PREMIUM BRANDS HOLDINGS CORPORATION Consolidated Financial Statements Fiscal Years Ended and
PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Consolidated Balance Sheets (in thousands of Canadian dollars) Current assets: Cash and cash equivalents 11,270 9,453 Accounts receivable (note 29) 159,879 116,544 Inventories (note 4) 141,589 121,693 Prepaid expenses 6,437 5,798 Other assets (note 5) 1,025 763 320,200 254,251 Capital assets (note 6) 227,287 203,340 Intangible assets (note 7) 79,663 71,545 Goodwill (note 8) 209,470 174,846 Investment in associates (note 9) 9,320 9,517 Deferred income taxes (note 24) - 22,257 Other assets (note 5) 10,227 3,391 856,167 739,147 Current liabilities: Cheques outstanding 6,796 6,353 Bank indebtedness (note 10) 3,886 - Dividend payable (note 18) 9,407 6,978 Accounts payable and accrued liabilities 133,836 102,598 Current portion of long-term debt (note 11) 3,685 2,645 Current portion of provisions (note 12) 1,920 1,746 159,530 120,320 Long-term debt (note 11) 202,794 211,292 Puttable interest in subsidiaries (note 13) 26,283 17,900 Deferred revenue 4,494 4,520 Provisions (note 12) 4,126 4,556 Pension obligation (note 14) 1,400 1,437 Deferred income taxes (note 24) 15,491-414,118 360,025 Convertible unsecured subordinated debentures (note 15) 121,837 174,549 Equity attributable to shareholders: Deficit (57,937) (36,838) Share capital (note 16) 345,222 227,247 Equity component of convertible debentures (note 15) - 1,744 Reserves (note 17) 32,369 11,804 Non-controlling interest 558 616 320,212 204,573 856,167 739,147 Commitments and contingencies (note 27) Subsequent event (note 34) Approved by the Board of Directors (signed) George Paleologou Director (signed) Johnny Ciampi Director The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations (in thousands of Canadian dollars except per share amounts) Revenue 1,484,577 1,221,798 Cost of goods sold (note 21) 1,199,833 993,319 Gross profit before depreciation, amortization, plant start-up and restructuring costs, and other income 284,744 228,479 Selling, general and administrative expenses before depreciation, amortization, plant startup and restructuring costs, and other income (note 21) 173,104 150,861 111,640 77,618 Plant start-up and restructuring costs (note 22) 2,924 20,299 Other income (note 32) - (4,703) 108,716 62,022 Depreciation of capital assets 25,301 19,874 Amortization of intangible assets (note 7) 4,459 4,356 Amortization of other assets 5 5 Interest and other financing costs (note 23) 17,651 20,556 Amortization of financing costs 226 253 Acquisition transaction costs 223 266 Change in value of puttable interest in subsidiaries (note 13) 5,887 1,996 Accretion of provisions (note 12) 494 342 Unrealized gain on foreign currency contracts (100) (400) Equity income in associates (note 9) (60) (52) Other - 655 Earnings before income taxes 54,630 14,171 Provision for (recovery of) income taxes (note 24) Current 3,258 (3,538) Deferred 13,303 5,042 Deferred tax provision resulting from CRA settlement 21,520-38,081 1,504 Earnings from continuing operations 16,549 12,667 Loss from discontinued operation, net of income taxes (note 26) (4,913) (1,275) Earnings 11,636 11,392 Earnings (loss) for the year attributable to: Shareholders 11,694 11,426 Non-controlling interest (58) (34) 11,636 11,392 Earnings (loss) per share from (note 19): Continuing operations: Basic 0.68 0.58 Diluted 0.68 0.57 Discontinued operation basic and diluted (0.20) (0.06) Earnings attributable to shareholders basic and diluted 0.48 0.52 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Earnings (in thousands of Canadian dollars) Earnings 11,636 11,392 Other comprehensive earnings: Actuarial gain (loss) on pension obligation (note 14) 401 (680) Unrealized foreign exchange gain on investment in foreign operations 21,457 6,261 Comprehensive earnings 33,494 16,973 Comprehensive earnings (loss) attributable to: Shareholders 33,552 17,007 Non-controlling interest (58) (34) Actuarial gains and losses on pension obligation are adjusted through retained earnings (deficit). 33,494 16,973 Unrealized foreign exchange gains and losses on investment in foreign operations are adjusted through earnings in the event of a disposal of the investment in the foreign operations. The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows (in thousands of Canadian dollars) Cash flows from (used in) operating activities: Earnings from continuing operations 16,549 12,667 Items not involving cash: Depreciation of capital assets 25,301 19,874 Amortization of intangible and other assets (note 7) 4,464 4,361 Amortization of financing costs 226 253 Change in value of puttable interest in subsidiaries (note 13) 5,887 1,996 Gain on sales of capital assets (173) (4,682) Accrued interest income (17) (21) Net unrealized gain on foreign currency contracts (100) (400) Equity income in associates (note 9) (60) (52) Deferred revenue (232) 716 Accretion of convertible debentures, long-term debt and provisions 4,048 3,261 Non-cash loss on sale of routes - 137 Deferred income taxes (note 24) 34,823 5,042 90,716 43,152 Change in non-cash working capital (note 30) (17,135) (20,283) 73,581 22,869 Discontinued operation (note 26): Discontinued operation (net of income taxes) (4,913) (1,275) Items not involving cash (1,317) (250) 67,351 21,344 Cash flows from (used in) financing activities: Long-term debt net (14,801) 88,686 Bank indebtedness and cheques outstanding 2,176 (28,803) Proceeds from convertible debentures net of issuance costs (note 15) 65,740 - Repayment of convertible debentures (note 15) (4,260) - Dividends paid to shareholders, net of dividends received from cancelled shares (32,538) (27,653) Share issuance and financing costs (232) (1,026) 16,085 31,204 Cash flows from (used in) investing activities: Capital asset additions (note 6) (29,368) (47,065) Business acquisitions (note 20) (43,002) (2,885) Payments to shareholders of non-wholly owned subsidiaries (note 13) (1,746) (801) Payment of provisions (note 12) (1,250) (2,347) Purchase of shares for employee share loans (7,500) - Net change in share purchase loans and notes receivable 314 (326) Investment in associates (note 9) - (1,860) Distribution from associates (note 9) 257 344 Proceeds from sale and leaseback of asset (note 32) - 10,200 Net proceeds from sales of assets 652 168 (81,643) (44,572) Increase in cash and cash equivalents 1,793 7,976 Effects of exchange on cash and cash equivalents 24 40 Cash and cash equivalents beginning of year 9,453 1,437 Cash and cash equivalents end of year 11,270 9,453 Supplemental cash flow information (note 30) The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Shareholders Equity (in thousands of Canadian dollars) Deficit Share capital Equity component of convertible debentures Reserves Noncontrolling interest Shareholders equity Balance as at December 28, 2013 (19,816) 221,994 1,744 4,929 650 209,501 Common shares issued (note 16) - 5,345 - - - 5,345 Earnings (loss) for the year attributable to: Shareholders 11,426 - - - - 11,426 Non-controlling interest - - - - (34) (34) Dividends declared (27,768) - - - - (27,768) Actuarial loss on pension obligation (note 14) (680) - - - - (680) Effect of share based compensation plans - (92) - 614-522 Foreign currency translation adjustment - - - 6,261-6,261 Balance as at (36,838) 227,247 1,744 11,804 616 204,573 Common shares issued (note 16) - 118,764 - - - 118,764 Earnings (loss) for the year attributable to: Shareholders 11,694 - - - - 11,694 Non-controlling interest - - - - (58) (58) Dividends declared (note 18) (34,968) - - - - (34,968) Return of dividends for cancelled shares 30 - - - - 30 Actuarial gain on pension obligation (note 14) 401 - - - - 401 Effect of share based compensation plans - (789) - (892) - (1,681) Maturity of 7.00% debentures and redemption of 5.75% debentures (note 15) 1,744 - (1,744) - - - Foreign currency translation adjustment - - - 21,457-21,457 Balance as at (57,937) 345,222-32,369 558 320,212 The accompanying notes are an integral part of these consolidated financial statements.
For the Fiscal Years Ended and 1. Corporate information Premium Brands Holdings Corporation (the Company) is incorporated under the Canada Business Corporations Act. Through its subsidiaries, the Company owns a broad range of specialty food manufacturing and premium food distribution and wholesale businesses with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, Ohio, and Washington State. The Company s Board of Directors approved these consolidated financial statements on March 9, 2016. 2. Significant accounting policies Basis of presentation The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Basis of measurement These consolidated financial statements have been prepared under the historical cost convention, except for puttable interests in subsidiaries, provisions, foreign exchange forward contracts, and interest rate swaps, which are measured at fair value. Principles of consolidation The consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries after elimination of intercompany transactions and balances. The Company has a 60% interest in Hempler Foods Group LLC (Hempler s), an 80% interest in Duso s Enterprises Ltd. (Duso s), a 76.7% interest in Medex Fish Importing & Exporting Co. Ltd. (Maximum), a 60% interest in Hub City Fisheries Ltd. (Hub), and a 70% interest in Expresco Foods Inc. (Expresco). The Company holds options to purchase the third party interests in these businesses (calls), and in all cases, the third party stakeholders hold options that entitle them to require the Company to purchase their respective interests (puts). The puts for Hempler s, Duso s, and Hub have all vested and can be exercised at any time, with the purchase prices being based on formulas tied to the profitability of the businesses. The Maximum put vests in stages over the next four years and becomes fully exercisable in November 2019. The Expresco put vests and becomes fully exercisable in September 2018. Based on its majority ownership and control over the operations of these subsidiaries, the Company has consolidated 100% of their operations into its consolidated financial statements, and for the third party interests in these subsidiaries, it has recorded the puts as a financial liability (puttable interest in subsidiaries) at fair value on the consolidated balance sheet. Changes in the value of this financial liability are recognized in the consolidated statement of operations (change in value of puttable interest in subsidiaries). The fair value of the puttable interest in subsidiaries is based on the Company s best estimates of the future amounts and timing of the cash flows of these subsidiaries, including their revenues, expenses, working capital needs, and capital expenditures. Changes in the value of the puts resulting from changes in the assumptions used to estimate future put exercise prices are recorded in earnings as determined. The Company also has a 70% interest in Made-Rite Meat Products LP (Made-Rite). The third party stakeholder does not, however, hold an option that requires the Company to purchase their remaining interest. Therefore, a non-controlling interest has been recognized in respect of Made-Rite. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The cost of the business combination is measured as the sum of the fair values of assets given, equity instruments issued, and liabilities incurred or assumed, in exchange for control of the businesses acquired. Acquisition related costs are expensed as incurred. The excess of the cost of a business combination over the fair value of the underlying identifiable assets acquired and liabilities assumed is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets acquired, the difference is recognized in the current period as a gain (acquisition bargain purchase gain) in the consolidated statement of operations. 1
For the Fiscal Years Ended and Fiscal year The fiscal year of the Company is the fifty-two week or fifty-three week period ending the nearest Saturday on or before December 31. Fiscal year was the fifty-two week period, and fiscal year was the fifty-two week period. Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest bearing securities with original maturities at the date of purchase of three months or less. Inventories Raw materials, finished goods, and equipment inventories are stated at the lower of cost and net realizable value. Cost includes raw materials, manufacturing labour, and direct and indirect overhead, and is determined using either the first-in first-out or weighted average cost methods. Net realizable value is the estimated selling price less applicable selling expenses. Capital assets Capital assets are stated at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition or construction of the capital assets. Capital assets are depreciated once they are complete and available for use. Depreciation is provided on a straight-line or declining balance basis over the period in use at the following annual rates, which are based on the expected useful life of the assets: Buildings and leaseholds 2.5% to 5% or term of lease Machinery and equipment 10% to 30% Buildings and leaseholds includes the buildings owned by the Company as well as significant leasehold improvements made to facilities leased by the Company. Machinery and equipment includes production equipment, distribution equipment, information technology equipment, vehicles, and office equipment. For significant long-term capital projects, the Company capitalizes interest as a component of the cost. Intangible assets Intangible assets consist of acquired brand names and customer relationships. The Company sells many of its specialty food products under proprietary brand names, which have been determined to have an indefinite useful life as they are not expected to decline in value over time, and thus are not amortized but are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that they might be impaired. Under the requirements of the impairment test, the carrying values of the brand names are compared with their fair values and any excess is charged to earnings. Definite life intangible assets include customer relationships which are acquired as part of business combinations and are amortized on a straight-line basis over 15 to 20 years. Goodwill Goodwill represents the excess of the cost of an acquired business over the fair value of its underlying net identifiable assets at the time of acquisition. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Goodwill impairment is assessed based on a comparison of the fair value of a cash generating unit (CGU) to the underlying carrying amount of the CGU s net assets, including goodwill. When the carrying amount of the CGU exceeds its fair value, the difference is charged to earnings. When the cost of an acquired business is less than the fair value of its underlying net identifiable assets at the time of acquisition, a bargain purchase gain is recognized in earnings. Impairment of non-financial assets Capital assets and finite life intangible assets are reviewed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying value of a capital asset or a finite life intangible asset exceeds its recoverable amount, which is the greater of the value in use of the asset or its fair value less the cost to sell it. Any impairment recognized is measured as the amount by which the carrying value of the asset exceeds its recoverable amount. 2
For the Fiscal Years Ended and Investment in associates Associates are entities over which the Company has significant influence, but not control. Investment in associates are accounted for using the equity method, under which the investment is initially recorded at cost and the carrying value is adjusted thereafter to include the Company s pro-rata share of post-investment earnings or loss of the associate, and is reduced by the amount of cash distributions received from the associates. Joint venture Joint ventures are entities in which the Company has a contractual arrangement that establishes joint control over the economic activities of the entity by the Company and another party. Joint ventures are accounted for using the equity method and are included with investment in associates. Long-term debt The Company s long-term debt is initially recognized at fair value, net of financing costs. Any difference between the proceeds, net of financing costs, and the redemption value is recognized in the consolidated statement of operations over the term of the debt using the effective interest rate method. Provisions Provisions are recognized when there is a probable outflow of economic resources from the Company and the amount of that outflow can be estimated reliably, although the timing or amount of the outflow may be uncertain, due to the outflow being contingent upon the occurrence of certain events, such as a business achieving defined financial targets over a particular period of time. Provisions are measured at the fair value of the estimated expenditure required to settle the future obligation, based on the most reliable evidence available at the reporting date. Changes in the value of provisions resulting from changes in the assumptions used to estimate the future outflows are recorded in earnings. Convertible unsecured subordinated debentures (convertible debentures) The Company accounts for convertible debentures by allocating the proceeds of the debentures, net of financing costs, between debt and equity based on estimated fair values of the debt and conversion option, as determined by the residual valuation of the equity component. Under this approach, the debt component is valued first and the difference between the proceeds of the debentures and the fair value of the debt component is assigned to the equity component. Interest expense is recorded as a charge to earnings and is calculated at an effective rate with the difference between the coupon rate and the effective rate being credited to the debt component of the convertible debentures (accretion of convertible debentures) such that, at maturity the debt component is equal to the face value of the outstanding convertible debentures. For some convertible debentures issuances, the Company has the option to make a cash payment in lieu of issuing shares when a debenture holder submits a notice of conversion. In these cases, the equity component is recorded as a financial liability and is included with the debt component balance of the convertible debentures. When the Company purchases and cancels its convertible debentures under a normal course issuer bid, the difference between the book value and fair value of the cancelled convertible debentures is recorded as interest and other financing costs, and the remaining difference between the cost to purchase the convertible debentures and the fair value of the convertible debentures is recorded as a reduction of the equity component of convertible debentures. Revenue recognition For products sold and delivered to customers by third party carriers, revenue is recognized at the time the goods leave the Company s possession, subject to being reasonably measured and collection being reasonably assured. For products sold through the Company s proprietary distribution networks, revenue is recognized when the product is delivered to the customer. Revenue is reported net of rebates, allowances and returns. Cost of goods sold Cost of goods sold includes raw materials, manufacturing labour costs and plant overhead costs. Leases Leases in which substantially all of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are recognized as an expense over the lease term. Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as capital leases and are recorded as a component of long-term debt, and the corresponding leased asset is recorded in capital assets. 3
For the Fiscal Years Ended and Income taxes The Company follows the asset and liability method of accounting for income taxes whereby deferred income tax assets and liabilities are recognized based on differences between the value of the assets and liabilities used for financial statement purposes and those used for income tax purposes. Deferred income tax assets and liabilities are calculated using substantively enacted tax rates for the period in which the differences are expected to reverse. Deferred income tax assets are recognized only to the extent that management determines that it is more likely than not that the deferred income tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment. Foreign currency translation The Company s United States based operations have a functional currency of U.S. dollars and accordingly have been translated to Canadian dollars using the year end exchange rate for the consolidated balance sheet and the average exchange rate for the year for the consolidated statement of operations. Gains or losses resulting from translation adjustments are recorded as a component of reserves in shareholders equity until there is a realized reduction in the net investment in the U.S. operation. Foreign currency accounts of Canadian operations have been translated to Canadian dollars using the year end exchange rate for monetary assets and liabilities and the prevailing exchange rate at the time for income and expense transactions. Gains and losses resulting from this translation are included in the consolidated statement of operations. Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker is responsible for allocating resources and assessing the performance of the operating segments. Financial instruments Under IFRS 9 Financial Instruments (IFRS 9), the Company recognizes a financial asset or financial liability only when the entity becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. Financial assets initially recognized at fair value and are classified as measured at amortized cost or measured at fair value. Financial assets held solely for the purpose of collecting the contractual cash flows, where those cash flows represent solely payments of principal and interest, are classified as measured at amortized cost, which includes a provision for credit losses. Under IFRS 9, the expected credit losses take into consideration potential future events and their impact on estimated credit losses of the Company. There were no material adjustments to credit losses required as a result of this change in guidance. Financial assets that are held both for the purpose of collecting the contractual cash flows and for selling the financial assets themselves are classified as measured at fair value and are re-measured each period, either through other comprehensive income or through the statement of operations. Financial liabilities are initially recognized at fair value and, with certain exceptions, are classified as measured at amortized cost. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value in subsequent periods. For derivatives have not been designated as hedging instruments, the changes in their fair value are recognized in the statement of operations. For derivatives to be designated as hedging instruments, the Company documents at the inception of the hedging transaction its risk management objectives and strategy and the economic relationship between the hedging instruments and the hedged items, including whether the hedging instrument is expected to offset changes in cash flows of the hedged items. Changes in effective portion of the fair value of the derivatives that are designated as hedging instruments are recognized in reserves in the equity portion of the Company s balance sheet, while changes in any ineffective portion, if any, of the derivatives are recognized in the statement of operations. Foreign currency contracts are derivatives classified as fair valued through profit and loss, and are measured at fair value at each balance sheet date with changes reflected in the consolidated statement of operations. The interest rate swap contracts entered into during (note 29) were designated as hedging instruments to hedge the interest rate risk on a portion of the Company s long-term debt. 4
For the Fiscal Years Ended and Accounts receivable and notes and loans receivable are classified as measured at amortized cost. Cheques outstanding, bank indebtedness, dividends payable, accounts payable and accrued liabilities, long-term debt and convertible debentures are classified as measured at amortized cost. Impairment of financial assets Financial assets are assessed for indications of impairment at the balance sheet date. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the financial assets have been negatively impacted. The factors used to determine whether objective evidence of impairment exists include the financial condition of the obligor and delinquencies in payments of interest or principal. If objective evidence exists that financial assets are impaired, the carrying amount of the financial assets are reduced to their fair value, either directly or indirectly through the use of an allowance account. Hedging instruments The Company, from time to time, uses interest rate swap contracts (swaps) to manage risks associated with fluctuations in interest rates, and all such interest rate swap contracts are used only for risk management purposes. For the swaps entered into in 2011 which expired in, the Company did not apply hedge accounting, and as a result, changes in their fair value were recognized in earnings. In, the Company entered into new swaps which it has designated as a cash flow hedge and applied hedge accounting. As a result, changes in its fair value are recognized in other comprehensive earnings. The Company uses foreign currency forward contracts to manage exchange risks associated with its U.S. dollar payments and receipts. The Company has not applied hedge accounting to its foreign currency forward contracts in and, and accordingly, changes in the fair value of these contracts were recognized in earnings. The Company may choose to apply hedge accounting to its foreign currency contracts in the future. Critical accounting estimates and judgments The preparation of financial statements requires management to use judgment in applying its accounting policies and to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to: (i) Inventories Internally manufactured products are valued at the lower of cost and net realizable value, where cost includes raw materials, manufacturing labour and overhead. Inherent in the determination of the cost and valuation of such inventories are certain management judgments and estimates with regards to the allocation of overhead and determining the net realizable value. (ii) Goodwill and intangible assets The Company assesses the impairment of goodwill and intangible assets with indefinite lives on an annual basis and finite life intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors which could trigger an impairment review include significant underperformance relative to plan, a change in the Company s business strategy, or significant negative industry or economic trends. Assessing impairment of goodwill and intangible assets with indefinite lives requires significant judgement including identifying appropriate cash generating units, making estimates with regards to the amounts and timing of future cash flows and the discount rates to be used to value such cash flows. (iii) Capital assets Capital assets are recorded at cost and then depreciated over their estimated useful life. A significant amount of judgment is required to estimate the useful life of an asset. Changes in the life of an asset are reflected prospectively through changes in future depreciation rates. (iv) Income tax provision The provision for deferred income taxes is based on changes in the estimated temporary differences between the value of the assets and liabilities used for tax purposes and those used for accounting purposes. In determining these temporary differences, certain management judgments and estimates are required. Furthermore, deferred income tax 5
For the Fiscal Years Ended and assets are recognized only to the extent that management determines that it is more likely than not that the deferred income tax assets will be realized. (v) Puttable interest in subsidiaries Puttable interest in subsidiaries is calculated using the effective interest rate method based on projections of future cash flows of certain subsidiaries. A significant amount of judgment is required in estimating the amounts and timing of these cash flows and in determining the appropriate discount rates to be used under this valuation method. (vi) Convertible unsecured subordinated debentures The determination of reasonable fair market values for the debt and equity components of convertible unsecured subordinated debentures is based on a variety of quantitative and qualitative factors, including comparative information for other similar financial instruments, and correspondingly requires a significant amount of judgment. (vii) Business acquisitions and contingent consideration The allocation of the purchase price associated with the acquisition of a business requires a significant amount of judgment in terms of identifying and determining: (i) the fair market values of the tangible and intangible assets purchased; and (ii) the fair value of liabilities assumed. Furthermore, when an acquisition involves contingent consideration, there is also significant judgment involved in determining the value, if any, of such consideration. (viii) Provisions Provisions represent management s best estimate of the fair value of future costs associated with contingent consideration and lease restoration costs. The final settlement of these amounts depends upon future events and as a result, a significant amount of judgment is required in estimating them. (ix) Plant start-up and restructuring costs Plant start-up and restructuring costs consist of costs associated with the start-up of new production capacity and/or the significant restructuring of one or more of the Company s businesses. The determination of plant start-up and restructuring costs requires a significant amount of judgement with regards to the allocation of certain costs to these projects. Share based compensation plans The Company has a restricted share plan and an employee benefit plan, both of which provide awards to eligible directors, executives, consultants and employees of the Company and its subsidiaries. The restricted share plan is treated as a cash-settled share based payment. Based on the restricted shares granted, a liability equal to the current fair value is determined at each balance sheet date, and changes in the fair value are recognized in earnings over the vesting period. The employee benefit plan is treated as an equity-settled share based payment. The shares granted are measured at their fair value on the grant date. This fair value is then expensed based on a graded vesting pattern over the associated vesting period, with the deferred portion recognized as a component of reserves in shareholders equity. The Company s unvested shares acquired pursuant to the employee benefit plan are recorded as a reduction to the Company s outstanding share capital, and are recognized as outstanding share capital as they legally vest and ownership is transferred to the beneficiary. Employee future benefit plan The Company has a defined benefit pension plan covering certain employees. Benefits under this plan are based on years of service and the employee s compensation level. The Company accrues its obligations under the defined benefit pension plan and the related costs, net of plan assets. The cost of pension benefits earned by employees is actuarially determined using the projected benefit method prorated on service and management s best estimate of expected plan investment performance, salary escalation and retirement ages of employees. For the purpose of calculating the expected rate of return on plan assets, the fair value method is used. Any net actuarial gain or loss of the benefit obligation and the fair value of plan assets is recognized as a component of comprehensive earnings for the current period, and immediately recognized as an adjustment to retained earnings (deficit). Non-controlling interest Non-controlling interest is presented in the consolidated balance sheet as a component of shareholders equity. 6
For the Fiscal Years Ended and Earnings per share Basic earnings per share is calculated using the earnings for the period attributable to the shareholders of the Company, divided by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the basic weighted average number of shares outstanding during the period is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive effect of convertible debentures is determined using the if-converted method. Accounting standards and amendments issued but not yet adopted The IASB periodically issues new standards and amendments or interpretations to existing standards. The new pronouncements listed below are those that management considers most significant. They are not int to be a complete list of new pronouncements that may affect the consolidated financial statements. (i) IFRS 15 Revenue from Contracts with Customers In May, the IASB issued IFRS 15, Revenue from Contracts with Customers, which supersedes IAS 11, Construction Contracts and a number of revenue-related interpretations. This standard addresses revenue recognition and establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to control its use and obtain the benefits from the good or service. IFRS 15 is effective for annual periods beginning on or after January 1, 2017, with earlier application permitted. The Company is assessing the potential impact IFRS 15 may have on its consolidated financial statements. (ii) IFRS 16 Leases In January 2016, the IASB issued IFRS 16, Leases, which replaces the existing lease accounting guidance. IFRS 16 requires all leases to be reported on the balance sheet unless certain criteria for exclusion are met. IFRS 16 is effective for annual periods ending on December 31, 2019 with early adoption permitted if IFRS 15 is also adopted at the same time. The Company has not yet determined the impact of this standard on its consolidated financial statements. 3. Change in accounting policy Financial Instruments under IFRS 9 The Company has early adopted the requirements of IFRS 9, which is a new standard for financial instruments and replaces IAS 39, Financial Instruments: Recognition and Measurement. With regards to financial assets and liabilities, the Company has determined that there is no material impact in its accounting for these items under IFRS 9. With regards to derivative financial instruments, IFRS 9 has new requirements for determining if a derivative is sufficiently effective to be designated as a hedging instrument. Under IFRS 9, the Company s outstanding swaps are considered to be effective as a cash flow hedge, and correspondingly the Company has designated these to be a hedging instrument. As a result the fair value of these swaps is recorded as an asset or liability on its consolidated balance sheet and changes in their fair value are recorded as other comprehensive earnings. To any extent that the swaps are not an effective hedge, changes in their fair value are recorded in earnings. The adoption of IFRS 9 had no material impact on the Company s financial statements. 7
For the Fiscal Years Ended and 4. Inventories Raw materials 51,552 48,618 Finished goods 79,838 63,359 Concessionary equipment for sale 10,199 9,716 141,589 121,693 5. Other assets Employee share purchase loans 7,962 519 Promissory note from associate 2,100 2,100 Notes receivable 466 906 Fair value of foreign currency forward contracts 700 600 Other 24 29 11,252 4,154 Less: current portion 1,025 763 Employee share purchase loans 10,227 3,391 As part of the Company s strategy to align the interests of management with those of the Company s shareholders, it has provided certain members of management with non-interest bearing loans (the share purchase loans), the proceeds of which were used to purchase the Company s shares in the open market (the purchased shares) on behalf of the individuals. Each share purchase loan bears no interest, has quarterly principal repayments equal to 55% of the quarterly dividend received on the corresponding purchased shares, is collateralized by the corresponding purchased shares and a promissory note, and is due upon the termination of the individual s employment. The amount of share purchase loans issued in was $7.5 million ( $nil). The payments expected to be received from the collection of the share purchase loans are as follows: 2016 284 2017 611 2018 501 2019 668 2020 973 2021 and thereafter 4,972 8,009 Future interest using the effective interest rate method (47) 7,962 8
For the Fiscal Years Ended and 6. Capital assets Land Buildings and leaseholds Machinery and equipment Total Cost 16,038 126,755 205,202 347,995 Accumulated depreciation - (34,665) (109,990) (144,655) Net book value 16,038 92,090 95,212 203,340 Cost 16,137 144,694 238,582 399,413 Accumulated depreciation - (44,461) (127,665) (172,126) Net book value 16,137 100,233 110,917 227,287 Net book value as at December 28, 2013 17,625 70,175 89,475 177,275 Acquired through business acquisitions - - 645 645 Additions - 27,721 19,344 47,065 Disposal sale and leaseback (1,628) (1,337) - (2,965) Disposals - - (188) (188) Depreciation, including discontinued operation - (5,485) (14,599) (20,084) Foreign currency exchange adjustment 41 1,016 535 1,592 Net book value as at 16,038 92,090 95,212 203,340 Acquired through business acquisitions - 1,681 8,109 9,790 Additions - 6,911 22,457 29,368 Disposals - (72) (712) (784) Depreciation, including discontinued operation - (7,455) (17,999) (25,454) Foreign currency exchange adjustment 99 7,078 3,850 11,027 Net book value as at 16,137 100,233 110,917 227,287 7. Intangible assets Brand names Customer relationships Customer supply agreements Total Cost 33,850 58,018 6,996 98,864 Accumulated amortization - (20,325) (6,994) (27,319) Net book value 33,850 37,693 2 71,545 Cost 35,449 69,689 7,474 112,612 Accumulated amortization - (25,475) (7,474) (32,949) Net book value 35,449 44,214-79,663 9
For the Fiscal Years Ended and Brand names Customer relationships Customer supply agreements Total Net book value as at December 28, 2013 33,775 40,747 577 75,099 Amortization - (3,761) (595) (4,356) Foreign currency exchange adjustment 75 707 20 802 Net book value as at 33,850 37,693 2 71,545 Additions resulting from business acquisitions 1,304 9,412-10,716 Amortization - (4,457) (2) (4,459) Foreign currency exchange adjustment 295 1,566-1,861 Net book value as at 35,449 44,214-79,663 8. Goodwill Balance beginning of year 174,846 168,925 Additions resulting from business acquisitions 31,068 4,939 Disposals - (118) Foreign currency exchange adjustment 3,556 1,100 Balance end of year 209,470 174,846 In assessing goodwill for impairment at October 1,, the Company compared the recoverable amount, using the discounted cash flow method, to the carrying amount of each cash generating unit within the specific business segment. The recoverable amount of each cash generating unit was based on budgeted cash flows for the next three years, a terminal value based on a long-term growth rate of 3%, and a discount rate of 12.2%. 9. Investment in associates Balance beginning of year 9,517 7,949 Investment Pender West Income Properties LP - 1,860 Equity income in associates 60 52 Distribution from associates (257) (344) Balance end of year 9,320 9,517 Investment in associates consists of the Company s 50% interest in Golden Valley Farms Inc., 35% interest in Pender West Income Properties LP and 25% interest in McLean Meats Inc. During, the associates had revenues of $68.4 million and earnings of $0.3 million ( $58.9 million and $0.5 million), and as at the associates had assets of $62.6 million and liabilities of $40.8 million ( $64.0 million and $41.6 million). 10
For the Fiscal Years Ended and 10. Bank indebtedness Bank indebtedness consists of amounts drawn on operating lines of credit. As at the Company had total available operating lines of $24.8 million ( $19.4 million). All of the Company s operating lines bear interest at floating rates based on bank prime rates, banker s acceptance rates, or LIBOR and are secured by specific assets of the Company including an assignment of certain inventories and accounts receivable. 11. Long-term debt Revolving term loan maturing in September 2019 with no principal payments until maturity. The loan bears interest at a rate that is calculated quarterly based on the Company s ratio of senior debt to cash flow and can fluctuate from 0.25% to 1.25% percentage points over the bank prime rate or 1.25% to 2.25% percentage points over the banker s acceptance rate 190,000 202,000 US$6.1 million secured Industrial Development Revenue Bond (IRB) with no principal payments until maturity in July 2036. The bond bears interest at the weekly variable rate for such bonds, which averaged 0.1226% for the 52-weeks ( 0.1176%), plus a factor that is calculated quarterly based on the Company s ratio of debt to cash flow and can fluctuate from 0.5% to 1.5% 8,480 7,119 US$3.2 million unsecured note payable, bearing interest at 6.0%, due in 2025 but redeemable by the noteholder in 2020 or anytime thereafter, with no principal payments until redemption or maturity 4,399 - Capital leases and other term loans 4,794 5,942 207,673 215,061 Financing costs (1,194) (1,124) Current portion (3,685) (2,645) 202,794 211,292 The Company s term loans and IRB are collateralized by an assignment of inventories, accounts receivable, insurance policies, fixed charges on capital assets and a general lien on all other assets of the Company. In addition, they contain financial covenants that require the maintenance of certain ratios regarding fixed charge coverage and debt to cash flow. At, the Company was in compliance with all such covenants. Scheduled principal repayments on long-term debt are as follows: 2016 3,685 2017 1,255 2018 869 2019 190,540 2020 2,844 Thereafter 8,480 207,673 11
For the Fiscal Years Ended and 12. Provisions Provisions for contingent consideration associated with acquisitions Provision for lease restoration Total Balance as at December 28, 2013 5,526 513 6,039 Payments (2,347) - (2,347) Partial reversal of provision for contingent consideration due to conditions of payment not being met (169) - (169) Provisions arising from business acquisitions 2,437-2,437 Accretion 332 10 342 Balance as at 5,779 523 6,302 Payments (1,250) - (1,250) Additional lease restoration costs accrual - 500 500 Accretion 484 10 494 Balance as at 5,013 1,033 6,046 Current portion 1,920 1,746 Non-current 4,126 4,556 6,046 6,302 13. Puttable interest in subsidiaries Balance beginning of year 17,900 14,498 Change in value of puttable interest in subsidiaries 5,887 1,996 Puttable interest resulting from business acquisitions 13,455 1,920 Cash distributions to non-controlling shareholders with puttable interests (1,746) (801) Purchase of minority shareholders interest (10,010) - Foreign currency exchange adjustment 797 287 Balance end of year 26,283 17,900 12
For the Fiscal Years Ended and 14. Pension obligation The Company maintains a defined benefit pension plan (the Pension Plan) that covers certain salaried staff. Benefits under the Pension Plan are based on years of credited service and average compensation. The measurement date used to measure the plan assets and accrued benefit obligation is December 31 of each year. The most recent actuarial valuation of the Pension Plan for funding purposes was as of December 31, 2013. Additional information on the Pension Plan is as follows: Funded status Defined benefit obligation 10,341 9,389 Fair value of plan assets (8,941) (7,952) Pension obligation 1,400 1,437 Defined benefit obligation Balance beginning of year 9,389 7,689 Current service costs 766 664 Interest cost 372 358 Benefits paid (189) (298) Actuarial loss 3 976 Balance end of year 10,341 9,389 Fair value of plan assets Fair value beginning of year 7,952 7,036 Employer contributions 442 517 Employee contributions 77 89 Benefits paid (189) (298) Actuarial return on plan assets 325 342 Administrative expenses (70) (30) Variance on return on plan assets 404 296 Fair value end of year 8,941 7,952 Recognition of actuarial gains (losses) and variance on returns Actuarial loss on defined benefit obligation (3) (976) Variance on return on plan assets 404 296 The plan assets for the Pension Plan consisted of the following: 401 (680) % % Asset category Equity securities 70 76 Cash and debt securities 30 24 100 100 13
For the Fiscal Years Ended and The elements of the defined benefit costs recognized for and are as follows: Current service costs net of employee contributions 689 575 Net interest cost 47 16 Administrative expenses 70 30 Defined benefit costs recognized in earnings 806 621 Net actuarial (gains) losses and variance on plan assets recognized in other comprehensive income (401) 680 Total defined benefit costs 405 1,301 The significant actuarial assumptions adopted in measuring the Company s accrued benefit obligations and in determining net cost were as follows: % % Discount rate 4.00 4.00 Rate of compensation increase 2.50 2.50 The impact of a change in these assumptions on the Pension Plan s defined benefit obligation is as follows: Defined Benefit Obligation as at Discount rate impact: Base assumption a discount rate of 4.00% 10,341 Discount rate + 1% 8,850 Discount rate 1% 12,245 Rate of compensation increase impact: Base assumption an average salary increase of 2.50% 10,341 Salary increase + 1% 10,697 Salary increase 1% 9,682 For 2016, the Company s contributions to the Pension Plan are expected to be approximately $0.5 million. 14
For the Fiscal Years Ended and 15. Convertible unsecured subordinated debentures Changes in the allocated debt components of the Company s convertible unsecured subordinated debentures for and were as follows: Debt component 7.00% Debentures 5.75% Debentures 5.70% Debentures 5.50% Debentures 5.00% Debentures Total Balance as at December 28, 2013 11,390 55,626 55,333 54,708-177,057 Conversions of debentures to common shares (5,238) (107) - - - (5,345) Accretion 796 902 643 496-2,837 Balance as at 6,948 56,421 55,976 55,204-174,549 Issuance of debentures, net of issuance costs - - - - 65,740 65,740 Conversions of debentures to common shares (6,717) (56,190) (54,674) (83) - (117,664) Maturity or redemption of debentures (231) (1,203) (2,826) - - (4,260) Accretion - 972 1,524 532 444 3,472 Balance as at - - - 55,653 66,184 121,837 Changes in the allocated equity components of the Company s convertible unsecured subordinated debentures for and were as follows: Equity component 7.00% Debentures 5.75% Debentures Total Balance as at December 28, 2013 747 997 1,744 Balance as at 747 997 1,744 Maturity or redemption of debentures (747) (997) (1,744) Balance as at - - - Issuance of 5.00% Debentures In April, the Company issued $69.0 million of convertible unsecured subordinated debentures (the 5.00% Debentures) at a price of $1,000 per debenture. The 5.00% Debentures have a maturity date of April 30, 2020, are redeemable on or after April 30, 2018 subject to certain conditions, and bear interest at an annual rate of 5.00% payable semi-annually in arrears on April 30 and October 31 in each year, commencing on October 31,. The 5.00% Debentures are convertible at any time at the option of the holders into common shares of the Company at a conversion rate of approximately 22.3964 shares per debenture, which is equal to a conversion price of $44.65 per share. Upon conversion of the 5.00% Debentures, the Company may elect to pay the holder cash, in lieu of delivering common shares, to settle the conversion obligation (the Cash Conversion Option). The allocation of the proceeds of the 5.00% Debentures was as follows: Debt component Cash conversion option liability Total Allocation of the proceeds 68,600 400 69,000 Transaction costs (3,241) (19) (3,260) 65,359 381 65,740 15