrative 857 754 1,794 1,584
Interest 116 121 229 236
Foreign exchange (gain)
loss (68) 72 (30) 157
Amortization of other
assets 216 646 857 1,292
-------------------------------------------------------------------------
1,121 1,634 2,850 3,269
-------------------------------------------------------------------------
Earnings before undernoted
items 878 25 506 608
Gain on disposal of property,
plant and equipment - - - (31)
Goodwill impairment charge - 13,500 - 13,500
-------------------------------------------------------------------------
Net earnings (loss) for the
period 878 (13,475) 506 (12,861)
Deficit at beginning of
period (55,818) (30,404) (55,220) (29,452)
Distributions paid to
unitholders (225) (1,228) (451) (2,794)
-------------------------------------------------------------------------
Deficit at
end of period $ (55,165) $ (45,107) $ (55,165) $ (45,107)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss per trust unit -
Basic and diluted
(8,947,000 units) $ 0.098 (1.506) $ 0.056 $ (1.437)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per trust
unit -
Basic and diluted
(8,947,000 units) $ 0.025 $ 0.137 $ 0.050 $ 0.312
-------------------------------------------------------------------------
-------------------------------------------------------------------------
General Donlee Income Fund
Interim Consolidated Statements of Cash Flows
For the Period Ended June 30, 2005
(unaudited)
(in thousands of dollars, except unit and per unit amounts)
-------------------------------------------------------------------------
Three-Month Three-Month Six-Month Six-Month
Period Period Period Period
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Cash flows from operating
activities
Net earnings (loss) for
the period $ 878 $ (13,475) $ 506 $ (12,861)
Add (deduct) items not
affecting cash:
Amortization of property,
plant and equipment 508 441 1,018 882
Amortization of other
assets 216 646 857 1,292
Gain on disposal - - - (31)
Derivative contracts 139 184 298 446
Employee future benefits (46) (131) (79) (49)
Goodwill impairment
charge - 13,500 - 13,500
-------------------------------------------------------------------------
Cash provided by operating
activities before changes
in non-cash working
capital 1,695 1,165 2,600 3,179
Net change in non-cash
working capital items
related to operating
activities (958) 320 (751) (1,031)
-------------------------------------------------------------------------
Cash provided by operating
activities 737 1,485 1,849 2,148
-------------------------------------------------------------------------
Cash flows from investing
activities
Purchase of property, plant
and equipment - (1,898) (14) (2,095)
Proceeds from disposal of
property plant and
equipment - - - 64
Deferred finance charges - - (90) -
Restricted cash - 1,147 - -
-------------------------------------------------------------------------
Cash used in investing
activities - (751) (104) (2,031)
-------------------------------------------------------------------------
Cash flows from financing
activities
Advances of long-term
debt - - - 1,475
Repayment of long-term
debt - (441) (300) (441)
Distributions paid (225) (1,228) (451) (2,794)
-------------------------------------------------------------------------
Cash used in financing (225) (1,669) (751) (1,760)
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period 512 (935) 994 (1,643)
Cash and cash
equivalents at
beginning of period 665 1,778 183 2,486
-------------------------------------------------------------------------
Cash and cash
equivalents at end
of period $ 1,177 $ 843 $ 1,177 $ 843
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Please do not forget to join us for the broadcast of our second quarter
conference call on Tuesday, August 16, 2005 at 10:00 a.m. The dial-in numbers
are toll free 1-800-814-4860 and 416-640-4127 in the Toronto area. A telephone
replay will be available from 1:00 p.m. on August 16, 2005 and may be accessed
by calling toll free 1-877-289-8525 or 416-640-1917 in the Toronto area, using
the access code 21132926, followed by the number sign, for both areas. The
audio archive of the Webcast will be available after 1:00 p.m. on August 16,
2005 and a transcript of the conference call will be available on our Website
on August 18, 2005.
For further information:
Gerald Thain
Chief Financial Officer,
tel: 416.743.4417
email: gthain@generaldonlee.com
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