2009 Annual Report
K-BRO LINEN INCOME FUND
(TSX: KBL.UN)
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 seven large processing facilities in Toronto, Edmonton, Calgary, Vancouver, Victoria and
Québec City, we employ over 1,500 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 2009 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.
2
FINANCIAL HIGHLIGHTS
3
PRESIDENT’S MESSAGE
5
MANAGEMENT’S DISCUSSION AND ANALYSIS
37
FINANCIAL STATEMENTS
62
CORPORATE INFORMATION
1
FINANCIAL HIGHLIGHTS
(cid:131) EBITDA (1) increased by 25.4% and revenues increased by 2.8% in 2009 from 2008.
(cid:131) Net earnings increased by 65.2% to $7.8 million in 2009 from $4.7 million in 2008.
(cid:131) Distributions of $1.10 per unit were paid in 2009 consistent with the previous three years.
(cid:131) Distributable cash (1) was $14.0 million or $1.99/unit, an increase of $3.0 million over 2008.
(cid:131) K-Bro had a conservative payout ratio (1) of 55.1% for 2009 and 68.4% for 2008.
(cid:131) The company had a conservative debt to EBITDA (1) ratio of 0.26 at December 31, 2009.
REVENUE EBITDA (1) DISTRIBUTABLE CASH (1)
(in millions of Canadian dollars) (in millions of Canadian dollars) (in millions of Canadian dollars)
90
80
70
60
50
40
30
16
14
12
10
8
6
4
16
14
12
10
8
6
4
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
TOTAL CUMULATIVE RETURN (February 3, 2005 to April 30, 2010)
K-BRO LINEN INCOME FUND V.S. S&P/TSX
COMPOSITE
d
e
t
s
e
v
n
I
0
0
1
$
r
e
p
n
r
u
t
e
R
e
v
i
t
a
l
u
m
u
C
l
a
t
o
T
$250
$225
$200
$175
$150
$125
$100
$75
K-Bro Linen Income Fund
S&P/TSX Composite Index
S&P/TSX Income Trust Index
Dec-04 Mar-05
Jun-05
Sep-05
Dec-05 Mar-06
Jun-06
Sep-06
Dec-06 Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08 Mar-09
Jun-09
Sep-09
Dec-09 Mar-10
(1) Please refer to page 21 of Management’s Discussion and Analysis for a discussion of this non-GAAP measure.
INDEX VS. S&P/TSX INCOME TRUST INDEX
2
PRESIDENT’S MESSAGE
I am pleased to report that the results of our growth initiatives, the progress made on labour costs and the
positive impact of a full year in our new Calgary plant are all reflected in our strong 2009 results. We enter 2010
with the successful acquisition in January, 2010 of a second plant in Vancouver, the anticipated continuance of a
low payout ratio, a strong balance sheet, low debt levels and effective control over our costs. However, our view
of future organic growth is tempered by a low inflation rate negatively impacting price adjustments, provincial
deficits potentially impacting hospital funding, changes in linen usage patterns as customers seek savings and an
economy still in recovery mode. I feel that we are positioned to deal with these issues and pursue growth
opportunities as they arise but are cautiously optimistic about 2010.
Our revenue for the year ended December 31, 2009 was $87.5 million, a modest increase of 2.8% over 2008.
However, EBITDA for the 2009 year increased by a gratifying 25.4% to $15.5 million compared to the 2008
fiscal year. The EBITDA margin also increased significantly to 17.8% in 2009 from 14.6% in 2008, primarily as
a result of an improvement in labour and energy costs. For the year, K-Bro made distributions of $1.10 per unit
and distributable cash was $1.99 per unit. This amounted to annual distributions of $7.7 million compared to
distributable cash of $14.0 million for a conservative payout ratio of 55.1%. Net earnings after taxes increased in
2009 by 65.2% to $7.8 million as a result of the increased EBITDA. Despite the flat revenue, we are pleased to be
able to deliver these improved returns to our Unitholders.
In concluding, I reiterate that my outlook for 2010 continues to remain positive but somewhat tempered by the
risks and uncertainties of today’s realities. However, the strategies, prospects, people, and financial capacity all
remain in place and we have a solid foundation to meet the challenges of 2010.
I would like to thank our Unitholders, our employees, our customers and our Board for the continued support.
Linda McCurdy
President and Chief Executive Officer
3
A FIVE YEAR REVIEW OF ACHIEVEMENTS
Since our IPO on February 3, 2005 K-Bro has achieved the
following significant milestones and accomplishments:
Significant revenue growth has been
achieved.
Growth by acquisition has been
achieved.
Significant EBITDA growth has been
achieved.
Significant growth in distributable
cash has been achieved.
Market capitalization has increased
significantly.
The level of distributions to
Unitholders was increased in 2006
and has been maintained since then.
Revenues have increased from $48.1
million in 2005 to $87.5 million in
2009. This is a compounded annual
growth rate (“CAGR”) of
16.1%.
From four plants in 2005, K-Bro has
grown to include seven processing
plants. Acquisitions were completed in
Victoria (2006), Quebec City (2008)
and a second plant in Vancouver (2010).
EBITDA has increased from $7.1
million in 2005 to $15.5 million in
2009, a CAGR of
21.6%.
Distributable cash has increased from
$6.2 million in 2005 to $14.0 million in
2009, a CAGR of
18.5%.
From a market capitalization of $43.4
million at IPO to a market capitalization
of $93.5 million at December 31, 2009,
this is a CAGR of
16.6%
The $1.05 per Unit distribution was
increased in 2006 to $1.10 per Unit and
has been consistently paid at that rate
since then. The payout ratio for 2009
was a conservative 55.1%.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 10, 2010
The following Management's Discussion and Analysis (“MD&A”) 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, 2009 and 2008. 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 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 10, 2010.
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 labour costs;
(iv) K-Bro's dependence on long-term contracts with the associated renewal risk, (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 impact of labour cost
initiatives; and (iv) 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.
5
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.
Summary of Results and Key Events
Introduction
Key Performance Drivers
Outlook
Results of Operations
Liquidity and Capital Resources
6
7
10
11
12
15
Distributions for the Year
Distributable Cash
Outstanding Units
Related Party Transaction
Critical Accounting Estimates
Non-GAAP Measures
17
18
19
19
19
21
Changes in Accounting Policies
Financial Instruments
Critical Risks and Uncertainties
Controls and Procedures
Vision
Strategy
22
28
31
34
35
36
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 seven 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.
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.
6
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.
SUMMARY OF RESULTS AND KEY EVENTS
Acquisition of Business and Assets of Second Plant in Greater Vancouver
On January 29, 2010, the Fund completed the acquisition of the laundry business, linen, certain working capital
and equipment of a plant located in Burnaby, British Columbia. The business acquisition will be accounted for
using the purchase method, whereby the purchase consideration will be allocated to the fair values of the net
assets acquired at January 29, 2010. The purchase price to be allocated to the net assets acquired is
approximately $12.6 million including estimated acquisition costs. The acquisition was funded through the
Fund’s revolving credit facility.
Of the cash consideration payable to the vendor, $250,000 was deposited into escrow with an escrow agent. The
full amount of the funds held in escrow will be released to the vendor in 2011 upon the determination that certain
representations and warranties are met in the twelve-month period subsequent to the acquisition. Goodwill will
be correspondingly increased by the amount released.
The acquired business consists of Vancouver healthcare institutions and hospitality customers in both the greater
Vancouver area and Whistler, British Columbia. K-Bro acquired all assets of the owner’s Vancouver linen
business including the processing plant that operates from a leased facility.
Annual revenues from the acquired business were $14.4 million in its most recent fiscal year ended June 30,
2009. Management estimates that adjusted EBITDA was approximately $1.7 million for that fiscal year. These
operating results, combined with potential synergies, results in an acquisition that management believes will be
immediately accretive to the Fund.
Revolving Credit Facility Increased
In March, 2010, K-Bro Linen Systems Inc. secured an additional $10,000,000 of credit under its revolving credit
facility that will now have a limit of $40,000,000. The term of the agreement was extended to June 30, 2012 and
the working capital covenant was removed.
7
Sustained Revenue and EBITDA Growth in 2009
Revenue increased in the fourth quarter of 2009 to $21.6 million or by 0.4% compared to the fourth quarter of
2008. For the year ended December 31, 2009, revenue increased to $87.5 million or by 2.8% over 2008. This
growth was achieved despite the overall economic recession experienced. However, it is reflective of a lower
inflation rate that impacts price adjustments, negligible growth in the hospitality sector as volume from new
accounts secured was offset by reductions experienced by other customers, as well as cost cutting initiatives by
hospitals as they face budget pressures from deficit strapped provincial governments. See further discussion below
under Market Activities and Opportunities.
EBITDA (see Non-GAAP Measures) increased in the fourth quarter of 2009 to $3.8 million from $3.3 million in
the fourth quarter of 2008. This was an increase of 14.4%. For the year ended December 31, 2009, EBITDA
increased to $15.5 million from $12.4 million in 2008, an increase of 25.4%. The EBITDA margin has increased
to 17.6% in Q4 2009 versus 15.4% in Q4 2008. For the year ended December 31, the EBITDA margin has
increased to 17.8% in 2009 versus 14.6% in 2008. This is primarily the result of:
•
the operating efficiencies being achieved in the new Calgary plant that started up in Q2 2008 with
increased volumes pursuant to a further 10 year contract with its major healthcare customer;
contractual price adjustments from customers;
the positive impact of labour initiatives being realized; and
•
•
• more favorable natural gas and electricity rates on the unhedged portion of K-Bro’s requirements.
Labour Cost Improvements Achieved
Labour costs for plant staff as a percentage of revenue decreased in the fourth quarter from 46.1% in 2008 to 44.9%
in 2009 (and from 47.2% for 2008 to 45.1% for 2009).
This decrease in labour costs is the result of the new, more efficient Calgary plant and the impact of utilizing the
federal government’s Temporary Foreign Worker Program. Staff hired under the Temporary Foreign Worker
Program have been deployed as they arrive between Edmonton, Calgary, Vancouver and Victoria to fill vacancies,
reduce overtime and night shifts, and to fill vacancies due to turnover. This federal program has been in existence
since 1996 and the “temporary” nature of it applies to the workers who are granted a 12 – 24 month work permit
that can be extended under certain circumstances. K-Bro has been successful in obtaining two new Labour Market
Opinions under this program which will allow further hiring as well as obtaining extensions for workers who wish
to stay an additional year. Hiring domestically has also seen improvement as a result of an increasing
unemployment rate in Canada.
Market Activities and Opportunities
Activities of significance in K-Bro’s markets in 2009 have included:
British Columbia – Processing commenced for a total of seven new hotel accounts during the year. In
December, 2009 a Request for Proposal was issued by the hospital authority with respect to the laundry
services provided by the Tilbury Regional Hospital Laundry to Lower Mainland hospitals. K-Bro
responded to this request and is awaiting the outcome. Given the competitive nature of the RFP process,
there can be no assurance that K-Bro’s bid will be successful for this volume.
Alberta – Processing commenced in Q4 for Alberta Hospital in Edmonton which is part of Alberta Health
Services. This volume was previously processed by the hospital using an on premise laundry. In the
February provincial budget, Alberta Health Services received a 6% increase in its operating grant, a one
time provision to eliminate its accumulated deficit and a budget of $2.5 billion over three years to support
capital projects. It remains to be seen as to how this may impact a previous announcement that Alberta
Health Services is seeking “where applicable, opportunities to improve effectiveness and efficiencies
8
consistent with the Board’s goal of accessibility, quality and sustainability in order to achieve further
savings in 2010/2011 and beyond.” K-Bro’s Edmonton contracts with Alberta Health Services expire
December 31, 2010 and discussions have commenced with Alberta Health Services regarding this
situation.
Ontario – In 2009, processing commenced for four new hotel accounts and the contracts of three other
hotel customers were extended for a further three year period. As previously announced, the Halton
Healthcare contract was not renewed and service was ended in April. One hospital contract was extended
for a further five year period to 2016 pursuant to an extension option exercised by the customer.
Quebec – Processing commenced for two new hotel customers.
The new hotel customers noted above will generate additional annual revenue of approximately $2.0 million.
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.
Effects of Economic 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 contract.
• K-Bro’s $40 million line of credit is with a major Canadian bank and has a term to June 30, 2012 with
an annual option to renew for an additional year. No events of default have occurred and at December
31, 2009, under its previous limit of $30 million, K-Bro had unutilized borrowing capacity of $25.7
million or 86% of the line available.
• K-Bro’s payout ratio for the quarter was 54.9% and for the year ended December 31, 2009 was 55.1%.
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 variable cost components such as natural gas, electricity and interest
rates through forward contracts or swaps. In Q4, 2009, K-Bro entered into natural gas and electricity
hedges for a three year term commencing once the existing hedges expire in February, 2010.
Taxation
On March 12, 2009, Bill C-10, Budget Implementation Act, 2009, which further modifies the rules applicable to
certain publicly traded income trusts in Canada, received Royal Assent. In particular, Bill C-10 provides rules to
facilitate the conversion of income trusts into corporations on a tax-deferred basis. These rules are being
evaluated and will be utilized in evaluating the options available to K-Bro in light of the impact of Bill C-52
Budget Implementation Act 2007, which contained legislation creating a new tax on distributions from publicly
traded income trusts in Canada that was enacted by the Canadian Federal Government. Subsequent enacted tax
rate changes have reduced the tax rate applicable to distributions from Canadian public income trusts. The new
tax is not expected to apply to the Fund until 2011 as a transition period applies to publicly traded trusts that
existed prior to November 1, 2006. There was no future income tax expense or recovery that needed to be
recorded by the Fund as a result of this legislation as the Fund has no taxable temporary differences that would
exist in 2011. Future income taxes are already recorded by the Fund’s wholly-owned subsidiary K-Bro Linen
Systems Inc.
9
ACHIEVEMENT OF KEY PERFORMANCE DRIVERS
K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain
distributions and maximize unitholder value. The following outlines our level of success in each of these areas:
Category
Specific Indicator
Growth (% change from comparative period) Distributable cash
Profitability (actual for the period)
Stability
EBITDA1
Revenue
EBITDA
EBITDA margin
Net income
Payout ratio
Distributions (annualized rate
per Unit)
Debt to total Capitalization
Unutilized line of credit
Q4
2009
17.3%
14.4%
0.4%
$3,805
17.6%
$1,947
54.9%
$0.27
Q4
20082
98.0%
76.5%
15.1%
$3,325
15.4%
$1,384
64.4%
$0.28
YTD
2009
26.7%
25.4%
2.8%
YTD
20082
43.4%
34.9%
14.9%
$15,546
17.8%
$7,802
$12,395
14.6%
$4,722
55.1%
$1.10
68.4%
$1.10
6.0%
$25,707
6.0%
$25,504
6.0%
$25,707
6.0%
$25,504
Cost containment (as a % of revenue)
Wages and benefits
Utilities
Total operating expenses
44.9%
7.5%
82.4%
46.1%
7.3%
84.6%
45.1%
7.2%
82.2%
47.2%
7.8%
85.4%
Notes:
1.
2.
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.
Restated for the adoption of CICA accounting standard 3064, which requires the expensing of certain expenditures related to
a pre-operating period of a facility rather than recording them as assets (discussed further in Changes in Accounting Policies
Including Initial Adoption – Goodwill and intangible assets)
10
OUTLOOK
Management believes that 2010 will show an increase in revenue and EBITDA compared to 2009 but with a
moderation of historical “same plant” growth. This belief is predicated on:
• The acquisition completed in January, 2010 (see Summary of Results and Key Events);
• The improved results from the new Calgary plant, which opened in 2008 with increased volumes and
operating efficiencies, are fully reflected in the 2009 results, thereby tempering future gains;
• The organic growth from existing customers may moderate as cost savings initiatives are implemented
by them;
• The positive impact of the labour initiatives over the last two years will continue but further margin
improvements will be minimal; and
• The low rate of inflation will be of some benefit in moderating certain expenses but will also result in
lower price adjustments for customers with contracts subject to an annual consumer price index “CPI”
adjustment factor.
In 2010 there will be both opportunities and risks that will be confronted. Management believes that these
include:
• A recovering economy that will potentially have positive impacts on our hospitality business.
• Provincial governments in a deficit position are once again putting healthcare costs under a microscope
and are potentially seeing the advantage of further outsourcing of non-core activities such a laundry
services. This has already been seen in Alberta and British Columbia (see Market Activities and
Opportunities). Conversely, all healthcare costs and processes are being examined and some changes
could negatively impact K-Bro.
• The initiatives in BC and Ontario to implement a harmonized sales tax (“HST”) on July 1, 2010 will
lower the input cost of some materials and services to the benefit of K-Bro by an as yet undetermined
amount.
• A CPI that remains very low which is potentially positive from a labor, materials and interest rate
perspective but which is negative from a revenue perspective for those customer contracts encompassing
a price adjustment based on CPI.
• A relatively high unemployment rate which is positive from a labor supply perspective but negative if
access to such programs as the Temporary Foreign Worker Program is reduced.
• Natural gas prices that could move higher if current prices prove unsustainable as drilling is curtailed
and supplies decrease. Conversely, they could move lower if vast quantities of shale gas glut the market.
K-Bro has managed this risk through further hedging of these costs which could be at prices higher than
those 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 steps to take in respect of the Fund. 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 in 2010. There can be no assurance that the Fund will be
able to undertake any measures to minimize the long-term impact; however, based on current knowledge
and belief, it appears that conversion to a dividend paying corporation on or before December 31, 2010
may be a suitable alternative structure. The cost of such a conversion may range from $0.5 million to $1.0
million. The post conversion dividend policy will be determined by the Board giving full consideration
to K-Bro’s business outlook, payout ratio, capital requirements and market conditions.
Given this outlook, combined with an expected continuance of a conservative payout ratio, management believes
that the current level of cash distributions is sustainable for the Fund in its current structure for 2010.
11
RESULTS OF OPERATIONS
(all amounts in this section in $000’s except per unit amounts and percentages)
Overall Performance
The fourth quarter of 2009 saw revenue increase by $87 or 0.4% over the fourth quarter of 2008 (increases of
$2,419 and 2.8% for 2009 compared to 2008). See the previous discussion under Summary of Results and Key
Events and the Revenues section below for an analysis of this change. Operating costs decreased to 82.4% of
revenue in the current quarter compared to 84.6% in 2008 (82.2% of revenue for 2009 compared to 85.4% in
2008). The causes of this are discussed later under Operating Expenses. As a result, EBITDA increased in the
current quarter by $480 (14.4%) over the fourth quarter of 2008 ($3,151 or 25.4% for 2009 compared to 2008).
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
Total
Revenue 87,533
Operating expenses 71,987
EBITDA1 15,546
EBITDA as a % of revenue 17.8%
Amortization 7,504
311
54
-
Financial charges
Loss (gain) on disposal of equipment
Write-off of new plant start-up costs
Earnings before income taxes 7,677
125
Income tax (expense) recovery
Net earnings 7,802
Net earnings as a % of revenue 8.9%
Basic Earnings per Unit 1.12
Diluted earnings per Unit 1.11
Q4
21,635
17,830
3,805
17.6%
1,856
96
50
-
1,803
145
1,948
9.0%
0.28
0.27
2009
Q3
22,659
18,521
4,138
18.3%
1,885
60
1
-
2,192
(97)
2,095
9.2%
0.30
0.30
Q2
21,746
17,635
4,111
18.9%
1,871
64
-
-
2,176
(8)
2,168
10.0%
0.31
0.31
Q1
21,493
18,001
3,492
16.2%
1,892
91
3
-
1,506
85
1,591
7.4%
0.23
0.23
Total
85,113
72,718
12,395
14.6%
7,203
687
507
132
3,866
856
4,722
5.5%
0.70
0.70
20082
Q3
22,063
18,466
3,597
16.3%
1,903
148
-
-
1,546
64
1,610
7.3%
0.23
0.23
Q4
21,547
18,223
3,324
15.4%
1,950
142
49
-
1,183
202
1,385
6.4%
0.21
0.21
Q2
21,840
18,539
3,301
15.1%
1,896
140
458
27
780
231
1,011
4.6%
0.14
0.14
Q1
19,663
17,490
2,173
11.1%
1,454
257
-
105
357
359
716
3.6%
0.12
0.12
2007
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
Total assets 82,816
Total long-term financial liabilities 8,500
82,816
8,500
83,565
9,676
84,639
11,263
86,344
11,536
85,793
8,636
85,793
8,636
88,241
10,825
89,398
13,718
89,463
8,872
83,342
21,948
Funds provided by (used in) operations 11,860
Long-term debt, end of period 4,043
Distributions declared per unit 1.10
3,549
4,043
0.27
5,568
5,107
0.28
3,539
6,735
0.27
(796)
7,210
0.28
15,322
4,061
1.10
5,594
4,061
0.27
5,570
6,219
0.28
470
9,010
0.28
3,688
4,000
0.27
6,942
16,627
1.10
Notes:
1.
2.
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.
Restated for the adoption of CICA accounting standard 3064, which requires the expensing of certain expenditures related to
a pre-operating period of a facility rather than recording them as assets (discussed further in Changes in Accounting Policies
Including Initial Adoption – Goodwill and intangible assets)
12
Revenues
See previous discussion under Summary of Results and Key Event and Overall Performance. Revenues by sector
consist of:
Fiscal year
Total
Q4
2009
Q3
Q2
Q1
Total
Q4
2008
Q3
Q2
Q1
Sector
Healthcare
Hospitality
Total
66,846
20,687
87,533
16,662
4,973
21,635
16,524
6,135
22,659
16,723
5,023
21,746
16,937
4,556
21,493
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
Operating Expenses
Wages and benefits - The major cause of the quarterly and annual improvement in labour costs as a percentage of
revenue is as outlined under Labour Cost Improvements Achieved in Summary of Results and Key Events.
Linen - Costs as a percentage of revenue have decreased for both the quarter and year ended December 31, 2009
compared to the same periods in 2008, as the costs of standard linen items have decreased somewhat in a
competitive global market and operating room linen purchases have been somewhat less.
Utilities - Reductions in natural gas and electricity rates occurred in the last half of 2008 and for most of 2009,
resulting in a decrease in utility costs as a percentage of revenue from 7.8% in 2008 to 7.2% in 2009. The
somewhat increased expense in Q4 2009 vs. Q4 2008 (7.5% of revenue vs. 7.3%) is primarily the result of a
decline in the amount of the rebate received through the Alberta Natural Gas Rebate Program. This program ended
on March 31, 2009. K-Bro has executed its strategy to utilize natural gas and electricity hedges to take advantage of
the current low prices in order to lock in future variable costs where feasible.
Delivery - The decrease in delivery costs for both the quarter and year is primarily the result of lower fuel costs.
Repairs and maintenance – As a percentage of revenue, repairs and maintenance costs were relatively stable with a
decrease of 0.2 percentage points for the quarter and an increase of 0.1 percentage points for the year.
Materials and supplies – This includes many different categories, including administrative expenses at the plant
level. Year over year, total expenditures in this category were flat. The decrease for Q4 2009 of 1.5 percentage
points compared to Q4 2008 was in large part due to the 2008 one-time recovery of costs related to the new
Calgary plant and foreign worker recruitment costs expensed in Q4 2008.
Occupancy – Year over year total expenditures in this category were flat. Quarter over quarter variances can occur
as a result of accrual adjustments for such things as property taxes and operating costs.
Corporate - Costs increased in Q4 2009 by $72 over Q4 2008 and $514 in 2009 compared to 2008. This is
primarily attributable to an increase in the accrual for the Long Term Incentive Plan (see below) as a result of
exceeding performance targets for the year.
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 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. At December 31, 2009 a total of 69,692 units were unvested.
LTIP expense for the 2009 year, included in Corporate expenses, was $915 (2008 - $463).
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 quarter and the 2009 year has increased from the comparable period in
2008 primarily due to the capital expense of the new Calgary plant and other capital additions.
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. Amortization expense in 2009
increased modestly compared to 2008 as the Quebec City acquisition was completed on January 31, 2008.
Financial Charges
Financial charges in the current quarter decreased by $46 over 2008 (and decreased by $376 for the 2009 year
compared to 2008) as a result of a reduced long-term debt balance and lower market interest rates (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 Budget Implementation Act 2007, which contained legislation creating a new 31.5
per cent tax on distributions from publicly traded income trusts in Canada, was substantively enacted by the
Canadian Federal Government. Subsequent substantively enacted tax rate changes have reduced the tax rate
14
applicable to distributions from Canadian public income trusts. The new tax is not expected to apply to the Fund
until 2011 as a transition period applies to publicly traded trusts that existed prior to November 1, 2006. There
was no future income tax expense or recovery that needed to be recorded by the Fund as a result of this
legislation as the Fund has no taxable temporary differences that would exist in 2011. Future income taxes are
already recorded by the Fund’s wholly-owned subsidiary K-Bro Linen Systems Inc.
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.
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 $3,549 in the fourth quarter of 2009, a decrease of $2,045 from the funds
provided by operating activities in the fourth quarter of 2008. This $2,045 decrease is attributable to an increase in
cashflow from operations of $525 offset by an increased working capital requirement of $2,570 in the quarter
compared to the corresponding period in 2008. For the year, cash provided by operating activities was $11,860 in
2009, a decrease of $3,462 from the funds provided by operating activities in 2008. This $3,462 decrease is
attributable to an increase in cashflow from operations of $3,644 offset by an increased working capital
requirement of $7,106 compared to the corresponding period in 2008.
The changes in working capital requirements are the result of: an increase in accounts receivable resulting from the
timing of receipts from major customers, a reduction in accounts payable and accrued liabilities (primarily the
payment of accrued volume rebates) and an increase in prepaid expenses (primarily acquisition costs related to the
2010 Vancouver plant acquisition).
Financing Activities
In the first quarter of 2008, the Fund raised proceeds (net of offering costs before tax) of $18,252 from the issuance
of 1,362,000 units on a bought deal basis and 146,700 additional units when a portion of the related over-allotment
option was exercised. As planned, these funds financed the acquisition of HMR in Quebec City and were used for
the retrofit and equipping of the new Calgary plant and for general corporate purposes. No equity issuances
occurred in 2009.
During the quarter ended December 31, 2009, the Fund declared distributions to unitholders at an annualized rate
of $1.10 per unit for a total amount of $1,927 ($1,927 for the fourth quarter of 2008). For the year ended December
31, 2009, the Fund declared distributions to unitholders at an annualized rate of $1.10 per unit for a total amount of
$7,706 ($7,554 for 2008). The increase in 2009 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, 2009 was $4,043 compared with $4,061 at December 31, 2008.
The existing long-term debt of $4,043 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 is 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.
15
In March, 2010 K-Bro Linen Systems Inc. secured an additional $10,000,000 of credit under its revolving credit
facility that will now have a limit of $40,000,000. The term of the agreement was extended to June 30, 2012 and
the working capital covenant was removed.
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 was 2.90% as of December 31, 2009.
Investing Activities
During the current quarter, K-Bro used $34 (2008 – $180) of funds for maintenance capital expenditures and $597
(2008 – $1,325) of funds for strategic capital expenditures for a total cash investment of $631 (2008 – $1,505) for
the quarter. For the year, K-Bro used $505 of funds for maintenance capital expenditures in 2009 (2008 – $490)
and $2,974 of funds for strategic capital expenditures (2008 – $9,255) for a total cash investment of $3,479 (2008 –
$9,745). Management defines maintenance capital expenditures as additions to, or replacements of, property and
equipment to maintain K-Bro's current business operations. K-Bro is progressing with its computer software
upgrade that commenced in the first quarter of 2009. Total cost of software for phase one of this two phase project
is estimated to be $800, of which $679 was incurred in 2009 ($153 in Q4). This investment is recorded in
intangible assets but treated as a maintenance capital expenditure for purposes of calculating Distributable Cash
(see Non- GAAP Measures).
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. The high level of strategic capital expenditures in 2008 is related to the new Calgary plant.
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 strategic capital expenditures in 2009 are primarily related to the requirements of handling additional
volume and gaining efficiencies.
No significant disposals of equipment were recorded in the fourth quarter or for the 2009 year as a whole.
Contractual Obligations
At December 31, 2009, 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
4,043
18,915
1,898
Less than
1 year
–
5,113
1,898
1-3 years
4,043
7,959
–
4-5 years
–
3,228
–
After 5 years
–
2,615
–
The source of funds for these commitments will be from operating cash flow and the undrawn portion of the Credit
Facility.
16
Financial Position
Capital Structure at December 31
Long-term debt
Unitholders’ equity
Total capitalization
Debt to total capitalization
2009
$4,043
63,793
67,836
6.0%
2008
4,061
63,766
67,827
6.0%
For the year ended December 31, 2009, the Fund had a payout ratio (see Non-GAAP Measures) of 55.1%, a debt to
total capitalization of 6.0%, an unused line of credit of $25,707 and has not incurred any events of default under the
terms of its credit facility agreement. Based on this, management believes that K-Bro has sufficient liquidity and is
able to generate sufficient amounts of cash to meet its planned growth and has access to the equity market, if
available and cost effective, to fund additional growth as acquisition opportunities arise.
DISTRIBUTIONS FOR THE YEAR
Fiscal year
Period
Fund Units
Payment Date
Per Unit
Distribution
Distribution
Amount ($)
Per Unit
Distribution
Distribution
Amount ($)
2009
2008
First quarter
Second quarter
Fourth quarter
October
November
December
November 13
December 15
January 15
Fourth quarter
Year to date
Exchangeable Shares
First quarter
Second quarter
Fourth Quarter
October
November
December
November 13
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
$1.10000
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.10000
$1.10000
$1,906,524
$1,906,524
$1,906,524
$635,508
$635,508
$635,508
$1,906,524
$7,626,096
$19,914
$19,913
$19,914
$6,638
$6,638
$6,637
$19,913
$79,654
$7,705,750
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.1000
$0.27501
$0.27501
$0.27501
$0.09167
$0.09167
$0.09167
$0.27501
$1.10000
$1.10000
$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
For the year ended December 31, 2009, the Fund distributed $1.10 per unit compared with Distributable Cash (see
Non-GAAP Measures) per unit of $1.99. The actual payout ratio was 55.1%.
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.
17
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 year1
Total
Q4
2009
Q3
Q2
Q1
Total
Q4
20082
Q3
Q2
Q1
Per consolidated financial
statements:
Cash provided by (used in)
$11,860
$3,549
$5,568
$3,539
$(796)
15,322
$5,594
$5,570
$470
$3,688
operating activities
Add (deduct):
Net changes in non-cash working
capital items3
Maintenance capital expenditures4
3,318
146
(1,505)
494
4,183
(3,788)
(2,424)
(2,135)
2,649
(1,878)
(1,184)
(187)
(256)
(608)
(133)
(490)
(180)
(68)
(172)
(70)
Distributable cash
$13,994
$3,508
$3,807
$3,425
$3,254
11,044
$2,990
$3,367
$2,947
$1,740
Distributable cash per weighted
average diluted Units outstanding
Distributions declared5
Distributions declared per unit (see
$1.99
$0.50
$0.54
$0.49
$0.46
$1.63
$0.44
$0.48
$0.42
$0.29
$7,706
$1,927
$1,927
$1,926
$1,926
$7,554
$1,927
$1,926
$1,926
$1,775
“Non-GAAP Measures”)
$1.10
$0.27
$0.28
$0.27
$0.28
$1.10
$0.27
$0.28
$0.28
$0.27
(see “Non-GAAP
Payout ratio
Measures”)5
Weighted average units outstanding
55.1%
54.9%
50.6%
56.2%
59.2% 68.4% 64.4%
57.2%
65.4%
102%
during the period – Basic
6.946
6,935
6,930
6,946
6,970
6,719
6,969
6,969
6,961
5,972
Weighted average units outstanding
during the period – Diluted
7,000
6,989
6,994
7,010
6,999
6,747
6,998
6,996
6,985
5,997
12-month trailing
Distributable cash
Distributions
Payout ratio
Cumulative since IPO February 3,
2005
Distributable cash
Distributions
Payout ratio
13,994
13,476
13,036
12,558
7,706
7,706
7,705
55.1%
57.2%
59.1%
7,705
61.4%
11,044
7,554
9,564
7,138
8,245
6,724
7,483
6,309
68.4%
74.6%
81.6%
84.3%
46,149
31,278
67.8%
42,641
38,834
29,351
27,424
68.8%
70.7%
35,409
25,498
72.0%
32,155
29,165
25,798
22,851
23,572
21,645
19,719
17,793
73.3%
74.2%
76.4%
77.9%
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. Restated for the adoption of CICA accounting standard 3064, which requires the expensing of certain expenditures related to a pre-operating period
of a facility rather than recording them as assets (discussed further in Changes in Accounting Policies Including Initial Adoption – Goodwill and
intangible assets).
3. 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.
4. Maintenance capital expenditure is discussed under Investing Activities.
5.
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.
18
OUTSTANDING UNITS
The Fund has 6,932,562 Fund Units outstanding and 72,411 Special Trust Units outstanding (unchanged from
September 30, 2009 and December 31, 2009 and 2008). The basic and the diluted weighted average number of
units outstanding for 2009 were 6,946,495 and 6,999,719 respectively (6,719,305 and 6,747,522 respectively for
2008). The Fund’s subsidiary issued 72,411 Exchangeable Shares to certain members of management that 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. Special Trust Units are attached to and issued in conjunction with Exchangeable Shares for the sole
purpose of entitling holders thereof to voting rights at any meeting of holders of Fund Units and Special Trust
Units.
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 2009
approved LTIP compensation of $0.8 million (2008 – $0.3 million) and approved the funding and transfer of
$0.8 million (2008 – $0.3 million) of cash to the LTIP Trust in April 2009 and March 2008 respectively in order
to fund the purchase of Units by the LTIP Trust. In April 2009, the LTIP Trust purchased 68,173 Units of the
Fund (2008 – 24,751). As at December 31, 2009, 72,739 Units held by the LTIP Trust have vested (December
31, 2008 – 38,961). The cost of the 69,692 unvested units held in trust by the LTIP at December 31, 2009
(December 31, 2008 – 35,297) was $834,137 (December 31, 2008 - $457, 079). 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, primarily relating to acquisitions. The amounts charged are recorded at their exchange
amounts and are subject to normal trade terms. For the three months ended December 31, 2009, the Fund
incurred such fees totaling $34,500 (three months ended December 31, 2008 – $34,500). For the year ended
December 31, 2009, the Fund incurred such fees totaling $138,000 (year ended December 31, 2008 – $74,000).
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.
19
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:
5%
Building……………………………………………………………………………………………...
Laundry equipment .................................................................................................................................... 15%
Office and delivery equipment .................................................................................................................. 20%
Computers and software ............................................................................................................................ 30%
Leasehold improvements…………………………………………...straight line over the initial lease period
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
2009 and 2008 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. Those which relate to computer
software will be amortized using the straight-line method over sixty months when put into service. 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 2009 or 2008 that would impact the carrying value of intangible assets.
20
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.
21
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
The Fund has adopted the following new standards:
Goodwill and intangible assets
In February 2008, the CICA issued a new accounting standard – Section 3064 “Goodwill and intangible assets”
which replaced the existing standard for goodwill and other intangible assets in Section 3062 and research and
development costs in Section 3450. The new Section was adopted by the Fund beginning January 1, 2009. It
established 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 were written off retrospectively against equity in 2009 with
restatement of comparative amounts. The adoption of this standard resulted in an increase of $132,631 in the
“Write-off of new plant start-up costs” expense, an increase in the “Future income tax recovery” of $36,414, and
reduced basic earnings per unit by $0.02 and diluted earnings per unit by $0.01 for the year ended December 31,
2008. Also as required by this standard, certain computer software costs have been recorded in 2009 as a finite
life intangible asset.
Credit risk and the fair value of financial assets and financial liabilities
Emerging Issues Committee (“EIC”) EIC 173, Credit risk and the fair value of financial assets and financial
liabilities concludes that an entity’s own credit risk and the credit risk of the counterparty should be taken into
account when determining the fair value of financial assets and financial liabilities including derivative
instruments. This Abstract is to apply to all financial assets and liabilities measured at fair value in interim and
annual financial statements for periods ending on or after January 20, 2009. The adoption of this Abstract did not
have a significant impact to the Fund’s consolidated financial statements.
Financial Instruments – Disclosures
Section 3862, Financial Instruments – Disclosures was amended in June 2009 by the CICA to improve fair
value and liquidity risk disclosures. Section 3862 now requires that all financial instruments measured at fair
value be categorized into one of three hierarchy levels, described below, for disclosure purposes. Each level is
based on the transparency of the inputs used to measure the fair values of assets and liabilities:
• Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.
• Level 2 – inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly.
• Level 3 – inputs used in a valuation technique are not based on observable market data in
determining fair values of the instruments.
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever
available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that
is significant to the measurement of fair value. The Fund has also enhanced the liquidity disclosures by including
the sources of funding. The additional disclosures required as a result of the adoption of these standards are
included in the notes to the consolidated financial statements.
22
Future changes in accounting policies are:
Business combinations
Section 1582 “Business combinations” will be applicable to business combinations for which the acquisition date
is on or after 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
Consolidated financial statements
Section 1601 “Consolidated financial statements” will be applicable to financial statements 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.
Non-controlling interests
Section 1602 “Non-controlling interests” will be applicable to financial statements 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.
International Financial Reporting Standards (“IFRS”)
In February 2008, the Canadian Accounting Standards Board confirmed that Canadian publicly accountable
enterprises will be required to adopt IFRS in place of Canadian Generally Accepted Accounting Principles
(Canadian GAAP) for interim and annual reporting purposes for fiscal years beginning on or after January 1,
2011. Accordingly, the Fund will issue its last financial statements prepared in accordance with Canadian GAAP
in 2010. Starting from the first quarter of 2011, the Fund’s financial statements will be prepared in accordance
with IFRS in effect in 2011, with 2010 comparative figures and January 1, 2010 (‘’date of transition’’) opening
balance sheet restated to conform to IFRS.
Financial reporting under IFRS differs from Canadian GAAP in a number of respects, some of which are
significant. IFRS on the date of adoption also is expected to differ from current IFRS due to new IFRS standards
and pronouncements that are expected to be issued before the changeover date.
The Fund has established a changeover plan in order to transition its financial statement reporting, presentation
and disclosure under IFRS to meet the January 1, 2011 deadline. An implementation team, which is led by finance
management, has been created and third party advisors have been utilized to plan for and achieve a smooth
transition to IFRS.
23
The implementation project consists of three primary phases, which in certain cases will be in process
concurrently as IFRS is applied to specific areas from start to finish:
Phase 1: Scoping and Diagnostic Phase
This phase involved performing a detailed diagnostic comparing Canadian GAAP to IFRS and identifying key
areas that may be impacted by the transition to IFRS. Phase 1 included:
• Performing a detailed analysis of our actual accounting policies and practices with all relevant IFRS
•
standards and applicable interpretations;
Identifying the different options available to the Fund at the date of transition as well as the ongoing
IFRS policy choices that could be applied to prepare subsequent IFRS financial statements; and
• Classifying the differences identified by work streams to analyze and resolve the differences.
Phase 2: Impact Analysis and Design Phase
In this phase, each area identified from the scoping and diagnostic phase were addressed. Phase 2 included:
• Making accounting policy choices, including those under IFRS 1 choices;
• Determining the changes required to existing accounting policies;
• Determining the changes or additions required to information technology and data systems, internal
controls over financial reporting and disclosure controls; and
• Developing draft IFRS financial statements.
Phase 3: Implementation and Review Phase
In this last phase, we will implement changes in accounting policies and practices to the different business
processes, information systems and internal controls. These changes will be adequately tested before the
changeover date to ensure all significant differences have been successfully resolved by the first quarter of 2011.
Current status of our IFRS changeover plan
We have completed Phase 1 and Phase 2 of our conversion project. As a result of this work, we have identified a
number of differences and policy alternatives between Canadian GAAP and IFRS that will modify our financial
statements at the date of conversion.
The following describes the major identified differences that could be presented in our reconciliation of net
earnings and unitholders’ equity upon transition if the conversion was done as of December 31, 2009 with
currently applicable standards. Key IFRS exemption options are subsequently presented.
Notwithstanding the above, the current International Accounting Standards Board (IASB) and International
Financial Reporting Interpretations Committee (IFRIC) projects are likely to significantly modify some of the
actual IFRS requirements which might therefore ultimately impact the following identified major differences.
24
Major differences with current accounting policies
Income Taxes – Temporary differences on intangible assets
Canadian GAAP – Future income taxes are calculated from temporary differences that are differences between
the tax basis of an asset or liability and its carrying amount in the balance sheet. Under the current Canadian
Income Tax Act, "eligible capital expenditures" are deductible for tax purposes to the extent of 75 percent of the
cost incurred; Section 3465 – Income taxes addresses this specific situation and specifies that for these assets, at
any point in time,
the tax basis represents the balance in the cumulative eligible capital pool plus 25 percent of the carrying amount.
IFRS – The definition of temporary differences under IFRS is generally consistent with Canadian GAAP.
However, IFRS does not provide specific guidance in relation to the determination of the tax basis of eligible
capital expenditures such as the one described above. As such, the tax basis of these assets, without taking into
consideration the 25 percent adjustment of the carrying amount as allowed under Canadian GAAP, should be
compared with the carrying amount in the balance sheet to determine the temporary difference relating to these
assets.
Business Combinations
Canadian GAAP – Business combinations are currently accounted for using Section 1581 – Business
combinations. The recognition and measurement requirements applicable under this Section differ in a number of
ways from the IFRS standards applicable to business combinations.
IFRS – Business combinations will be accounted for in accordance with IFRS 3 – Business Combinations. Under
IFRS 3, acquisition costs such as legal and consulting fees that the acquirer incurs to effect a business
combination are recognized as expenses then they are incurred. They are not included as part of the purchase
consideration as they are under GAAP. The allocation of the purchase consideration to assets and liabilities will
be in accordance with other IFRS provisions that may differ from GAAP. Contingent consideration is included in
the fair value of consideration where it is probable that the outflow will occur. In addition, an entity making the
transition to IFRS will be required to show comparative information for any business combinations completed
during the preceding fiscal year measured and presented in accordance with IFRS 3. This will impact the
accounting for the recent acquisition in Vancouver (see Summary of Results and Key Events).
Consolidation and non-controlling interests
Canadian GAAP – Section 1600 – Consolidated financial statements currently establishes standards for the
preparation of consolidated financial statements. This section differs in a number of ways from the IFRS standards
applicable for consolidation and non-controlling interests. However, none of these differences are expected to
impact the Fund.
Grouping of assets for impairment purposes
Canadian GAAP – When a long-lived asset does not have identifiable cash flows that are largely independent of
those from other assets, that asset must be grouped with other related assets for impairment. This is referred to as
the asset group.
IFRS – Asset grouping should be done when an asset does not have identifiable cash inflows, as opposed to net
cash flows, that are independent of those from other assets. The Fund’s individual operations have identifiable
cash inflows and will therefore be evaluated individually for impairment purposes.
25
Key IFRS 1 Exemption Options
1. Business combinations – IFRS 3, Business Combinations, may be applied retrospectively or prospectively.
The retrospective basis would require restatement of all business combinations that occurred prior to the transition
date. We will not elect to retrospectively apply IFRS 3 to business combinations that occurred prior to the
Transition Date and such business combinations will not be restated. Any goodwill arising on such business
combinations before the Transition Date will not be adjusted from the carrying value previously determined under
Canadian GAAP as a result
of applying these exemptions except as required under IFRS 1, unless warranted by an impairment test.
2. Fair value as deemed cost – IFRS 1 provides a choice between measuring property, plant and equipment at its
fair value at the date of transition and using those amounts as deemed cost or using the historical valuation under
the prior GAAP. We will continue to apply the cost model for property, plant and equipment and will not restate
property, plant and equipment to fair value under IFRS. We will use the historical bases under Canadian GAAP as
deemed cost under IFRS at Transition Date.
At this time, the quantitative impact on these differences and elections on our future financial position and results
of operations is not reasonably determinable or estimable. However, they should not impact distributable cash
given that the majority of these adjustments are not cash related.
The following table summarizes the status of our changeover plan based on the recommendations published in
October 2008 by the Canadian Performance Reporting Board with regards to the Pre-2011 communications about
IFRS conversion. Given the progress of the project and outcomes identified, we could change our intentions
between the time of communicating these key milestones below and the changeover date. Further, changes in
regulation or economic conditions at the date of the changeover or through the project could result in change of
the project activities communicated in the following chart.
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
Senior Management sign-off and
audit committee review for all
items by end of fourth quarter,
2009.
Differences have been identified
and documented.
Recommendation regarding
IFRS policies and selection of
choices under IFRS 1 have been
finalized.
Staffing:
Define and introduce appropriate level of IFRS expertise for each
of the following:
Appropriate level of expertise to
be in place by second quarter
2009.
(cid:131) Accounting staff
(cid:131)
Senior executives and Board, including Audit
Committee
Infrastructure:
Ensure information technology is fully compliant for IFRS as
follows:
Ready for parallel processing of
2010 general ledgers and for
planning/monitoring process.
Experienced consultant
contracted in July, 2009 and
work was completed in
December, 2009. Review of
work by external accounting
advisors was completed. Internal
resource assessment ongoing.
Process currently underway in
conjunction with financial
systems software upgrade.
(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
26
Business Policy Assessment: Financial Covenants
Identify impact of IFRS on financial covenants
(cid:131)
(cid:131) Complete any required renegotiations/changes
Renegotiations to be completed
by third quarter 2010.
Business Policy Assessment: Compensation Arrangements
Fourth quarter 2010.
Identify impact on compensation arrangements
(cid:131)
(cid:131) Make any required changes
Process of identifying metrics
affected by conversion to IFRS
currently underway.
Preliminary discussions with
bank held.
Process of identifying metrics
affected by conversion to IFRS
currently underway.
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.
Reviewed in conjunction with
accounting policies. No
substantive changes identified as
being required.
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.
Publish material changes in
policies and expectations by
January 10, 2011.
Publish revised 2010 results and
MD&A by March 31, 2011.
27
FINANCIAL INSTRUMENTS
K-Bro’s financial instruments at December 31, 2009 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 capitalized and then
amortized over the expected life of the financial instrument using the effective interest 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.
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.
Section 3862 of the Handbook, Financial Instruments – Disclosures, was amended in June 2009 by the CICA to
improve fair value and liquidity risk disclosures. Section 3862 now requires that all financial instruments
measured at fair value be categorized into one of three hierarchy levels, described below, for disclosure
purposes. Each level is based on the transparency of the inputs used to measure the fair values of assets and
liabilities:
• Level 1 – inputs are unadjusted quoted prices of identical instruments in active
markets.
• Level 2 – inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly.
• Level 3 – inputs used in a valuation technique are not based on observable market
data in determining fair values of the instruments.
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever
available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that
is significant to the measurement of fair value. The Fund has also enhanced the liquidity disclosures by including
the sources of funding.
28
Fair value
The Fund’s financial instruments at December 31, 2009 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. All of the Fund’s financial instruments are classified as Level 2 using the fair value hierarchy described
above.
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.
Price risk
(i)
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, 2009, no foreign exchange forward option
contracts were outstanding. Based on the Fund’s US dollar liability for equipment purchases at
December 31, 2009, a 1% change in the Canadian-US dollar foreign exchange rate would
result in a $2,300 change in the amount recorded in property, plant and equipment.
(ii)
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 was 2.90% at
December 31, 2009. Based on the outstanding balance on the Fund’s revolving credit facility
for which the interest rate has not been fixed at December 31, 2009, 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.
(iii)
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.
29
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 allowance for doubtful accounts and past due receivables are reviewed by management at each balance sheet
reporting date. The Fund updates its estimate of the allowance for doubtful accounts based on the evaluation of
the recoverability of accounts receivable balances of each customer taking into account historic collection trends,
the contractual relationship with the customer and the nature of the customer which in many cases is a publicly
funded health care entity. 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.
The aging of the Fund’s receivables and related allowance for doubtful accounts are:
2009
$
2008
$
Current
6,223,678
6,701,444
Past due amounts:
1 – 30 days
Greater than 30 days
Less: allowance for doubtful accounts
Accounts receivable, net
2,698,973
570,626
(42,287)
9,450,990
1,851,171
160,028
(42,704)
8,669,939
Liquidity risk
The Fund’s accounts payable and distribution payable are due within one year.
The Fund has long-term debt with a maturity date of February 28, 2011 (subsequently extended to June 30, 2012
– see Summary of Results and Key Events). 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, 2009.
30
CRITICAL RISKS AND UNCERTAINTIES
Effects of Market Volatility and Uncertainty
See “Summary of Results and Key Events – Effects of Economic Volatility and Uncertainty”, “Market Activities
and Opportunities” and “Outlook”. Risks and uncertainties in this area include those associated with contract
renewals, customer volumes, price adjustments and customer cost cutting initiatives.
Alberta Labour Market
Despite an increased unemployment rate in Alberta, K-Bro continues to be faced with a 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, especially so when a
contract is due to expire and the Fund may be subjected to a competitive Request for Proposal process. 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, 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. However, there can
be no assurance that contract renewals will be achieved given the competitive environment faced by the Fund.
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 3 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 have in the past benefited from a natural gas rebate program sponsored by
the Alberta provincial government. The program was terminated by the Alberta government effective March 31,
2009. There can be no assurance that the program will be renewed in the future.
31
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.
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 conversion rules, as enacted by Bill C-10, 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.
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.
32
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 commenced a project to upgrade its management information systems which will
increase this anticipated annual amount for 2010 and possibly 2011.
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.
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.
33
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, 2009, 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, 2009. 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, 2009, 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.
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, 2009, 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, 2009, 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
34
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, Four
Seasons and Hyatt. This customer base provides a strong reference list for entry into new markets or
expanding services in existing markets.
Modest Maintenance Capital Expenditure Requirements – Laundry equipment can, with proper
ongoing maintenance, remain operative for long periods of time. For example, the useful life of a high
capacity, energy efficient tunnel washer can extend beyond 20 years. This allows for competitive pricing
for existing and new customers, as well as margin improvement as additional volumes are processed
without additional capital expenditure. The longevity of equipment is enhanced by having a full
complement of qualified maintenance engineers at each plant performing a comprehensive on-going
preventative maintenance program.
National Brand-Name Recognition and Strong Reputation – K-Bro is the largest owner and operator of
laundry and linen processing plants in Canada and the only service provider with a large operation in
several of Canada's largest cities. Management believes that K-Bro's size and presence in multiple markets
provide it with enhanced credibility when competing for new accounts in existing markets. As well,
opportunity for growth in new markets through acquisitions or new builds is also enhanced. Management
believes that this reputation is also enhanced through well established “green programs’ including: an
extensive reusable operating room linen program (K-Bro’s “KOR” program); effective energy use and re-
use through direct fired water heaters, heat exchangers and efficient tunnel washer systems; plastic
recycling programs; and, replacement of chlorine bleach with more environmentally friendly hydrogen
peroxide where feasible.
Experienced Management Team and Effective Organizational Structure – The general managers at
K-Bro's six laundry facilities have each been in the industry from 15 to 21 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 18 years of industry
experience and an average age of 47. This provides an effective combination of youth and experience
which bodes well for the future success of K-Bro in achieving its vision.
35
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.
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. A second plant in Vancouver was acquired in January, 2010. 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.
36
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 10, 2010
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, 2009 and 2008 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, 2009 and 2008 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
37
K-Bro Linen Income Fund
Consolidated Balance Sheets
Assets
Current assets
Accounts receivable
Linen in service
Prepaid expenses and deposits
Future income taxes (note 9)
Restricted escrow funds (note 3)
Property, plant and equipment (note 4)
Intangible assets (note 5)
Goodwill (note 3)
Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Distribution payable to unitholders
Long-term debt (note 6)
Unamortized lease inducements (note 8)
Future income taxes (note 9)
Contingencies and commitments (note 10)
Unitholders’ Equity
Exchangeable shares (note 11b)
Fund units (note 11b)
Fund units held in trust by LTIP (note 12)
Contributed surplus (note 11c)
Deficit
Accumulated other comprehensive loss (note 11d)
As at December 31,
2009
$
2008
$
Restated
(see note 2k)
9,450,990
7,304,877
1,212,988
448,920
18,417,775
-
33,583,038
14,594,973
16,220,250
8,669,939
7,755,839
623,953
426,032
17,475,763
540,500
36,024,039
16,073,218
15,679,750
82,816,036
85,793,270
9,880,299
642,146
10,522,445
4,043,068
610,547
3,846,961
12,749,682
642,146
13,391,828
4,061,285
655,357
3,919,231
19,023,021
22,027,701
724,110
70,675,516
(834,137)
572,376
(7,309,840)
(35,010)
724,110
70,675,516
(457,079)
340,728
(7,405,966)
(111,740)
63,793,015
63,765,569
82,816,036
85,793,270
The accompanying notes are an integral part of these financial statements.
Approved on behalf of the Fund
(Signed) “Ross Smith”
(Signed) “Matthew Hills”
___________________________________ Trustee _____________________________Trustee
38
K-Bro Linen Income Fund
Consolidated Statements of Earnings and Deficit
Revenue
Expenses
Wages and benefits
Linen
Utilities
Delivery
Repairs and maintenance
Materials and supplies
Occupancy costs
Corporate
Earnings before the undernoted
Other expenses
Amortization of property, plant and equipment
Amortization of intangible assets
Financial charges (note 7)
Loss on disposal of property, plant and equipment
Write-off of new plant start-up costs (note 2k)
Earnings before income taxes
Income tax recovery (note 9)
Net earnings for the year
Year ended December 31,
2009
$
2008
$
Restated
(see note 2k)
87,532,626
85,113,294
39,433,498
10,191,609
6,272,505
3,280,422
3,176,857
3,015,370
2,991,442
3,625,066
40,142,329
10,238,433
6,626,307
3,643,869
3,008,801
2,914,738
3,032,291
3,111,187
71,986,769
72,717,955
15,545,857
12,395,339
(5,346,744)
(2,157,140)
(311,087)
(53,752)
-
(5,053,611)
(2,149,978)
(686,731)
(506,668)
(132,631)
(7,868,723)
(8,529,619)
7,677,134
124,742
7,801,876
3,865,720
856,151
4,721,871
Deficit – beginning of year, as previously stated
(7,309,749)
(4,573,837)
Adjustment due to accounting policy change (note 2k)
(96,217)
-
Deficit – beginning of year, as restated
Distributions to unitholders (note 13)
Deficit – end of year
Net earnings per unit (note 11e)
Basic
Diluted
(7,405,966)
(4,573,837)
(7,705,750)
(7,554,000)
(7,309,840)
(7,405,966)
$
1.12
1.11
$
0.70
0.70
The accompanying notes are an integral part of these financial statements.
39
K-Bro Linen Income Fund
Consolidated Statements of Comprehensive Income
Net earnings for the year
Other comprehensive income (loss) for the year
Gain (loss) on derivative instruments designated as cash flow hedges, net of future
income taxes of $29,584 (2008 – ($50,340))
Comprehensive income for the year
The accompanying notes are an integral part of these consolidated financial statements.
Year ended December 31,
2009
$
2008
$
Restated
(see note 2k)
7,801,876
4,721,871
76,730
(113,639)
7,878,606
4,608,232
40
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 on disposal of property, plant and equipment
Future income taxes
Net change in non-cash working capital items (note 14)
Cash provided by operating activities
Financing activities
Decrease in long-term debt revolving line of credit
Distributions paid to unitholders
Fund units issued – net of offering costs
Cash used in financing activities
Investing activities
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchase of intangible assets
Business acquisition (note 3)
Escrow funds (note 3)
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
The accompanying notes are an integral part of these financial statements
41
Year ended December 31,
2009
$
2008
$
Restated
(see note 2k)
7,801,876
5,346,744
2,157,140
(56,231)
53,752
(124,742)
15,178,539
(3,318,158)
4,721,871
5,053,611
2,149,978
(42,174)
506,668
(856,151)
11,533,803
3,788,404
11,860,381
15,322,207
(18,217)
(7,705,750)
-
(12,565,822)
(7,415,697)
18,092,544
(7,723,967)
(1,888,975)
(3,479,019)
21,500
(678,895)
-
-
(9,744,642)
163,259
-
(3,311,349)
(540,500)
(4,136,414)
(13,433,232)
-
-
-
–
–
–
316,646
533,361
585,739
1,082,763
-
138,303
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
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 that include the processing, management and distribution of general
linen and operating room linen.
2 Significant accounting policies
These consolidated financial statements have been prepared by management in accordance with accounting
principles generally accepted in Canada. The precise determination of many assets and liabilities is
dependent upon future events. Accordingly, the preparation of financial statements for a reporting period
necessarily involves the use of estimates and approximations which have been made using careful
judgment. Actual results could differ from those estimates. These consolidated financial statements have,
in management’s opinion, been properly prepared within reasonable limits of materiality and within the
framework of the accounting policies summarized below.
a) Basis of presentation
These consolidated financial statements include the Fund, its wholly owned subsidiary K-Bro Linen
Systems Inc. and the LTIP Trust, a variable interest entity (note 12). All intercompany balances and
transactions have been eliminated upon consolidation.
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.
42
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
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
Computer hardware
Leasehold improvements
5% declining balance
15% declining balance
20% declining balance
30% declining balance
Straight-line over the initial lease period
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 1 month to 157 months. Those which relate to computer
software will be amortized using the straight-line method over sixty months when put into service.
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 of the Fund 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.
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
43
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
assets are only recognized to the extent that, in the opinion of management, they will more likely than
not be realized. The effect on future income tax assets or liabilities is recognized in income in the
period that the tax rate 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, 2009 or 2008.
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:
• Accounts receivable are classified as loans and receivables and are initially measured at fair
value. Subsequent periodic revaluations are recorded at amortized cost using the effective
interest 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 periodic revaluations
are recorded at amortized cost using the effective interest method.
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 on the consolidated balance sheet. Transaction costs related to financial
instruments are capitalized and then amortized over the expected life of the financial instrument using
the effective interest method.
44
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
k) Adoption of new accounting policies
Goodwill and intangible assets
In February 2008, the CICA issued a new accounting standard – Section 3064 “Goodwill and
intangible assets” which replaced the existing standard for goodwill and other intangible assets in
Section 3062 and research and development costs in Section 3450. The new Section was adopted
by the Fund beginning January 1, 2009. It established 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 were written off retrospectively against
equity in 2009 with restatement of comparative amounts. The adoption of this standard resulted in
an increase of $132,631 in the “Write-off of new plant start-up costs” expense, an increase in the
“Future income tax recovery” of $36,414, and reduced basic earnings per unit by $0.02 and
diluted earnings per unit by $0.01 for the year ended December 31, 2008. Also as required by this
standard, certain computer software costs have been recorded in 2009 as a finite life intangible
asset.
Credit risk and the fair value of financial assets and financial liabilities
Emerging Issues Committee (“EIC”) EIC 173, Credit risk and the fair value of financial
assets and financial liabilities concludes that an entity’s own credit risk and the credit
risk of the counterparty should be taken into account when determining the fair value of
financial assets and financial liabilities including derivative instruments. This Abstract is
to apply to all financial assets and liabilities measured at fair value in interim and annual
financial statements for periods ending on or after January 20, 2009. The adoption of this
Abstract did not have a significant impact to the Fund’s consolidated financial statements.
Financial Instruments - Disclosures
Section 3862, Financial Instruments – Disclosures was amended in June 2009 by the
CICA to improve fair value and liquidity risk disclosures. Section 3862 now requires that
all financial instruments measured at fair value be categorized into one of three hierarchy
levels, described below, for disclosure purposes. Each level is based on the transparency
of the inputs used to measure the fair values of assets and liabilities:
• Level 1 – inputs are unadjusted quoted prices of identical instruments in active
markets.
• Level 2 – inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly.
• Level 3 – inputs used in a valuation technique are not based on observable market
data in determining fair values of the instruments.
45
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Determination of fair value and the resulting hierarchy requires the use of observable
market data whenever available. The classification of a financial instrument in the
hierarchy is based upon the lowest level of input that is significant to the measurement of
fair value. The Fund has also enhanced the liquidity disclosures by including the sources
of funding. The additional disclosures required as a result of the adoption of these
standards are included in the notes to the consolidated financial statements (Note 15).
1) Future changes in accounting policies
(i)
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 with internal
and external resources. 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.
(ii) Business combinations
Section 1582 “Business combinations” will be applicable to business combinations for which the
acquisition date is on or after 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
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.
46
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(iv) Non-controlling interests
Section 1602 “Non-controlling interests” will be applicable to financial statements 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.
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 was
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 was 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, was 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 were 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 was correspondingly increased by the
amount released.
47
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
4 Property, plant and equipment
Land
Building
Equipment
Laundry(1)
Office
Delivery
Computer hardware
Leasehold improvements
Cost
$
Accumulated
amortization
$
70,000
550,000
37,503,351
692,182
420,806
1,336,725
11,131,484
-
51,449
13,654,741
242,396
218,475
800,426
3,154,023
2009
Net
$
70,000
498,551
23,848,610
449,786
202,331
536,299
7,977,461
(1) Of this total, $585,739 is included in accounts payable.
51,704,548
18,121,510
33,583,038
Land
Building
Equipment
Laundry(2)
Office
Delivery
Computer hardware
Leasehold improvements
Cost
$
70,000
550,013
34,865,253
644,938
467,656
1,293,542
10,985,452
Accumulated
amortization
$
-
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
(2) Of this total, $1,082,763 is included in accounts payable.
48,876,854
12,852,815
36,024,039
48
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
5
Intangible assets
Finite life intangible assets
Healthcare contracts
Operating room contracts
Hospitality contracts
Computer software under development
Finite life intangible assets
Healthcare contracts
Operating room contracts
Hospitality contracts
6 Long-term debt
Cost
$
Accumulated
amortization
$
2009
Net
$
15,700,000
3,500,000
4,697,000
678,895
5,546,553
2,401,162
2,033,207
-
10,153,447
1,098,838
2,663,793
678,895
24,575,895
9,980,922
14,594,973
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
K-Bro Linen Systems Inc. has a revolving credit facility of up to $30,000,000 of which $4,293,068 is drawn
(including letters of credit totalling $250,000 per note 10 a). The facility is a two-year committed facility
maturing February 28, 2011. It is extendable annually for another year at the lender’s option. Interest
payments only are due during the term of the facility. See also note 19b.
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.
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, 2009 for Bankers’ Acceptances the margin varied from 2.50% to 3.50% and for Canadian
prime rate loans, the margin varied from 1.00% to 2.00%.
49
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
The balance consists of:
Bankers’ Acceptances, 2.90% (2008 – 3.64%)
Prime rate loan, 3.25% (2008 – 4.00%)
7 Financial charges
Interest on long-term debt
Other charges, net
8 Unamortized lease inducements
2009
$
2008
$
4,000,000
43,068
4,000,000
61,285
4,043,068
4,061,285
Year ended December 31,
2008
2009
$
$
316,646
(5,559)
311,087
533,361
153,370
686,731
The Fund entered into a ten-year lease in 2007 that included certain lease inducements consisting of a tenant
allowance and a rent-free period. Tenant allowances are recorded as a liability when credited or received
and 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 is recorded
as an increase or deferral in unamortized lease inducements.
The balance consists of:
Lease inducements received
Accumulated (amortization) deferral, net
Less current portion, included in accrued liabilities
2009
$
698,783
(43,426)
655,357
(44,810)
2008
$
698,783
1,384
700,167
(44,810)
610,547
655,357
50
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
9
Income taxes
A reconciliation of the expected income tax recovery to the actual income tax recovery is as follows:
Year ended December 31,
2008
2009
$
$
Restated
(see note 2k)
Canadian statutory rates (federal and provincial)
30.1%
30.7%
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
(2,310,050)
(1,186,389)
(39,166)
225,515
2,248,443
(42,471)
(114,962)
2,199,973
Actual provision for income tax recovery
124,742
856,151
Future income tax assets (liabilities) are attributable to the following items:
Linen in service
Accounts payable and accrued liabilities
Current future income tax asset
Property and equipment
Intangible assets and goodwill
Offering costs and other
2009
$
108,162
340,758
448,920
(1,094,774)
(3,145,543)
393,356
2008
$
Restated
(see note 2k)
172,119
253,913
426,032
(725,530)
(3,767,294)
573,593
Long-term future income tax liability
(3,846,961)
(3,919,231)
Future income tax liability, net
(3,398,041)
(3,493,199)
The benefit of deductible temporary differences of $nil (2008 – $300,000) relating to offering
costs borne directly by the Fund have not been recorded. The amount of goodwill deductible for
tax purposes is $3,862,485 (2008 – $3,321,984).
51
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
10 Contingencies and commitments
a) Contingencies – Letters of credit
The Fund has an outstanding letter of credit issued as part of normal business operations in the amount
of $250,000 (2008 – $250,000) expiring January 24, 2011. A $185,000 letter of credit outstanding at
December 31, 2008 was cancelled in March 2009.
b) Commitments
(i) Operating leases and utility commitments
Minimum lease payments for operating leases on buildings and equipment and estimated natural
gas and electricity commitments for the next five calendar years are as follows:
2010
2011
2012
2013
2014
Subsequent
$
5,112,785
4,020,401
3,938,840
1,868,786
1,358,620
2,615,211
18,914,643
(ii) Linen purchase commitments
At December 31, 2009, the Fund was committed to linen expenditure obligations in the amount
of $1,898,431 (December 31, 2008 – $2,196,023).
52
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
11 Unitholders’ equity
a) Authorized
The declaration of trust provides that an unlimited number of units and an unlimited number of Special
Trust Units may be issued.
b)
Issued and outstanding
Fund Units
Balance at December 31, 2007
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
#
$
5,423,862
52,210,472
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, 2009 and 2008
6,932,562
70,675,516
Exchangeable Shares / Special Trust Units
#
$
Balance at December 2009 and 2008
72,411
724,110
Total Fund Units and Exchangeable Shares / Special Trust
Units 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. Special Trust Units are attached to and issued in conjunction with
Exchangeable Shares for the sole purpose of entitling holders thereof to voting rights at any meeting of
holders of Fund Units and Special Trust Units.
53
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
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
Balance, beginning of year
Other comprehensive income (loss) during the year
Balance, end of year
e) Weighted average number of units outstanding
Weighted average unit calculation
Basic
Units – opening
Weighted average units issued during the year
Weighted average unvested units purchased for LTIP
Year ended December 31,
2008
2009
$
$
340,728
650,730
(419,082)
413,671
319,628
(392,571)
572,376
340,728
Year ended December 31
2008
2009
$
$
(111,740)
76,730
(35,010)
1,899
(113,639)
(111,740)
Year ended December 31,
2008
2009
#
#
7,004,973
–
(58,478)
5,496,273
1,262,115
(39,083)
Weighted average units for the year
6,946,495
6,719,305
Diluted
Basic weighted average units
Dilutive effect of LTIP units
6,946,495
53,224
6,719,305
28,217
6,999,719
6,747,522
54
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
12 Long Term Incentive Plan
In April, 2006, a trust (the “LTIP Trust”) was formed to hold Units of the Fund on behalf of the participants
of the Fund’s long-term incentive plan (the “LTIP”). The Fund is neither a trustee nor a direct participant
of the LTIP; however, under certain circumstances the Fund may be the beneficiary of forfeited Units held
by the LTIP Trust. Consequently, the LTIP Trust is considered a variable interest entity for accounting
purposes and the Fund has consolidated the LTIP Trust in accordance with the CICA issued Accounting
Guideline AcG-15. For a specific performance year, one-quarter of the Units held by the LTIP Trust vest to
the participants of the LTIP thirty days after approval of the audited financial statements by the Trustees
upon the participant signing a Participation Agreement and Confirmation and three-quarters will vest on the
second anniversary of that date upon continued employment, except in limited circumstances.
Compensation expense is recorded by the Fund in the period earned. Distributions made by the Fund with
respect to unvested Units held by the LTIP Trust are paid to LTIP participants. Unvested units held by the
LTIP Trust are shown as a reduction of unitholders’ equity.
In accordance with the LTIP agreement and in conjunction with the performance of the Fund in the prior
fiscal year, the Compensation, Nominating and Corporate Governance Committee of the Trustees of the
Fund in 2009 approved LTIP compensation of $0.8 million (2008 – $0.3 million) and approved the funding
and transfer of $0.8 million (2008 – $0.3 million) of cash to the LTIP Trust in April 2009 and March 2008
respectively in order to fund the purchase of Units by the LTIP Trust. In April 2009, the LTIP Trust
purchased 68,173 Units of the Fund (2008 – 24,751). As at December 31, 2009, 72,739 Units held by the
LTIP Trust have vested (December 31, 2008 – 38,961). The cost of the 69,692 unvested units held in trust
by the LTIP at December 31, 2009 (December 31, 2008 – 35,297) was $834,137 (December 31, 2008 -
$457, 079).
The basic net earnings per unit calculation exclude the unvested units held by the LTIP Trust.
13 Distributions to unitholders
The Fund’s policy is to make distributions to unitholders of its available cash to the maximum extent
possible consistent with good business practice considering requirements for capital expenditures, working
capital, growth capital and other reserves considered advisable by the Trustees of the Fund. All such
distributions are discretionary. Distributions are declared payable each month to the Fund unitholders and
exchangeable shareholders on the last business day of each month and are paid by the 15th day of the
following month.
During the year ended December 31, 2009, the Fund declared total distributions to Unitholders and
Exchangeable Unitholders of $7,705,750 (2008 – $7,554,000) or $1.10 per unit (2008 – $1.10).
55
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
14 Net change in non-cash working capital items
Cash provided (used) by changes in
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities
15 Financial instruments
a) Fair value
Year ended December 31,
2008
2009
$
$
(781,051)
450,962
(589,035)
(2,399,034)
719,182
929,238
188,696
1,951,288
(3,318,158)
3,788,404
The Fund’s financial instruments at December 31, 2009 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. All of the Fund’s
financial instruments are classified as Level 2 using the fair value hierarchy described in Note 2 k.
b) 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.
c) Price risk
(i) 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
56
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
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, 2009, no foreign exchange forward option
contracts were outstanding. Based on the Fund’s US dollar liability for equipment purchases at
December 31, 2009, a 1% change in the Canadian-US dollar foreign exchange rate would
result in a $2,300 change in the amount recorded in property, plant and equipment.
(ii)
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 was 2.90% at
December 31, 2009. Based on the outstanding balance on the Fund’s revolving credit facility
for which the interest rate has not been fixed at December 31, 2009, 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.
(iii) 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.
d) 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 allowance for doubtful accounts and past due receivables are reviewed by
management at each balance sheet reporting date. The Fund updates its estimate of the allowance for
doubtful accounts based on the evaluation of the recoverability of accounts receivable balances of each
customer taking into account historic collection trends, the contractual relationship with the customer
and the nature of the customer which in many cases is a publicly funded health care entity. 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.
57
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
The aging of the Fund’s receivables and related allowance for doubtful accounts are:
Current
Past due amounts:
1 – 30 days
Greater than 30 days
Less: allowance for doubtful accounts
Accounts receivable, net
e) Liquidity risk
2009
$
2008
$
6,223,678
6,701,444
2,698,973
570,626
(42,287)
1,851,171
160,028
(42,704)
9,450,990
8,669,939
The Fund’s accounts payable and distribution payable are due within one year.
The Fund has long-term debt with a maturity date of February 28, 2011 (see note 6 and 19b). 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.
f) 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,
2009.
58
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
16 Capital management
The Fund views its capital resources as the aggregate of its debt, unitholders’ equity and amounts available
under its credit facility. 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 6). 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, 2009,
this ratio was calculated at 0.27 (2008 – 0.38). 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, 2009 (2008 – $93.4 million).
Available liquidity as at December 31, 2009 consisting of unused committed revolving credit facility was
$25.7 million (2008 – $25.5 million). The Fund has incurred no events of default under the terms of its
credit facility agreement.
59
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
17 Segmented information
The Fund provides laundry and linen services to the healthcare and hospitality sectors through operating
divisions in Vancouver, Victoria, Calgary, Edmonton, Toronto and Quebec City. The services offered and
the economic characteristics associated with these divisions are similar, therefore they 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.
Healthcare
Hospitality
Total
Healthcare
Hospitality
Total
Year ended December 31, 2009
%
$
66,845,537
20,687,089
87,532,626
76.4
23.6
100.0
Year ended December 31, 2008
%
$
64,698,218
20,415,076
85,113,294
76.0
24.0
100.0
In Edmonton, the Fund is the significant supplier of laundry and linen services to the entity which manages
all major healthcare facilities in the region. This contract expires on December 31, 2010. In Calgary, the
major customer is contractually committed to February 28, 2018 and in Vancouver the major customer is
contractually committed to January 15, 2013. For the year ended December 31, 2009, the Fund has recorded
revenue of $52.4 million (2008 – $49.4 million) from these three major customers, representing 60% (2008
– 58%) of total revenue.
18 Related party transaction
The Fund has incurred expenses in the normal course of business for advisory consulting services provided
by a Trustee primarily 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, 2009, the Fund incurred
such fees totalling $138,000 (2008 – $74,000).
60
K-Bro Linen Income Fund
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
19 Subsequent Events
a) Business acquisition
On January 29, 2010, the Fund completed the acquisition of the laundry business, linen, certain working
capital and equipment of a plant located in Burnaby, British Columbia. The business acquisition will be
accounted for using the purchase method, whereby the purchase consideration will be allocated to the fair
values of the net assets acquired at January 29, 2010. The purchase price to be allocated to the net assets
acquired is approximately $12.6 million including estimated acquisition costs. The acquisition has been
funded through the Fund’s revolving credit facility.
Of the cash consideration payable to the vendor, $250,000 was deposited into escrow with an escrow agent.
The full amount of the funds held in escrow will be released to the vendor in 2011 upon the determination
that certain representations and warranties are met in the twelve-month period subsequent to the acquisition.
Goodwill will be correspondingly increased by the amount released.
b) Revolving credit facility
In March, 2010 K-Bro Linen Systems Inc. secured an additional $10,000,000 of credit under its revolving
credit facility that will now have a limit of $40,000,000. The term of the agreement was extended to June
30, 2012 and the working capital covenant was removed.
20 Comparative Amounts
Certain comparative amounts have been reclassified to conform to the current year’s financial statement
presentation.
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CORPORATE INFORMATION
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
Steven Matyas (Chair)
Michael Percy
Ross Smith
Legal Counsel
Goodmans LLP
McLennan Ross LLP
Officers
Linda McCurdy
President and CEO
Sean Curtis, Senior Vice President
and General Manager, Edmonton
Doug Thomson, FCA, Vice President
and Chief Financial Officer
Jerry Ostrzyzek, Vice President Eastern Operations
and General Manager, Toronto
Ron Graham, General Manager, Vancouver
Jeff Gannon, General Manager, Calgary
Annual General Meeting
The Annual General Meeting of the Unitholders will be
held at the Sheraton Centre Hotel, Carleton Room, in
Toronto on Thursday, June 17, 2009 at 1 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
Vancouver
4590 Canada Way
Burnaby, British Columbia V5G 1J6
Phone 604-681-3291 Fax 604-685-1458
Victoria
861 Van Isle Way
Victoria, B.C. V9B 5R8
Phone 250-474-5699 Fax 250-474-5680
Website
www.k-brolinen.com
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