K-BRO LINEN INCOME FUND
2007 ANNUAL REPORT
In 2007, K-Bro continued to successfully
execute its three-part strategic focus:
• Secure and Maintain Long-Term Contracts with Large Healthcare and
Hospitality Customers
• Extend Core Services To New Markets
• Introduce Related Services
TABLE OF CONTENTS
2
President’s Message…………………………………
3
Financial Highlights…………………………………
5
Management’s Discussion and Analysis……………..
Financial Statements…………………………………
30
Corporate Information……………………………….. 54
1
President’s Message to our Stakeholders…………………………
By continuing to maintain our three part strategic focus since our initial public offering on February 3, 2005,
we have once again achieved some significant growth for the benefit of our unitholders, set the stage for
additional further future growth, maintained a conservative balance sheet and have made distributions to
unitholders at a stable level in recognition of our results as well as the future opportunities and challenges we
have in front of us.
In 2007, much of our focus was in Alberta as we negotiated a new long-term contract with the Calgary Health
Region and commenced the build out of a larger, more efficient processing facility to handle the increased
volumes from the new contract as well as provide us with the capacity needed to handle anticipated additional
future volumes in a vibrant Alberta marketplace. We commenced processing under the terms of the new
Calgary Health Region contract on March 1, 2008 and the transition into the new Calgary plant was
substantially completed by March 31, 2008. This was a major undertaking that was accomplished by our
dedicated and experienced team without any significant disruption to our customers.
This vibrant Alberta economy also continues to give us one of our largest challenges in terms of the costs of
labor in our Alberta plants. Significant cost increases were experienced in 2007. With a more efficient
Calgary plant and our ongoing labor initiatives, such as availing ourselves of the temporary foreign worker
program, we are starting to see some positive results on this most important component of our operations.
However, Alberta wasn’t our only focus as we also continued to extend services into new markets as we
pursued and negotiated the purchase of the business and assets of Buanderie HMR Inc. HMR is a leading
laundry and linen service provider located in Québec City, Québec and the acquisition was finalized on
January 31, 2008. K-Bro believes that HMR has a strong market position in the hospitality and commercial
sectors, with excellent brand name recognition. Its large customer base ranges in size from major hotels to
family operated restaurants. Similar to our acquisition of Premier Linen in Victoria in 2006, HMR
provides us with an accretive acquisition upon which we can hopefully leverage our health care expertise
to expand the services provided to its marketplace.
While our overall revenue growth of 14% in 2007 was satisfying, as was our EBITDA growth of 10%, our
2007 Q4 and our 2008 Q1 were challenging quarters. However, we anticipate that 2008 as a whole will
show a meaningful increase in revenue and EBITDA compared to 2007 with an overall payout ratio that
falls within acceptable levels. This anticipation is based on: the new Calgary Health Region contract and
operating efficiencies expected from the new Calgary plant; the anticipated positive impact of contractual
price adjustments and continued organic growth from major customers in the last three quarters of the year;
the expected contribution from our recent acquisition in Québec City; and, the anticipated positive impact
of the foreign worker and other labour initiatives that is expected to be fully realized as the year progresses.
We remain focused on providing our existing customers with the service quality they deserve. We are
pursuing additional growth opportunities in existing and new markets. With our successful equity
financing in Q1, 2008 that raised net cash proceeds of $18.1 million, we have the financial capacity to
pursue these opportunities aggressively but intelligently. With the continued support of our customers, our
1,000 employees, our Board and our unitholders, we look forward to 2008 with optimism and enthusiasm.
Linda McCurdy
President and Chief Executive Officer
2
K-Bro’s Strategic Focus Continues to Provide………………………..
INCOME
K-Bro Linen Income Fund vs. S&P/TSX Composite Index
vs. S&P/TSX Income Trust Index
d
e
t
s
e
v
n
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0
1
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$180
$170
$160
$150
$140
$130
$120
$110
$100
$90
Feb-05
May-05
Aug-05
Nov-05
K-Bro Linen Income Fund
Feb-06
May-06
Aug-06
Nov-06
Feb-07
S&P/TSX Composite Index
May-07
Aug-07
S&P/TSX Income Trust Index
Nov-07
Feb-08
May-08
Growing Revenues
Growing EBITDA
10
)
s
n
o
i
l
l
i
m
$
(
9
8
7
6
5
4
3
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
12 months ended December 31
12 months ended December 31
80
70
)
s
60
n
o
i
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i
m
$
(
50
40
30
3
and K-Bro’s Strategic Focus Continues to Provide…………………..
TRUST
Growing Distributable Cash
Consistent Distributions per Unit
$1.10
$1.05
$1.00
2005
2006
2007
12 months ended December 31
2005
2006
2007
Conservative Payout Ratio
Growth Capital Available
35
30
)
s
25
n
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(
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15
C
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5
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2005
2006
2007
Debt Outstanding Credit Available
Dec 31 2005
Dec 31 2006
Dec 31 2007
Mar 31 2008
7.8
7.6
7.4
7.2
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(
6.6
6.4
6.2
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%
100
90
80
70
60
50
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 6, 2008
The following management's discussion and analysis is supplemental to, and should be read in conjunction
with, the audited consolidated financial statements of K-Bro Linen Income Fund (“the Fund”) for the years
ended December 31, 2007 and 2006. These financial statements and other documents filed with regulatory
authorities can be found on SEDAR at www.sedar.com. The Fund’s financial statements are prepared in
accordance with Canadian generally accepted accounting principles (“GAAP”). The Fund’s reporting
currency is the Canadian dollar. The Fund and its subsidiary K-Bro Linen Systems Inc. will collectively be
referred to as “K-Bro” in this Management’s discussion and Analysis.
Management is responsible for the information contained in this Management’s Discussion and Analysis and
its consistency with information presented to the Audit Committee and Board of Trustees. All information in
this document has been reviewed and approved by the Audit Committee and Board of Trustees. This review
was performed by Management with information available as of March 6, 2008.
In the interest of providing unitholders and potential investors of K-Bro with information regarding future
plans and operations, this Management's Discussion and Analysis ("MD&A") contains forward-looking
information that represents internal expectations, estimates or beliefs concerning, among other things,
future activities or future operating results and various components thereof. The use of any of the words
“anticipate”, “continue”, “expect”, “may”, “will”, “project”, “should”, “believe”, and similar
expressions suggesting future outcomes or events are intended to identify forward-looking information.
Statements regarding such forward-looking information reflect management’s current beliefs and are
based on information currently available to management.
These statements are not guarantees of future performance and are based on management’s estimates and
assumptions that are subject to risks and uncertainties, which could cause K-Bro’s actual performance and
financial results in future periods to differ materially from the forward-looking information contained in
this MD&A. These risks and uncertainties include, among other things, (i) interruptions or delays in
relocating K-Bro’s Calgary plant, and any consequential interruption in customer service; (ii) risks
associated with the acquisition of HMR, including additional expense associated with completing an
acquisition and amortizing any acquired intangible assets; the difficulty of assimilating the operations and
personnel of the acquired business; the possibility of undisclosed material liabilities; and the potential
disruption of K-Bro's ongoing business and the distraction of management from its day-to-day operations;
(iii) K-Bro's competitive environment; (iv) utility costs; (v) K-Bro's dependence on long-term contracts, (vi)
increased capital expenditure requirements; (vii) reliance on key personnel; and (viii) the availability of
future financing. Material factors or assumptions that were applied in drawing a conclusion or making an
estimate set out in the forward-looking information include: (i) volumes and pricing assumptions; (ii)
utility costs; (iii) expected contribution from new Calgary plant once it comes on-line in the latter part of
Q1, 2008; (iv) expected impact of labour cost initiatives; (v) anticipated contribution from the HMR
acquisition; and, (vi) the level of capital expenditures. Although the forward-looking information contained
in this MD&A is based upon what management believes are reasonable assumptions, there can be no
assurance that actual results will be consistent with these forward-looking statements. Certain statements
regarding forward-looking information included in this MD&A may be considered “financial outlook” for
purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes
other than this MD&A.
5
All forward-looking information in this MD&A is qualified by these cautionary statements. Forward-
looking information in this MD&A is presented only as of the date made. Except as required by law, K-Bro
does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent
events or circumstances.
This MD&A also makes reference to certain non-GAAP measures to assist in assessing the Fund's financial
performance. Non-GAAP measures do not have any standard meaning prescribed by GAAP and are
therefore unlikely to be comparable to similar measures presented by other issuers. Please see “Non-GAAP
Measures” for further discussion.
Recent Developments
Outlook
Results of Operations
Liquidity and Capital Resources
Distributions for the Period
Distributable Cash
6
10
11
14
16
17
Outstanding Units
Related Party Transaction
Critical Accounting Estimates
Non-GAAP Measures
Changes in Accounting Policies
18
18
18
19
20
Financial Instruments
Critical Risks and Uncertainties
Controls and Procedures
Corporate Overview
Vision
Strategy
23
23
26
26
28
29
RECENT DEVELOPMENTS
Acquisition of Business and Assets of Buanderie HMR Inc. in Quebec City
On January 31, 2008, K-Bro completed the acquisition of the laundry business, linen, property and
equipment of Buanderie HMR Inc. (“HMR”) located in Quebec City, Quebec. The business acquisition
will be accounted for using the purchase method, whereby the purchase consideration will be allocated to
the fair values of the net assets acquired at January 31, 2008. The purchase price including estimated
acquisition costs was approximately $3.8 million. Of the cash consideration payable to the vendor, $0.5
million was deposited into escrow with an escrow agent. The full amount of the funds held in escrow will
be released to the vendor upon the determination that specified earnings before interest, income taxes and
amortization were met in the twelve-month period subsequent to the acquisition. Goodwill will
correspondingly be increased by the amount released.
HMR is a leading laundry and linen service provider located in Quebec City, Quebec. K-Bro believes that
HMR has a strong market position in the hospitality and commercial sectors, with excellent brand name
recognition. Its large customer base ranges in size from major hotels to family operated restaurants.
In its most recent fiscal year ended May 31, 2007, revenues from HMR’s business were $3.8 million.
Management estimates that HMR’s EBITDA (see “Non-GAAP Measures”), after adjustments for expected
non-recurring costs, was approximately $0.6 million for the fiscal year ended May 31, 2007. These
operating results, combined with an expected low maintenance capital expenditure requirement, results in
an acquisition that management believes will be immediately accretive to the Fund.
Equity Issuance
On February 6, 2008 the Fund announced it had entered into an agreement to sell 1,362,000 units of the
Fund (“Units”) at a price of $12.85 per Unit to raise gross proceeds of approximately $17.5 million on a
bought deal basis. K-Bro also granted the Underwriters an Over-Allotment Option, exercisable in whole or
in part for a period of 30 days following closing, to purchase up to an additional 204,300 Units at the same
offering price. If the Over-Allotment Option is fully exercised, the total gross proceeds to K-Bro will be
approximately $20.1 million. The offering was made by way of a short form prospectus in all of the
provinces of Canada and closed on February 27, 2008 with the issuance of 1,362,000 Units.
6
The net proceeds of the offering will be used to repay indebtedness incurred on the acquisition of the assets
of HMR, the retrofit and equipping of the new Calgary plant and for general corporate purposes.
Sustained Revenue Growth
Revenue increased in the fourth quarter of 2007 by 5.7% compared to the fourth quarter of 2006. For the
year ended December 31, 2007, revenue increased by 13.8%. Of this 2007 revenue growth, approximately
2.0% is the result of the integration of the assets of Premier Linen Supply Ltd. (“Premier”), which were
acquired on March 31, 2006, 3.1% is from the addition of new customers part way through 2006 and in 2007,
9.8% is growth from existing customers as a result of growing volumes and price increases and the loss or
termination of existing customers accounted for a 1.1% reduction.
The strengthened Canadian dollar did not have a significant negative impact on hospitality revenues in the
fourth quarter. This sector in fact grew by 0.8% in the quarter compared to 2006. There can be no assurance
that this trend will continue as continued strengthening of the Canadian dollar may negatively impact our
hospitality revenues if tourism decreases in the future.
Bank Line of Credit Increased
In August 2007, K-Bro’s bank line of credit was increased from $18 million to $30 million. There were also
some favorable adjustments to certain covenants regarding the total funded debt to EBITDA ratio (see “Non-
GAAP Measures”), the working capital ratio and the interest coverage ratio (see “Liquidity and Financial
Resources – Financing Activities”).
Market Updates
Alberta
(i) Labour
Labour costs for plant staff in Alberta as a percentage of plant revenue increased for the fourth quarter from
53.0% in 2006 to 54.8% in 2007. For the year, these labour costs as a percentage of Alberta plant revenue
increased from 51.5% in 2006 to 53.7% for 2007. An ongoing tight labour market in Alberta has resulted in
these increased costs due to the requirement for significantly higher wage increases than in the past, overtime
due to staff shortages and lower productivity resulting from increased turnover. Labour costs as a percentage
of plant revenue over the last five quarters is as follows:
All plants
Alberta plants
Q4
51.6%
54.8%
Q3
50.8%
54.6%
Q2
49.8%
53.8%
Q1
49.2%
51.6%
2007
2006
Q4
50.0%
53.0%
A moderation of this is expected in 2008 with the new more efficient Calgary plant being brought on line,
price adjustments on the Calgary Health Region contract and the impact of the temporary foreign worker
program being implemented. In this regard, K-Bro has received approval to bring in a significant number of
workers under the Temporary Foreign Worker Program. These people will be deployed between Edmonton
and Calgary to fill current vacancies, reduce overtime and to fill future vacancies due to turnover.
Management believes the positive impact of these additional workers will start to be realized in Q2 with
improvements continuing gradually through 2008.
7
In addition to wage adjustments and the steps noted above, wherever possible, price increases from customers
are being or will be sought. Given the long-term economic outlook for Alberta, there can be no assurance
that these steps will be sufficient to stem the impact of these increasing labour costs.
(ii) Calgary Health Region Contract and Plant
K-Bro and the Calgary Health Region are finalizing a new ten year contract that commenced March 1, 2008
under an interim agreement. K-Bro’s initial ten year contract expired February 29, 2008. The new contract
encompasses all the long-term healthcare volume of the region previously processed by a competitor, in
addition to the acute care volume that K-Bro currently processes. The Finance Committee of the Calgary
Health Region approved the recommendation at their February 13 meeting and it was approved by their
Board on February 19, subject to finalization of any outstanding contractual matters.
To perform under the new contract, K-Bro has entered into a ten year lease for a new 80,000 sq. ft. plant in
Calgary. K-Bro’s existing lease expires in 2008 and was not available for renewal. Full occupancy was
received on January 31, 2008. The transition of volume from the current plant is taking place in stages and
commenced in February 2008. This transition is expected to be completed by March 31, 2008.
The new facility is being equipped and retrofitted in order to operate as efficiently as possible in a continuing
tight labour market, to be able to meet the growth plans of the Calgary Health Region and to be able to seize
other available opportunities in a growing Calgary region. This equipment includes the purchase of an
additional tunnel washer system that is a twin of the tunnel washer purchased for Calgary in 2006 as well as
an overhead materials handling monorail system which does not exist in the current plant. The estimated
total project cost is expected to be approximately $15 million. This cost was initially funded from the Fund’s
line of credit, which has now been paid down as a result of the equity issuance noted previously.
(iii) Market Opportunities
Significant growth in both the Calgary Health Region and Capital Health in Edmonton has been announced
and the projects associated with that growth are underway. This growth in Edmonton includes the opening of
the Mazankowski Heart Institute (2008), the Lois Hole Hospital for Women and the Centre for Cardiac
Services (2009), the Orthopedic Surgery Centre (2009), the Strathcona Community Hospital (2009) and the
Edmonton Clinic (2011). In Calgary, in addition to various expansions and renovations of existing facilities,
the South Health Campus phase one is expected to be completed in 2011. These announced projects entail
estimated costs of $2.5 billion to Capital Health in Edmonton and $2.2 billion to the Calgary Health Region
in the period 2008 – 2011. The government has also approved $280 million for 832 continuing care beds to
alleviate pressure in hospitals and meet the needs of an aging population.
Management believes that the expanded and more efficient new Calgary plant will provide additional
opportunities in both the healthcare and hospitality sectors in that marketplace. In Edmonton, additional
volume falling under the auspices of Capital Health continues to be added with the start of Leduc Hospital in
January and Devon Hospital scheduled for a March start-up. Management believes that similar additional
facilities may become available in the future.
The recently re-elected Progressive Conservative party put forth an election platform that included launching
a made-in-Alberta immigration strategy to deal with labour shortages, establishing a Temporary Foreign
Workers Advisory Office and increasing the duration of permits, reducing waiting lists by dealing with the
shortages of healthcare professionals and have included health facilities in its 20–year strategic building plan
to deal with anticipated growth and demand. It is anticipated that these initiatives, if enacted, would be of
benefit to K-Bro.
8
British Columbia
(i) Bill 29 Update
In 2002, the British Columbia provincial government enacted the Health and Social Services Delivery
Improvement Act, which, among other things, voided certain provision of existing collective agreements
between public sector healthcare organizations and their employees. As a result, B.C. healthcare
organizations were permitted to contract with outside service providers to perform certain services
previously provided by their employees. The enactment of this legislation provided K-Bro with the
opportunity to expand its operations by attracting new healthcare customers in the Vancouver region who
wished to outsource their linen processing requirements to private sector laundries. Certain healthcare
sector unions, associations of bargaining agents and employees affected by this legislation challenged its
constitutionality in B.C. courts and before the Supreme Court of Canada.
On June 8, 2007, the Supreme Court of Canada found that certain sections of the B.C. legislation violated
the freedom of association provision in the Canadian Charter of Rights and Freedoms, on the basis that
they violated workers' right to engage in collective bargaining. The court ruled that B.C. health employers
retained the right to contract out certain services, but that health care workers have a right to negotiate
language in their collective agreements on issues as fundamental to their working lives as contracting out.
The Supreme Court suspended its declaration until June 2008 to permit the B.C. government and the
affected health unions to engage in meaningful consultations and good faith negotiations surrounding the
implementation of the decision.
On January 25, 2008, the Facilities Bargaining Association reached a settlement agreement regarding the
implementation of the Supreme Court decision with the B.C. Government and the Health Employers'
Association of B.C.. The impact of the decision and the settlement agreement on the Fund is difficult to
predict, but management considers the settlement a positive development in that it reduces regulatory
uncertainty with respect to the Fund's current Vancouver contracts and may create opportunities for the
Fund to attract new healthcare customers in B.C. The settlement agreement was approved by the Hospital
Employees’ Union on February 22, 2008.
(ii) BC Budget
On February 19 2008, the British Columbia Minister of Finance introduced the province’s 2008 budget.
The budget includes a carbon tax that is to be “revenue neutral”. This tax will apply to fossil fuels
including gasoline, diesel fuel and natural gas, all of which K-Bro uses in its operations. Based on the
initial rate, it has been estimated that the tax will amount to 2.4 cents per litre of gasoline. The budget also
includes reductions in corporate tax rates. The impact of these provisions on K-Bro is uncertain and is
currently being examined by Management.
Quebec
Report of the Task Force on the Funding of the Health System
In February 2008, a report titled “Getting Our Money’s Worth” was released in Quebec by a task force set
up by the government in 2007 to make recommendations on how best to adequately fund the health care
system. The Task Force considers that Quebec must secure the long-term viability of the public health care
system by increasing its productivity and adjusting the growth in public health spending to the growth rate
of Quebec’s economy, while improving access to care and quality of services. As K-Bro has seen in
Alberta and British Columbia, such proposals and initiatives have sometimes led to private sector
involvement in non core activities such as laundry and linen services. There can be no guarantee that this
will be the case in Quebec but K-Bro now has a presence in the Quebec marketplace with a processing
facility following the HMR acquisition, which may be of benefit should any such opportunities arise.
9
Implementation of “Tax Fairness Plan”
On June 12, 2007, Bill C-52 Budget Implementation Act 2007, which contains legislation to tax publicly
traded trusts in Canada, was substantively enacted by the Canadian Federal Government. As a result, a
new 31.5 per cent tax will be applied to distributions from Canadian public income trusts. The new tax is
not expected to apply to the Fund until 2011 as a transition period applies to publicly traded trusts that
existed prior to November 1, 2006. There was no future income tax expense or recovery that needed to be
recorded by the Fund as a result of this legislation as the Fund has no taxable temporary differences that
would exist in 2011. Future income taxes are already recorded by the Fund’s wholly-owned subsidiary K-
Bro Linen Systems Inc.
See “Risks and Uncertainties” and “Income Tax Recovery” for further discussion of the potential
impact of this proposed legislation.
Other Future Business Development Opportunities
K-Bro currently has several proposals out and has entered into discussions with potential new healthcare and
hospitality customers. In addition, discussions are at various stages with potential acquisition candidates.
The degree of likelihood of success with any of these proposals or potential acquisitions cannot be stated with
any degree of accuracy at this time.
OUTLOOK
Although Management expects 2008 to start slowly from an EBITDA perspective with an anticipated
payout ratio (see “Non-GAAP Measures”) in the first quarter that is significantly higher than past
performance, management anticipates that 2008 as a whole will show a meaningful increase in revenue and
EBITDA compared to 2007 with an overall payout ratio that falls within acceptable levels.
This anticipation is based on:
• The new Calgary contract commencing March 1, 2008 with an anticipated increase in
EBITDA contribution as a result of increased volumes, price adjustments and operating
efficiencies expected from the new Calgary plant.
• The anticipated positive impact of contractual price adjustments from major customers in
the last three quarters of the year.
• The expected contribution from the recent acquisition in Quebec City.
• The anticipated positive impact of the foreign workers and other labour initiatives that is
expected to be fully realized as the year progresses.
The potential long-term impact of the Federal Government’s implementation of its “Tax Fairness Plan”
(see “Recent Developments”) will continue to unfold as capital markets, investors and the minority
government react to the new reality. The Fund continues to monitor the possible long term impact they will
have on the Fund and its investors, and what, if any, steps to take in respect of the Fund. However, this
legislation is not expected to have an immediate impact on the Fund's tax treatment or distribution policy or
the tax treatment of distributions to investors. There can be no assurance that the Fund will be able to
undertake any measures to minimize the long-term impact.
10
RESULTS OF OPERATIONS
(all amounts in $000’s except per unit amounts)
Overall Performance
The fourth quarter of 2007 saw revenue increase by $1,013 or 5.7% over 2006 (increases of $8,993 and
13.8% for fiscal 2007 compared to 2006). This revenue increase was the result of the integration of Premier,
which was acquired on March 31, 2006, additional volume, price increases and the addition of new accounts
as discussed under “Recent Developments”. However, the positive impact of this additional revenue was
more than offset by operating costs that increased to 89.9% of revenue in the current quarter compared to
87.0% in 2006 (87.6% of revenue for fiscal 2007 compared to 87.2% in 2006). The causes of this are
discussed later under “Operating Expenses”.
EBITDA (see “Non-GAAP Measures”) decreased in the current quarter by $416 (18.1%) over 2006 (but
increased by $853 or 10.2% for fiscal 2007 compared to 2006) as a result of the increase in operating
expenses, net of the additional revenue.
Selected Annual and Quarterly Financial Information (Unaudited)
The following table provides certain selected consolidated financial and operating data prepared by K-Bro
management for the periods indicated:
Fiscal year
Revenue
Operating expenses
EBITDA1
EBITDA as a % of revenue
Amortization
Financial charges
Loss (gain) on disposal of
equipment
Earnings before income taxes
Income tax recovery
Net earnings
Net earnings as a % of revenue
Basic & diluted earnings per
Unit
Total assets
Total long term financial
liabilities
Funds provided (used) by
operations
Long-term debt, end of period
Total
74,101
64,913
9,188
12.4%
5,755
880
(3)
2,556
1,558
4,114
5.6%
0.75
Q4
18,725
16,842
1,883
10.1%
1,408
318
(28)
185
859
1,044
5.6%
0.19
2007
Q3
19,059
16,630
2,429
12.7%
1,443
230
-
756
262
1,018
5.3%
0.19
Q2
18,560
16,050
2,510
13.5%
1,447
154
28
881
220
1,101
5.9%
0.20
Q1
17,757
15,391
2,366
13.3%
1,457
178
(3)
734
217
951
5.4%
0.17
Total
65,108
56,773
8,335
12.8%
5,118
554
(4)
2,667
1,211
3,878
6.0%
0.74
Q4
17,712
15,413
2,299
13.0%
1,411
194
(2)
696
269
964
5.4%
0.17
2006
Q3
17,024
14,940
2,084
12.2%
1,372
150
-
562
727
1,289
7.6%
0.24
Q2
16,362
14,228
2,134
13.0%
1,288
68
(2)
780
90
870
5.3%
0.16
Q1
14,010
12,192
1,818
13.0%
1,047
142
-
629
125
755
5.4%
0.17
83,342
21,948
83,342
21,948
76,384
18,335
74,119
14,576
74,030
12,693
75,074
14,591
75,074
14.591
75,024
15,276
72,260
12,159
72,408
10,061
6,942
2,966
207
124
3,645
4,558
2,926
860
(432)
1,204
16,627
16,627
12,734
9,510
7,478
9,278
9,278
9,861
6,303
4,000
Note:
EBITDA is defined as revenue less operating expenses as reflected in the table above (which equates to net earnings
(1)
before income tax recovery, gain on disposals, finance costs and amortization). See “Non-GAAP Measures”.
11
Revenues
See previous discussion under “Sustained Revenue Growth” and “Overall Performance”. Revenues by sector
consist of:
Fiscal year
Total
Q4
2007
Q3
Q2
Q1
Total
Q4
2006
Q3
Q2
Q1
Sector
Healthcare
Hospitality
Total
57,393
16,708
74,101
14,806
3,919
18,725
14,318
4,741
19,059
14,261
4,299
18,560
14,008
3,749
17,757
50,152
14,956
65,108
13,826
3,886
17,712
12,446
4,578
17,024
12,181
4,181
16,362
11,699
2,311
14,010
The increase in these sectors’ revenues is accounted for as follows:
Fiscal year ended December 31
2007
2006
2007
2006
2007
2006
Total
Healthcare
Hospitality
Base revenues, beginning of year
Revenue from new customers in year
Revenue from new customers commenced during prior year
Revenue from new customers obtained by acquisition
Revenue growth from volume and price increases to existing
customers
Lost or terminated customers
Base revenues, end of year
Operating Expenses
65,108
52,198
50,152
713
1,329
1,332
6,370
4,546
1,061
3,970
3,859
562
1,154
70
5,784
(751)
74,101
(526)
65,108
(329)
57,393
43,680
2,666
580
211
3,509
(494)
50,152
14,956
151
175
1,262
586
(422)
16,708
8,518
1,880
481
3,759
350
(32)
14,956
Compared to the fourth quarter of 2006, operating expenses increased by $1,429 (9.3%) in the fourth quarter
of 2007 (increases of $8,140 or 14.3% for fiscal 2007 compared to 2006). These dollar increases are in large
part attributable to the increase in revenue of 5.7% in the quarter (13.8% for the year). However, as a
percentage of revenue, operating expenses increased by 2.9 percentage points in the quarter (0.4 percentage
points in the year).
Labour costs as a percentage of revenue increased by 1.3 percentage points ($742) compared to the fourth
quarter of 2006 (0.8 percentage points and $5,030 for fiscal 2007 compared to 2006) which was augmented
by increased repairs and linen costs, resulting in the net increase in operating costs of 2.9 percentage points
for the quarter (0.4 percentage points for the year). While some stabilization of the labour situation has
occurred, we do not expect significant reductions in hourly labour costs given the current Alberta economy
and labour market conditions. However, productivity gains and overtime reductions are anticipated from the
new Calgary plant and the impact of the temporary foreign worker program.
The year to date increase in corporate expense of $450 is the result of: a $126 write-off in Q1 2007 with
respect to costs associated with an abandoned acquisition; a $325 increase in executive salaries and provision
for bonuses; and an increase in other costs of $36. Offsetting these was a reduction of $37 related to accruals
for K-Bro’s Long Term Incentive Plan (“LTIP”) which was a recovery of $50 in the fourth quarter of 2007
compared to an expense of $14 in the fourth quarter of 2006 ($151 for fiscal 2007 compared to $188 for
2006).
In April, 2006, a trust (the “LTIP Trust”) was formed to hold Units of the Fund on behalf of the
participants of K-Bro’s long-term incentive plan (the “LTIP”). K-Bro is neither a trustee nor a direct
participant of the LTIP; however, under certain circumstances K-Bro may be the beneficiary of forfeited
Units held by the LTIP Trust. Consequently, the LTIP Trust is considered a variable interest entity for
accounting purposes and K-Bro has consolidated the LTIP Trust in accordance with the Canadian Institute
12
of Chartered Accountants (“CICA”) issued Accounting Guideline AcG-15. For a specific performance
year, one-quarter of the Units held by the LTIP Trust vest to the participants of the LTIP thirty days after
approval of the audited financial statements by the Trustees upon the participant signing a Participation
Agreement and Confirmation and three-quarters will vest on the second anniversary of that date upon
continued employment, except in limited circumstances. Compensation expense is recorded by K-Bro in
the period earned. Distributions made by the Fund with respect to unvested Units held by the LTIP Trust
are paid to LTIP participants. Unvested units held by the LTIP Trust are shown as a reduction of
unitholders’ equity.
Effects of Inflation
The majority of K-Bro’s customer contracts have an annual price adjustment mechanism based on a
published price index such as CPI. To the extent that such indices are impacted by inflation, this would be
reflected in K-Bro’s revenues and net income. K-Bro’s operating costs may be affected by general inflation
but to a much greater extent are impacted by labour market conditions, textile costs in a global
environment and commodity prices impacting the cost of natural gas and electricity.
Amortization of Property and Equipment
Amortization of property and equipment represents the expense related to the appropriate matching of certain
of K-Bro's long-term assets to the estimated useful life and period of economic benefit to K-Bro of those
assets. Linen amortization expense is included in operating expenses and is accounted for in EBITDA.
Amortization of plant and equipment has increased as a result of the acquisition of the Premier assets as well
as the capital additions from 2006 related to the $6.4 million strategic capital expenditure program and the
$1.9 million for the tunnel washer added in Calgary.
Amortization of Intangible Assets
Amortization of intangible assets represents the expense related with matching K-Bro’s finite life intangible
assets to the estimated useful life and period of economic benefit to K-Bro of those assets. As part of the
valuation completed for purposes of the purchase price allocation for the K-Bro acquisition by the Fund and
the Premier acquisition by K-Bro, total intangible assets were recognized on the balance sheet of K-Bro in the
amount of $23,047, representing the value attributable to various contracts held. Amortization expense in the
fourth quarter of 2007 was unchanged from 2006. Amortization expense for fiscal 2007 increased compared
to 2006 as a result of the Premier acquisition on March 31, 2006.
Financial Charges
Financial charges in the current quarter increased by $124 over 2006 ($326 for the year) as a result of an
increase in long-term debt (see “Liquidity and Capital Resources – Financing Activities”).
Income Tax Recovery
Income tax recovery includes current and future income taxes based on taxable income and the temporary
timing differences between the tax and accounting bases of assets and liabilities. Income tax recovery reflects
the structure as an income trust whereby the Fund’s unit holders bear the tax obligations with respect to
distributions. The large income tax recovery in Q4 2007 was the result of substantively enacted income tax
rates which were decreased from 31.1% to 27.9% resulting in an additional recovery of $550 being recorded
in the fourth quarter of 2007.
On June 12, 2007, Bill C-52 Budget Implementation Act 2007, which contains legislation to tax publicly
traded trusts in Canada, was substantively enacted by the Canadian Federal Government. As a result, a
new 31.5 per cent tax will be applied to distributions from Canadian public income trusts. The new tax is
13
not expected to apply to the Fund until 2011 as a transition period applies to publicly traded trusts that
existed prior to November 1, 2006. There was no future income tax expense or recovery that needed to be
recorded by the Fund as a result of this legislation as the Fund has no taxable temporary differences that
would exist in 2011. Future income taxes are already recorded by the Fund’s wholly-owned subsidiary K-
Bro Linen Systems Inc.
Currently, the Fund is only taxable on amounts that are not distributed to Unitholders. If enacted in its
current form, the proposed legislation will result in a change in which the earnings of the Fund will be
subject to income tax regardless of whether amounts are distributed to the Unitholders or not.
LIQUIDITY AND CAPITAL RESOURCES ($000’S)
Cash Flow from Operating Activities
Cash provided by operating activities was $2,966 in the fourth quarter of 2007 ($6,942 for fiscal 2007), an
increase of $40 from the funds provided by operating activities in the fourth quarter of 2006 (and an increase
of $2,384 for the year). This $40 increase is attributable to a decreased working capital requirement of $578
in the quarter compared to the corresponding period in 2006 (a decrease of $1,857 for the year) as well as a
decrease in cashflow from operations of $538 in the quarter (an increase of $527 for the year).
The decrease in the working capital requirement of $578 in the quarter compared to the fourth quarter of 2006
is the result of: increased accounts receivable requirement of $250 resulting from the timing of receipts from
major customers; a decrease of linen purchases of $170 due to the timing of purchases and the requirement in
2006 to purchase linen for the major healthcare contract start ups in Toronto; and, funds used by a net
decrease in accounts payable and prepaids of $658 as the result of timing differences in payments.
Financing Activities
On February 27, 2008, the Fund issued additional units and raised proceeds as described under “Recent
Developments – Equity Issuance”. On March 31, 2006, the Fund raised proceeds (net of offering costs before
tax) of $14,312 from the issuance of 1,080,000 units in a private placement bought deal. These 2006 funds
financed the acquisition of Premier ($8,310 including the escrowed funds) and $6,002 of the strategic capital
expenditure program. No equity issues occurred in 2007.
During the quarter ended December 31, 2007, the Fund declared distributions to unitholders at an annualized
rate of $1.10 per unit for a total amount of $1,512 ($6,046 for the year ended December 31, 2007). In the
fourth quarter of 2006, K-Bro declared distributions to the unit holders in the amount of $1,511 (an
annualized rate of $1.10) and $5,749 for the year ended December 31, 2007. The year-over-year increase in
2007 is reflective of the increased number of units outstanding as a result of the private placement on March
31, 2006.
Long-term debt at December 31, 2007 was $16,627 compared with $12,734 at September 30, 2007 and
$9,278 at December 31, 2006. The increase from the third quarter of 2007 is the result of the purchase of
additional strategic capital assets, primarily the Calgary plant, offset by a decrease in working capital
requirements as previously discussed.
The existing long-term debt of $16,627 consists of draw downs on a secured revolving, interest only, credit
facility of up to $30,000 (increased from $18,000 in August 2007). The facility is a two-year committed
facility maturing February 28, 2009 and extendable annually for an additional year at the lender’s option. It is
subject to customary terms and conditions and is also subject to the maintenance of a maximum ratio of
funded debt to EBITDA of 2.75 (changed from 2.50 in August 2007), and minimum ratios of 1.50 for the
defined current ratio and 1.00 for fixed charge coverage. K-Bro is in compliance with all of its covenants.
14
On June 24, 2005, K-Bro entered into an interest rate swap arrangement whereby the interest rate paid on a
notional amount of $4,000 of this debt has been fixed at 5.95% for a period of five years. The floating rate of
interest that was swapped for this fixed rate is currently at 7.10%.
In the second quarter of 2007, the Fund entered into foreign exchange forward contracts at an average
exchange rate of 1.085 Canadian per US dollar to cover its foreign exchange exposure with respect to its US
$2.9 million commitment for equipment purchases in Calgary (see “Recent Developments- Calgary Update”).
These foreign exchange forward contracts were done at a time when the Canadian dollar hit a 30 year high
against the US dollar. The Canadian dollar has strengthened further which has resulted in a loss on derivative
instruments being recorded in other comprehensive income.
Investing Activities
During the current quarter, K-Bro used $58 of funds for maintenance capital expenditures ($604 for the year)
and $4,856 of funds for strategic capital expenditures ($7,691 for the year) for a total cash investment of
$4,914 for the quarter ($8,295 for the year). Management defines maintenance capital expenditures as
additions to, or replacements of, property and equipment to maintain K-Bro's current business operations.
Management estimates that ongoing annual average maintenance capital expenditures are approximately
$850. The modest level of maintenance capital expenditures is due to the long life of the majority of the
processing equipment.
Expenditures on wear parts such as motors, belts and ironer pads are expensed as incurred. These
expenditures and an extensive preventative maintenance program performed at each plant by a full
complement of qualified maintenance engineers, has resulted in a repairs and maintenance expense (including
personnel costs) totaling $1,161 in the fourth quarter of 2007 ($947 in 2006) which are included in the
calculation of EBITDA. For the year ended December 31, 2007, these expenditures were $4,103 in 2007,
compared with $3,644 in 2006 with the amount as a percentage of revenue down 0.1 percentage points.
Strategic capital expenditures are defined by management as those expenditures utilized for improvements to,
and expansion of, K-Bro’s property and equipment to enhance efficiencies and capacity to process
incremental volumes. In addition to the $7,691 of cash invested in strategic capital assets in 2007, there were
additional purchases of $3,091 included in accounts payable and $576 included in the lease inducement
liability for a total investment of $11,358. Of this total, $10,064 is related to the new Calgary plant, $481 is
related to the purchase of assets from the receiver for DoveCorp (a former competitor in Toronto), and $813
is related to the requirements of handling the increase in volume (primarily tubs and carts). Included in the
$481 DoveCorp asset purchase was a complete 2006 Milnor tunnel washing system and various other
washing, drying, finishing and boiler room equipment.
Contractual Obligations
At December 31, 2007, payments due under contractual obligations for the next five years and thereafter are
as follows:
Operating leases and utility
commitments
Linen purchase obligations
Equipment purchase commitments
Total
18,973
2,741
126
Payments Due by Period
1-3 years
4-5 years
After 5 years
6,207
3,496
5,427
Less than
1 year
3,843
2,741
126
-
-
-
-
-
-
The source of funds for these commitments will be from operating cash flow and the undrawn portion of the
revolving credit facility.
15
Financial Position
Capital Structure at December 31
Long-term debt
Unitholders’ equity
Total capitalization
Debt to total capitalization
2007
16,627
48,243
64,870
25.6%
2006
9,278
50,164
59,442
15.6%
For the year ended December 31, 2007, the Fund had a payout ratio (see “Non-GAAP Measures”) of 78.5%,
a debt to total capitalization of 25.6%, an unused line of credit of $12,938 and was in compliance with all
debt covenants. Based on this and the 2008 equity issuance previously discussed, management believes that
K-Bro has sufficient liquidity and is able to generate sufficient amounts of cash to meet its planned growth
and has access to the equity market to fund additional growth as acquisition opportunities arise.
DISTRIBUTIONS FOR THE PERIOD
Payment
Date
Per Unit
Distribution
Distribution
Amount ($)
Per Unit
Distribution
Distribution
Amount ($)
2007
2006
Fiscal year
Period
Fund Units
First quarter
Second quarter
Third quarter
October
November
December
November 15
December 14
January 15
Fourth quarter
Year to date
Exchangeable
Shares
First quarter
Second quarter
Third quarter
October
November
December
November 15
December 14
January 15
Fourth quarter
Year to date
Total Distributions
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.10004
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.10004
$1.10004
$1,491,617
$1,491,617
$1,491,617
$497,205
$497,205
$497,204
$1,491,614
$5,966,465
$19,913
$19,913
$19,913
$6,639
$6,639
$6,638
$19,916
$79,655
$6,046,120
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.10004
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.10004
$1.10004
$1,194,606
$1,491,615
$1,491,615
$497,205
$497,205
$497,205
$1,491,615
$5,669,451
$19,913
$19,915
$19,915
$6,638
$6,639
$6,638
$19,915
$79,658
$5,749,109
For the year ended December 31, 2007, the Fund distributed $1.10 per unit compared with Distributable Cash
(see “Non-GAAP Measures”) per unit of $1.40. The actual payout ratio was 78.5%.
The Fund’s policy is to make distributions to unitholders of its available cash to the maximum extent
possible consistent with good business practices considering requirements for capital expenditures,
working capital, growth capital and other reserves considered advisable by the Trustees of the Fund. All
such distributions are discretionary. Distributions are declared payable each month in equal amounts to the
Fund unitholders and exchangeable shareholders on the last business day of each month and are paid by the
15th of the following month.
16
DISTRIBUTABLE CASH (see “Non-GAAP Measures”)
(000’s except per unit amounts and percentages)
The Fund’s source of cash for distributions is cash provided by operating activities. Distributable cash,
reconciled to cash provided by operating activities as calculated under GAAP, is presented as follows:
Fiscal year(1)
Total
Q4
2007
Q3
Q2
Q1
Total
Q4
2006
Q3
Q2
Q1
Per consolidated financial statements:
Cash provided (used) by operating activities
$6,942
$2,966
$207
$124
$3,645
$4,558
$2,926
$860
$(432)
$1,204
Add (deduct):
Net changes in non-cash working capital
items(2)
Maintenance capital expenditures(3)
1,366
(1,398
1,991
2,231
(1,458
3,223
(820)
1,074
2,497
472
)
)
(604)
(58)
(150)
(170)
(226)
(539)
(75)
(205)
(110)
(149)
Distributable Cash
$7,704
$1,510
$2,048
$2,185
$1,961
$7,242
$2,031
$1,729
$1,955
$1,527
Distributable Cash per weighted average
diluted Units outstanding
Distributions Declared(4)
$1.40
$0.26
$0.38
$0.40
$0.36
$1.39
$0.37
$0.32
$0.36
$0.34
$6,046
$1,511
$1,512
$1,511
$1,512
$5,749
$1,511
$1,512
$1,512
$1,214
Distributions Declared per Unit (see “Non-
GAAP Measures”)
Ratio
Payout
Measures”)(4)
Weighted Average Units Outstanding During
“Non-GAAP
(see
$1.10
$0.27
100.0
$0.28
$0.28
$0.27
$1.10
$0.27
$0.28
$0.28
$0.27
78.5%
%
73.8%
69.2%
77.1%
79.3%
74.3%
87.4%
77.8%
79.5%
the Period- Basic
5,464
5,459
5,459
5,465
5,476
5,219
5,476
5,476
5,482
4,428
Weighted Average Units Outstanding During
the Period- Diluted
12-month trailing
Distributable cash
Distributions
Payout ratio
Cumulative since IPO February 3, 2005
Distributable cash
Distributions
Payout ratio
5,498
5,493
5,493
5,498
5,488
5,227
5,490
5,490
5,490
4,428
7,704
6,046
8,225
6,046
7,906
6,046
7,676
6,047
7,242
5,749
6,729
5,396
6,842
5,044
6,744
4,692
78.5%
73.5%
76.5%
78.8%
79.3%
80.2%
73.7%
69.6%
21,111
19,601
17,553
15,368
16,018
14,507
12,995
11,484
13,407
11,376
9,972
8,461
9,647
6,949
7,692
5,437
75.9%
74.0%
74.0%
74.7%
74.4%
74.4%
72.0%
70.7%
1 Following the revised Staff Notice 52-306 issued by the Canadian Securities Administrators on distributable cash
presentation, we adopted their recommendations retroactive to February 3, 2005 in order to disclose comparable results.
2 Net changes in non-cash working capital is excluded from the calculation as it would introduce significant cash flow
variability and affect underlying cash flow from operating activities. Significant variability can be caused by such things as
the timing of receipts (which individually are large because of the nature of K-Bro’s customer base and timing may vary due
to the timing of customer approval, vacations of customer personnel, etc.) and the timing of disbursements (such as the
payment of large volume rebates done once annually). As well, large increases in working capital are generally required
when contracts with new customers are signed as linen is purchased and accounts receivable increase. Management feels
that this amount should be excluded from the distributable cash figure which is used as the basis for determining the
distributions to be paid.
3 Maintenance capital expenditure is discussed under “Investing Activities”.
4 The level of distributions paid compared to distributable cash is reviewed periodically to take into account the current and
prospective performance of the business and other items considered to be prudent.
17
OUTSTANDING UNITS
At December 31, 2007, the Fund had 5,423,862 Fund Units outstanding and 72,411 Special Trust Units
outstanding (unchanged from December 31, 2006). The basic and the diluted weighted average number of
units outstanding for fiscal 2007 was 5,464,487 and 5,498,318 respectively (5,219,225 and 5,227,474
respectively for 2006).
In accordance with the LTIP agreement and in conjunction with the performance of the Fund in the prior
fiscal year, the Compensation, Nominating and Corporate Governance Committee of the Trustees of the
Fund in 2007 approved LTIP compensation of $0.3 million (2006 - $0.4 million) and approved the funding
and transfer of $0.3 million (2006 - $0.4 million) of cash to the LTIP Trust in April 2007 and 2006
respectively in order to fund the purchase of Units by the LTIP Trust. In the second quarter of 2007, the
LTIP Trust purchased 22,647 Units of the Fund (2006 – 27,113). As at December 31, 2007, 12,436 Units
held by the LTIP Trust have vested (December 31, 2006 – 6,779). The weighted average units outstanding
and net earnings per unit calculation exclude the unvested units held by the LTIP Trust.
RELATED PARTY TRANSACTION
The Fund has incurred expenses in the normal course of business for advisory consulting services provided
by a Trustee relating to acquisitions. The amounts charged are recorded at their exchange amounts and are
subject to normal trade terms. For the year ended December 31, 2007, the Fund incurred such fees totaling
$46,000 (2006 - $74,000). Of the total 2007 amount, $38,000 is included in prepaid expenses to be
recognized as an acquisition cost related to the assets of HMR and $8,000 is included in equipment costs
related to the acquisition of equipment from a receivership. For 2006, $40,000 is included in acquisition
costs related to the assets of Premier and $34,000 is included in Corporate expenses.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the financial statements, in conformity with GAAP, requires management of K-Bro to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Management regularly evaluates these estimates and assumptions
which are based on past experience and other factors that are deemed reasonable under the circumstances.
This involves varying degrees of judgment and uncertainty and, therefore, amounts currently reported in the
financial statements could differ in the future.
Linen in Service
Linen in service is recorded at cost. Operating room linen is amortized on a straight-line method over an
estimated service life of 24 months. General linen is amortized based on usage which results in an estimated
service life of the linen equal to 24 months. Based on past experience, management believes that a service life
of 24 months is representative of the average service life of linen and would not expect a material deviation to
the balance of Linen in Service or Linen expense.
Revenue and Volume Rebates
Revenue from linen management and laundry services is largely based on written service agreements
whereby K-Bro has agreed to collect, launder, deliver and replenish linens. K-Bro recognizes revenue in the
period in which the services are provided. Volume rebates, where applicable, are recorded based on
annualized expected volumes when it is determined that they are likely to be met. Based on past experience,
management believes that volumes utilized for any estimates are reasonable and would not expect a material
deviation to the balance of accrued liabilities or Revenue.
18
Property and Equipment
Property and equipment are recorded at cost. Amortization is provided over the estimated useful lives of the
assets, based on past experience, on a declining basis using the following annual rates:
Laundry equipment....................................................................................................................................... 15%
Office and delivery equipment ..................................................................................................................... 20%
Computers and software ............................................................................................................................... 30%
Leasehold improvements……………………………..…………………….straight line over the lease period
Asset under development………...……….…………..at applicable rates and methods when put into service
The carrying value of property and equipment is evaluated whenever significant circumstances indicate
impairment in value is likely. The carrying value of property and equipment and amortization expense is
affected by these estimates.
Goodwill
Goodwill is not amortized and K-Bro assesses goodwill for impairment on an annual basis, or more
frequently if changes in circumstances indicate a potential impairment. Any potential impairment is
identified by comparing the fair value of the business to its carrying value. If the fair value exceeds its
carrying value, goodwill is considered not to be impaired. If the carrying value exceeds its fair value, a more
detailed goodwill impairment assessment would have to be undertaken. Any resulting impairment would be
charged to earnings in the period in which the impairment is identified and would affect the carrying value of
goodwill but such charges do not result in a cash outflow and would not affect K-Bro’s liquidity. No
impairment was incurred upon completion of management’s 2007 and 2006 assessments. The possible
impact of the proposed “Tax Fairness” legislation has been taken into account in K-Bro’s review for
impairment of goodwill.
Intangible Assets
Intangible assets with a finite life which relate to contracts K-Bro has with certain customers are recorded at
cost and are amortized over the remaining life of the contract plus one renewal period. Impairment is
evaluated if there are significant changes in circumstances affecting the carrying value of intangible assets by
comparing the fair value of the finite life intangible asset with its carrying value. Management has
determined that no such significant change has occurred in 2007 or 2006 that would impact the carrying value
of intangible assets.
NON-GAAP MEASURES
EBITDA
We report on our EBITDA (Earnings before interest, taxes, depreciation and amortization) because it is a
key measure used by management to evaluate performance. EBITDA is utilized in measuring compliance
with debt covenants and in making decisions relating to distributions to unitholders. We believe EBITDA
assists investors in assessing our performance on a consistent basis without regard to depreciation and
amortization, which are non-cash in nature and can vary significantly depending on accounting methods or
non-operating factors such as historical cost.
EBITDA is not a calculation based on GAAP and is not considered an alternative to net earnings in
measuring K-Bro’s performance. EBITDA does not have a standardized meaning and is therefore not
likely to be comparable with similar measures used by other issuers. For reconciliation with GAAP, please
refer to “Selected Annual and Quarterly Information”. EBITDA should not be used as an exclusive
measure of cash flow since it does not account for the impact of working capital changes, capital
19
expenditures, debt changes and other sources and uses of cash, which are disclosed in the consolidated
statements of cash flows.
Distributable Cash
Distributable cash is a non-GAAP measure generally used by Canadian income trusts as an indicator of
financial performance but it should not be seen as a measurement of liquidity or a substitute for comparable
metrics prepared in accordance with GAAP. Management believes that this measure is commonly used by
investors, management and other stakeholders to evaluate the ongoing performance of K-Bro. For a
reconciliation with GAAP, please refer to the “Distributable Cash” section.
Cash Distributions per Unit and Payout Ratios
We report on cash distributions per unit and payout ratios (actual cash distribution divided by distributable
cash) because they are believed to be key measures used by investors to value K-Bro, assess its
performance and provide an indication of the sustainability of distributions. Cash distributions per unit and
the payout ratio depend on the amount of distributable cash generated and the Fund’s distribution policy.
The Fund’s policy is to make distributions to unitholders of its available cash to the maximum extent
possible consistent with good business practices considering requirements for capital expenditures,
working capital, growth capital and other reserves considered advisable by the Trustees of the Fund.
Distributions are declared payable each month to the Fund unitholders and exchangeable shareholders on
the last business day of each month and are paid by the 15th of the following month. All distributions are
discretionary. We periodically review cash distributions taking into account our current and prospective
performance.
CHANGES
ADOPTION
IN ACCOUNTING POLICIES
INCLUDING
INITIAL
The CICA has issued five new accounting standards:
(i) Financial instruments – recognition and measurement
On January 1, 2007, the Fund adopted Section 3855 of the CICA Handbook, “Financial
Instruments – Recognition and Measurement”. It describes the standards for recognizing and
measuring financial instruments in the balance sheet and the standards for reporting gains and
losses in the financial statements. Financial assets available for sale, assets and liabilities held for
trading and derivative financial instruments, part of a hedging relationship or not, have to be
measured at fair value.
The Fund has made the following classifications:
• Cash and temporary investments will be classified as financial assets held for trading and
measured at fair value. Gains and losses related to periodical revaluation are recorded in
net income.
• Accounts receivable are classified as loans and receivables and are initially measured at
fair value and subsequent periodical revaluations are recorded at amortized cost using the
effective interest rate method.
20
• Accounts payable and accrued liabilities, distribution payable and long-term debt are
classified as other liabilities and are initially measured at fair value and subsequent
periodical revaluations are recorded at amortized cost using the effective interest rate
method.
The adoption of this Section was done retroactively without restatement of the consolidated
financial statements of prior periods. As at January 1, 2007 and December 31, 2007, there was
no impact on the consolidated financial statements from these classifications.
The impact on the consolidated balance sheet of measuring hedging derivatives at fair value as at
January 1, 2007 was an increase in other current assets and accumulated other comprehensive
income of $28,085. Prior periods were not restated.
An embedded derivative is a component of a financial instrument or another contract of which
the characteristics are similar to a derivative. The Fund has no significant embedded derivatives.
(ii)
Comprehensive income
On January 1, 2007, the Fund adopted Section 1530 of the CICA Handbook, “Comprehensive
Income”. It describes reporting and disclosure recommendations with respect to comprehensive
income and its components. Comprehensive income is the change in unitholders’ equity, which
results from transactions and events from sources other than the Fund’s unitholders. These
transactions and events include unrealized gains and losses resulting from changes in fair value
of certain financial instruments.
As a result of the adoption of this Section, the Fund now presents a consolidated statement of
comprehensive income as part of the consolidated financial statements.
(iii)
Equity
On January 1, 2007, the Fund adopted Section 3251 of the CICA Handbook, “Equity”, replacing
Section 3250 “Surplus”. It describes standards for the presentation of equity and changes in
equity for a reporting period as a result of the application of Section 1530, “Comprehensive
Income”.
(iv)
Hedges
On January 1, 2007, the Fund adopted Section 3865 of the CICA Handbook, “Hedges”. The
recommendations of this Section expand the guidelines required by Accounting Guideline 13
(AcG-13), “Hedging Relationships”. This Section describes when and how hedge accounting
can be applied as well as the disclosure requirements. Hedge accounting enables the recording of
gains, losses, revenue and expenses from the derivative financial instruments in the same period
as for those related to the hedged item. This has been applied to the Fund’s interest rate swap
and foreign exchange forward contracts.
(v)
Accounting changes
Effective January 1, 2007, the Fund adopted CICA Handbook Section 1506 “Accounting
Changes”. This section established criteria for changing accounting policies together with the
accounting treatment and disclosure of changes in accounting policies, changes in accounting
estimates and the correction of errors.
It includes the disclosure, on an interim and annual basis, of a description and the impact on our
financial results of any new primary source of GAAP that has been issued but is not yet effective.
21
The Fund has determined that there is no material impact on the consolidated financial statements
from the adoption of Handbook Section 1506.
Future changes in accounting policies are:
(i) Capital disclosures
The CICA issued a new accounting standard, Section 1535 “Capital Disclosures”, which requires
the disclosure of both qualitative and quantitative information that provides users of financial
statements with information to evaluate the entity’s objectives, policies and processes for
managing capital. This new section is effective for the Fund beginning January 1, 2008.
Management does not expect that the adoption of this standard will have an impact on the
consolidated financial statement as the standard relates to note disclosure.
(ii) Financial instruments-disclosure and Financial instruments-presentation
Two new accounting standards were issued by the CICA, Section 3862 “Financial Instruments-
Disclosures”, and Section 3863 “Financial Instruments – Presentation”. These sections will
replace Section 3861 “Financial Instruments – Disclosure and Presentation” once adopted. The
objective of Section 3862 is to provide users with information to evaluate the significance of the
financial instruments on the entity’s financial position and performance, the nature and extent of
risks arising from financial instruments, and how the entity manages those risks. The provisions
of Section 3863 deal with the classification of financial instruments, related interest, dividends,
losses and gains and the circumstances in which financial assets and financial liabilities are
offset. These new sections are effective for the Fund beginning January 1, 2008. Management
does not expect that the adoption of this standard will have an impact on the consolidated
financial statement as the standard relates to note disclosure.
(iii) Inventories
In June 2007, the CICA issued a new accounting standard – Section 3031 “Inventories” which
replaces the existing standard for inventories, Section 3030. The new Section is effective for the
Fund beginning January 1, 2008. Application of the new Section is not expected to have a
material impact on the financial statements.
(iv)
Goodwill and intangible assets
In February 2008, the CICA issued a new accounting standard – Section 3064 “Goodwill and
intangible assets” which replaces the existing standard for goodwill and other intangible assets,
Section 3062 and research and development costs, Section 3450. The new Section is effective
for the Fund beginning January 1, 2009; however, earlier adoption is encouraged. It establishes
standards for the recognition, measurement, presentation and disclosure of goodwill subsequent
to its initial recognition and of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the previous Section 3062.
Standards with respect to intangible assets may have an impact on the Fund’s treatment of certain
costs associated with its new Calgary plant. Management is assessing the impact of these new
standards on its consolidated financial statements.
International Financial Reporting Standards
The Accounting Standards Board of Canada has announced that accounting standards in Canada, as
used by public companies, will be converged to International Financial Reporting Standards (“IFRS”)
effective January 1, 2011. The Fund will convert to these new standards according to the timetable set
22
with these new rules. Management is currently assessing the future impact of these new standards on its
consolidated financial statements.
FINANCIAL INSTRUMENTS
K-Bro’s financial instruments consists of derivative financial instruments, accounts receivable, accounts
payable and accrued liabilities, distribution payable to unitholders and long-term debt. Unless otherwise
stated, the fair value of the financial instruments approximates their carrying value.
Derivative financial instruments are utilized by K-Bro to manage cashflow risk against the volatility in
interest rates on its long-term debt and foreign exchange rates on its equipment purchase commitments. K-
Bro does not utilize derivative financial instruments for trading or speculative purposes. K-Bro has
floating interest rate debt and equipment purchase commitments in US dollars that gives rise to risks that
its earnings and cash flows may be adversely impacted by fluctuations in interest rates and foreign
exchange rates. In order to manage these risks, K-Bro may enter into interest rate swaps, forward contracts
or option contracts. K-Bro has entered into an interest rate swap arrangement and foreign exchange
forward contracts as described under “Financing Activities”.
It is K-Bro’s policy to document all relationships between hedging instruments and hedged items, as well
as its risk management objectives and strategy for undertaking various hedge transactions. This process
includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. K-Bro also assesses, both at the hedge inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting
changes in fair value or cash flows of hedged items. K-Bro’s interest rate swaps, forward contracts or
option contracts are designated as hedges when the underlying risks of the hedged and hedging instruments
offset to manage K-Bro’s exposure. Gains or losses relating to such contracts are accounted for in
accordance with Section 3865 discussed above.
CRITICAL RISKS AND UNCERTAINTIES
Income Tax Matters
On October 31, 2006, the Minister of Finance (Canada) announced new tax proposals concerning the
taxation of income trusts and other flow-through entities. The October 31, 2006 Proposal was followed by
the release of draft legislation by the Department of Finance on December 21, 2006. The 2006 Proposed
Amendments, if enacted as currently drafted, will subject the Fund to trust level taxation as of January 1,
2011. In addition, the taxable distributions received by investors from the Fund, would be treated as taxable
dividends.
There can be no assurance that the Fund will be able to retain the benefit of the deferred application of the
new tax regime until 2011. If K-Bro is deemed to have undergone "undue expansion" during the period
from November 1, 2006 to December 31, 2010, as described in the Normal Growth Guidelines issued by
the Department of Finance on December 15, 2006, the 2006 Proposed Amendments would become
effective on a date earlier than January 1, 2011.
The Normal Growth Guidelines indicate that the Fund will not lose the benefit of the deferred application
of the new tax regime to 2011 if the equity capital of the Fund does not grow as a result of issuances of
new equity (which includes trust units, debt that is convertible into trust units, and potentially other
substitutes for such equity) before 2011 by an amount that exceeds the greater of $50 million and an
objective "safe harbour" amount based on a percentage of the Fund’s October 31, 2006 Market
Capitalization. The Normal Growth Guidelines provide for a "safe harbour" amount equal to 40% of the
October 31, 2006 Market Capitalization for the period from November 1, 2006 to the end of 2007, and
23
20% for each of the 2008 to 2010 calendar years. These amounts of “safe harbour” are cumulative during
the transition period. The Fund’s October 31, 2006 Market Capitalization was approximately $81.4 million.
It is therefore believed that, based upon the availability of $50 million of “safe harbour” per year, the Fund
will not be subject to the 2006 Proposed Amendments until January 1, 2011.
However, in the event that K-Bro issues additional Units or convertible debentures (or other equity
substitutes) in excess of the “safe harbour” amount on or before 2011, the Fund may become subject to the
2006 Proposed Amendments prior to 2011. No assurance can be given that the 2006 Proposed
Amendments will not apply to the Fund prior to 2011. Loss of the benefit of the deferred application of the
new tax regime until 2011 could have a material and adverse effect on the value of units of the Fund.
Competitive Environment
K-Bro experiences competition in its markets from its public and private sector competitors. The principal
elements of competition include quality, service and price. While many competitors are independent and
privately-owned, certain of K-Bro's competitors are public sector entities and may have greater financial and
other resources. There can be no assurance that these competitors will not substantially increase the resources
devoted to the development and marketing, including discounting, of products and services that compete with
those offered by K-Bro.
In addition to competition provided by its laundry processor competitors, K-Bro also competes against
suppliers of single-use disposable linens, particularly in its K-Bro Operating Room (“KOR”) business of
providing reusable surgical packs. Management estimates that suppliers of disposable packs currently control
80% of the overall market in Canada.
It is believed that these risks are managed primarily by entering into long-term contacts where possible,
providing a comprehensive program of services that are difficult to replace, adhering to the highest possible
quality and service standards and providing a cost effective service through the economies of large scale
processing plants and purchasing power.
Acquisitions and Integration of Acquired Businesses
K-Bro's long-term growth strategy depends, in part, on its ability to acquire and successfully integrate and
operate additional businesses. There can be no assurances that K-Bro can successfully integrate this new
volume or successfully identify, negotiate, complete and integrate any future acquisitions. However, the size
and scope of K-Bro’s operations, the experience and reputation of its management team and its financial
capacity may alleviate this risk.
Utility Costs
K-Bro's operations utilize natural gas, electricity and water that comprise approximately 8% of its operating
expenses. K-Bro's energy costs are affected by various market factors including the availability of supplies of
particular forms of energy, energy prices and local and national regulatory decisions. There can be no
assurance that K-Bro will be protected against substantial changes in the price or availability of energy
sources. K-Bro has entered into fixed price natural gas and electricity contracts with remaining terms of 2
years to fix the price on a significant portion of its natural gas and electricity requirements over this time
period. Upon expiration of the contracts, K-Bro will be subject to prevailing market rates. K-Bro reviews its
requirements and the forward pricing regularly to determine if it’s feasible and desirable to lock in additional
volumes or years.
K-Bro's Calgary and Edmonton facilities currently benefit from a natural gas rebate program sponsored by
the Alberta provincial government. The winter rebate program runs from October through March, when gas
prices are traditionally highest. During the program, when the price of gas on most Albertans' monthly bills is
over $5.50/GJ, rebates are issued. The rebate program was originally set to terminate March 31, 2006 but was
24
extended for a further three years to March 31, 2009. There can be no assurance that the program will be
renewed upon its expiry. If the rebate program is not renewed and natural gas prices continue at their present
levels, K-Bro's financial results could be negatively impacted.
Relocation of Calgary Plant
K-Bro is in the process of relocating from its current Calgary plant. Although Management expects to
relocate in a cost-effective manner, any interruption or delay could cause the relocation to be more expensive
than anticipated and could have an adverse effect on K-Bro’s business. There can be no assurance that the
relocation will be accomplished efficiently, that customer service will continue uninterrupted during the
relocation process, or that K-Bro’s operations, financial condition, liquidity and operating results will not be
materially and adversely affected by such relocation.
Alberta Labour Market
Alberta currently has the highest employment rate in Canada. With the high employment and competition in
the workplace, K-Bro is faced with a very competitive market for workers and the inability to recruit and
retain sufficient workers to process increasing volumes of business could have an adverse impact on the
operations. K-Bro has taken steps on many fronts including utilizing the Temporary Foreign Worker
program, adjusting wage levels, reviewing benefits and working conditions to address this situation but there
can be no assurance that these will be successful.
British Columbia Labour Legislation
See “Recent Developments – Market Updates – British Columbia – Bill 29 Update”.
Credit Facility Imposes Numerous Covenants and Encumbers Assets
Covenants in the Credit Facility include, among others, ones that limit the ability of K-Bro to incur additional
debt, make liens, dispose of assets, consolidate, merge or acquire other businesses, pay dividends or make
other distributions (including on the K-Bro Common Shares and K-Bro Notes held by The Fund), and amend
material contracts. These covenants restrict numerous aspects of the business of K-Bro. Moreover, financial
performance covenants require K-Bro, among other things, to maintain up to a maximum total debt-to-
EBITDA ratio, no less than a minimum ratio of current assets to current liabilities and up to a maximum total
fixed charge coverage ratio. The failure to comply with the terms of the Credit Facility would entitle the Bank
to accelerate all amounts outstanding under the Credit Facility, and upon such acceleration, the Bank would
be entitled to begin enforcement procedures against the assets of K-Bro Linen Systems Inc. or the Fund,
including accounts receivable, inventory and equipment. The Bank would then be repaid from the proceeds of
such enforcement proceedings, using all available assets. Only after such repayment and the payment of any
other secured and unsecured creditors would the holders of Units receive any proceeds from the liquidation of
K-Bro’s assets. K-Bro’s ability to satisfy the restrictive covenants may be affected by events beyond its
control. K-Bro monitors its compliance on an ongoing basis, including prospectively. K-Bro is in compliance
with all bank covenants.
Environmental Matters
K-Bro's facilities are subject to federal, provincial and municipal laws and regulations relating to the
protection of the environment and worker health and safety including those governing water waste
discharges, management, recycling and disposal of hazardous materials and waste, cleanup of contamination,
and worker exposure to hazardous materials. K-Bro is attentive to the environmental concerns surrounding
and the environmental laws regulating the disposal of its waste materials and has through the years continued
to make significant investments in properly handling and disposing of these materials. K-Bro does not use
25
toxic materials or produce hazardous waste in its laundry facilities. All waste water is discharged through the
municipal sewer system in compliance with applicable regulations. Each plant's waste water is regularly
tested by the relevant municipal authorities to ensure compliance with local by-laws. Compliance with
environmental laws and regulations has not and is not expected to give rise, in the aggregate, to any material
adverse financial or operational effects upon K-Bro's business. Environmental laws and regulations and their
interpretation, however, have changed rapidly over the years and may continue to do so in the future.
CONTROLS AND PROCEDURES
In order to ensure that information with regard to reports filed or submitted under securities legislation
present fairly in all material respects the financial information of K-Bro, management including the
President and Chief Executive Officer and the Vice-President and Chief Financial Officer are responsible
for establishing and maintaining disclosure controls and procedures, as well as internal control over
financial reporting.
Disclosure Controls and Procedures
In fiscal 2007, an evaluation of the effectiveness of our disclosure controls and procedures as defined in
Multilateral Instrument 52-109 was performed under the supervision of the President and Chief Executive
Officer and the Vice President and Chief Financial Officer who attested that the design and operation of
these disclosure controls and procedures were effective, as at December 31, 2007. K-Bro’s management
can therefore provide reasonable assurance that material information relating to the Fund is reported to it in
a timely manner so that it can provide investors with complete and reliable information.
Internal Controls over Financial Reporting
K-Bro undertook the documentation and assessment of the design of internal controls over financial
reporting for its operating and accounting processes. Similar to the evaluation of disclosure controls and
procedures referred to above, the design of internal controls over financial reporting was evaluated as
defined in Multilateral Instrument 52-109. Based on the results of this evaluation, the President and Chief
Executive Officer and the Vice President and Chief Financial Officer attested that the internal controls over
financial reporting are designed to provide reasonable assurance that its financial reporting is reliable and
that K-Bro’s consolidated financial statements were prepared in accordance with Canadian GAAP.
Management also concluded that during the quarter and year ended December 31, 2007, no changes were
made to internal controls over financial reporting that would have materially affected, or would be
reasonably considered to materially affect, these controls.
CORPORATE OVERVIEW
Core Business
The Fund is a limited purpose trust established under the laws of Alberta pursuant to the Amended and
Restated Fund Declaration of Trust dated February 3, 2005. The Fund was created for the purpose of
acquiring, directly or indirectly, all of the issued and outstanding securities of K-Bro Linen Systems Inc.
K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada. K-Bro provides
a comprehensive range of general linen and operating room linen processing, management and distribution
services to healthcare institutions, hotels and other commercial accounts. K-Bro currently has processing
facilities in six Canadian cities: Toronto, Edmonton, Calgary, Vancouver, Victoria, and Quebec City.
26
Industry and Market
K-Bro provides laundry and linen services to Canadian healthcare, hospitality and other commercial
customers. Typical services offered by K-Bro include the processing, management and distribution of general
and operating room linens, including sheets, blankets, towels, surgical gowns and drapes and other linen.
Other types of processors in K-Bro's industry in Canada include independent privately-owned facilities
(i.e. typically small single facility companies), public sector central laundries and public and private sector
on-premise laundries (known as “OPLs”). Participants in other sectors of the laundry and linen services
industry, such as uniform rental companies (which own and launder uniforms worn by their customers'
employees) and facilities management companies (which manage public sector central laundries and OPLs),
typically do not offer services that significantly overlap with those offered by K-Bro.
Management believes that the healthcare and hospitality sectors of the laundry and linen services industry
represent a stable base of annual recurring business with opportunities for growth as additional healthcare
beds and funds are made available to meet the needs of an aging demographic.
Industry Characteristics and Trends
Management believes that the industry exhibits the following characteristics and trends:
Stable Industry with Moderate Cyclicality--as evidenced by the stability in the number of
approved hospital beds in the healthcare system and hotel rooms in the hospitality industry. Service
relationships are typically formalized through contracts in the healthcare sector that are typically long term
(from seven to ten years), while contracts in the hospitality sector typically range from two to five years.
Significant Barriers to Entry--establishing new laundry facilities involves significant up-front
investment in equipment, linen, facilities and labour. In addition, customer contracts are typically long-term,
making it more difficult for new entrants to access new accounts other than upon the expiry of a contract's
term.
Outsourcing and Privatization--there are often advantages to healthcare institutions in
outsourcing the processing of healthcare linen to private sector laundry companies such as K-Bro because of
the economies of scale and significant management expertise that can be provided on a more comprehensive
and cost-effective basis than customers can achieve in operating their own laundry facilities.
Fragmentation--most Canadian cities have at least one and sometimes several private sector
competitors operating in the healthcare and hospitality sectors of the laundry and linen services
industry. Management believes that the presence of these operators provides acquisition and
consolidation opportunities for larger industry participants with the financial means to complete
acquisitions.
Customers and Product Mix
K-Bro's customers include some of the largest healthcare and hospitality institutions in Canada. Healthcare
customers include acute care hospitals and long-term care facilities. Most of K-Bro's hospitality customers
(typically 250+ rooms) generate between 500,000 and 3,000,000 pounds of linen per year. Most healthcare
customers generate between 500,000 pounds of linen per year for a hospital and up to 20,000,000 pounds of
linen per year for a healthcare region.
27
VISION
Management believes that K-Bro can grow in existing and new markets by capitalizing on its strengths and
competitive advantages which include:
Long-Term Contracts--K-Bro's contracts with its healthcare customers typically range from seven
to ten years. Contracts in the hospitality sector typically range from two to five years. With finalization of a
new ten year contract with the Calgary Health Region, (see “Recent Developments”), approximately 87% of
K-Bro's current healthcare revenues will be under contract until at least December 2010. K-Bro is the
exclusive provider of laundry and linen services to most of its customers. These long standing relationships,
customer knowledge, quality services and value added services may bode well when contract renewals are
due.
Strong Institutional Customer Base--K-Bro's customers include a number of leading hospitals,
health authorities, continuing care facilities and hotels in Canada. Healthcare customers include: Calgary
Health Region (the central healthcare organization in Calgary); The Hospital For Sick Children, Mount Sinai
Hospital and St. Michael’s Hospital in Toronto; Vancouver Coastal Health and Fraser Health (the central
healthcare organizations for the greater Vancouver region) and Capital Health (the central healthcare
organization for the Edmonton region). K-Bro's hospitality customers include major hotels from such well
known groups as Fairmont, Westin, Delta and Hyatt. This customer base provides a strong reference list for
entry into new markets or expanding services in existing markets.
Modest Maintenance Capital Expenditure Requirements--laundry equipment can, with proper
ongoing maintenance, remain operative for long periods of time. For example, the useful life of a high
capacity, energy efficient tunnel washer can extend beyond 20 years. This allows for competitive pricing for
existing and new customers, as well as margin improvement as additional volumes are processed without
additional capital expenditure. The longevity of equipment is enhanced by having a full complement of
qualified maintenance engineers at each plant performing a comprehensive on-going preventative
maintenance program.
National Brand-Name Recognition and Strong Reputation--K-Bro is the largest owner and
operator of laundry and linen processing plants in Canada and the only service provider with a large operation
in several of Canada's largest cities. Management believes that K-Bro's size and presence in multiple markets
provide it with enhanced credibility when competing for new accounts in existing markets. As well,
opportunity for growth in new markets through acquisitions or new builds is also enhanced. Management
believes that this reputation is also enhanced through well established “green programs’ including: an
extensive reusable operating room linen program (K-Bro’s “KOR” program); effective energy use and re-use
through direct fired water heaters, heat exchangers and efficient tunnel washer systems; plastic recycling
programs; and, replacement of chlorine bleach with more environmentally friendly hydrogen peroxide where
feasible.
Experienced Management Team and Effective Organizational Structure--the general
managers at K-Bro's six laundry facilities have each been in the industry from 14 to 20 years, and four began
their careers at K-Bro in other positions before being promoted to their current positions. K-Bro’s
organizational structure has been developed to enable the general managers of its plants to focus on growth
and operations in their individual markets, while enabling aggressive business development and tight
management controls through K-Bro's separate corporate team.
Scalable Business Model--each of K-Bro's plants is highly automated and has a cost structure with
a significant fixed cost component. This allows the Company to generate economies of scale as volumes
increase.
28
STRATEGY
K-Bro maintains the following three-part strategic focus:
Secure and Maintain Long-Term Contracts with Large Healthcare and Hospitality
Customers--K-Bro's core service is providing high quality laundry and linen services at competitive prices
to large healthcare and hospitality customers under long-term contracts. K-Bro's contracts in the healthcare
sector typically range from seven to ten years in length. Contracts in the hospitality sector typically range
from two to five years.
Extend Core Services To New Markets--Management has demonstrated its ability to
successfully expand K-Bro's business into new markets from its established base in Edmonton and Toronto.
K-Bro entered the Calgary market in 1998, the Vancouver market in 2003, the Victoria market in 2006 and
the Quebec market in 2008. These new markets have contributed significantly to K-Bro's growth.
Management believes that new outsourcing opportunities will continue to arise in the near to medium-term
and that K-Bro is well-positioned for continued growth, particularly as healthcare and hospitality institutions
continue to increase their focus on core services and confront pressures for capital and cost savings.
Management may in the future expand its core services to new markets either through acquisitions or by
establishing new facilities. Its choice of areas for expansion will depend on the availability of suitable
acquisition candidates, the volume of healthcare linen to be processed and the policies of applicable
governments.
Introduce Related Services--in addition to focusing on its core services, K-Bro also attempts to
capitalize on attractive business opportunities by introducing closely-related services that enable it to provide
more complete solutions to the K-Bro's healthcare customers. These related service offerings include K-Bro
Operating Room Services ("KOR") and on-site services. For the Mount Sinai Hospital and St. Michael’s
Hospital contracts in Toronto, K-Bro introduced the sterilization of operating room linen packs to its menu of
services.
29
MANAGEMENT’S REPORT
Management is responsible for the integrity and objectivity of the financial information presented in this Annual
Report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted
accounting principles. The financial information presented elsewhere in this annual report is consistent with that
shown in the accompanying consolidated financial statements.
Management maintains a system of internal controls to provide reasonable assurance at to the reliability of financial
information and the safeguarding of assets. The consolidated financial statements include amounts that are based on
the best estimates of management.
The Board of trustees is responsible for ensuring management fulfills its responsibilities for financial reporting and
internal control. The Board carries out this responsibility principally through its Audit Committee. The Audit
Committee, which consists solely of non-management trustees, reviews the consolidated financial statements and
recommends them to the Board for approval. The fund’s auditors PricewaterhouseCoopers LLP have full and
unrestricted access to the Audit Committee and meet periodically with them (and separately, in the absence of
management) to discuss audit, financial reporting and related matters.
Linda McCurdy
Doug Thomson, FCA
President and Chief Executive Officer
Vice President and Chief Financial Officer
AUDITORS’ REPORT
March 6, 2008
T o t h e U n i t h o l d e r s o f K-Bro Linen Income Fund
We have audited the consolidated balance sheets of K-Bro Linen Income Fund as at December 31, 2007 and
2006 and the consolidated statements of earnings and deficit, comprehensive income and cash flows for the years
then ended. These financial statements are the responsibility of the Fund’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position
of the Fund as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Edmonton, Canada
30
K-Bro Linen Income Fund
Consolidated Balance Sheets
Assets
Current assets
Accounts receivable
Linen in service
Prepaid expenses and deposits
Restricted escrow funds (note 3)
Property and equipment (note 4)
Intangible assets (note 5)
Goodwill (note 3)
Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Distribution payable to unitholders
Future income taxes (note 9)
Long-term debt (note 6)
Unamortized lease inducements (note 8)
Future income taxes (note 9)
Contingencies and commitments (note 10)
Unitholders’ Equity
Exchangeable shares (note 11)
Fund units (note 11)
Fund units held in trust by LTIP (note 12)
Contributed surplus (note 11)
Deficit
Accumulated other comprehensive income (note 11)
2007
$
2006
$
As at December 31,
9,141,721
8,560,077
837,212
18,539,010
-
31,864,330
17,373,196
15,565,799
7,441,178
8,493,301
496,360
16,430,839
1,000,000
23,633,367
19,444,380
14,565,799
83,342,335
75,074,385
12,540,726
503,843
106,603
13,151,172
16,627,107
576,376
4,744,968
35,099,623
724,110
52,210,472
(533,603)
413,671
(4,573,837)
1,899
48,242,712
83,342,335
8,705,514
503,843
1,110,450
10,319,807
9,278,429
-
5,312,391
24,910,627
724,110
52,210,472
(313,561)
184,635
(2,641,898)
-
50,163,758
75,074,385
The accompanying notes are an integral part of these financial statements.
Approved on behalf of the Fund
31
K-Bro Linen Income Fund
Consolidated Statements of Earnings and Deficit
Revenue
Expenses
Wages and benefits
Linen
Utilities
Delivery
Occupancy costs
Materials and supplies
Repairs and maintenance
Corporate
Earnings before the undernoted
Other income (expenses)
Amortization of property and equipment
Amortization of intangible assets
Financial charges (note 7)
Gain on disposal of equipment
Earnings before income taxes
Income tax recovery (note 9)
Net earnings for the year
Deficit – beginning of year
Distributions to unitholders (note 13)
Deficit– end of year
Net earnings per unit
Basic
Diluted
Weighted average number of units outstanding (note 11)
Basic
Diluted
The accompanying notes are an integral part of these financial
statements.
32
Year ended December 31
2007
$
2006
$
74,100,941
65,108,094
37,334,778
9,396,962
5,728,452
2,780,344
2,405,533
2,465,795
2,227,415
2,573,468
64,912,747
9,188,194
(3,684,034)
(2,071,184)
(879,747)
2,838
(6,632,127)
2,556,067
1,558,114
4,114,181
(2,641,898)
(6,046,120)
32,240,036
8,134,865
5,292,785
2,571,692
2,310,667
2,144,746
1,954,158
2,123,874
56,772,823
8,335,271
(3,126,036)
(1,992,509)
(553,747)
4,486
(5,667,806)
2,667,465
1,210,663
3,878,128
(770,917)
(5,749,109)
(4,573,837)
(2,641,898)
$
0.75
0.75
#
$
0.74
0.74
#
5,464,487
5,498,318
5,219,225
5,227,474
K-Bro Linen Income Fund
Consolidated Statements of Comprehensive Income
Net earnings for the year
Other comprehensive loss
Loss on derivative instruments designated as cash flow hedges, net of future income taxes
of $13,156
Other comprehensive loss for the period
Comprehensive income for the year
The accompanying notes are an integral part of these financial
statements.
Year ended December31
2007
$
2006
$
4,114,181
3,878,128
(26,186)
(26,186)
-
-
4,087,995
3,878,128
33
K-Bro Linen Income Fund
Consolidated Statements of Cash Flows
Cash provided by (used in)
Operating activities
Net earnings for the year
Items not affecting cash
Amortization of property and equipment
Amortization of intangible assets
Gain on disposal of equipment
Future income taxes
Net change in non-cash working capital items (note 14)
Cash provided by operating activities
Financing activities
Fund units issued – net of offering costs
Distributions paid to Unitholders
Increase in revolving line of credit
Cash provided by financing activities
Investing activities
Purchase of property and equipment
Business acquisition (note 3)
Escrow funds (note 3)
Proceeds from disposition of property and equipment
Cash used in investing activities
Change in cash
Cash - beginning of year
Cash–end of year
Supplementary cash flow information
Interest received
Year ended December31
2007
$
2006
$
4,114,181
3,684,034
2,071,184
(2,838)
(1,558,114)
8,308,447
(1,366,321)
6,942,126
-
(6,046,120)
7,348,678
1,302,558
(8,294,811)
-
-
50,127
(8,244,684)
-
-
-
-
3,878,128
3,126,036
1,992,509
(4,486)
(1,210,663)
7,781,524
(3,223,401)
4,558,123
14,317,046
(5,631,690)
3,876,970
12,562,326
(8,822,756)
(7,310,033)
(1,000,000)
12,340
(17,120,449)
-
-
-
-
Interest paid
820,751
521,364
Non-cash financing and investing activities
Distribution included in distribution payable
Equipment purchases included in accounts payable
Leasehold improvements included in lease inducements
The accompanying notes are an integral part of these financial
statements.
-
3,091,099
576,376
117,419
825,715
-
34
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
1 Business description
K-Bro Linen Income Fund (the “Fund”) is a limited purpose trust established under the laws of Alberta
pursuant to the Amended and Restated Fund Declaration of Trust dated February 3, 2005. The Fund was
created for the purpose of acquiring, directly or indirectly, all of the issued and outstanding securities of K-Bro
Linen Systems Inc. K-Bro Linen Systems Inc. provides a range of services to healthcare institutions, hotels and
other commercial accounts. These services include the processing, management and distribution of linen.
2 Significant accounting policies
These consolidated financial statements have been prepared by management in accordance with accounting
principles generally accepted in Canada. The precise determination of many assets and liabilities is dependent
upon future events. Accordingly, the preparation of financial statements for a reporting period necessarily
involves the use of estimates and approximations which have been made using careful judgment. Actual results
could differ from those estimates. These consolidated financial statements have, in management’s opinion,
been properly prepared within reasonable limits of materiality and within the framework of the accounting
policies summarized below.
a) Basis of presentation
These consolidated financial statements include the Fund, its wholly owned subsidiary K-Bro Linen
Systems Inc. and the LTIP Trust, a variable interest entity (note 12). All material intercompany balances
and transactions have been eliminated upon consolidation. These consolidated financial statements are for
the years ended December 31, 2007 and 2006.
b) Linen in service
Linen in service is recorded at cost. Operating room linen is amortized using the straight-line method over
the estimated service life of 24 months. General linen is amortized based on usage which results in an
estimated average service life of 24 months.
c) Revenue recognition
Revenue from linen management and laundry services is largely based on written service agreements
whereby the Fund agrees to collect, launder, deliver and replenish linens. The Fund recognizes revenue in
the period in which the services are provided.
35
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
d)
Property and equipment
Property and equipment are recorded at cost. Amortization is provided over the estimated useful life of the
asset using the following annual rates and methods:
Laundry equipment
Office and delivery equipment
Computers and software
Leasehold improvements
Asset under development
e)
Intangible assets
15% declining balance
20% declining balance
30% declining balance
Straight-line over the lease period
At applicable rates and methods when put into service
Intangible assets with a finite life, which relate to contracts the Fund has with certain customers, are
recorded at cost and are amortized using the straight-line method over the remaining life of the contract
plus one renewal period, ranging from 25 months to 171 months.
f)
Impairment of long-lived assets
The Fund assesses impairment of its long-lived assets (property and equipment and finite life intangible
assets) when events or changes in circumstances cause the carrying value of an asset to exceed the total
undiscounted cash flows expected from its use and eventual disposition. An impairment loss, if any, is
determined as the excess of the carrying value of the asset over its fair value.
g)
Future income taxes
The Fund is a mutual fund trust for income tax purposes. As such, the Fund is currently only taxable on
any amount not distributed to Unitholders and income tax liabilities relating to distributions of the Fund
are taxed in the hands of the Unitholders. As substantially all taxable income is distributed to the
Unitholders, no provision for current income taxes on earnings of the Fund is made in the financial
statements. On June 12, 2007, the Canadian federal government substantively enacted legislation whereby
the income tax rules applicable to publicly traded trusts was significantly modified. In particular, income
earned by a trust will be taxed in a manner similar to income earned and distributed by a corporation. The
legislation is effective for the 2007 taxation year, but the application of the rules is delayed to the 2011
taxation year with respect to trusts that were publicly traded prior to November 1, 2006 within certain
guidelines. For the Fund, only temporary differences expected to reverse after January 1, 2011 are taken
into account in the determination of the provision for income taxes.
The incorporated subsidiary of the Fund calculates income taxes using the liability method of accounting.
Temporary differences arising from the difference between the tax basis of an asset or liability and its
carrying amount on the balance sheet are used to calculate future income tax liabilities or assets. Future
income tax liabilities or assets are calculated using substantively enacted tax rates applicable to the period
that the temporary differences are expected to reverse. Future income tax assets are only recognized to the
extent that, in the opinion of management, they will more likely than not be utilized. The effect on future
income tax assets or liabilities is recognized in income in the period that the change occurs.
36
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Income tax obligations relating to distributions of the Fund are the obligations of the Unitholders and,
accordingly, no provision for income taxes has been made in respect of the assets and liabilities of the
Fund. The enactment of the new legislation did not have a significant impact on the Fund’s consolidated
financial statements.
h) Goodwill
Goodwill represents the excess of the cost of business acquisitions over the fair value of net identifiable
assets acquired. Goodwill is not amortized but is tested for impairment annually or more frequently if
changes in circumstances indicate a potential impairment. Goodwill will be written down when the
carrying value exceeds the fair value. Management has determined that there was no goodwill impairment
at December 31, 2007 or 2006.
i) Volume rebates
Certain customers receive a rebate based on specified annual processing volumes. A volume rebate
liability is recognized at the time it is expected that the customer will meet the specified annual volume
levels.
j) Adoption of new accounting policies:
(i) Financial instruments – recognition and measurement
On January 1, 2007, the Fund adopted Section 3855 of the Canadian Institute of Chartered Accountants’
(“CICA”) Handbook, “Financial Instruments – Recognition and Measurement”. It describes the standards
for recognizing and measuring financial instruments in the balance sheet and the standards for reporting
gains and losses in the financial statements. Financial assets available for sale, assets and liabilities held
for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured
at fair value.
The Fund has made the following classifications:
(cid:31) Cash and temporary investments will be classified as financial assets held for trading and
measured at fair value. Gains and losses related to periodical revaluation are recorded in net
income.
(cid:31) Accounts receivable are classified as loans and receivables and are initially measured at fair value
and subsequent periodical revaluations are recorded at amortized cost using the effective interest
rate method.
(cid:31) Accounts payable and accrued liabilities, distribution payable and long-term debt are classified as
other liabilities and are initially measured at fair value and subsequent periodical revaluations are
recorded at amortized cost using the effective interest rate method.
37
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
The adoption of this Section was done retroactively without restatement of the consolidated financial
statements of prior periods. As at January 1, 2007 and December 31, 2007, there was no impact on the
consolidated financial statements from these classifications.
The impact on the consolidated balance sheet of measuring hedging derivatives at fair value as at
January 1, 2007 was an increase in other current assets and accumulated other comprehensive income of
$28,085. Prior periods were not restated.
An embedded derivative is a component of a financial instrument or another contract of which the
characteristics are similar to a derivative. The Fund has no significant embedded derivatives.
(ii) Comprehensive income
On January 1, 2007, the Fund adopted Section 1530 of the CICA Handbook, “Comprehensive Income”. It
describes reporting and disclosure recommendations with respect to comprehensive income and its
components. Comprehensive income is the change in unitholders’ equity, which results from transactions
and events from sources other than the Fund’s unitholders. These transactions and events include
unrealized gains and losses resulting from changes in fair value of certain financial instruments.
As a result of the adoption of this Section, the Fund now presents a consolidated statement of
comprehensive income as part of the consolidated financial statements.
(iii) Equity
On January 1, 2007, the Fund adopted Section 3251 of the CICA Handbook, “Equity”, replacing Section
3250 “Surplus”. It describes standards for the presentation of equity and changes in equity for a reporting
period as a result of the application of Section 1530, “Comprehensive Income”.
(iv) Hedges
On January 1, 2007, the Fund adopted Section 3865 of the CICA Handbook, “Hedges”. The
recommendations of this Section expand the guidelines required by Accounting Guideline 13 (AcG-1 3),
“Hedging Relationships”. This Section describes when and how hedge accounting can be applied as well
as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenue and
expenses from the derivative financial instruments in the same period as for those related to the hedged
item. This has been applied to the Fund’s interest rate swap and foreign exchange forward contracts.
(v) Accounting changes
Effective January 1, 2007, the Fund adopted CICA Handbook Section 1506 “Accounting Changes”. This
section established criteria for changing accounting policies together with the accounting treatment and
disclosure of changes in accounting policies, changes in accounting estimates and the correction of errors.
It includes the disclosure, on an interim and annual basis, of a description and the impact on our financial
results of any new primary source of GAAP that has been issued but is not yet effective. The Fund has
38
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
determined that there is no material impact on the consolidated financial statements from the adoption of
Handbook Section 1506.
k) Future changes in accounting policies
(i)
Capital disclosures
The CICA issued a new accounting standard, Section 1535 “Capital Disclosures”, which requires the
disclosure of both qualitative and quantitative information that provides users of financial statements with
information to evaluate the entity’s objectives, policies and processes for managing capital. This new
section is effective for the Fund beginning January 1, 2008. Management does not expect that the
adoption of this standard will have an impact on the consolidated financial statement as the standard
relates to note disclosure.
(ii)
Financial instruments-disclosure and Financial instruments-presentation
Two new accounting standards were issued by the CICA, Section 3862 “Financial Instruments-
Disclosures”, and Section 3863 “Financial Instruments – Presentation”. These sections will replace
Section 3861 “Financial Instruments – Disclosure and Presentation” once adopted. The objective of
Section 3862 is to provide users with information to evaluate the significance of the financial instruments
on the entity’s financial position and performance, the nature and extent of risks arising from financial
instruments, and how the entity manages those risks. The provisions of Section 3863 deal with the
classification of financial instruments, related interest, dividends, losses and gains and the circumstances
in which financial assets and financial liabilities are offset. These new sections are effective for the Fund
beginning January 1, 2008. Management does not expect that the adoption of this standard will have an
impact on the consolidated financial statement as the standard relates to note disclosure.
(iii)
Inventories
In June 2007, the CICA issued a new accounting standard – Section 3031 “Inventories” which replaces the
existing standard for inventories, Section 3030. The new Section is effective for the Fund beginning
January 1, 2008. Application of the new Section is not expected to have a material impact on the financial
statements.
(iv)
Goodwill and intangible assets
In February 2008, the CICA issued a new accounting standard – Section 3064 “Goodwill and intangible
assets” which replaces the existing standard for goodwill and other intangible assets, Section 3062 and
research and development costs, Section 3450. The new Section is effective for the Fund beginning
January 1, 2009; however, earlier adoption is encouraged. It establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the
standards included in the previous Section 3062. Standards with respect to intangible assets may have an
impact on the Fund’s treatment of certain costs associated with its new Calgary plant. Management is
assessing the impact of these new standards on its consolidated financial statements.
39
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
l)
International Financial Reporting Standards
The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used
by public companies, will be converged to International Financial Reporting Standards (“IFRS”) effective
January 1, 2011. The Fund will convert to these new standards according to the timetable set with these
new rules. Management is currently assessing the future impact of these new standards on its consolidated
financial statements.
3 Business acquisition
On March 31, 2006, the Fund completed the acquisition of the business, linen and equipment of Premier Linen
Supply Ltd. located in Victoria, British Columbia. The business acquisition has been accounted for using the
purchase method, whereby the purchase consideration was allocated to the fair values of the net assets acquired
at March 31, 2006.
The purchase price allocated to the net assets acquired was as follows:
Consideration
Purchase price including acquisition costs
Less
Assumption of accrued liability
Restricted escrow funds
Net cash consideration
Net assets acquired
Linen
Laundry equipment and vehicles
Intangible assets
Goodwill
$
8,362,919
(52,886)
(1,000,000)
7,310,033
355,000
1,600,000
3,147,000
2,208,033
7,310,033
Of the cash consideration payable to the vendor, $1 million was deposited into escrow with an escrow agent.
The full amount of the funds held in escrow were released to the vendor in 2007 upon the determination that
specified earnings before interest, income taxes and amortization were met in the twelve-month period
subsequent to the acquisition. Goodwill was correspondingly increased by the amount released.
40
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
4 Property and equipment
Equipment
Laundry
Office
Delivery
Computers and software
Leasehold improvements
Asset under development-new Calgary plant(1)
Cost
$
25,740,872
219,308
433,578
845,624
3,413,524
10,063,932
Accumulated
amortization
$
6,925,484
86,151
158,466
420,855
1,261,552
-
2007
Net
$
18,815,388
133,157
275,112
424,769
2,151,972
10,063,932
(1) Of this total, $3,091,099 is included in accounts payable and
$576,376 is included in unamortized lease inducements.
40,716,838
8,852,508
31,864,330
Equipment
Laundry
Office
Delivery
Computers and software
Leasehold improvements
Cost
$
Accumulated
amortization
$
2006
Net
$
24,282,273
223,008
440,490
755,906
3,106,058
3,989,592
61,259
99,163
284,228
740,126
20,292,681
161,749
341,327
471,678
2,365,932
28,807,735
5,174,368
23,633,367
41
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
5 Intangible assets
Finite life intangible assets
Healthcare contracts
Operating room contracts
Hospitality contracts
Finite life intangible assets
Healthcare contracts
Operating room contracts
Hospitality contracts
6 Long-term debt
Accumulated
amortization
$
2007
Net
$
3,290,328
1,424,418
959,058
12,409,672
2,075,582
2,887,942
Cost
$
15,700,000
3,500,000
3,847,000
23,047,000
5,673,804
17,373,196
Cost
$
Accumulated
amortization
$
2006
Net
$
15,700,000
3,500,000
3,847,000
23,047,000
2,162,216
936,046
504,358
3,602,620
13,537,784
2,563,954
3,342,642
19,444,380
K-Bro Linen Systems Inc. has a revolving credit facility of up to $30,000,000 (increased from $18,000,000 as of
August 2007) of which $17,062,107 is drawn (including letters of credit totalling $435,000 per note 10(a)). The
facility is a two-year committed facility maturing February 28, 2009. It is extendable annually for another year at
the lender’s option. Interest payments only are due during the term of the facility.
A general security agreement over all assets, a mortgage against all leasehold interests, insurance policies and
an assignment of material agreements have been pledged as collateral.
Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime
rate loans, letters of credit or standby letters of guarantee. Drawings under the revolving credit facility bear
interest at a floating rate, plus an applicable margin based on certain financial performance ratios. For Bankers’
Acceptances the margin will vary from 2.00% to 3.00%, for Canadian prime rate loans, the margin will vary
from 0.50% to 1.50%.
42
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
The balance consists of:
Bankers’ Acceptances, 7.10% (2006 -6.34%)
Prime rate loan, 7.00% (2006- 6.50%)
7 Financial charges
Interest on long-term debt
Other charges
8 Unamortized lease inducements
2007
$
4,000,000
12,627,107
2006
$
4,000,000
5,278,429
16,627,107
9,278,429
Year ended December 31
2006
2007
$
$
820,751
58,996
879,747
521,364
32,383
553,747
Lease inducements are received from certain of the Fund’s landlords, primarily in the form of leasehold
improvements and rent-free periods. Lease inducements are recorded as a liability when credited or received
and will be amortized on a straight-line basis as a reduction of rent expense over the term of the related lease.
For lease contracts with escalating lease payments, total rent expense for the lease term is expensed on a
straight-line basis over the lease term. The difference between rent expensed and amounts paid will be
recorded as an increase or reduction in deferred lease inducements.
The Fund entered into a ten year lease for a new facility in Calgary in 2007 which included certain lease
inducements. These inducements totalling $585,748 include leasehold improvements and a rent-free period.
The lease term commenced on November 1, 2007 and the amortization commenced on a straight-line basis over
the term of the lease. Accumulated amortization at December 31, 2007 is $9,372.
43
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
9 Income taxes
A reconciliation of the expected income tax recovery (expense) to the actual income tax recovery (expense) is
as follows:
Year ended December 31
2006
2007
$
$
Canadian statutory rates (federal and provincial)
33.4%
33.7%
Expected provision for income taxes
Increase (decrease) from
Non-deductible items
Impact of substantively enacted rates and other
Income of the Fund allocated to unitholders
(853,726)
(898,402)
(24,235)
559,529
1,876,546
(28,143)
532,175
1,605,033
Actual provision for income tax recovery
1,558,114
1,210,663
Future income taxes have been provided as follows:
Linen in service
Accounts payable and accrued liabilities
Property and equipment
Intangible assets and goodwill
Offering costs and other
Year ended December 31
2006
2007
$
$
299,969
(193,366)
1,287,351
(176,901)
106,603
1,110,450
1,022,216
4,304,982
(582,230)
1,091,996
5,059,722
(839,327)
4,744,968
5,312,391
4,851,571
6,422,841
The benefit of deductible temporary differences of $600,000 (December 31, 2006 - $900,000) relating to
offering costs borne directly by the Fund have not been recorded. The amount of goodwill deductible for tax
purposes is $3,208,033 (2006 - $2,208,033).
44
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
10 Contingencies and commitments
a) Contingencies
Letters of credit
The Fund has outstanding letters of credit issued as part of normal business operations in the amounts of
$185,000 (2006 - $185,000) expiring January 21, 2009 and $250,000 (2006 - $250,000) expiring January
24, 2009.
b) Commitments
Operating leases and utility commitments
Minimum lease payments for operating leases on buildings and equipment and estimated natural gas and
electricity commitments for the next five calendar years are as follows:
2008
2009
2010
2011
2012
Subsequent
Linen commitments
$
3,842,976
3,807,240
2,399,151
1,784,292
1,711,894
5,427,296
At December 31, 2007, the Fund was committed to linen expenditure obligations in the amount of
$2,741,266 (December 31, 2006 - $5,987,689). This is the result of an annual tendering process whereby
purchase orders are issued to successful bidders for the anticipated requirements for the ensuing year.
Equipment purchase commitments
The Fund has commitments to purchase equipment totaling $126,000 at December 31, 2007 (December
31, 2006 - nil).
45
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
11 Unitholders’ equity
a) Authorized
The declaration of trust provides that an unlimited number of units and an unlimited number of Special
Trust Units may be issued.
b) Issued and outstanding
Fund Units
Issued on initial public offering
Offering costs
Balance at December 31, 2005
Issued on March 31, 2006 pursuant to a private placement
at $13.90 per Unit
Offering costs – net of future tax recovery of $230,000
Balance at December 31, 2007 and 2006
Exchangeable shares
#
$
4,343,862
-
43,438,620
(5,775,195)
4,343,862
37,663,425
1,080,000
-
15,012,000
(464,953)
1,080,000
14,547,047
5,423,862
#
52,210,472
$
72,411
724,110
Total Fund Units and Exchangeable shares issued
5,496,273
The exchangeable shares were issued by the Fund’s subsidiary to certain members of management and are
exchangeable on a one-to-one basis for Fund Units. The risks and privileges of these shares are the same
as for Fund Units. The exchangeable shares of the Fund’s subsidiary are synonymous with the Special
Trust Units of the Fund.
c) Contributed surplus
Balance, beginning of year
Net stock based compensation recorded during the year
Balance, end of year
Year ended December 31
2006
2007
$
$
-
184,635
184,635
229,036
413,671
184,635
46
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
d) Accumulated other comprehensive income
Balance, beginning of year, as previously reported
Financial instruments – recognition and measurement (note 2)
Restated balance, beginning of year
Other comprehensive income during the year
Balance, end of year
e)
Weighted average number of units outstanding
Weighted average unit calculation
Basic
Units - opening
Weighted average units issued during the year
Weighted average unvested units purchased for LTIP
Diluted
Basic weighted average units- opening
Dilutive effect of LTIP units
Year ended December 31
2007
$
-
28,085
28,085
(26,186)
1,899
2006
$
-
-
-
-
-
Year ended December 31
2007
$
2006
$
5,496,273
-
(31,786)
4,416,273
816,658
(13,706)
5,464,487
5,219,225
5,464,487
33,831
5,498,318
5,219,225
8,249
5,227,474
47
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
12 Long Term Incentive Plan
In April, 2006, a trust (the “LTIP Trust”) was formed to hold Units of the Fund on behalf of the participants of
the Fund’s long-term incentive plan (the “LTIP”). The Fund is neither a trustee nor a direct participant of the
LTIP; however, under certain circumstances the Fund may be the beneficiary of forfeited Units held by the
LTIP Trust. Consequently, the LTIP Trust is considered a variable interest entity for accounting purposes and
the Fund has consolidated the LTIP Trust in accordance with the CICA issued Accounting Guideline AcG-15.
For a specific performance year, one-quarter of the Units held by the LTIP Trust vest to the participants of the
LTIP thirty days after approval of the audited financial statements by the Trustees upon the participant signing
a Participation Agreement and Confirmation and three-quarters will vest on the second anniversary of that date
upon continued employment, except in limited circumstances. Compensation expense is recorded by the Fund
in the period earned. Distributions made by the Fund with respect to unvested Units held by the LTIP Trust are
paid to LTIP participants. Unvested units held by the LTIP Trust are shown as a reduction of unitholders’
equity.
In accordance with the LTIP agreement and in conjunction with the performance of the Fund in the prior fiscal
year, the Compensation, Nominating and Corporate Governance Committee of the Trustees of the Fund in 2007
approved LTIP compensation of $0.3 million (2006 - $0.4 million) and approved the funding and transfer of
$0.3 million (2006 - $0.4 million) of cash to the LTIP Trust in April 2007 and 2006 respectively in order to
fund the purchase of Units by the LTIP Trust. In April 2007, the LTIP Trust purchased 22,647 Units of the
Fund (2006 - 27,113). As at December 31, 2007, 12,436 Units held by the LTIP Trust have vested (2006 -
6,779).
The basic net earnings per unit calculation exclude the unvested units held by the LTIP Trust.
48
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
13 Distributions to Unitholders
The Fund’s policy is to make distributions to unitholders of its available cash to the maximum extent possible
consistent with good business practice considering requirements for capital expenditures, working capital,
growth capital and other reserves considered advisable by the Trustees of the Fund. All such distributions are
discretionary. Distributions are declared payable each month to the Fund unitholders and exchangeable
shareholders on the last business day of each month and are paid by the 15th of the following month.
Distributions declared during the years ended December 31, 2007 and 2006 are as follows:
Period
Fund Units
January 1 – December 31, 2007
Exchangeable shares
January 1 – December 31, 2007
Period
Fund Units
January 1 – March 31, 2006
April 1 – December 31, 2006
Exchangeable shares
January 1 – December 31, 2006
# of
Units
Per Unit
Per Month
$
2007
Amount
$
5,423,862
0.09167
5,966,465
72,411
0.09167
79,655
6,046,120
2006
Amount
$
# of
Units
Per Unit
Per Month
$
4,343,862
5,423,862
0.09167
0.09167
1,194,605
4,474,849
72,411
0.09167
79,655
5,749,109
49
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
14 Net change in non-cash working capital items
Cash provided (used) by changes in
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities
15 Financial instruments
Year ended December 31
2006
2007
$
$
(1,700,543)
(66,776)
(316,792)
717,790
(1,806,078)
(1,784,587)
(193,401)
560,665
(1,366,321)
(3,223,401)
The Fund’s financial instruments consist of accounts receivable, accounts payable and accrued liabilities, and
long-term debt.
Financial risk management
The Fund’s activities are exposed to a variety of financial risks: price risk, credit risk, liquidity risk and cash flow
risk. The Fund’s overall risk management program focuses on the unpredictability of financial and economic
markets and seeks to minimize potential adverse effects on the Fund’s financial performance. Risk management
is carried out by financial management in conjunction with overall Fund governance.
Price risk
There are three types of price risk:
Currency risk – Foreign currency risk arises from the fluctuations in foreign exchange rates and the
degree of volatility of these rates relative to the Canadian dollar. The Fund is not significantly
exposed to foreign currency risk as all revenues are received in Canadian dollars and minimal
expenses are incurred in foreign currencies. For large capital expenditure commitments denominated
in a foreign currency, the Fund will enter into foreign exchange forward contracts (see below) if
considered prudent to mitigate this risk.
Interest rate risk – The Fund’s long-term debt is subject to interest rate fluctuations and the degree
of volatility in these rates. The Fund currently has in place a financial instrument in the form of an
interest rate swap agreement (see below) to mitigate a portion of this risk. Management does not
believe that the impact of interest rate fluctuations will be significant
Market risk – The Fund’s exposure to financial market risk is limited since there are no significant
financial instruments which fluctuate as a result of changes in market prices.
50
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Credit risk
The Fund is exposed to credit risk in the event of non-performance by customers, but does not anticipate such
non-performance due to the nature of its customers. The maximum credit risk is the fair value of the accounts
receivable.
Liquidity risk
The Fund manages liquidity risk through the availability of an adequate committed line of credit (see note 6).
Cash flow risk
As the Fund has no interest bearing assets, the Fund’s income and operating cash flows are substantially
independent of changes in market interest rates.
Fair value
The carrying value of accounts receivable, and accounts payable and accrued liabilities approximate fair value
due to the immediate or short-term maturity of these financial instruments. The fair value of the Fund’s long-
term debt is estimated based on market prices for same or similar instruments and approximates carrying value.
Interest rate swap agreement
The Fund entered into an interest rate swap agreement on June 24, 2005 through its Canadian chartered bank to
fix the interest rate on a portion of its debt by exchanging a notional amount of $4,000,000 of existing debt from
a floating rate to a fixed interest rate for five years at 5.95%. The difference between the amounts paid and
received is accrued and accounted for as an adjustment to interest expense. For the years ended December 31,
2007 and 2006 there was no gain or loss recorded as the result of hedge ineffectiveness.
Foreign exchange contracts
The Fund, in 2007, entered into foreign exchange contracts through its Canadian chartered bank to hedge its
foreign denominated equipment purchase commitments. At December 31, 2007, a foreign exchange forward
option contract was outstanding to purchase $385,000 US at a rate of 1.084 which is exercisable in April, 2008.
51
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
16 Segmented information
The Fund provides laundry and linen services to the healthcare and hospitality sectors through five operating
segments in Vancouver, Victoria, Calgary, Edmonton and Toronto. The services offered and the economic
characteristics associated with these segments are similar, therefore these segments have been aggregated into
one reportable segment which operates exclusively in Canada.
Total revenue derived from the healthcare and hospitality sectors are as follows:
Healthcare
Hospitality
Total
Healthcare
Hospitality
Total
Year ended December 31, 2007
%
$
57,393,080
16,707,861
74,100,941
77.5
22.5
100.0
Year ended December 31, 2006
%
$
50,151,631
14,956,463
65,108,094
77.0
23.0
100.0
In Edmonton, the Fund is the significant supplier of laundry and linen services to the entity which manages all
major healthcare facilities in the region. This contract expires on December 31, 2010. In Calgary, the major
customer is contractually committed to February 28, 2008 and the Fund is in the process of finalizing a new ten
year contract upon that termination. In Vancouver the major customer is contractually committed to January
15, 2013.
For the year ended December 31, 2007, the Fund has recorded revenue of $42.8 million (December 31, 2005 -
$37.8 million) from these three major customers, representing 58% (December 31, 2005 - 58%) of total
revenue.
17 Related party transaction
The Fund has incurred expenses in the normal course of business for advisory consulting services provided by a
Trustee relating to acquisitions. The amounts charged are recorded at their exchange amounts and are subject to
normal trade terms. For the year ended December 31, 2007, the Fund incurred such fees totaling $46,000
(2006 - $74,000). Of the total 2007 amount, $38,000 is included in prepaid expenses to be recognized as an
acquisition cost related to the assets of Buanderie HMR Inc. (see note 18) and $8,000 is included in equipment
costs related to the acquisition of equipment from a receivership. For 2006, $40,000 is included in acquisition
costs related to the assets of Premier Linen Supply Ltd. (see note 3) and $34,000 is included in Corporate
expenses.
52
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
18 Subsequent events
a) Business acquisition
On January 31, 2008, the Fund completed the acquisition of the laundry business, linen, property and
equipment of Buanderie HMR Inc. located in Quebec City, Quebec. The business acquisition will be
accounted for using the purchase method, whereby the purchase consideration will be allocated to the fair
values of the net assets acquired at January 31, 2008.
The purchase price including estimated acquisition costs was approximately $3.8 million. Of the
cash consideration payable to the vendor, $0.5 million was deposited into escrow with an escrow agent.
The full amount of the funds held in escrow will be released to the vendor upon the determination
that specified earnings before interest, income taxes and amortization were met in the twelve-month
period subsequent to the acquisition and goodwill will correspondingly be increased by the amount
released.
b) Equity issuance:
On February 27, 2008 the Fund completed the issuance of 1,362,000 Units at a price of $12.85 per Unit.
Net proceeds to the Fund after commission and expenses, net of tax, are approximately $16.7
million. The underwriters have also been granted an over – allotment option, exercisable in whole or
in part for a period of 30 days following closing, to purchase up to an additional 204,300 units at the
same offering price. If the over– allotment option is fully exercised, additional net proceeds to K-Bro
will be approximately $2.5 million.
53
Annual General Meeting
The Annual General Meeting of the Unitholders will be
held at the Sheraton Centre Hotel, Peel Room, in Toronto
on Thursday, June 12, 2008 at 2 o’clock in the afternoon.
All Unitholders are cordially invited to attend.
Offices
Corporate
103, 15023 – 123 Avenue
Edmonton, Alberta T5V 1J7
Phone 780-453-5218 Fax 780-455-6676
Edmonton
15253 – 121A Avenue
Edmonton, Alberta T5V 1N1
Phone 780-451-3131
Fax 780-452-2838
Calgary
6969 – 55th Street S.E.
Calgary, Alberta T2C 4Y9
Phone 403-724-9001
Fax 403-720-2959
Québec City
367, boulevard des Chutes
Québec, Québec G1E 3G1
Phone 418-661-6163
Fax 418-661-4000
Toronto
15 Shorncliffe Road
Etobicoke, Ontario M9B 3S4
Phone 416-233-5555
Fax 416-233-4434
Vancouver
8035 Enterprise Street
Burnaby, B.C. V5A 1V5
Phone 604-420-2203
Fax 604-420-2313
Victoria
861 Van Isle Way
Victoria, B.C. V9B 5R8
Phone 250-474-5699
Fax 250-474-5680
Website
www.k-brolinen.com
Auditors
PricewaterhouseCoopers LLP
Banker
Toronto Dominion Bank
Transfer Agent and Registrar
Valiant Trust Company
Suite 310, 606 – 4th Street S.W.
Calgary, Alberta T2P 1T1
Phone 403-781-8755 Fax 403-233-2857
Stock Exchange and Symbol
Toronto Stock Exchange
Trading Symbol KBL.UN
Board of Trustees
Ross Smith (Chair)
Matthew Hills
Steven Matyas
Linda McCurdy
Michael Percy
Audit Committee
Ross Smith (Chair)
Steven Matyas
Michael Percy
Compensation, Nominating and
Corporate Governance Committee
Matthew Hills (Chair)
Steven Matyas
Michael Percy
Ross Smith
Legal Counsel
Goodmans LLP
McLennan Ross LLP
Officers
Linda McCurdy
President and CEO
Sean Curtis
Senior Vice President and General Manager, Edmonton
Doug Thomson, FCA
Vice President and Chief Financial Officer
Jerry Ostrzyzek
Vice President Eastern Operations & General Manager
Ron Graham
General Manager Vancouver
Jeff Gannon
General Manager Calgary
54