PRT Forest Regeneration Income Fund. Consolidated Financial Statements December 31, 2010 and 2009 (in thousands of dollars)

Transcription

1 PRT Forest Regeneration Income Fund Consolidated Financial Statements December 31, 2010 and 2009 (in thousands of dollars) 2010

2 To the Unitholders Independent Auditors Report We have audited the accompanying consolidated financial statements of PRT Forest Regeneration Income Fund, which comprise the consolidated balance sheets as at December 31, 2010 and December 31, 2009, the consolidated statements of operations, comprehensive income (loss) and cumulative earnings and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of PRT Forest Regeneration Income Fund as at December 31, 2010 and December 31, 2009, and its consolidated results of operations and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. March 16, 2011 Victoria, Canada Page 2

3 Consolidated Balance Sheets As at December 31, 2010 and 2009 (in thousands of dollars) Assets Current assets Cash and cash equivalents $ 92 $ - Accounts receivable (note 19) 6,147 11,237 Inventories (note 4) 1,576 1,422 Prepaid expenses and deposits Unbilled revenue 1,167 1,801 9,200 14,684 Investment (note 5) Property, plant and equipment (note 6) 26,277 26,674 Property, plant and equipment held for sale (note 7) Intangible assets (note 8) Liabilities $ 36,022 $ 42,895 Current liabilities Operating line (note 9) $ - $ 3,566 Accounts payable and accrued liabilities 2,407 1,799 Current portion of long-term debt (note 10) 230 1,698 2,637 7,063 Long-term debt (note 10) 898 3,456 Future income taxes (note 11) ,616 10,622 Unitholders' Equity Capital contributions (note 12) 90,485 90,395 Cumulative earnings 13,946 13,982 Unit option grants Cumulative distributions declared (note 13) (72,184) (72,184) 32,406 32,273 $ 36,022 $ 42,895 Commitments (note 18) Subsequent events (note 22) See accompanying notes to these consolidated financial statements. Page 3

4 Consolidated Statements of Operations, Comprehensive Income (Loss) and Cumulative Earnings For the years ended December 31, 2010 and 2009 (in thousands of dollars, except per unit amounts) Revenue $ 25,965 $ 30,062 Expenses Costs of production 15,562 19,693 Selling, general and administration 7,588 7,905 Loss (gain) on foreign exchange 4 (91) Earnings before the following 2,811 2,555 Interest Amortization of property, plant and equipment 1,374 2,691 Amortization of intangibles Equity in earnings of investee (note 5) (89) (88) Loss (gain) on disposal of property, plant and equipment (note 15) 105 (1,797) Long-lived asset impairment charges - 2,558 Exit activity charges (note 14) 1, Loss before income taxes (59) (2,203) Recovery of income taxes (note 11) Net loss and comprehensive income (loss) (36) (1,829) Cumulative earnings - beginning of year 13,982 15,811 Cumulative earnings - end of year $ 13,946 $ 13,982 Basic and dilluted loss per Trust Unit (note 13) $ - $ (0.19) Weighted average number of Trust Units outstanding (note 13) 9,736,409 9,671,961 See accompanying notes to these consolidated financial statements. Page 4

5 Consolidated Statements of Cash Flows For the years ended December 31, 2010 and 2009 (in thousands of dollars) Cash flows from operating activities Net Loss $ (36) $ (1,829) Items not affecting cash Amortization of property, plant and equipment (excluding seedling containers) 1,374 2,691 Seedling container amortization included in costs of production Amortization of intangibles Recovery of future income taxes (22) (222) Loss (gain) on disposal of property, plant and equipment 105 (1,797) Long-lived asset impairment charges - 2,558 Equity in earnings of investee (note 5) (89) (88) Unrealized loss (gain) on foreign exchange 202 (248) Unrealized gain on interest rate swaps (63) (59) Unit option grants (note 12) ,380 2,179 Net change in non-cash working capital balances (note 16) 1,643 1,190 4,023 3,369 Cash flows from financing activities Distributions paid to Unitholders (note 13) - (192) Repayment of long-term debt (4,209) (266) Decrease in operating line (3,566) (2,489) Issuance of Trust Units (note 12) (7,685) (2,801) Cash flows from investing activities Repayment of loans by investee Dividend from investee Purchase of property, plant and equipment (1,785) (935) Disposal costs of property, plant and equipment (103) - Proceeds from disposal of property, plant and equipment (notes 7 & 15) 5, ,754 (760) Increase (decrease) in cash and cash equivalents 92 (192) Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year $ 92 $ - Supplemental cash flow information (note 16) See accompanying notes to these consolidated financial statements. Page 5

6 1. Organization and nature of operations PRT Forest Regeneration Income Fund (the Fund ) is an open-ended single purpose trust, created under the laws of British Columbia by a Declaration of Trust dated May 14, The Fund is the largest producer of container-grown forest seedlings in North America. The Fund provides seedling growing services from its nurseries in British Columbia, Alberta, Saskatchewan, Ontario and Oregon. These consolidated financial statements include the accounts of the Fund, its wholly owned subsidiary Pacific Regeneration Technologies Inc. ( PRT or the Company ) and PRT s wholly owned subsidiary companies. 2. Significant accounting policies Basis of presentation These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada (GAAP) and are presented in Canadian dollars. Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period. Revenue recognition Revenue from contracts is recognized as a percentage of the contract price, based on the percentage of total direct expenses incurred to total expected direct costs. Total revenue is recognized when seedling crops reach substantial completion, which is defined as meeting all contracted growth specifications. Any excess of revenues recorded using this percentage of completion method over amounts billed is recorded as unbilled revenue. The Fund uses this method of revenue recognition as it can reasonably estimate the expected costs and revenues of the contract based on the Fund s business practices, methods and experience. This method requires estimates of costs and profits over the full duration of the contract. Management regularly revises the underlying estimates of profitability and such adjustments are reflected in the statement of operations when known. Provisions for estimated losses, if any, are recognized in the period the loss is determined. Revenue from non-contracted goods and services is recognized when the goods are delivered or the service has been substantially rendered. Revenue from all sources is only recognized when collection is reasonably assured. Inventories Inventories of supplies are recorded at the lower of cost and replacement cost (which approximates net realizable value), with cost being determined on a weighted average basis. Seedling inventories ( spec stock ) are valued at the lower of average cost or net realizable value. Future income taxes The Fund accounts for income taxes using the asset and liability method. Future income taxes are recognized for the future income tax consequences of differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the Page 6

7 years in which the temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in income in the year that includes the enactment date. Future income tax assets are recorded in the financial statements if realization is considered more likely than not. Investments The Fund accounts for investments over which it exercises significant influence using the equity method. Under this method, the initial investment is recorded at cost and the Fund s pro rata share of the investees earnings or losses is included in results of operations. Dividends received are recorded as a decrease in the equity investment. Property, plant and equipment Property, plant and equipment are carried at cost less accumulated amortization. Useful lives are reviewed annually. Amortization related to seedling containers is included in costs of production in the consolidated statements of operations, comprehensive income (loss) and cumulative earnings. As part of the ongoing implementation plan for IFRS conversion at January 1, 2011, the Company has re-evaluated the useful lives of its long-lived assets. Amortization is calculated using the straightline method or declining balance method at rates that reflect the estimated useful lives of the assets as follows: Previously Re-evaluated Buildings years 50 years Greenhouses years years Equipment 3-15 years 5-10 years Seedling Containers 5 years 5 years The impact of this change in accounting estimate resulted in a decrease in amortization cost of $757 for the year ended December 31, The change has been applied on a prospective basis commencing in the first quarter of 2010, and is expected to result in proportionately lower amortization charges on property, plant and equipment in future years. Property, plant and equipment held for sale Property, plant and equipment held for sale represents assets being actively marketed for sale, recorded at lower of carrying value and fair value less cost to sell. Government grants PRT is under agreement to receive two government grants: an Innovative Clean Energy Fund (ICE) grant from the BC provincial government and an Industrial Research Assistance Program (IRAP) grant from the federal government. Both grants correspond to expenditures at the Red Rock nursery which relate to a biomass energy project. Government grants are only recognized when there is reasonable assurance that PRT will comply with the conditions attached to them and reasonable assurance that the grants will be received. GAAP provides two approaches to accounting for government grants: the capital approach and the income approach. PRT has chosen to account for government grants under the capital approach. The Page 7

8 grants are considered a financing device and since no repayment is expected, the grants are shown on the statement of financial position rather than recognized in profit or loss. The fair value of the asset is reduced by the grant amount to arrive at the carrying amount of the asset shown on the statement of financial position. The grant is then recognized in profit or loss over the life of a depreciable asset as a reduced depreciation expense. Intangibles assets Intangibles represent patents, customer lists, leases and non-competition agreements recorded on acquisition of subsidiaries. Intangibles are being amortized over their estimated useful lives of 5 to 20 years. Impairment of long-lived assets GAAP requires that a long-lived asset should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In assessing impairments management has concluded that Primary Assets of PRT, as defined in CICA HB 3063, are greenhouses and related structures for the consideration of impairment. Greenhouses with an appropriate maintenance program together with sustaining capital expenditures for infrastructure can be extremely long-lived and are therefore the most appropriate primary asset of the asset group. The nature of the PRT business is that, within the current operating year, specific cash flows can be identified with specific locations and therefore the assets at that location. However, from year-to-year the market environment changes enough that PRT cannot specifically identify which types of crops (e.g. species, crop rotation, age, etc.,) will be grown at any particular location, and capacity is managed on a pooled basis so that site by site analysis would be inappropriate. Therefore the most appropriate asset grouping over a number of years for an impairment analysis is the entire Company. Where a location is being closed, such that PRT is able to identify the specific cash flows to be associated with the long lived assets at that location in that year, and, where those long-lived assets are not planned to be reused at other nurseries in future years, PRT can identify the appropriate impairment charge for those assets. Property, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances suggest that the carrying amount of an asset may not be recoverable or may be in excess of its fair value. Impairment is assessed using a two step approach. Under the first step, affected assets are tested for recoverability by comparing the carrying amount of the assets to the undiscounted estimated future net cash flows expected from their use and disposal. If the carrying amount of the assets exceeds the undiscounted cash flows, they are considered to be impaired. If the asset is considered impaired, a second step is then carried out whereby an impairment loss is measured and recorded as the amount by which the carrying amount of the assets exceeds their fair value. Foreign exchange Foreign currency transactions are translated into Canadian dollars at the exchange rates in effect at the transaction dates. Monetary account balances denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet dates. Non-monetary account balances denominated in foreign currencies are translated at their historical exchange rates. Exchange gains and losses arising from the translation or settlement of foreign currency denominated monetary items are included in the determination of net earnings. Page 8

9 The accounts of the Fund s United States operations are considered to be integrated and are translated into Canadian dollars using the temporal method. Exchange gains and losses arising from the translation of the Fund s foreign operations are included in the determination of net earnings. Use of estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual amounts could differ from those estimates. The most significant estimates are related to the recoverability of accounts receivable, costs to complete contracts as a basis for revenue recognition, future income tax assets, asset impairment and useful lives for amortization. Financial instruments All financial instruments are required to be measured at fair value on initial recognition except for certain related party transactions. After initial recognition, financial instruments are measured at their fair values, except for financial assets classified as held-to-maturity or loans and receivables and other financial liabilities, which are measured at cost or amortized cost using the effective interest method. Financial assets classified as available-for-sale that do not have a quoted market price in an active market are measured at cost. Amortization related to financial assets classified as held-to-maturity or loans and receivables and other financial liabilities and unrealized gains and losses related to financial assets and financial liabilities classified as held-for-trading is recorded in net earnings for the year in which it arises. If a financial asset is classified as available-for-sale, the cumulative unrealized gain or loss is recognized in Accumulated Other Comprehensive Income (AOCI) and recognized in earnings upon the sale or other-than-temporary impairment. The Company has adopted the following classification for financial assets and financial liabilities: Cash and cash equivalents are classified as held-for-trading. Due to the short term to maturity of these financial instruments the carrying values approximate their fair values. Accounts receivable are classified as loans and receivables. Accounts payable and accrued liabilities, distributions payable, operating line and long-term debt are classified as other financial liabilities. The Company recognizes financing charges on financial instruments as an expense in the statement of operations. Accounting standards require all derivative financial instruments to be measured at fair value on the consolidated balance sheet, even when they are part of an effective hedging relationship. An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. If certain conditions are met, an embedded derivative is separated from the host contract (bifurcated) and accounted for as a derivative in the consolidated balance sheet, and measured at fair value. As at December 31, 2010, the Company does not have any material outstanding contracts or financial instruments with embedded derivatives that require bifurcation (2009 none). Page 9

10 Hedges PRT has not elected to use hedge accounting on any derivative financial instruments. Unit based compensation The Fund has a unit based compensation plan, which is described in note 12. The Fund accounts for all unit based payments to non-employees, and employee awards that are direct awards of units, calling for settlement in cash or other assets, or are unit appreciation rights that call for settlement by the issuance of equity instruments, using the fair value based method. The fair value of options is determined by the Black-Scholes pricing model with assumptions for risk-free interest rates, dividend yields, volatility of the expected market price of the Fund s Trust Units, and an expected life and rate of forfeiture of the options. Under the fair value based method, compensation cost attributable to awards to employees that are direct awards of unit appreciation rights that call for settlement by the issuance of equity instruments, is measured at fair value at the grant date and recognized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash or other assets is measured at fair value at issuance date and is recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For awards that vest at the end of the vesting year, compensation cost is recognized on a straight-line basis; for awards that vest on a graded basis, compensation cost is recognized on a prorata basis over the vesting year. Comprehensive income (loss) Comprehensive income (loss) represents the change in equity of an enterprise during a year from transactions and other events arising from non-owner sources including gains and losses arising on translation of self-sustaining foreign operations, gains and losses from changes in the fair value of available for sale financial assets and changes in fair value of the effective portion of cash flow hedging instruments. The Company has not recognized any adjustments through other comprehensive income (loss) for the years ended December 31, 2010 and Earnings (loss) per unit Earnings (loss) per unit is calculated based on the net earnings (loss) attributable to Units for the year divided by the weighted average number of Units issued and outstanding during the year. Diluted earnings (loss) per unit is calculated using the treasury stock method under which all options whose exercise price is less than or equal to the average Unit price of the Fund for the year are assumed to be exercised at the beginning of the year (or at the time of vesting if later) and the Fund using the resulting proceeds to purchase its units at the average market price during the year. The purchased units reduce the number of units issued upon exercise of the options and this net number is included in the denominator when calculating diluted earnings per unit. When the effect of options converted into common shares is anti-dilutive, including when the Company has incurred a loss for the period, basic and diluted loss per share are the same. 3. Adoption of new or future accounting changes Business Combinations (Section 1582): CICA Handbook Section 1582 was issued in January 2009 to replace Section 1581, Business Combinations. Section 1582 establishes standards for accounting for business combinations and will apply prospectively to business combinations for Page 10

11 acquisitions completed on or after January 1, The Fund is not evaluating the impact, if any, that this standard would have on its consolidated financial statements as the Fund is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) for all fiscal years beginning on or after January 1, International financial reporting standards ( IFRS ) In January 2006, the CICA ratified a strategic plan calling for the evolution and convergence of Canadian GAAP with IFRS, after a specified transition year, by publicly accountable enterprises in Canada. The CICA has more recently confirmed January 1, 2011 as the date IFRS will replace current Canadian standards and interpretations as GAAP for this category of reporting entity. As a result, the Fund will be required to prepare its consolidated financial statements in accordance with IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, The Fund is currently completing its implementation and conversion plan on the consolidated financial statements and disclosures of the Fund, and will issue its first set of financial reports under IFRS as at and for the year ending December 31, 2011 and for the period ending March 31, Further information on the implementation plan and anticipated changes to financial reporting may be found in the Fund s annual 2010 management s discussion and analysis. 4. Inventories PRT carries the following balances of raw materials consisting mainly of growing materials and supplies including: peat, sand and vermiculite, packaging material, and fertilizers and pesticides. Work in progress and finished goods both consist of seedlings grown specifically for non-contract sales: Raw Materials (Consumables) $ 1,152 $ 1,158 Work In Progress (Seedlings) Finished Goods (Seedlings) $ 1,576 $ 1,422 The cost of inventory expensed in cost of production in 2010 totaled $2,578 (2009 $3,460). In 2010, costs of production included $0 for unsold inventory provision (2009 of $414) 5. Investment In 2003, PRT acquired a 40% non-controlling interest in a privately held company for cash consideration of $742. The investment is accounted for by the equity method. The excess of the purchase price of the investment over the underlying book value at the date of acquisition, totalling $625, has been allocated to intangible assets, which are being amortized over their estimated useful lives on the basis of units sold. The investee is a supplier of software solutions for seedling supply management by forest companies and the investment has a carrying value as follows: Page 11

12 Opening carrying value $ 333 $ 265 Equity earnings of investee Amortization of intangible assets - (5) Dividends paid (120) - Repayment of shareholder loan (20) (20) Closing carrying value $ 281 $ 333 As at December 31, 2009, the intangible assets related to the investee were fully amortized. 6. Property, plant and equipment (excludes property held for sale see note 7) 2010 Cost Accumulated amortization Net Land $ 3,264 $ - $ 3,264 Buildings 6,963 1,758 5,205 Greenhouses 22,683 10,930 11,753 Equipment 20,239 15,014 5,225 Seedling containers 8,300 7, $ 61,449 $ 35,172 $ 26, Cost Accumulated amortization Net Land $ 3,264 $ - $ 3,264 Buildings 6,684 1,646 5,038 Greenhouses 22,485 10,588 11,897 Equipment 19,489 14,249 5,240 Seedling containers 8,141 6,906 1,235 $ 60,063 $ 33,389 $ 26,674 Page 12

13 The following summarizes amortization charged to earnings: Seedling container amortization included in costs of production $ 665 $ 851 Other amortization 1,374 2,691 Total amortization $ 2,039 $ 3,542 Included in property, plant and equipment is a reduction of $441 ( $145) for funds received under Provincial and Federal grant programs, including $101 ( $3) recorded as accounts receivable at year end. In October 2008, the Fund announced that it would close its seedling nursery facility in Maple Ridge, BC. The closure took place in phases and operations ceased in August of The Company relocated certain long-lived assets to other nursery locations in the first quarter of 2010 and disposed of other excess assets. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. As such, in relation to the Maple Ridge assets disposed of in 2010, no adjustments were made in the current year; however, in 2009, the Company recorded an impairment charge of $2,558 on property, plant and equipment located at that site. In November 2009 the Company announced the temporary closure of its Kirkland Lake, Ontario nursery and permanent closure of its Summerland, BC nursery facility. Property, plant and equipment previously located at Summerland has been relocated at other facilities within the PRT group of nurseries. 7. Property, plant and equipment held for sale The following summarizes the value of assets held for sale from the Maple Ridge site: Net Book Value Land $ - $ - Buildings Growing facilities Equipment - 32 $ - $ 775 All held for sale assets were disposed of in The disposal included a non-monetary transaction with the owner of the Maple Ridge site where certain PRT owned plant and equipment were exchanged for other movable and production equipment. The value was measured at carrying value with a difference of $42 in value paid by PRT. This non-monetary transaction generated no gain or loss. Page 13

14 8. Intangible assets PRT s intangible assets include customer lists acquired with the Coldstream and Maple Ridge, BC nurseries and certain agreements that arose from contractual agreements including non-competition agreements and leases. PRT amortizes intangibles over the term of those contracts. No additions or disposals took place during 2010 or PRT reclassified patents held on certain equipment to intangibles in 2010 (previously reported within equipment). The table below includes $133 gross, $58 net book value that, for comparative purposes was reported in property plant and equipment in 2009 (2009 NBV - $65). The following summarizes intangible assets held: 2010 Accumulated Cost amortization Net Customer lists $ 970 $ 970 $ - Non-competition agreements Lease Patent $ 1,683 $ 1,419 $ Cost Accumulated amortization Net Customer lists $ 970 $ 873 $ 97 Non-competition agreements Lease Patent Amortization expense for the year was $165 ( $267). 9. Operating line $ 1,683 $ 1,254 $ 429 PRT has a demand revolving operating facility with a major Canadian bank of up to $13,000 to fund the Company s working capital and general corporate requirements, and to provide temporary financing of capital expenditures prior to conversion of this financing to term debt. The amount of operating line available is dependent upon meeting certain margin requirements. As at December 31, 2010, $10,029 of the facility was available for use, based on margin requirements, and the Company had no drawings ( $3,566) of cash advances bearing interest at prime plus 1%. A first fixed and floating charge over PRT s assets is provided as security. 10. Long-term debt PRT repaid all Canadian bank term debt in February This includes all term debt disclosed below with the exception of the subsidiary s US$ debt (Term loan #2). Page 14

15 Term loan #2 was renewed with the Company s US lender on December 22, 2010 for $1,105, with a maturity date of November 30, PRT has entered a new term loan facility agreement with Farm Credit Canada ( FCC ) in December 2010 for $5,500. No draws were made on this facility in As at December 31, the following amounts have been drawn under the term debt facilities & lease agreements: Term loan #11a, bearing interest at prime plus 2%, maturing on October 1, 2011, with quarterly payments Term loan #9a, bearing interest at bank prime plus 2%, maturing on October 1, 2011, with quarterly payments Term loan #13, bearing interest at 6.05%, maturing October 1, 2012, with monthly payments Term loan #13a, bearing interest at prime plus 2%, maturing October 1, 2012, with monthly payments Term loan #16, bearing interest at 6.07%, maturing October 1, 2013, with monthly payments Term loan #16a, bearing interest at prime plus 2%, maturing October 1, 2013, with monthly payments Term loan #10 (USD), bearing interest at US Bank Rate plus 2%, maturing October 1, 2011, with blended monthly principal and interest payments based on a 10-year amortization period (US$549) Term loan #2 (USA), bearing interest at 5%, maturing on November 30, 2015, with blended monthly principal and interest payments based on a 5-year period (US$1,090) $ - $ ,078 1,450 Lease Agreements 50-1,128 5,154 Less: Current portion 230 1,698 $ 898 $ 3,456 Interest paid on long-term debt $ 114 $ 320 A first fixed and floating charge over the Company s nursery assets at the Pitt Meadows, Armstrong and Harrop, BC nurseries is provided as security for the FCC facilities, and a fixed and floating charge over nursery assets in Oregon, USA secure the US term debt facility. Page 15

16 The principal repayments required on the long-term debt facilities are as follows: Year ending December $ - $ 1, , Income taxes $ 1,078 $ 5,154 The Fund is not taxable on any income that is distributed to Unitholders. PRT is taxable on its income at Canadian statutory tax rates. a) The consolidated income tax recovery comprises the following: Current income taxes $ 1 $ 152 Future income taxes $ 23 $ 374 b) The recovery of income taxes shown in the consolidated statement of operations, comprehensive income and cumulative earnings differs from the amounts obtained by applying statutory tax rates to the earnings before income taxes for the following reasons: Income tax recovery computed at statutory rates $ 15 $ 667 Valuation allowances and other 8 (293) Recovery of income taxes $ 23 $ 374 c) The net future income tax liability comprises the following differences between book value and tax value at current tax rates: Future income tax liabilities Property, plant and equipment $ (895) $ (798) Tax loss carry-forwards and other 1,300 1,417 Valuation allowances (486) (722) Future income tax liability - net $ (81) $ (103) d) Non-capital loss carry-forwards in subsidiary companies start to expire commencing in Page 16

17 12. Capital contributions The Declaration of Trust provides that an unlimited number of Trust Units may be created and issued. Each Trust Unit represents an equal undivided beneficial interest in the assets of the Fund. All Trust Units of the Fund are of the same class with equal rights and privileges. Each Trust Unit is transferable and entitles the holder to participate equally in allocations and distributions, and to one vote at all meetings of Unitholders. Unitholders are not subject to future calls or assessments. Trust Units are redeemable at the holder s option at amounts related to market prices at the time, subject to a maximum of $75 in cash redemptions by the Fund in any particular month. The monthly redemption limitation may be waived at the discretion of the Trustees of the Fund. Redemption in excess of the maximum, assuming no waiving of the limitation, shall be paid by way of a distribution of a pro rata number of PRT common shares and unsecured variable interest rate subordinated notes (the Notes ). PRT has established an Employee Stock Ownership Plan ( ESOP ) whereby eligible directors and employees of PRT, or any subsidiary of PRT, can purchase Units of the Fund through payroll deduction. Under the terms of the ESOP, eligible employees can contribute between 1% and 10% of their earnings to the plan, and PRT will contribute 15% of the employee contribution toward the purchase price of Units and pay all transaction fees on Unit purchases made under the plan. The plan allows for Units to be purchased through the market or by way of treasury issuances on the same terms. Units outstanding as at December 31 are as follows: Capital Contributions Capital Contributions - Beginning of year $ 90,395 $ 90,249 Contributions from Units issued under ESOP program Capital Contributions - End of year $ 90,485 $ 90,395 Units outstanding - Beginning of year 9,715,858 9,603,116 Units issued under ESOP program 39, ,742 Units outstanding - End of year 9,754,979 9,715,858 The Fund has a Unit option plan whereby the Trustees of the Fund may, from time to time, grant options to purchase Units to eligible officers, employees and consultants of the Fund or any subsidiary, and to directors of any subsidiary. The aggregate number of Units reserved under the plan is 560,572. The maximum term of any option is ten years. The exercise price of an option cannot be less than the average of the Unit price at the close of business on the five trading days preceding the grant date. In February 2010 there were 120,000 Unit options granted to eligible officers and employees at an exercise price of $2.07 per unit. No grants were made in the year ended December 31, 2009 and 355,600 options had been previously granted. The Fund has applied the fair value method of Page 17

18 accounting for Unit option grants. The fair value of each option granted was estimated using the Black-Scholes option pricing model with the weighted average assumptions below: Weighted Average Assumptions February 2010 Risk-free interest rate 2.6% Expected life (years) 5.0 Expected volatility 66.2% Dividend yield 8.0% Number of options granted 120,000 Fair value of each option granted $ 0.70 The fair value of the 120,000 Unit options granted in 2010 is estimated to be $84. For this and all previous grants, the compensation cost is being charged against earnings over the three-year vesting year of the underlying options. A non-cash expense of $79 has been recognized in net earnings for the year ended December 31, 2010 ( $55), with a corresponding credit to capital contributions. Summary of options outstanding Options Outstanding Options Exercisable Range of exercise prices Number outstanding at Dec 31, 2010 Weighted Average Remaining Contract Life (Years) Weighted Average Exercise Price Number exercisable at Dec 31, 2010 Weighted Average Exercise Price $1 - $ , $ ,500 $1.65 $ $ , $ ,450 $3.65 $1 - $5 435, $ ,950 $3.14 As at and during the year ended December 31, 2010, 171,050 options vested. As at and during the year ended December 31, 2009, 78,900 options vested and 40,000 were forfeited and cancelled. Outstanding at beginning of year 315, ,600 Granted 120,000 - Exercised - - Forfeited - 40,000 Outstanding at end of year 435, ,600 Options were issued subsequent to year-end see note Distributions to unitholders Subject to availability of distributable cash, the Fund s policy is to make a cash distribution each month equal to interest received from PRT by the Fund on the $72,900 of inter-group Notes plus Page 18

19 interest charged on any other inter-group indebtedness less estimated Fund administration costs. In addition to the monthly distributions, an additional distribution (the Thirteenth Distribution ) may be made on or before March 31 of the following year based on the actual available cash for the year, less reserves, if any, as considered appropriate by the Board of Directors of PRT and the Trustees of the Fund. For 2009 the Fund entered into a forbearance agreement with the Company to waive interest on the inter-group Notes, and suspended distributions to Unitholders from current year operations, in order to preserve cash flow during the current industry downturn. The forbearance agreement remained in place through Distributions of $192 declared in 2008 were paid in January of The costs of issuing Trust Units are deductible for income tax purposes on a straight-line basis over a five-year year. The Fund incurred issue costs in 1997 of $3,003, in 2002 of $1,540 and in 2005 of $1,365. The Fund can designate these deductions as a non-taxable distribution of amounts to Unitholders. As at December 31, 2010, $541 ( $541) of issue costs are available for future designation as non taxable distributions. 14. Exit activity charges In October 2008, the Fund announced that it would close its seedling nursery facility in Maple Ridge, BC and cease operations in the latter part of 2009; the exit activities were completed during The Fund also announced, in November 2009, the permanent closure of its seedling nursery facility in Summerland, BC and the temporary closure of its Kirkland Lake, ON facility. The Summerland business is being consolidated with PRT s other three sites in the Okanagan region. It is anticipated the consolidation will be completed in Anticipated exit expenditures related to the site closures are as follows: Total anticipated Amounts incurred Amounts incurred expenditures in 2010 to date Legal $ 64 $ 3 $ 51 Employee costs Deactivation of facilities Dismantling and relocation of long-lived assets $ 1,989 $ 1,034 $ 1,850 The above table excludes costs associated with the disposal of capital assets from the Maple Ridge site (see note 6). Costs specific to exit activities are recognized when the activities take place and the costs are incurred, and are included in the statement of operations, comprehensive income (loss) and cumulative earnings as exit activity charges. 15. Insurance claim settlement In late December 2008 the Company suffered damage to greenhouses at its two lower mainland nurseries as a result of unusually heavy snowfall. The loss was insured at replacement cost subject to an insurance deductible of $100 which was charged to earnings in The demolition and salvage Page 19

20 operation was completed in 2009 and an agreement reached on a cash settlement in December 2009 on the crop and greenhouse losses. PRT recognized proceeds of the cash settlement agreement on greenhouse losses of $4,667 at December 31, 2009 of which $4,534 was receivable at that time. This amount is included in proceeds from disposal of property, plant and equipment on the consolidated statement of cash flows. The proceeds of the cash settlement agreement also resulted, in 2009, in a gain on disposal of property, plant and equipment of $1,797 and a reduction in the balance of property, plant and equipment of $2, Supplemental cash flow information Interest paid $ 281 $ 561 Income taxes paid $ 7 $ 10 Changes in non-cash working capital Decrease in trade accounts receivable $ 739 $ 109 Decrease (increase) in non-trade receivable (183) 164 Decrease (increase) in inventory (154) 947 Decrease (increase) in prepaid expenses and deposits 6 (25) Decrease in unbilled revenue 634 2,264 Increase (decrease) in accounts payable and accrued liabilities 608 (2,252) Other working capital changes (7) (17) $ 1,643 $ 1,190 The change in accounts receivable in 2009 excludes a non-trade receivable of $4,534 for insurance proceeds outstanding as of December 31, Segmented information - geographic areas PRT has one operating segment the production of forest seedlings. The following tables provide geographic revenue and property, plant and equipment information: 2010 Property, plant and Revenue equipment Canada $ 22,646 $ 22,807 United States 3,319 3,470 $ 25,965 $ 26,277 Page 20

21 2009 Property, plant and Revenue equipment Canada $ 25,730 $ 23,899 United States 4,332 3, Commitments $ 30,062 $ 27,449 PRT has commitments for facility operating leases and natural gas supply contracts. Future minimum payments are as follows: 2011 $ Thereafter 347 $ 2, Financial instruments Fair value The fair values of accounts receivable, operating line, accounts payable and accrued liabilities approximate their carrying values given the short-term maturity of these instruments. Management considers that the fair value of the long-term debt approximates its carrying amount because it is floating rate debt and risk is addressed through the renewal of the credit agreement annually. Credit risk A substantial portion of PRT s accounts receivable are with customers in the forest industry and are subject to normal industry credit risks. Credit risk is managed by continuous evaluation by management of credit exposure on key accounts which includes current and future billings and contract values, and aged receivable balances in conjunction with specific client knowledge, past experience, and industry analysis. Allowance for doubtful accounts and past due receivables are reviewed by management at each balance sheet reporting date. PRT updates its estimate of allowance for doubtful accounts based on the specific evaluation of each customer s accounts receivable balance considering the account s historical collection trends and outlook. Accounts receivable are written-off once it is determined that they are more likely than not to be uncollectible. Page 21

22 Accounts receivable includes a non-trade receivable of $4,534 for insurance proceeds outstanding as of December 31, Trade $ 5,927 $ 6,666 Insurance receivable - 4,534 Other non-trade $ 6,147 $ 11,237 With regards to their respective terms, trade accounts receivable are aged as follows as at December 31: Current $ 5,744 $ 6,580 Past due less than 30 days 40 - Past due over 30 days Trade accounts receivable $ 5,927 $ 6,666 Trade receivables have been netted against the allowance for bad debts against specific receivables of $58 ( $85). The changes in the allowance for doubtful accounts were as follows: Balance, beginning of year $ 85 $ 74 Bad debt expense, net of recovery (27) 11 Balance, end of year $ 58 $ 85 The carrying amount of financial assets recorded in the financial statements, net of allowances for doubtful accounts, represents the Fund s maximum exposure to credit risk. Interest rate risk PRT is exposed to interest rate risk on a portion of its long-term debt. PRT previously mitigated this risk primarily through the use of interest rate swaps. PRT opted to not renew swaps on debt where arrangements expired in the third quarter of 2009 while considering options to reduce the overall debt. At December 31, 2009 the fair value of the Company s outstanding interest rate swaps was lower than their carrying amount based on reference to current market interest rates, and the difference in 2009 of $59 had accordingly been charged to earnings in the year net of charges recognized in prior years. In 2010 all loans with swapped rates were paid out and rate differences realized to income. Management estimates that a 1% change in interest rates would affect earnings per Trust Unit by $0.002 based on current levels of borrowing. Page 22

23 Currency risk PRT operates internationally and is exposed to risk from changes in foreign currency rates. PRT mitigates this risk principally through the use of foreign currency denominated debt, and local currency denominated growing costs. PRT may use foreign currency forward sales contracts to manage currency exposure on net US dollar cash flows. The terms of such contracts are designed to match the receipt of US dollars under seedling sales contracts. Outstanding foreign currency forward sales contracts are revalued on a mark-to-market basis at the end of each reporting year, and any resulting gains or losses are recorded in income during the year. At December 31, 2010 and 2009 there were no foreign currency forward sales contracts outstanding. The consolidated balance sheets include significant foreign financial assets (cash and cash equivalents and accounts receivable), as well as significant foreign financial liabilities (accounts payable and accrued liabilities); in the reporting currency, Canadian dollars, these amounted to $477 and $117, respectively, as of December 31, 2010 ($662 and $125 respectively, as of December 31, 2009). As at December 31, 2010, US dollar financial assets, and financial liabilities balances amounted to US$481 and US$118 respectively ( US$630 and US$119). Liquidity risk PRT manages liquidity through a combination of operating cash flow, an operating line of credit, and a term debt facility; the latter is used to finance long-term capital or project expenditures only. From an operating point of view, the management of the Company s liquidity exposures is centralized by a daily cash concentration process which enables PRT to manage its liquidity requirements according to the actual need of the Company and each nursery. The Company s short- and mid-term liquidity takes into account the maturities of financial assets and liabilities and estimates of cash flows from the operating business. The Company s policy is to use 10 year amortizing debt against its term debt facility. As at December 31, 2010 this facility stood at $6,594 ( $5,500). Detailed information on PRT s financial liabilities is provided in Notes 9, 10, 18 and 19 to the consolidated financial statements. Market risk The business of PRT is highly dependent on the forest industry in Canada. While the Company is not materially dependent on any one customer, regional markets may be impacted by changes in global markets and government regulations and by more consolidated buying decisions by larger customers. PRT manages and reduces this risk through diversification of operations across a wider variety of customers, and Provincial and State jurisdictions. 20. Capital management The Fund s objectives when managing capital are: (i) to maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and (ii) to manage capital in a manner which considers the interests of equity (Unit) holders and obligations to debt holders. Page 23

24 In the management of capital, the Fund includes Unitholders Equity, Long-term Debt (including any associated hedging assets or liabilities), short term bank indebtedness (Operating Line), cash and cash equivalents and temporary investments in the definition of capital. The Fund manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Fund may adjust the amount of distributions paid to unitholders, issue new units, issue new debt, retire existing debt, or issue new debt to replace existing debt with different characteristics. PRT is subject to certain externally imposed capital requirements as related to both the Operating Line and long-term debt. These obligations require the Company to report to the lenders on certain covenants including margin requirements monthly for the Operating Line, and the following key ratios reported quarterly for long-term debt: 1. Ratio of principal, interest, and other monies payable on loans and the notes issued under the Trust Deed to EBITDA less cash taxes and sustaining capital expenditures and adjusted by a notional Fund for Debt Service not to exceed 1:1; 2. Working capital ratio not less than 1.25:1; 3. Tangible net worth not less than $25,000; and 4. Total Debt to Tangible Net Worth is not greater than 1:1. The Company is in compliance with all externally imposed capital requirements as at and for the year ended December 31, 2010 and Significant customers In 2010, two customers accounted for more than 10% of PRT s revenues (2009 one customer). 22. Subsequent events Subsequent to December 31, 2010 the following significant transactions or events occurred: 1. In January 2011 there were 10,000 Unit options granted to eligible officers and employees at an exercise price of $2.83 per unit. 2. On January 1, 2011 the Canadian Federal Government tax on publicly traded income trusts came into effect. Effectively, distributions made by the Fund in 2011 will be subject to this tax at 29.5% and 28% thereafter. Page 24