2008 Annual Report
K-BRO LINEN INCOME FUND
K-BRO LINEN INCOME FUND
K-Bro Linen Income Fund, through its wholly-owned subsidiary K-Bro Linen Systems Inc., is
Canada’s largest healthcare and hospitality laundry and linen processor. Our name is known and
respected in our industry. With large processing facilities in Toronto, Edmonton, Calgary,
Vancouver, Victoria and Québec City, we employ over 1,000 people.
K-Bro provides an extensive value added menu of services that go beyond basic laundry services.
These include reusable operating room pack services (KOR Services), resident personal clothing
programs, specialty linen purchasing, various textile testing and extensive customer site-based
services, including floor-to-floor distribution and linen room management.
We continued to successfully execute our three-part strategic focus in 2008 to:
(cid:131) Secure and maintain long-term contracts with large healthcare and hospitality customers
(cid:131) Extend core services to new markets
(cid:131)
Introduce related services.
3
FINANCIAL HIGHLIGHTS
4
PRESIDENT’S MESSAGE
7
MANAGEMENT’S DISCUSSION AND ANALYSIS
39
FINANCIAL STATEMENTS
64
CORPORATE INFORMATION
FINANCIAL HIGHLIGHTS
(cid:131) Revenues increased by 14.9% and EBITDA (1) by 34.9% in 2008 over 2007.
(cid:131) Distributions of $1.10 per unit were paid in 2008 consistent with the previous two years.
(cid:131) Distributable cash (1) was $11.2 million or $1.66/unit, an increase of $3.5 million over 2007.
(cid:131) K-Bro had a conservative payout ratio (1) of 67.6% for 2008.
(cid:131) The company had a conservative debt to EBITDA (1) ratio of 0.38 at December 31, 2008.
REVENUE EBITDA (1)
(in millions of Canadian dollars) (in millions of Canadian dollars)
DISTRIBUTABLE CASH (1)
(in millions of Canadian dollars)
85.1
12.4
11.2
74.1
65.1
52.1
9.2
8.3
7.6
7.7
7.2
6.7
2005
2006
2007
2008
2005
2006
2007
2008
2005
2006
2007
2008
TOTAL CUMULATIVE RETURN (February 3, 2005 to May 8, 2009)
K-BRO LINEN INCOME FUND V.S. S&P/TSX COMPOSITE INDEX
VS. S&P/TSX INCOME TRUST INDEX
d
e
t
s
e
v
n
I
0
0
1
$
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e
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n
r
u
t
e
R
e
v
i
t
a
l
u
m
u
C
l
a
t
o
T
$180
$170
$160
$150
$140
$130
$120
$110
$100
$90
$80
K-Bro Linen Income Fund
S&P/TSX Composite Index
S&P/TSX Income Trust Index
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
(1) Please refer to page 27 of Management’s Discussion and Analysis for a discussion of this non-GAAP measure.
2008 ANNUAL REPORT
3
PRESIDENT’S MESSAGE
I am happy to report that 2008 was a year of continued growth and improved profitability for K-Bro.
While we are never satisfied and always strive to improve, I believe we are well positioned to weather the
current economic storms and hope to see further strong performance in 2009. We enter 2009 with much
of our business from long-term healthcare contracts, good growth prospects and improving profitability, a
relatively conservative payout ratio and a strong flexible balance sheet.
K-Bro’s revenue grew by 14.9% in 2008 as a result of our Quebec City acquisition, the addition of new
customers in our six Canadian markets and volume and price increases from our existing customers. We
realized increases in both our healthcare and hospitality business and we’re happy with results from all of
our facilities. Approximately 76% of our revenue is from large publicly funded healthcare customers
under long-term contracts, providing some stability in our business while we are still presented with
significant growth opportunities in our markets. Our 34.9% EBITDA growth was primarily due to higher
labour productivity, efficiencies from our new Calgary plant as well as our revenue growth, and we
continue to focus on all key expense savings going forward. Finally, we have a significant line of credit
so that we can quickly respond to attractive growth opportunities.
I believe that we have the strategy, prospects, people, and financial capacity to have a successful 2009 and
beyond. At the beginning of 2008, I stated that although I expected to start 2008 slowly, I believed that
we would gain momentum throughout the year to end on a successful note with a solid base to profitably
grow the company further. K-Bro achieved those goals in 2008 and we look forward to 2009 with
continued optimism and enthusiasm and an expectation of further growth in revenue and EBITDA.
I thank you, our employees, our customers and our Board for your continued support.
Linda McCurdy
President and Chief Executive Officer
4
2008 ANNUAL REPORT
K-Bro’s new 80,000 sq. ft. facility in Calgary
was fully operational in April, 2008 with the
transitioning of all acute care and long term
care volume of the Calgary Health Region as
well as that of major Calgary hotels.
Highly automated and energy efficient dryers
(above) combined with twin 16 chamber tunnel
washers (left) enhance production efficiencies
and processing quality to a very high level.
Combined with a
labour saving materials
handling system via overhead monorail, the new
plant has the capacity to handle additional
volume available now and in the future in a
growing southern Alberta market.
WE CAPITALIZED ON GROWTH OPPORTUNITIES IN
EXISTING MARKETS
In 2008 we commenced processing under the terms of a further 10-year contract with the Calgary Health
Region. The new contract encompassed all the existing acute care volume we processed as well as the
long-term care volume previously processed by a competitor. We successfully transitioned into our new
state-of-the-art Calgary facility in 2008, which not only allows us to meet the growing demands for
services from our existing customers, but also provides us with the capacity to secure additional volumes
in the future.
2008 ANNUAL REPORT
5
The acquisition of HMR in Quebec City on January
31, 2008 gains us entry into another new and
important market.
hotels
Primarily servicing the hospitality industry
local
including major
restaurants, HMR also provides an
extensive floor mat rental service which is
an extension to K-Bro’s traditional service
offerings.
and
WE ACHIEVED GROWTH THROUGH ACQUISITION
We completed the purchase of the business and assets of Buanderie HMR Inc., a leading laundry and
linen service provider located in Québec City, Québec, in 2008. HMR has a strong market position in the
hospitality and commercial sectors, with excellent brand recognition. This purchase provides K-Bro with
an accretive acquisition that will allow us to leverage our healthcare expertise to expand the services
provided to the Québec marketplace.
6
2008 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 12, 2009
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, 2008 and 2007. 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 (“MD&A”).
Management is responsible for the information contained in this MD&A 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 12, 2009.
In the interest of providing unitholders and potential investors of K-Bro with information regarding future
plans and operations, this 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) risks associated with acquisitions,
including the possibility of undisclosed material liabilities; (ii) K-Bro's competitive environment; (iii) utility
and labor costs; (iv) K-Bro's dependence on long-term contracts, (v) increased capital expenditure
requirements; (vi) reliance on key personnel; and (vii) 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 the new Calgary plant; (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.
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.
2008 ANNUAL REPORT
7
Introduction
Summary of Results and Key Events
Achievement of Key Performance Drivers
Outlook
Results of Operations
Liquidity and Capital Resources
8
10
16
16
17
21
Distributions for the Year
Distributable Cash
Outstanding Units
Related Party Transaction
Critical Accounting Estimates
Non-GAAP Measures
23
24
25
25
25
27
Changes in Accounting Policies
Financial Instruments
Critical Risks and Uncertainties
Controls and Procedures
Vision
Strategy
28
31
32
35
36
38
INTRODUCTION
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.
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.
8
2008 ANNUAL REPORT
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.
2008 ANNUAL REPORT
9
SUMMARY OF RESULTS AND KEY EVENTS FOR THE YEAR
Significant Revenue and EBITDA Growth in 2008
Revenue increased in the fourth quarter of 2008 by 15.1% compared to the fourth quarter of 2007. For the
year ended December 31, 2008, revenue increased by 14.9%. Of this 2008 growth, approximately 5.2
percentage points are the result of the acquisition of the assets of Buanderie HMR Inc. (“HMR”) located in
Quebec City, Quebec which took place on January 31, 2008, 2.8 percentage points are from the addition of
new customers part way through 2007 and in 2008, 8.1 percentage points are from growth in existing
customers as a result of growing volumes and price increases, and the loss or termination of existing
customers accounted for a 1.2 percentage point reduction. Of the 8.1 percentage points of organic growth,
approximately half is from price increases and half from volume increases.
The weakened economy and a strengthened Canadian dollar for much of the year did not have a significant
impact on hospitality revenues in 2008. With the addition of HMR, this sector grew by 21.6% in the fourth
quarter of 2008 compared to the fourth quarter of 2007 and by 22.2% for the year ended December 31, 2008
compared to 2007, with all of this growth as a result of the HMR acquisition. There can be no assurance that
this trend will continue as the general economic conditions may negatively impact K-Bro’s hospitality
revenues if tourism or business travel decreases in the future.
EBITDA (see “Non-GAAP Measures”) increased in the fourth quarter of 2008 by 76.5% compared to the
fourth quarter of 2007. For the year ended December 31, 2008, EBITDA increased by 34.9%. This is the
result of:
• The successful startup of the new Calgary plant with increased volumes, price adjustments and
operating efficiencies being achieved;
• The positive impact of contractual price adjustments from customers;
• The contribution from the HMR acquisition; and
• The positive impact of the labour initiatives being realized.
10
2008 ANNUAL REPORT
Effects of Market Volatility and Uncertainty
K-Bro management feels that it is positioned to withstand the current market volatility and uncertainty given
that:
• Approximately 76% of its revenues are from large publicly funded healthcare customers under long-
term contracts.
• The impact of the market downturn on the Fund’s revenue from hospitality customers, which
currently accounts for 24% of total revenue, is mitigated by the fact that the majority of this business
is from large downtown, primarily business, hotels. Such hotels are not as dependent on tourism as
others and often have commitments several years in advance for meetings and conventions.
However, this sector could be negatively impacted by current economic conditions which could
impact K-Bro’s results if volumes fall or price concessions are required. Management believes this
impact may not be material.
• K-Bro’s $30 million line of credit is with a major Canadian bank and has a term to February 28,
2011 with an annual option to renew for an additional year. No events of default have occurred and
at December 31, 2008, K-Bro had unutilized borrowing capacity under this line of $25.5 million or
85% of the line available.
• K-Bro’s payout ratio for the quarter was 66.1% and for the year was 67.6%. The undistributed
portion of cashflow provides K-Bro with cashflow from operations to fund growth or cushion it
against business downturns.
• K-Bro has fixed a portion of certain potentially volatile components of its cost structure such as
natural gas, electricity and interest rates through forward contracts or swaps. With the lowering of
commodity prices such as natural gas, K-Bro will benefit as this is a major input cost.
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 HMR. The business acquisition was accounted for using the purchase method, whereby the
purchase consideration was allocated to the estimated fair values of the net assets acquired at January 31,
2008. The purchase price including acquisition costs was $3.9 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.
Management expects the full amount to be paid to the vendor by March 31, 2009.
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.
The operating results achieved, combined with a low maintenance capital expenditure requirement, resulted
in an acquisition that was accretive to the Fund in 2008.
2008 ANNUAL REPORT
11
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. 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. On March 28, 2008 the underwriters exercised a
portion of their over-allotment option and an additional 146,700 Units were issued, which brought the total
gross proceeds of the offering to $19.4 million.
The net cash proceeds of the offering of $18.1 million were 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.
Alberta Labour Costs
Labour costs for plant staff in Alberta as a percentage of plant revenue decreased significantly in the fourth
quarter from 54.8% in 2007 to 43.9% in 2008. For the year, these labour costs as a percentage of Alberta
plant revenue decreased from 53.7% in 2007 to 46.9% for 2008. Labour cost as a percentage of plant
revenue for the year and over the last five quarters is as follows:
All plants
Alberta
Year
47.2%
46.9%
Q4
46.1%
43.9%
2008
Q3
45.9%
45.2%
Q2
46.3%
46.1%
Q1
50.7%
53.0%
2007
Year
50.4%
53.7%
Q4
51.6%
54.8%
This decrease in labour costs is the result of the new, more efficient Calgary plant and further impact of the
federal government’s Temporary Foreign Worker Program. Staff hired under the Temporary Foreign
Worker Program have been deployed as they arrive between Edmonton and Calgary to fill current vacancies,
reduce overtime and night shifts, and to fill vacancies due to turnover.
12
2008 ANNUAL REPORT
Calgary Health Region Contract and New Calgary Plant
Effective March 1, 2008, K-Bro and the Calgary Health Region have been operating under an interim
agreement that reflects the revised pricing and terms of a new ten year contract. The finalized signed new
contract was received on March 6, 2009. K-Bro’s initial ten-year contract expired February 29, 2008. The
new agreement 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 has processed in the past.
The transition of volume to the new 80,000 sq. ft. plant was substantially completed by March 31, 2008. No
major service issues or disruptions were experienced during this significant undertaking.
The new facility is 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 included 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 did not exist in the previous plant. The total capital cost
as of December 31, 2008 is $15.2 million (see “Investing Activities”). This cost was initially funded from
the Fund’s line of credit, which was paid down as a result of the equity issuance noted previously.
Market Activities and Opportunities
Alberta
Significant healthcare projects in both Calgary and in Edmonton have been previously announced in Alberta
and certain projects associated with that growth are underway. This growth in Edmonton includes the
Mazankowski Heart Institute, the Lois Hole Hospital for Women and the Centre for Cardiac Services, the
Orthopedic Surgery Centre, the Strathcona Community Hospital and the Edmonton Clinic, which are
scheduled to open in the 2009 – 2012 timeframe. In Calgary, in addition to various expansions and
renovations of existing facilities, the South Health Campus phase one is planned to be completed in the next
five years. Alberta’s Health minister has said that projects with advanced construction (such as those noted
above) will continue; however, Alberta Health’s overall $4-billion capital plan is under review by the
provincial government because of escalating costs and reduced provincial revenues.
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 commencement of service
to Leduc Hospital in January and Devon Hospital in March. Management believes that similar additional
facilities may become available in the future.
On May 15, 2008 the Alberta government announced that one provincial government board would replace
the nine regional health authority boards. The new Alberta Health Services Board will be responsible for
health services delivery for the entire province and will report directly to the Minister of Health and
Wellness. Due to its track record and the contractual nature of K-Bro’s relationships in Edmonton and
Calgary, management does not believe there will be any negative impact on K-Bro’s business from this
change in structure. However, given this new provincial structure, the Alberta Health Board’s timing with
respect to addressing K-Bro’s contract with the Edmonton Capital Health Region, which expires December
31, 2010, is unknown at this time.
2008 ANNUAL REPORT
13
British Columbia
In 2002, the British Columbia provincial government enacted Bill 29, the Health and Social Services
Delivery Improvement Act, which, among other things, voided certain provisions of existing collective
agreements between public sector healthcare organizations and 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' rights 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.
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. Further outsourcing opportunities exist; however, their timing and
likelihood is uncertain, especially with a provincial election scheduled for 2009.
On the hospitality front, K-Bro’s Vancouver operation commenced processing for four new hotel accounts in
2008 and commenced service for a new group of three hotels in March, 2009.
Quebec
In February 2008, a government task force made recommendations on how best to adequately fund Quebec’s
health care system. The task force concluded 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. Although there can be no guarantee
that this will be the case in Quebec, 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.
14
2008 ANNUAL REPORT
Ontario
The Ontario market remains very competitive in both the healthcare and hospitality sectors with customers
being very price sensitive in the current market downturn. Two hospitality customers were lost to lower
priced competitors in 2008; however, K-Bro has been successful in renewing and extending certain major
hospitality contracts despite this pressure. Growth in volume from existing customers has offset any losses
experienced in 2008.
In March, 2009 K-Bro announced that it was unsuccessful in renewing its healthcare contract with Halton
Healthcare as the contract was awarded to another service provider pursuant to a request for proposal
process. Management believes that this will not have a material impact on K-Bro’s overall results.
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.
Neither the timing nor the degree of likelihood of success of any of these proposals or potential acquisitions
can be stated with any degree of accuracy at this time. The current state of the economy and capital markets
adds a significant component of uncertainty to this growth process with respect to availability and cost of
capital as well as the accretiveness of opportunities.
Taxation
On June 12, 2007, Bill C-52, which significantly modifies the income tax rules applicable to certain publicly
traded or listed trusts and partnerships, was substantively enacted by the Canadian Federal Government. In
particular, certain income of (and distributions made by) these entities will be taxed in a manner similar to
income earned by (and distributions made by) a corporation. These rules will be effective with respect to
trusts which commence public trading after October 31, 2006. For trusts which were publicly traded or listed
prior to November 1, 2006, the application of the rules will be delayed to the earlier or (i) the trust’s 2011
taxation year, and (ii) a taxation year of the trust in which the trust exceeds normal growth as determined by
reference to the normal growth guidelines, as amended from time to time, unless that excess arose as a result
of a prescribed transaction. As currently structured, the Fund will be subject to these new rules, once
applicable. 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.
Department of Finance (Canada) has table legislative proposals to amend released proposed amendments to
the Income Tax Act (Canada) (the “Tax Act”) to facilitate the conversion of income trusts into corporations
on a tax-deferred basis. These proposed amendments are being evaluated and will be utilized in evaluating
the options available to K-Bro in light of the impact of the Bill C-52 tax changes.
2008 ANNUAL REPORT
15
ACHIEVEMENT OF KEY PERFORMANCE DRIVERS
K-Bro’s key performance drivers focus on growth, profitability, and stability in order to maintain
distributions and maximize unitholder value. The following outlines our success in each of these areas:
Category
Specific Indicator
Growth (% increase from prior year) Revenue
EBITDA
Distributable cash
EBITDA
EBITDA margin
Net income
Payout ratio
Distributions per Unit
Debt to total Capitalization
Unutilized line of credit
Profitability (actual for the year)
Stability
OUTLOOK
2008
14.9%
34.9%
45.1%
$12,395
14.6%
$4,818
67.6%
$1.10
6.0%
$25,504
2007
13.8%
10.2%
6.4%
$9,188
12.4%
$4,114
78.5%
$1.10
25.6%
$12,938
Management believes that 2009 as a whole will again show a meaningful increase in revenue and EBITDA
compared to 2008 with an overall payout ratio (see “Non-GAAP Measures”) at a conservative level. Given
this outlook, management believes that the current level of cash distributions is sustainable for the Fund in its
current structure.
This belief is based on:
• The continued success of the new Calgary plant with increased volumes, price adjustments and
operating efficiencies being achieved for twelve months as opposed to only nine months in 2008;
• The anticipated continuing organic growth from existing customers;
• The anticipated positive impact of the labour initiatives that is expected to be realized on an ongoing
basis; and
• The reduction in energy costs currently being experienced.
The potential long-term impact of the Federal Government’s implementation of its income tax changes (see
“Taxation”) will continue to unfold as capital markets, investors and the government react to the changes.
The Fund, with the assistance of its professional advisers, 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.
16
2008 ANNUAL REPORT
RESULTS OF OPERATIONS
(all amounts in this section in $000’s except per unit amounts and percentages)
Overall Performance
The fourth quarter of 2008 saw revenue increase by $2,822 or 15.1% over the fourth quarter of 2007
(increases of $11,012 and 14.9% for fiscal 2008 compared to 2007). See the “Summary of Results and Key
Events for the Year” and the Revenues section below for an analysis of this change.
EBITDA (see “Non-GAAP Measures”) increased in the current quarter by $1,441 (76.5%) over the fourth
quarter of 2007 (increases of $3,207 and 34.9% for fiscal 2008 compared to 2007). The positive impact of
the additional revenue was aided by operating costs that decreased to 84.6% of revenue in the current quarter
compared to 89.9% in 2007 (85.4% of revenue for fiscal 2008 compared to 87.6% in 2007). The causes of
this are discussed later under “Operating Expenses”.
Selected Annual and Quarterly (Unaudited) Financial Information
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 earnings per Unit
Diluted earnings per Unit
Total assets
Total long-term financial
liabilities
Total
85,113
72,718
12,395
14.6%
7,203
687
507
3,998
820
4,818
5.7%
0.72
0.71
Q4
21,547
18,223
3,324
15.4%
1,950
142
49
1,183
202
1,385
6.4%
0.21
0.20
2008
Q3
22,063
18,466
3,597
16.3%
1,903
148
1,546
64
1,610
7.3%
0.23
0.23
Q2
21,840
18,539
3,301
15.1%
1,896
140
458
807
224
1,031
4.7%
0.15
0.15
Q1
19,663
17,490
2,173
11.1%
1,454
257
-
462
330
792
4.0%
0.13
0.13
Total
74,101
64,913
9,188
12.4%
5,755
880
(3)
2,556
1,558
4,114
5.6%
0.75
0.75
Q4
18,725
16,842
1,883
10.1%
1,408
318
(28)
185
859
1,044
5.6%
0.19
0.19
2007
Q3
19,059
16,630
2,429
12.7%
1,443
230
-
756
262
1,018
5.3%
0.19
0.19
Q2
18,560
16,050
2,510
13.5%
1,447
154
28
881
220
1,101
5.9%
0.20
0.20
Q1
17,757
15,391
2,366
13.3%
1,457
178
(3)
734
217
951
5.4%
0.17
0.17
2006
Total
65,108
56,773
8,335
12.8%
5,118
554
(4)
2,667
1,211
3,878
6.0%
0.74
0.74
85,926
85,926
88,373
89,531
89,568
83,342
83,342
76,384
74,119
74,030
75,074
8,537
8,537
10,862
13,755
8,901
21,948
21,948
18,335
14,576
12,693
14,591
Funds provided by operations
Long-term debt, end of period
Distributions declared per unit
15,455
4,061
1.10
5,431
4,061
0.28
5,583
6,219
0.27
691
9,010
0.28
3,750
4,000
0.27
6,942
16,627
1.10
2,966
16,627
0.28
207
12,734
0.27
124
9,510
0.28
3,645
7,478
0.27
4,558
9,278
1.10
Note: (1)
EBITDA is defined as revenue less operating expenses as reflected in the table above (which equates to net earnings before
income tax recovery, gain or loss on disposals, financial charges and amortization). See “Non-GAAP Measures”.
2008 ANNUAL REPORT
17
Revenues
See previous discussion under “Summary of Results and Key Events for the Year” and “Overall
Performance”. Revenues by sector consist of:
Fiscal year
Total
Q4
2008
Q3
Q2
Q1
Total
Q4
2007
Q3
Q2
Q1
Sector
Healthcare
Hospitality
Total
64,698
20,415
85,113
16,782
4,765
21,547
16,226
5,837
22,063
16,448
5,392
21,840
15,242
4,421
19,663
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
Operating Expenses
Wages and benefits - The major cause of the quarterly and annual improvement in labor costs is the
performance of the Alberta plants as outlined under Alberta Labour Costs on page 12.
Linen - costs as a percentage of revenue have decreased on an annual and quarterly basis as the costs of
standard and operating room linen items have remained flat in a competitive global market while revenues
have increased.
Utilities – The spike in natural gas rates in the first half of 2008 moderated significantly in the last half of
the year. This resulted in the improved quarterly performance as a percentage of revenue (7.3% in 2008 vs
8.2% in 2007) while the 2008 annual total was slightly greater than 2007 as a percentage of revenue (7.8%
vs 7.7%).
Delivery – The escalation in delivery costs for the quarter and the year is the result of the addition of
delivery costs for HMR, higher fuel costs and additional lease costs to handle the increased volumes.
Occupancy – Of the $626 increase in annual occupancy costs, $432 is attributable to the new and larger
Calgary facility which was occupied for nine months, $119 is attributable to vacating the former Calgary
plant, and $69 is attributable to the acquired HMR facility and other occupancy cost increases. For the
quarter, a reduction in property tax accruals offset other operating increases and resulted in a net decrease
of $39 compared to 2007.
Materials and supplies – this includes many different categories, including administrative expenses at the
plant level. The year to date increase of $543 and the quarterly increase of $444 is in large part due to
increased washfloor chemicals as a result of increased volumes processed. Also impacting this category is
the inclusion of recruitment costs under the Temporary Foreign Worker Program of $159 for the year and
$117 for the quarter.
18
2008 ANNUAL REPORT
Repairs and maintenance – As a percentage of revenue, there was a decrease of 0.1 percentage points for the
year and the quarter in repairs and maintenance costs. Of the $688 increase in repairs and maintenance in
2008, $199 is the result of the HMR acquisition and $489 is the result of increased repairs and maintenance
as certain equipment ages. For the quarter, HMR accounted for $48 of the $86 increase.
Corporate – costs increased by $538 for the year and $274 for the quarter. An increase in remuneration and
performance bonus accruals accounted for $268 of the annual increase ($148 for the quarter) while an
increase in the accrual for the Long Term Incentive Plan (see below) accounted for $312 of the annual
increase ($110 for the quarter) as a result of significantly exceeding performance targets for the year.
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 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 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 the Consumer Price Index. 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 energy.
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. Amortization of plant and equipment for the fourth quarter and fiscal year of 2008 has increased from
the comparable periods in 2007 primarily due to the capital expense of the new Calgary plant.
2008 ANNUAL REPORT
19
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
valuations completed for purposes of the purchase price allocations for the assets of Premier Linen Supply
Ltd. in Victoria (acquired on March 31, 2006) and the HMR acquisition by K-Bro, total additional intangible
assets were recognized on the balance sheet of K-Bro in the amounts of $3,147 and $850, respectively,
representing the value attributable to various contracts held. Amortization expense in the fourth quarter and
fiscal year 2008 increased compared to 2007 as a result of the HMR acquisition.
Financial Charges
Financial charges in the current quarter decreased by $175 over 2007 ($193 for the year) as a result of the
changing long-term debt balance primarily from the Calgary plant capital expenditures offset by the 2008
equity issuances (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 unitholders bear the tax obligations with respect to
distributions.
On June 12, 2007, Bill C-52, which significantly modifies the income tax rules applicable to certain publicly
traded or listed trusts and partnerships, was substantively enacted by the Canadian Federal Government. In
particular, certain income of (and distributions made by) these entities will be taxed in a manner similar to
income earned by (and distributions made by) a corporation. These rules will be effective with respect to
trusts which commence public trading after October 31, 2006. For trusts which were publicly traded or listed
prior to November 1, 2006, the application of the rules will be delayed to the earlier or (i) the trust’s 2011
taxation year, and (ii) a taxation year of the trust in which the trust exceeds normal growth as determined by
reference to the normal growth guidelines, as amended from time to time, unless that excess arose as a result
of a prescribed transaction. As currently structured, the Fund will be subject to these new rules, once
applicable. 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. Once the Fund is
subject to the new rules (which is not expected to be until 2011) the Fund will be subject to income tax on its
earnings regardless of whether amounts are distributed to the Unitholders or not.
20
2008 ANNUAL REPORT
LIQUIDITY AND CAPITAL RESOURCES
(all amounts in this section in $000’s except per unit amounts and percentages)
Cash Provided by Operating Activities
Cash provided by operating activities was $5,431 in the fourth quarter of 2008, an increase of $2,465 from
the funds provided by operating activities in the fourth quarter of 2007. This $2,465 increase is attributable to
an increase in cashflow from operations of $1,526 and a decreased working capital requirement of $939 in
the quarter compared to the corresponding period in 2007. For fiscal 2008, cash provided by operating
activities was $15,455, an increase of $8,513 from the funds provided by operating activities in 2007. This
$8,513 increase is attributable to an increase in cashflow from operations of $3,359 augmented by a
decreased working capital requirement of $5,154 compared to 2007.
The changes in working capital requirements are the result of: changes in accounts receivable resulting from
the timing of receipts from major customers and growth in revenues; changes in linen purchases due to the
timing of purchases and business growth; and, changes in accounts payable and prepaids as the result of
timing differences in payments.
Financing Activities
On February 27, 2008 and March 28, 2008, the Fund issued additional units and raised proceeds as described
under “Summary of Results and Key Events for the Year – Equity Issuance”. No equity issuances occurred
in 2007.
During the quarter ended December 31, 2008, the Fund declared distributions to unitholders at an annualized
rate of $1.10 per unit for a total amount of $1,926 ($1,512 for the 2007 fourth quarter). For the year ended
December 31, 2008, the Fund declared distributions to unitholders at an annualized rate of $1.10 per unit for
a total amount of $7,554 ($6,046 for 2007). The increase in 2008 is reflective of the increased number of
units outstanding as a result of the equity offering on February 27, 2008 and the related over-allotment option
exercised on March 28, 2008.
Long-term debt at December 31, 2008 was $4,061 compared with $16,627 at December 31, 2007. The
decrease from 2007 is the result of the equity issuance and the decrease in working capital requirements,
offset by the purchase of additional strategic capital assets, primarily the Calgary plant.
The existing long-term debt of $4,061 consists of draw downs on a secured, revolving, interest only credit
facility (the “Credit Facility”) of up to $30,000. The Credit Facility is a two-year committed facility
maturing February 28, 2011 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 (increased to 3.25 for the two fiscal quarters immediately following an acquisition), and
minimum ratios of 1.50 for the defined current ratio and 1.00 for fixed charge coverage. K-Bro has incurred
no events of default under the terms of its credit facility agreement.
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 3.64%.
2008 ANNUAL REPORT
21
Investing Activities
During the current quarter, K-Bro used $180 (2007 – $58) of funds for maintenance capital expenditures and
$1,325 (2007 – $4,856) of funds for strategic capital expenditures for a total cash investment of $1,505 (2007
– $4,914) for the quarter. For the year, K-Bro used $490 of funds for maintenance capital expenditures in
2008 (2007 – $604) and $9,255 of funds for strategic capital expenditures (2007 – $7,691) for a total cash
investment of $9,745 (2007 – $8,295). Management defines maintenance capital expenditures as additions to,
or replacements of, property and equipment to maintain K-Bro's current business operations. K-Bro will be
embarking on a computer software upgrade anticipated to commence in the first quarter of 2009. Total
estimated costs of this multi-phase project have not been finalized but it is anticipated that approximately
$250 could be incurred in Q1 2009 as a maintenance capital expenditure. 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 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
$1,263 in the fourth quarter of 2008 ($1,161 in 2007) which are included in the calculation of EBITDA. For
the year ended December 31, 2008, these expenditures were $4,871 in 2008, compared with $4,103 in 2007
with the amount as a percentage of revenue up 0.2 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. The majority of 2008 strategic capital expenditures relate to the new Calgary plant.
Proceeds from disposal of equipment of $4 were recorded in the fourth quarter and a loss on disposal of $49
was realized. For the year, proceeds from disposal of equipment of $163 were recorded and a loss on
disposal of $507 was realized. This was primarily the result of the sale or scrapping of unneeded or
technologically obsolete equipment from the former Calgary plant.
Contractual Obligations
At December 31, 2008, payments due under contractual obligations for the next five years and thereafter are
as follows:
Long-term debt
Operating leases and utility commitments
Linen purchase obligations
Payments Due by Period
Total
4,061
17,613
2,196
Less than
1 year
-
4,603
2,196
1-3 years
4,061
5,295
-
4-5 years
-
3,743
-
After
5 years
-
3,972
-
The source of funds for these commitments will be from operating cash flow and the undrawn portion of the
Credit Facility.
In the current year, the lease on the Toronto facility was extended for three additional years to December 31,
2013 with no material change to the annual cost.
22
2008 ANNUAL REPORT
Financial Position
Capital Structure at December 31
Long-term debt
Unitholders’ equity
Total capitalization
Debt to total capitalization
2008
4,061
63,862
67,923
6.0%
2007
16,627
48,243
64,870
25.6%
For the year ended December 31, 2008, the Fund had a payout ratio (see “Non-GAAP Measures”) of 67.6%,
a debt to total capitalization of 6.0%, an unused line of credit of $25,504 and has not incurred any events of
default under the terms of its credit facility agreement. Based on this, management believes that K-Bro has
sufficient liquidity and is able to generate sufficient amounts of cash to meet its planned growth and has
access to the equity market, if cost effective, to fund additional growth as acquisition opportunities arise.
DISTRIBUTIONS FOR THE YEAR
Fiscal year
Period
Fund Units
Payment Date Per Unit
Distribution
Distribution
Amount ($)
Per Unit
Distribution
Distribution
Amount ($)
2008
2007
First quarter
Second quarter
Third quarter
October
November
December
November 14
December 15
January 15
Fourth quarter
Year to date
Exchangeable Shares
First quarter
Second quarter
Third quarter
October
November
December
November 14
December 15
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
$1,754,774
$1,906,524
$1,906,524
$635,508
$635,508
$635,508
$1,906,524
$7,474,346
$19,913
$19,914
$19,913
$6,638
$6,638
$6,638
$19,914
$79,654
$7,554,000
$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
For the year ended December 31, 2008, the Fund distributed $1.10 per unit compared with Distributable
Cash (see “Non-GAAP Measures”) per unit of $1.66. The actual payout ratio was 67.6%.
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.
2008 ANNUAL REPORT
23
DISTRIBUTABLE CASH (see “Non-GAAP Measures”)
(all amounts in this section in $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
2008
Q3
Q2
Q1
Total
Q4
2007
Q3
Q2
Q1
Per consolidated financial statements:
Cash provided by operating activities
$15,455
$5,431
$5,583
$691
$3,750
$6,942
$2,966
$207
$124
$3,645
Add (deduct):
Net changes in non-cash working capital
items(2)
Maintenance capital expenditures(3)
(3,788)
(2,337)
(2,108)
2,491
(1,834)
1,366
(1,398)
1,991
2,231
(1,458)
(490)
(180)
(68)
(172)
(70)
(604)
(58)
(150)
(170)
(226)
Distributable cash
$11,177
$2,914
$3,407
$3,010
$1,846
$7,704
$1,510
$2,048
$2,185
$1,961
Distributable cash per weighted average
diluted Units outstanding
Distributions declared(4)
$1.66
$0.43
$0.49
$0.43
$0.31
$1.40
$0.26
$0.38
$0.40
$0.36
$7,554
$1,927
$1,926
$1,926
$1,775
$6,046
$1,511
$1,512
$1,511
$1,512
Distributions declared per unit (see “Non-
GAAP Measures”)
Payout ratio (see “Non-GAAP Measures”)(4)
Weighted average units outstanding during the
period – Basic
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
$1.10
$0.27
$0.28
$0.28
$0.27
$1.10
$0.27
$0.28
$0.28
$0.27
67.6%
66.1%
56.5% 64.0% 96.2% 78.5% 100.0%
73.8%
69.2% 77.1%
6,719
6,969
6,969
6,961
5,972
5,464
5,459
5,459
5,465
5,476
6,747
6,998
6,996
6,985
5,997
5,498
5,493
5,493
5,498
5,488
11,177
7,554
9,773
7,138
8,414
6,724
7,589
6,309
7,704
6,046
8,225
6,046
7,906
6,046
7,676
6,047
67.6%
73.0%
79.9%
83.1%
78.5%
73.5%
76.5%
78.8%
32,288
29,374
25,967
22,957
21,111
19,601
17,553
15,368
23,572
21,645
19,719
17,793
16,018
14,507
12,995
11,484
73.0%
73.7%
75.9%
77.5%
75.9%
74.0%
74.0%
74.7%
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 management believes 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.
24
2008 ANNUAL REPORT
OUTSTANDING UNITS
At December 31, 2008, the Fund had 6,932,562 Fund Units outstanding and 72,411 Special Trust Units
outstanding (unchanged from September 30, 2008). The basic and the diluted weighted average number of
units outstanding for fiscal 2008 were 6,719,305 and 6,747,522 respectively (5,464,487 and 5,498,318
respectively for 2007).
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 2008 approved LTIP compensation of $0.3 million (2007 – $0.3 million) and approved the funding
and transfer of $0.3 million (2007 – $0.3 million) of cash to the LTIP Trust in March 2008 and April 2007
respectively in order to fund the purchase of Units by the LTIP Trust. In March 2008, the LTIP Trust
purchased 24,751 Units of the Fund (2007 – 22,647). As at December 31, 2008, 38,961 Units held by the
LTIP Trust have vested (December 31, 2007 – 12,436). The basic 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 Matthew Hills, 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, 2008, the Fund incurred
such fees totaling $74,000 (2007 - $46,000). Of the total 2008 amount, $23,000 is included in costs related to
the HMR acquisition and $51,000 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.
2008 ANNUAL REPORT
25
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.
Property, Plant and Equipment
Property, plant 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:
Building…………………………………………………………………………………………………….5%
Laundry equipment………………………………………………………………………………………...15%
Office and delivery equipment……………………………………………………………………………..20%
Computers and software…………………………………………………………………………………... 30%
Leasehold improvements……………………………………………...straight line over the initial lease period
Asset under development…………………………….…at applicable rates and methods when put into service
The carrying value of property, plant and equipment is evaluated whenever significant circumstances
indicate impairment in value is likely. The carrying value of property, plant 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 2008 and 2007 assessments. The possible
impact of the Bill C-52 tax changes 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 2008 or 2007 that would impact the carrying
value of intangible assets.
26
2008 ANNUAL REPORT
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 as it is an indication of our capacity to generate
income from operations before taking into account management’s financing decisions and costs of
consuming tangible and intangible capital assets, which vary according to their vintage, technological
currency and management’s estimate their useful life. Accordingly, EBITDA comprises revenues less
operating costs before: financing costs, capital asset amortization, disposal and impairment charges, and
income taxes.
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 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
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.
2008 ANNUAL REPORT
27
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
The CICA has issued three new accounting standards:
(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 was adopted by the Fund beginning January 1, 2008. The adoption of
this standard did not have an impact on the consolidated financial statements other than with
respect to note disclosure.
The Fund views its capital as the combination of its indebtedness and equity balances. In general,
the overall capital of the Fund is evaluated and determined in the context of its financial objectives
and its strategic plan.
With respect to its level of indebtedness, the Fund determines the appropriate level in the context
of its cash flow and overall business risks. The Fund has historically generated cash flow in excess
of distributions and has used such excess to fund maintenance capital expenditures, working capital
and other reserves considered advisable by the Trustees of the Fund. Growth capital for strategic
capital expenditures and acquisitions has generally been funded from indebtedness and equity. As
well, the Fund will review its level of indebtedness in the context of the change in taxation
impacting the Fund commencing in 2011.
The Fund’s indebtedness is subject to a number of covenants and restrictions including the
requirement to meet certain financial ratios and financial condition tests. One such ratio is the
Total Funded Debt / EBITDA Ratio as defined in the Credit Facility. The maximum ratio allowed
for a 12-month trailing period is 2.75, which is increased to 3.25 for the two quarters immediately
following an acquisition. For the year ended December 31, 2008, this ratio was calculated at 0.38
(year ended December 31, 2007 – 1.86). Management also uses this ratio as a key indicator in
managing the Fund’s capital.
With respect to its equity, the current level of capital is considered adequate in the context of
current operations and the present strategic plan of the Fund. Any major acquisitions or expansions
may be financed in part with additional equity. The Fund will also review its level of equity in the
context of the change in taxation impacting the Fund commencing 2011.
(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 replaced
Section 3861 “Financial Instruments – Disclosure and Presentation”. 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 were
adopted by the Fund beginning January 1, 2008. The adoption of this standard did not have an
impact on the consolidated financial statement other than with respect to note disclosure.
28
2008 ANNUAL REPORT
(iii) Inventories
In June 2007, the CICA issued a new accounting standard – Section 3031 “Inventories” which
replaced the existing standard for inventories, Section 3030. The new Section was adopted by the
Fund beginning January 1, 2008. Application of the new Section did not have an impact on the
financial statements.
Future changes in accounting policies are:
(i) 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 in
Section 3062 and research and development costs in Section 3450. The new Section is effective
for the Fund beginning January 1, 2009. 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. In accordance with this new policy, deferred charges at
December 31, 2008 of $133 will be written off retrospectively against equity in 2009 with
restatement of comparative amounts.
(ii) Business combinations
Section 1582 “Business combinations” will be applicable to business combinations for which the
acquisition date is on or after the Fund’s interim and fiscal year beginning January 1, 2011. Early
adoption is permitted. The section improves the relevance, reliability and comparability of the
information that a reporting entity provides in its financial statements about a business combination
and it effects. The Fund has not yet determined the impact of the adoption of this new Section on
the consolidated financial statements.
(iii) Consolidated financial statements
Section 1601 “Consolidated financial statements” will be applicable to financial statements relating
to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is
permitted. This section establishes standards for the preparation of consolidated financial
statements. The Fund has not yet determined the impact of the adoption of this new Section on the
consolidated financial statements.
(iv) Non-controlling interests
Section 1602 “Non-controlling interests” will be applicable to financial statements relating to the
Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted.
This section establishes standards for accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business combination. The Fund has not yet
determined the impact of the adoption of this new Section on the consolidated financial statements.
2008 ANNUAL REPORT
29
(v)
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 changeover date is for interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2011.
IFRS uses a conceptual framework similar to Canadian GAAP but there are significant differences
in recognition, measurement and disclosure requirements. As a result, the Fund has established a
changeover plan to convert to these new standards according to the timetable set with these new
rules. An implementation plan has been created and will be executed primarily with internal
resources. The Fund will complete the scoping and diagnostic phase in the first quarter of 2009
and will then move to the impact analysis and design phase. The Fund’s preliminary analysis of
IFRS in comparison to Canadian GAAP has identified a number of differences. At this time, the
impact on our future financial position and results of operations is not reasonably determinable or
estimable. The Fund will continually review and adjust the changeover plan to ensure the
implementation process properly addresses the key elements of the plan.
Key activities, milestones/deadlines and status are as follows:
Key Activity
Milestones/Deadlines
Status
Financial Statement Preparation:
(cid:131)
Identify differences between IFRS and
Canadian GAAP accounting policies
(cid:131)
Selection of IFRS policies
(cid:131)
Select choices under IFRS 1
(cid:131) Develop financial statement format
(cid:131) Quantify effects of change in initial
IFRS1 disclosures and 2010 financial
statements
Staffing:
Define and introduce appropriate level of IFRS
expertise for each of the following:
(cid:131) Accounting staff
(cid:131)
Senior executives and Board, including
Audit Committee
Senior Management sign-off
and audit committee review for
all items by fourth quarter,
2009.
Analysis of issues currently
underway.
Appropriate level of expertise
to be in place by second quarter
2009.
Resource assessment
underway.
Infrastructure:
Ensure information technology is fully compliant
for IFRS as follows:
Ready for parallel processing
of 2010 general ledgers and for
planning/monitoring process.
Process to begin second quarter
2009 in conjunction with
financial systems software
upgrade.
Renegotiations to be completed
by third quarter 2010.
Process of identifying metrics
affected by conversion to IFRS
currently underway.
(cid:131) Capability of system to produce dual
financial statements (Canadian GAAP
and IFRS) during the transition years
Programs upgrades/changes
(cid:131)
(cid:131) Gathering disclosure data
(cid:131) Budget/forecast monitoring process
Business Policy Assessment: Financial
Covenants
(cid:131)
Identify impact of IFRS on financial
covenants
(cid:131) Complete any required
renegotiations/changes
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2008 ANNUAL REPORT
Business Policy Assessment: Compensation
Fourth quarter 2010.
Process of identifying metrics
affected by conversion to IFRS
currently underway.
Arrangements
(cid:131)
Identify impact on compensation
arrangements
(cid:131) Make any required changes
Business Policy Assessment: Customer and
Supplier Contracts
(cid:131)
Evaluate impact of IFRS on current
customer or supplier contracts.
Control Environment: ICFR
(cid:131)
(cid:131)
For all accounting policy changes
identified, assess ICFR design and
effectiveness implications.
Implement changes where appropriate.
Complete review by first
quarter 2010.
Process of identifying IFRS
consequences in process.
Fourth quarter 2009.
To be reviewed in conjunction
with accounting policies.
Control Environment: DC&P
See ICFR deadlines above.
(cid:131)
(cid:131)
For all accounting policy changes
identified, assess DC&P design and
effectiveness implications.
Implement changes where appropriate.
Publish impact of conversion
on Key Performance Indicators
in third quarter, 2010 MD&A.
To be reviewed in conjunction
with accounting policies.
Publish material changes in
policies and expectations by
January 10, 2011.
Publish revised 2010 results
and MD&A by March 31,
2011.
FINANCIAL INSTRUMENTS
K-Bro’s financial instruments at December 31, 2008 consist of accounts receivable, accounts payable and
accrued liabilities, distribution payable to unitholders, long-term debt and an interest rate swap agreement.
The Fund does not enter into financial instruments for trading or speculative purposes. Financial assets are
either classified as available for sale, held to maturity, trading or loans and receivables. Financial liabilities
are recorded at amortized cost. Initially, all financial assets and financial liabilities must be recorded on the
balance sheet at fair value. Subsequent measurement is determined by the classification of each financial
asset and liability. Unrealized gains and losses on financial assets that are held as available for sale are
recorded in other comprehensive income until realized, at which time they are recorded in the consolidated
statement of earnings. All derivatives, including embedded derivatives that must be separately accounted
for, are recorded at fair value in the consolidated balance sheet. Transaction costs related to financial
instruments are generally capitalized and then amortized over the expected life of the financial instrument
using the effective yield method.
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 that gives rise to risks that its earnings and cash flows may be adversely impacted by
fluctuations in interest 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 as described
under “Financing Activities”.
2008 ANNUAL REPORT
31
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 as discussed above.
CRITICAL RISKS AND UNCERTAINTIES
Effects of Market Volatility and Uncertainty
See “Summary of Results and Key Events for the Year – Effects of Market Volatility and Uncertainty”.
Alberta Labour Market
Alberta continues to have one of the lowest unemployment rates in Canada. With continuing 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. Continuance of the
federally legislated Temporary Foreign Worker program in its current form is an important factor in this
process but there can be no assurance of this continuance given the national unemployment rate.
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 operating room linen 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.
32
2008 ANNUAL REPORT
Utility Costs
K-Bro's operations utilize natural gas, electricity and water that comprise approximately 9% 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 up to
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 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.
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 common shares of K-Bro Linen Systems Inc. and the promissory notes
of K-Bro Linen Systems Inc. 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, after the expiration of available cure periods, 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 has incurred no events of default under the terms of its credit facility agreement.
Income Tax Matters
On June 12, 2007, Bill C-52, which significantly modifies the income tax rules applicable to certain publicly
traded or listed trusts and partnerships, was substantively enacted by the Canadian Federal Government. In
particular, certain income of (and distributions made by) these entities will be taxed in a manner similar to
income earned by (and distributions made by) a corporation. These rules will be effective with respect to
trusts which commence public trading after October 31, 2006. For trusts which were publicly traded or listed
prior to November 1, 2006, the application of the rules will be delayed to the earlier or (i) the trust’s 2011
taxation year, and (ii) a taxation year of the trust in which the trust exceeds normal growth as determined by
reference to the normal growth guidelines, as amended from time to time, unless that excess arose as a result
of a prescribed transaction.
2008 ANNUAL REPORT
33
On December 15, 2006, the Department of Finance (Canada) released the normal growth guidelines for
income trusts and other flow-through entities that qualify for the four-year transitional relief. The guidance,
as amended from time to time, establishes objective tests with respect to how much an income trust is
permitted to grow without jeopardizing its transitional relief. If the limits described in the normal growth
guidelines are exceeded, the Fund may lose its transitional relief and thereby become immediately subject to
the new rules.
The Department of Finance (Canada) has tabled legislative proposals to amend the Income Tax Act (Canada)
to facilitate the conversion of income trusts into corporations on a tax-deferred basis (the “Conversion
Rules”). The Conversion Rules provide income trusts with tax efficient structuring options to convert to
corporate form in advance of their 2011 taxation year at which time most income trusts would become
subject to a new entity level tax based on corporate income tax rates. Management is reviewing the
Conversion Rules to assess their implication to the Fund. There can be no assurances that the proposed
amendments will be enacted as proposed or at all.
The Fund is considering these legislative changes and their possible impact to the Fund. The new rules
(including the normal growth guidelines) may adversely affect the marketability of the Fund’s units and the
ability of the Fund to undertake financings and acquisitions, and, at such time as the new rules apply to the
Fund, the distributable cash of the Fund may be materially reduced.
Capital Investment
Laundry equipment can, with proper ongoing maintenance, remain useful for long periods of time. For
example, the useful life of a tunnel washer can extend beyond 20 years. K-Bro’s maintenance capital
expenditures have historically been modest. Management currently expects that for the foreseeable future,
the normalized level of capital expenditures required to maintain K-Bro’s laundry processing operations will
be approximately $850,000 per year. In 2009, K-Bro will be commencing a project to upgrade its
management information systems which will increase this anticipated annual amount for 2009 and 2010.
K-Bro also funds capital expenditures necessary for growth or that result in efficiencies that provide high
returns in terms of anticipated increased revenues or lower costs. The amount of these strategic capital
expenditures have fluctuated over the past several years as K-Bro has selectively pursued growth
opportunities through the purchase of (i) new equipment to increase capacity; (ii) equipment with an
anticipated high payback from a reduction in labour and utility costs; and (iii) the purchase or construction of
new laundry facilities.
The timing and amount of capital expenditures by K-Bro will indirectly affect the amount of cash available
for distribution to Unitholders. Distributions may be reduced, or even eliminated, at times when K-Bro
deems it necessary to make significant capital or other expenditures.
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.
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2008 ANNUAL REPORT
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
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
The Fund’s disclosure controls and procedures are designed to provide reasonable assurance that information
required to be disclosed by the Fund is recorded, processed, summarized and reported within the time periods
specified under Canadian securities laws, and include controls and procedures that are designed to ensure
that information is accumulated and communicated to management, including the President and Chief
Executive Officer and the Vice-President and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
As of December 31, 2008, 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, 2008. 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.
Management also concluded that during the three and twelve months ended December 31, 2008, 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.
2008 ANNUAL REPORT
35
Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining adequate internal controls over financial
reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP. The President and Chief Executive
Officer and the Chief Financial Officer assessed, or caused an assessment under their direct supervision of
the design and operating effectiveness of K-Bro’s internal controls over financial reporting as at December
31, 2008, and based on that assessment determined that K-Bro’s internal controls over financial reporting
were appropriately designed and were operating effectively in accordance with the COSO framework,
published by the Committee of Sponsoring Organizations of the Treadway Commission.
No changes were made in the Fund’s design of internal controls over financial reporting during the three and
twelve months ended December 31, 2008, that have materially affected, or are reasonably likely to materially
affect, K-Bro’s internal controls over financial reporting.
A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the control system are met. As a result of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues, including
instance of fraud, if any, have been detected. These inherent limitations include, amongst other items: (i) that
managements’ assumptions and judgments could ultimately prove to be incorrect under varying conditions
and circumstances; or, (ii) the impact of isolated errors.
Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or
more people, or by management override. The design of any system of controls is also based, in part, upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential (future) conditions.
VISION
Management believes that K-Bro has the capability to deliver results and can achieve its vision of continuing
to grow profitably 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. K-Bro is
the exclusive provider of laundry and linen services to most of its customers. Management believes
that these long standing relationships, customer knowledge, quality services and value added
services may bode well when contract renewals are due such as the contract with Alberta Health
Services in Edmonton due to expire December 31, 2010.
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:
Alberta Health Services (which encompasses the Calgary Health Region and Capital Health in
Edmonton); The Hospital For Sick Children, Mount Sinai Hospital and St. Michael’s Hospital in
Toronto; and, Vancouver Coastal Health and Fraser Health (the central healthcare organizations for
the greater Vancouver 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.
36
2008 ANNUAL REPORT
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.
When combined with the CEO and the CFO, the group of eight senior managers has an average of 17
years of industry experience and an average age of 46. This provides an effective combination of
youth and experience which bodes well for the future success of K-Bro in achieving its vision.
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. Maintenance capital expenditures are incurred as necessary to maintain
productive capacity in each plant. Strategic capital expenditures are incurred as necessary to
enhance productive capacity as dictated by growth from existing or new customers. See Liquidity
and Capital Resources—Investing Activities. Productive capacity can also be increased in each
plant through longer operating hours; however, adequate consideration must be given to downtime
for preventative maintenance as well as the availability of productive labor to perform efficiently in
an expanded day.
Effective Financing Strategy – K-Bro maintains a conservative financing strategy to ensure the
availability of lines of credit to fund growth as necessary. For major acquisitions or strategic capital
expenditures, the equity markets will be accessed when available and it is prudent to do so. Payout
ratios are kept at a prudent level giving consideration to business conditions and maintenance capital
expenditures.
2008 ANNUAL REPORT
37
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 three major hospitals in
Toronto, K-Bro has introduced the sterilization of operating room linen packs to its menu of services.
38
2008 ANNUAL REPORT
FINANCIAL STATEMENTS
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 12, 2009
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, 2008 and 2007
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, 2008 and 2007 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
2008 ANNUAL REPORT
39
K-Bro Linen Income Fund
Consolidated Balance Sheets
Assets
Current assets
Accounts receivable
Linen in service
Prepaid expenses and deposits
Future income taxes (note 10)
Restricted escrow funds (note 3)
Deferred charges (note 4)
Property, plant and equipment (note 5)
Intangible assets (note 6)
Goodwill (note 3)
Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Distribution payable to unitholders
Future income taxes (note 10)
Long-term debt (note 7)
Unamortized lease inducements (note 9)
Future income taxes (note 10)
Contingencies and commitments (note 11)
Unitholders’ Equity
Exchangeable shares (note 12b)
Fund units (note 12b)
Fund units held in trust by LTIP (note 13)
Contributed surplus (note 12c)
Deficit
Accumulated other comprehensive (loss) income (note 12d)
The accompanying notes are an integral part of these financial statements.
Approved on behalf of the Fund
40 2008 ANNUAL REPORT
2008
$
2007
$
As at December 31,
8,669,939
7,755,839
623,953
426,032
17,475,763
540,500
132,631
36,024,039
16,073,218
15,679,750
9,141,721
8,560,077
837,212
-
18,539,010
-
-
31,864,330
17,373,196
15,565,799
85,925,901
83,342,335
12,884,895
642,146
-
13,527,041
4,061,285
520,144
3,955,645
22,064,115
724,110
70,675,516
(457,079)
340,728
(7,309,749)
(111,740)
63,861,786
85,925,901
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
K-Bro Linen Income Fund
Consolidated Statements of Earnings and Deficit
Revenue
Expenses
Wages and benefits
Linen
Utilities
Delivery
Occupancy costs
Repairs and maintenance
Materials and supplies
Corporate
Earnings before the undernoted
Other income (expenses)
Amortization of property, plant and equipment
Amortization of intangible assets
Financial charges (note 8)
(Loss) gain on disposal of property, plant and equipment
Earnings before income taxes
Income tax recovery (note 10)
Net earnings for the year
Deficit – beginning of year
Distributions to unitholders (note 14)
Deficit– end of year
Net earnings per unit
Basic
Diluted
Weighted average number of units outstanding (note 12e)
Basic
Diluted
The accompanying notes are an integral part of these financial statements.
Year ended December 31,
2008
$
2007
$
85,113,294
74,100,941
40,142,329
10,238,433
6,626,307
3,643,869
3,032,291
3,008,801
2,914,738
3,111,187
72,717,955
12,395,339
(5,053,611)
(2,149,978)
(686,731)
(506,668)
(8,396,988)
3,998,351
819,737
37,334,778
9,396,962
5,728,452
2,780,344
2,405,533
2,227,415
2,465,795
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
4,818,088
4,114,181
(4,573,837)
(7,554,000)
(2,641,898)
(6,046,120)
(7,309,749)
(4,573,837)
$
0.72
0.71
#
$
0.75
0.75
#
6,719,305
6,747,522
5,464,487
5,498,318
2008 ANNUAL REPORT
41
K-Bro Linen Income Fund
Consolidated Statements of Comprehensive Income
Net earnings for the year
Other comprehensive loss
Unrealized loss on derivative instruments designated as cash flow hedges, net of future
income taxes of $50,340 (2007 – $13,156)
Other comprehensive loss for the year
Comprehensive income for the year
The accompanying notes are an integral part of these financial statements.
Year ended December 31,
2008
$
2007
$
4,818,088
4,114,181
(113.639)
(113,639)
4,704,449
(26,186)
(26,186)
4,087,995
42
2008 ANNUAL REPORT
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, plant and equipment
Amortization of intangible assets
Amortization of lease inducements
Loss (gain) on disposal of property, plant and equipment
Future income taxes
Net change in non-cash working capital items (note 15)
Cash provided by operating activities
Financing activities
Fund units issued – net of issue costs
Distributions paid to unitholders
(Decrease) increase in long term debt revolving line of credit
Cash (used) provided by financing activities
Investing activities
Purchase of property, plant and equipment
Business acquisition (note 3)
Escrow funds (note 3)
Deferred charges (note 4)
Proceeds from disposal of equipment
Cash used in investing activities
Change in cash
Cash – beginning of year
Cash – end of year
Supplementary cash flow information
Interest paid
Non-cash financing and investing activities
Equipment purchases included in accounts payable and accrued liabilities
Distribution included in distribution payable
Leasehold improvements included in lease inducements
The accompanying notes are an integral part of these financial statements.
Year ended December 31,
2008
$
2007
$
4,818,088
5,053,611
2,149,978
(42,174)
506,668
(819,737)
11,666,434
3,788,404
15,454,838
18,092,544
(7,415,697)
(12,565,822)
(1,888,975)
(9,744,642)
(3,311,349)
(540,500)
(132,631)
163,259
(13,565,863)
-
-
-
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)
-
-
-
533,361
820,751
1,082,763
138,303
3,091,099
-
-
576,376
2008 ANNUAL REPORT
43
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
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 13). All material intercompany
balances and transactions have been eliminated upon consolidation. These consolidated financial
statements are for the years ended December 31, 2008 and 2007.
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.
44 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
d) Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is provided over the estimated
useful life of the asset using the following annual rates and methods:
Building
Laundry equipment
Office and delivery equipment
Computers and software
Leasehold improvements
Asset under development
5% declining balance
15% declining balance
20% declining balance
30% declining balance
Straight-line over the initial lease period
At applicable rates and methods when put into service
e)
Intangible assets
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 13 months to 169 months.
f)
Impairment of long-lived assets
The Fund assesses impairment of its long-lived assets (property, plant 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 11, 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.
2008 ANNUAL REPORT 45
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
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.
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, 2008 or 2007.
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) Financial instruments
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.
• 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.
46 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
Initially, all financial assets and financial liabilities must be recorded on the balance sheet at fair
value. Subsequent measurement is determined by the classification of each financial asset and
liability. Unrealized gains and losses on financial assets that are held as available for sale are
recorded in other comprehensive income until realized, at which time they will be recorded in the
consolidated statement of earnings. All derivatives, including embedded derivatives that must be
separately accounted for, are recorded at fair value in the consolidated balance sheet. Transaction
costs related to financial instruments are generally capitalized and then amortized over the expected
life of the financial instrument using the effective yield method.
k) Adoption of new accounting policies
(i)
Capital disclosures
On January 1, 2008, the Fund adopted Section 1535 of the Canadian Institute of Chartered
Accountants’ (“CICA”) Handbook, “Capital Disclosures.” This Section 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. The
adoption of this standard did not have an impact on the consolidated financial statements as the
standard relates to note disclosure as per Note 17.
(ii) Financial instruments-disclosure and Financial instruments-presentation
On January 1, 2008, the Fund adopted Section 3862 “Financial Instruments– Disclosure” and
Section 3863 “Financial Instruments – Presentation” of the CICA Handbook. These sections replace
Section 3861 “Financial Instruments – Disclosure and Presentation.” 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. The adoption of these
standards did not have an impact on the consolidated financial statements as the standards relate to
note disclosure as per Note 16.
2008 ANNUAL REPORT 47
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(iii)
Inventories
On January 1, 2008, the Fund adopted Section 3031 of the CICA Handbook, “Inventories.” This
Section replaces the previous standard for inventories, Section 3030. Adoption of this standard had
no impact on the consolidated financial statements.
l) Future changes in accounting policies
(i) 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 in
Section 3062 and research and development costs in 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. In accordance
with this new policy, deferred charges at December 31, 2008 of $132,631 will be written off
retrospectively against equity in 2009 with restatement of comparative amounts.
(ii)
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. The changeover date is for interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2011.
IFRS uses a conceptual framework similar to Canadian GAAP but there are significant differences in
recognition, measurement and disclosure requirements. As a result, the Fund has established a
changeover plant to convert to these new standards according to the timetable set with these new
rules. An implementation plan has been created and will be executed primarily with internal
resources. The Fund will complete the scoping and diagnostic phase in the first quarter of 2009 and
will then move to the impact analysis and design phase. The Fund’s preliminary analysis of IFRS in
comparison to Canadian GAAP has identified a number of differences. At this time, the impact on
our future financial position and results of operations is not reasonably determinable or estimable.
The Fund will continually review and adjust the changeover plan to ensure the implementation
process properly addresses the key elements of the plan.
48 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
(iii)
Business combinations
Section 1582 “Business combinations” will be applicable to business combinations for which the
acquisition date is on or after the Fund’s interim and fiscal year beginning January 1, 2011. Early
adoption is permitted. The section improves the relevance, reliability and comparability of the
information that a reporting entity provides in its financial statements about a business combination
and it effects. The Fund has not yet determined the impact of the adoption of this new Section on
the consolidated financial statements.
(iv)
Consolidated financial statements
Section 1601 “Consolidated financial statements” will be applicable to financial statements relating
to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is
permitted. This section establishes standards for the preparation of consolidated financial
statements. The Fund has not yet determined the impact of the adoption of this new Section on the
consolidated financial statements.
(v)
Non-controlling interests
Section 1602 “Non-controlling interests” will be applicable to financial statements relating to the
Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted.
This section establishes standards for accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business combination. The Fund has not yet
determined the impact of the adoption of this new Section on the consolidated financial statements.
2008 ANNUAL REPORT 49
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
3 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 has been
accounted for using the purchase method, whereby the purchase consideration was allocated to the fair
values of the net assets acquired at January 31, 2008. The allocation is based on management’s best
estimate of the fair value of net assets acquired.
The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows:
Consideration
Purchase price including acquisition costs
Less
Restricted escrow funds
Net cash consideration
Net assets acquired
Net working capital
Linen
Property, plant and equipment
Intangible assets
Goodwill
$
3,851,849
(540,500)
3,311,349
62,397
125,000
2,160,000
850,000
113,952
3,311,349
Of the cash consideration payable to the vendor, $540,500 was deposited into escrow with an escrow
agent. The full amount of the funds held in escrow will be released to the vendor in 2009 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 be correspondingly increased by the
amount released. Management expects that the full amount will be paid to the vendor by March 31, 2009.
4 Deferred charges
Deferred charges relate to net expenditures during the pre-operating period of the new Calgary plant,
which are being amortized on a straight-line basis over the ten-year period of the associated lease. These
charges will be written off in 2009 as per Note 2l(i).
50 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
5 Property, plant and equipment
Land
Building
Equipment
Laundry(1)
Office
Delivery
Computers and software
Leasehold improvements
(1) Of this total, $1,082,763 is included in accounts payable.
Equipment
Laundry
Office
Delivery
Computers and software
Leasehold improvements
Asset under development-new Calgary plant(2)
Cost
$
Accumulated
amortization
$
70,000
550,013
34,865,253
644,938
467,656
1,293,542
10,985,452
-
25,209
10,047,651
147,653
204,865
616,283
1,811,154
2008
Net
$
70,000
524,804
24,817,602
497,285
262,791
677,259
9,174,298
48,876,854
12,852,815
36,024,039
Cost
$
Accumulated
amortization
$
2007
Net
$
25,740,872
219,308
433,578
845,624
3,413,524
10,063,932
6,925,484
86,151
158,466
420,855
1,261,552
-
18,815,388
133,157
275,112
424,769
2,151,972
10,063,932
40,716,838
8,852,508
31,864,330
(2) Of this total, $3,091,099 is included in accounts payable and $576,376 is included in unamortized lease inducements.
2008 ANNUAL REPORT 51
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
6
Intangible assets
Finite life intangible assets
Healthcare contracts
Operating room contracts
Hospitality contracts
Finite life intangible assets
Healthcare contracts
Operating room contracts
Hospitality contracts
7 Long-term debt
Cost
$
Accumulated
amortization
$
2008
Net
$
15,700,000
3,500,000
4,697,000
4,418,441
1,912,790
1,492,551
11,281,559
1,587,210
3,204,449
23,897,000
7,823,782
16,073,218
Cost
$
Accumulated
amortization
$
2007
Net
$
15,700,000
3,500,000
3,847,000
3,290,328
1,424,418
959,058
12,409,672
2,075,582
2,887,942
23,047,000
5,673,804
17,373,196
K-Bro Linen Systems Inc. has a revolving credit facility of up to $30,000,000 of which $4,496,285 is
drawn (including letters of credit totalling $435,000 per note 11(a)). The facility is a two-year committed
facility maturing February 28, 2010. It is extendable annually for another year at the lender’s option and
subsequent to December 31, 2008 it was extended to February 28, 2011. Interest payments only are due
during the term of the facility.
A general security agreement over all assets, a mortgage against all leasehold interests and real property,
insurance policies and an assignment of material agreements have been pledged as collateral.
52 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
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. At December 31, 2008 for Bankers’ Acceptances the margin varied from 2.00% to 3.00% and for
Canadian prime rate loans, the margin varied from 0.50% to 1.50%. Subsequent to December 31, 2008,
these margins in each case were increased by 0.50%.
The balance consists of:
Bankers’ Acceptances, 3.64% (2007 – 7.10%)
Prime rate loan, 4.00% (2007 – 7.00%)
8 Financial charges
Interest on long-term debt
Other charges
2008
$
2007
$
4,000,000
61,285
4,000,000
12,627,107
4,061,285
16,627,107
Year ended December 31,
2007
$
2008
$
533,361
153,370
686,731
820,751
58,996
879,747
9 Unamortized lease inducements
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. Accumulated amortization at December 31, 2008 is $65,604 (December 31, 2007 – $9,372). Of
this accumulated amortization at December 31, 2008, $23,430 (December 31, 2007 – $9,372) was
capitalized during the pre-opening period to leasehold improvements.
2008 ANNUAL REPORT 53
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
10 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,
2007
$
2008
$
Canadian statutory rates (federal and provincial)
30.7%
33.4%
Expected expense for income taxes
Change resulting from:
Non-deductible items
Impact of substantively enacted rates and other
Income of the Fund allocated to unitholders
(1,227,094)
(853,726)
(42,471)
(110,671)
2,199,973
(24,235)
559,529
1,876,546
Actual provision for income tax recovery
819,737
1,558,114
Future income tax assets (liabilities) are attributable to the following items:
Linen in service
Accounts payable and accrued liabilities
Year ended December 31,
2007
$
2008
$
172,119
253,913
(299,969)
193,366
Current future income tax asset (liability)
426,032
(106,603)
Property and equipment
Intangible assets and goodwill
Offering costs and other
(725,530)
(3,767,294)
537,179
(1,022,216)
(4,304,982)
582,230
Long-term future income tax liability
(3,955,645)
(4,744,968)
Future income tax liability, net
(3,529,613)
(4,851,571)
The benefit of deductible temporary differences of $300,000 (2007 – $600,000) relating to
offering costs borne directly by the Fund have not been recorded. The amount of goodwill
deductible for tax purposes is $3,321,984 (2007 – $3,208,033).
54 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
11 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 (2007 – $185,000) expiring January 21, 2010 and $250,000 (2007 – $250,000)
expiring January 24, 2010.
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 years are as follows:
2009
2010
2011
2012
2013
Subsequent
Linen purchase commitments
$
4,602,991
3,242,505
2,052,890
1,971,456
1,771,144
3,971,850
At December 31, 2008, the Fund was committed to linen expenditure obligations in the amount of
$2,196,023 (December 31, 2007 – $2,741,266).
Equipment purchase commitments
The Fund has commitments to purchase equipment totalling $nil at December 31, 2008 (December
31, 2007 – $126,000).
2008 ANNUAL REPORT 55
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
12 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
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, were $16.7 million. The
underwriters were also 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. On March 28, 2008, the over-allotment option was exercised in part and 146,700 additional
Units were issued at a price of $12.85 per Unit. Net proceeds to the Fund after commission and
expenses, net of tax, were $1.8 million.
Fund Units
#
$
Balance at December 31, 2007 and 2006
5,423,862
52,210,472
Issued on February 27, 2008 at $12.85 per Unit
Offering costs – net of future tax recovery of $341,000
Issued on March 28, 2008 at $12.85 per Unit
Offering costs – net of future tax recovery of $31,500
1,362,000
146,700
17,501,700
(842,959)
1,885,095
(78,792)
1,508,700
18,465,044
Balance at December 31, 2008
6,932,562
70,675,516
Exchangeable shares
#
$
Balance at December 31, 2008 and 2007
72,411
724,110
Total Fund Units and Exchangeable shares issued
7,004,973
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.
56 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
c) Contributed surplus
Balance, beginning of year
Net stock based compensation recorded
Issuance of vested Units to participants
Balance, end of year
d) Accumulated other comprehensive (loss) income
Balance, beginning of year, as previously reported
Financial instruments – recognition and measurement
Restated balance, beginning of year
Other comprehensive loss during the year
Year ended December 31,
2007
$
2008
$
413,671
319,628
(392,571)
184,635
302,294
(73,258)
340,728
413,671
Year ended December 31,
2007
$
2008
$
1,899
-
1,899
(113,639)
-
28,085
28,085
(26,186)
Balance, end of year
(111,740)
1,899
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
Year ended December 31,
2007
#
2008
#
5,496,273
1,262,115
(39,083)
5,496,273
-
(31,786)
Weighted average units for the year
6,719,305
5,464,487
Diluted
Basic weighted average units
Dilutive effect of LTIP units
6,719,305
28,217
5,464,487
33,831
6,747,522
5,498,318
2008 ANNUAL REPORT 57
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
13 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 2008 approved LTIP compensation of $0.3 million (2007 – $0.3 million) and approved the
funding and transfer of $0.3 million (2007 – $0.3 million) of cash to the LTIP Trust in March 2008 and
April 2007 respectively in order to fund the purchase of Units by the LTIP Trust. In March 2008, the
LTIP Trust purchased 24,751 Units of the Fund (2007 – 22,647). As at December 31, 2008, 38,961 Units
held by the LTIP Trust have vested (December 31, 2007 – 12,436).
The basic net earnings per unit calculation exclude the unvested units held by the LTIP Trust.
14 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
day of the following month.
During the year ended December 31, 2008, the Fund declared total distributions to Unitholders and
Exchangeable Unitholders of $7,554,000 (2007 – $6,046,120) or $1.10 per unit (2007 – $1.10).
58 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
15 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
16 Financial instruments
Fair value
Year ended December 31,
2007
$
2008
$
719,182
929,238
188,696
1,951,288
(1,700,543)
(66,776)
(316,792)
717,790
3,788,404
(1,366,321)
The Fund’s financial instruments at December 31, 2008 consist of accounts receivable, accounts payable
and accrued liabilities, distribution payable to unitholders, long-term debt, and an interest rate swap
agreement. The carrying value of accounts receivable, accounts payable and accrued liabilities, and
distribution payable to unitholders 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. The interest rate swap agreement
is a derivative designated as an effective hedge and is measured at fair value with subsequent changes in
fair value being charged to other comprehensive income.
Financial risk management
The Fund’s activities are exposed to a variety of financial risks: price risk, credit risk and liquidity 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.
2008 ANNUAL REPORT 59
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
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 if considered
prudent to mitigate this risk. At December 31, 2008, no foreign exchange forward option contracts
were outstanding. Based on the Fund’s US dollar liability for equipment purchases at December 31,
2008, a 1% change in the Canadian-US dollar foreign exchange rate would result in a $7,500 change
in the amount recorded in property, plant and equipment.
Interest rate risk – The Fund is subject to interest rate risk as its credit facility bears interest at rates
that depend on certain financial ratios of the Fund and vary in accordance with market interest rates.
On June 24, 2005, the Fund entered into an interest rate swap arrangement whereby the interest rate
paid on a notional amount of $4 million 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 3.64%. Based
on the outstanding balance on the Fund’s revolving credit facility for which the interest rate has not
been fixed at December 31, 2008, a 1% fluctuation in the Canadian prime rate would result in a
negligible change in annual interest expense. Management does not believe that the impact of
interest rate fluctuations will be significant.
Other price risk – The Fund’s exposure to other price risk is limited since there are no significant
financial instruments which fluctuate as a result of changes in market prices.
Credit risk
The Fund’s financial assets that are exposed to credit risk consist primarily of accounts receivable and an
interest rate swap agreement. The Fund, in the normal course of business, is exposed to credit risk from
its customers. The Fund is exposed to credit loss in the event of non-performance by counterparties to the
interest rate swap. Management believes that the risks associated with concentrations of credit risk with
respect to accounts receivable and the interest rate swap are limited due to the nature of the customers and
the swap counterparty serviced by the Fund and the generally short payment terms and frequent
settlement of swap differences.
60 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
The following outlines the details of the aging of the Fund’s receivables and related allowance for
doubtful accounts:
Current
Past due amounts:
1 – 30 days
Greater than 30 days
Less: allowance for doubtful accounts
Accounts receivable, net
Liquidity risk
2008
$
6,701,444
1,851,171
160,028
(42,704)
8,669,939
The Fund has long-term debt with a maturity date of February 28, 2010 (see note 7). Subsequent to
December 31, 2008 this maturity date was extended to February 28, 2011. The degree to which the Fund
is leveraged may reduce its ability to obtain additional financing for working capital and to finance
investments to maintain and grow the current levels of cash flows from operations. The Fund may be
unable to extend the maturity date of the credit facility.
Management, to reduce liquidity risk, has historically renewed the terms of the credit facility in advance
of its maturity dates and the Fund has maintained financial ratios that management believes are
conservative compared to financial covenants applicable to the credit facility. A significant portion of the
available facility remains undrawn.
Management measures liquidity risk through comparisons of current financial ratios with financial
covenants contained in the credit facility.
Hedge accounting
Where derivatives are held for risk management purposes or when transactions meet the criteria,
including documentation requirements, specified in the CICA Handbook Section 3865, hedge accounting
is applied to the risks being hedged. When hedge accounting is not applied, the change in the fair value
of the derivative is recognized in earnings.
The Fund applied hedge accounting on the interest rate swap agreement outstanding at December 31,
2008.
2008 ANNUAL REPORT 61
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
17 Capital management
The Fund views its capital resources as the aggregate of its debt, unitholders’ equity, internally generated
funds, amounts available under credit facilities and cash on hand. In general, the overall capital of the
Fund is evaluated and determined in the context of its financial objectives and its strategic plan.
With respect to its level of indebtedness, the Fund determines the appropriate level in the context of its
cash flow and overall business risks. The Fund has historically generated cash flow in excess of
distributions and has used such excess to fund capital expenditures, working capital, growth capital and
other reserves considered advisable by the Trustees of the Fund. The Fund would consider increasing its
level of indebtedness relative to cash flow to assist in the financing of an acquisition or expansion. As
well, the Fund will review its level of indebtedness in the context of the change in taxation impacting the
Fund commencing 2011.
The Fund’s indebtedness is subject to a number of covenants and restrictions including the requirement to
meet certain financial ratios and financial condition tests which are subject to an appropriate cure period
if necessary. One such ratio is the Total Funded Debt / EBITDA Ratio as defined in the credit facility
(see note 7). The maximum ratio allowed for a 12-month trailing period is 2.75, which is increased to
3.25 for the two quarters immediately following an acquisition. For the twelve months ended December
31, 2008, this ratio was calculated at 0.38 (twelve months ended December 31, 2007 – 1.86).
Management also uses this ratio as a key indicator in managing the Fund’s capital. EBITDA is defined in
the credit facility as net earnings plus interest expense, income taxes, and amortization expense. For the
purpose of the calculation of the Fund’s financial ratios under the credit facility, EBITDA is calculated on
a rolling four quarter basis.
With respect to its equity, the current level of capital is considered adequate in the context of current
operations and the present strategic plan of the Fund. Any major acquisitions or expansions may be
financed in part with additional equity. The Fund will also review its level of equity in the context of the
change in taxation impacting the Fund commencing 2011.
The Fund’s capital resources, comprised of long-term debt, unitholders’ equity and amounts available
under its committed revolving credit facility, totalled $93.4 million at December 31, 2008 (2007 – $77.8
million). Available liquidity as at December 31, 2008 consisting of unused committed revolving credit
facility was $25.5 million (2007 – $12.9 million). The Fund has incurred no events of default under the
terms of its credit facility agreement.
62 2008 ANNUAL REPORT
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
18 Segmented information
The Fund provides laundry and linen services to the healthcare and hospitality sectors through six
operating segments in Vancouver, Victoria, Calgary, Edmonton, Toronto and Quebec City. 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. The
results of the Quebec City operation acquired (see note 3) are reported commencing February 1, 2008.
Total revenue derived from the healthcare and hospitality sectors are as follows:
Healthcare
Hospitality
Total
Healthcare
Hospitality
Total
Year ended December 31, 2008
%
$
64,698,218
20,415,076
85,113,294
76.0
24.0
100.0
Year ended December 31, 2007
%
$
57,393,080
16,707,861
74,100,941
77.5
22.5
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, 2018 and in Vancouver the major
customer is contractually committed to January 15, 2013.
For the year ended December 31, 2008, the Fund has recorded revenue of $49.4 million (year ended
December 31, 2007 – $42.8 million) from these three major customers, representing 58% (2007 – 58%)
of total revenue.
19 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, 2008, the Fund incurred
such fees totalling $74,000 (2007 – $46,000). Of the total 2008 amount, $23,000 is included in
acquisition costs related to the assets of Buanderie HMR Inc. (see note 3) and $51,000 is included in
Corporate expenses.
2008 ANNUAL REPORT 63
CORPORATE INFORMATION
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 11, 2009 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 SE
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, British Columbia. 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
310, 606 – 4th Street SW
Calgary, Alberta T2P 1T1
Phone 403-233-2801 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)(1)
Steven Matyas(1)
Michael Percy
Ross Smith
(1) Effective May 12, 2009, Mr. Matyas was appointed Chair of the Committee
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
and General Manager, Toronto
Ron Graham, General Manager, Vancouver
Jeff Gannon, General Manager, Calgary
64 2008 ANNUAL REPORT