Renasant Financial Partners Ltd. ("Renasant" or the "Corporation")(TSX:REN)
today reported audited financial results for the year ended March 31, 2008 and
the sale of the technology equipment trading business.
Renasant is pleased to report that as part of its strategic process, the
Corporation has completed the sale of its equipment trading business to a
special purpose entity owned equally by the management group and an affiliate of
a major shareholder of the Corporation. The transaction was reflective of net
book value and closed in June 2008. As a result of the decision to sell the
trading business in the year, the trading activities have been characterized as
a discontinued business in the 2008 financial statements with retroactive
application for Fiscal 2007.
Net Income in Fiscal 2008 was $1.2 million or $0.14 per share as compared with
$1.6 million or $0.19 per share in the prior year. Net income from continuing
operations was $343,000 or $0.04 per share in the year essentially the same as
that earned in Fiscal 2007 although the composition was substantially different.
Investment income at $6.4 million in the year was approximately 5% greater than
last year's value but on a much smaller average portfolio. The appreciation in
the value of the Embedded Derivatives contained in Convertible Debentures
accounts for this difference. General and Administrative Expenses were almost
50% lower this year at $2.2 million, a function of a much smaller infrastructure
and lower salary costs. The Foreign Currency Translation Expense was also lower
in the year by approximately $400,000 due to changing currency profiles and the
magnitude of funds repatriated in the year. The final component of the
difference was the current year charge for contingency matters of $3.0 million
with no comparative value in the previous year.
Total assets increased to $34.4 million in Fiscal 2008 from $31.5 million in
Fiscal 2007 reflecting cash increases primarily associated with changes in
working capital.
The Corporation's net book value is $24.6 million up from $23.9 million in
Fiscal 2007. On a per share basis, shareholder's equity approximates $2.86 at
year-end.
During Fiscal 2008, the Corporation purchased 83,962 of its outstanding Common
Shares at an aggregate cost of $173,000 pursuant to its Normal Course Issuer Bid
Program. This compares to 175,000 shares costing $1.9 million in Fiscal 2007.
In Fiscal 2009, Renasant will continue to be focused on resolving its litigation
and tax contestation matters while generating investment income from its cash
balances.
RENASANT FINANCIAL PARTNERS LTD
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
March 31,
2008 2007
--------- ---------
ASSETS
Cash and cash equivalents $ 15,209 $ 2,824
Bridge loan investments (Note 4) 9,839 15,858
Loans to officers (Note 3) - 2,081
Receivables 212 300
Income taxes recoverable 3,201 2,605
Capital assets (Note 5) 376 328
Discontinued trading assets (Note 3) 5,570 7,541
--------- ---------
$ 34,407 $ 31,537
--------- ---------
--------- ---------
LIABILITIES
Accounts payable and accrued charges $ 6,958 $ 3,807
Future income tax liabilities (Note 8) 976 1,531
Discontinued trading liabilities (Note 3) 1,830 2,286
--------- ---------
9,764 7,624
--------- ---------
Contingencies and commitments (Note 9)
SHAREHOLDERS' EQUITY
Share capital (Note 6) 20,870 21,078
Accumulated other comprehensive loss (983) (675)
Retained earnings 4,756 3,510
--------- ---------
24,643 23,913
--------- ---------
$ 34,407 $ 31,537
--------- ---------
--------- ---------
APPROVED BY THE BOARD
Director
Director
RENASANT FINANCIAL PARTNERS LTD
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands of dollars except per share data)
Year ended March 31
2008 2007
--------- --------
INVESTMENT INCOME $ 6,408 $ 6,075
--------- --------
GENERAL AND ADMINISTRATIVE EXPENSES 2,192 4,550
FOREIGN CURRENCY TRANSLATION EXPENSE 598 989
CHARGE FOR CONTINGENCIES (NOTE 9) 3,000 -
--------- --------
INCOME FROM CONTINUING OPERATIONS 618 536
PROVISION FOR INCOME TAXES (NOTE 8) 275 200
--------- --------
NET INCOME FROM CONTINUING OPERATIONS 343 336
--------- --------
NET INCOME FROM DISCONTINUED OPERATIONS (NOTE 3)
Leasing Business - 157
Trading Business 868 1,141
--------- --------
NET INCOME FROM DISCONTINUED OPERATIONS 868 1,298
--------- --------
NET INCOME $ 1,211 $ 1,634
--------- --------
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized foreign currency translation (loss)
gain of self sustaining foreign operations (904) 69
Unrealized loss on available for sale,
net of financial assets, tax of $nil (2) -
--------- --------
TOTAL COMPREHENSIVE INCOME $ 305 $ 1,703
--------- --------
--------- --------
EARNINGS PER COMMON SHARE -
BASIC AND DILUTED
Continuing operations $ 0.04 $ 0.04
Discontinued operations 0.10 0.15
--------- --------
$ 0.14 $ 0.19
--------- --------
--------- --------
RENASANT FINANCIAL PARTNERS LTD
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
(in thousands of dollars)
Year ended March 31
2008 2007
------------------
RETAINED EARNINGS
Balance, beginning of year $ 3,510 $ 64,410
Net income for the year 1,211 1,634
Dividends - (61,583)
Discount (premium) on cancellation of
shares 35 (951)
------------------
Balance, end of year $ 4,756 $ 3,510
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year $ (675) $ (1,733)
Translation of net assets in self
sustaining foreign operations (904) 69
Foreign currency loss realized on
reduction of net investment in
self-sustaining foreign operations 598 989
Available for sale securities (2) -
------------------
Balance, end of year $ (983) $ (675)
------------------
RENASANT FINANCIAL PARTNERS LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Year ended March 31
2008 2007
-------------------
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net income from continuing operations $ 343 $ 336
Items not affecting cash
Amortization of capital assets 78 -
Unrealized fair value increment on
bridge loan investments (4,454) -
Interest accrued and other items related
to marketable securities - (1,316)
Future income tax (recovery) provision (181) 127
Net decrease (increase) in receivables,
accounts payable and accrued charges 1,377 (10,805)
-------------------
(2,837) (11,658)
-------------------
FINANCING
Repurchase of shares (173) (1,875)
Reduction of capital (26,000)
Dividends paid - (61,583)
-------------------
(173) (89,458)
-------------------
INVESTING
Reduction (increase) of bridge loan
investments, net 10,471 (2,188)
Reduction of marketable securities, net - 86,475
Reduction in loans to officers 2,081 -
Additions to capital assets (126) (328)
-------------------
12,426 83,959
-------------------
EFFECT OF FOREIGN EXCHANGE RATES ON CASH
AND CASH EQUIVALENTS (286) 99
-------------------
NET CASH INFLOW (OUTFLOW) FROM
CONTINUING OPERATIONS 9,130 (17,058)
-------------------
DISCONTINUED OPERATIONS
Leasing
Operating cash flows - (21,554)
Reduction of debt - (12,350)
Disposal of leases - 39,461
-------------------
- 5,557
-------------------
Trading
Operating cash flows 3,263 1,306
Addition to capital assets (8) (18)
-------------------
3,255 1,288
-------------------
NET CASH INFLOW FROM DISCONTINUED
OPERATIONS 3,255 6,845
-------------------
NET CASH INFLOW (OUTFLOW) 12,385 (10,213)
Cash and cash equivalents, beginning of year 2,824 13,037
-------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,209 $ 2,824
-------------------
-------------------
REPRESENTED BY:
Cash $ 14,043 $ 18
Cash equivalents 1,166 2,806
-------------------
$ 15,209 $ 2,824
-------------------
-------------------
MARCH 31, 2008 AND 2007, (ALL DOLLAR AMOUNTS ARE IN THOUSANDS,
EXCEPT FOR STOCK OPTION EXERCISE PRICE DATA)
1. NATURE OF OPERATIONS
Renasant Financial Partners Ltd. (the "Corporation") is an independent financial
services provider undertaking investments in both public and private
enterprises. The Corporation is also engaged in the wholesale trading of
computer assets.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). The Corporation's
significant accounting policies are summarized as follows:
a) Consolidation
The financial statements include the accounts of the Corporation and its
wholly-owned operating subsidiaries: Renasant Financial Services Inc., MFP
Technology Services Inc., both U.S. corporations, and MFP Technology Services
(UK) Ltd.
b) Measurement uncertainty
The preparation of the consolidated financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of revenues,
expenses, assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and during the
reported period. In particular, there is considerable management judgment
involved in estimating the Corporation's liability arising from its potential
exposure to certain income tax and litigation matters (Note 9).
c) Accounting for discontinued businesses
As discussed in Note 3, the Corporation discontinued its lease business in 2006
with the sale of the majority of the lease portfolio.
In 2008, the Corporation commenced negotiations with the management group of the
trading business concerning the sale of this division which ultimately resulted
in the sale of the business after year-end.
d) Bridge loan investments
Bridge loans
The bridge loans represent funds advanced on relatively short-term, mezzanine
loans. Bridge loans are recorded at amortized cost. Interest income is
recognized on an accrual basis. Fees associated with loans are amortized to
income over the remaining term. Loans are classified as impaired when, in
management's opinion, there is no longer any reasonable assurance of the timely
collection of principal or interest. When a loan is identified as impaired, the
accrual of interest is discontinued. Loans are held at amortized cost less any
allowance for impairment.
Convertible debentures
Convertible debentures are recorded at amortized cost. The equity conversion
feature is an embedded derivative and is valued separately from the host debt
contract. Changes in the fair value of the embedded derivative are recognized
in investment income.
Common shares
Common shares are classified as available for sale and are recorded at fair
market value as evidenced by quoted market prices. Prior to ultimate disposal,
fair value adjustments are reflected in other comprehensive income.
e) Cash and cash equivalents
Cash equivalents comprise only highly liquid investments with investment grade
credits having maturities at the date of purchase that are less than 90 days.
f) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined on a weighted average basis. The allowance for obsolescence is based
on management estimates of loss giving consideration to inventory aging and
market conditions.
g) Capital assets
Capital assets are recorded at cost less accumulated amortization. Amortization
is recorded on a basis that reflects the estimated useful lives of the capital
assets not to exceed 5 years.
h) Foreign exchange
Monetary assets and liabilities denominated in foreign currencies are translated
at the rate of exchange in effect at the balance sheet date. Revenue and
expenses are translated at the weighted average rate for the year.
The Corporation's subsidiaries in the United States and Europe are considered
self-sustaining. Cumulative gains or losses arising from the translation of the
assets and liabilities of these operations are recorded through other
comprehensive income.
i) Equipment trading
Equipment trading revenue is derived from the wholesale trading of computer
equipment. Revenue is recognized when pervasive evidence of an arrangement
exists and the revenues are considered fixed and determinable and collectibility
is reasonably assured.
j) Intangible assets
Intangible assets are amortized over their expected useful lives and are
included in capital assets.
k) Income per share
The Corporation uses the treasury stock method to calculate diluted income per
share. This method assumes that proceeds which could be obtained upon exercise
of in-the-money options would be used to purchase common shares at the average
market price during the period.
l) Allowance for doubtful accounts
The allowance is determined based on management's identification and evaluation
of problem accounts, estimated probable losses that exist on the remaining
receivable balance, and other factors including the composition and quality of
the receivables, and changes in economic conditions.
m) Stock-based compensation
The Corporation accounts for stock options using the fair value method. Under
the fair value method, compensation expense for stock options is measured at
fair value at the grant date using an option pricing model and recognized over
the vesting period. No compensation is recorded for options issued prior to
April 1, 2002.
n) Guarantees
The Corporation has adopted the requirements of CICA AcG-14 - "Disclosure of
Guarantees", which requires additional disclosure about a guarantor's
obligations under certain guarantees in the financial statements, without regard
to whether the Corporation is likely to have to make any payments under these
guarantees. AcG-14 defines a guarantee as a contract that contingently requires
the guarantor to make payments to a guaranteed party based on: (a) changes in
the underlying economic characteristics that are related to an asset, liability
or equity security of the guaranteed party; (b) failure of another party to
perform under an obligating agreement; or (c) failure of a third party to pay
its indebtedness when due.
CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
On April 1, 2007, the Corporation adopted three new accounting standards;
Section 1530, Comprehensive Income, Section 3855, Financial Instruments -
Recognition and Measurement and Section 3865, Hedges.
Section 1530 introduces comprehensive income which is comprised of Net Income
and Other Comprehensive Income and represents changes in Shareholders' equity
during a period arising from transactions and other events with non-owner
sources. Other comprehensive income ("OCI") includes unrealized gains or losses
in assets classified as available-for-sale, unrealized foreign currency
translation amounts net of hedging arising from self-sustaining foreign
operations, and changes in the effective portion of cash flow hedging
instruments. The Corporation's consolidated financial statements include a
Consolidated Statement of Comprehensive Income while the cumulative amount,
Accumulated Other Comprehensive Income ("AOCI"), has been presented as a new
category of Shareholder's equity in the Consolidated Balance Sheets.
Section 3855 establishes standards for recognizing and measuring financial
assets, financial liabilities and non-financial derivatives. It requires that
financial assets and financial liabilities, including derivatives, be recognized
on the balance sheet when the Corporation becomes party to the provisions of the
financial instrument or non-financial derivative contract. All financial
instruments should be measured at fair value on initial recognition except for
certain related party transactions. Measurement in subsequent periods depends on
whether the financial instrument has been classified as held-for-trading,
available for-sale, loans and receivables or other liabilities. Other
significant accounting implications arising on adoption of Section 3855 include
the use of the effective interest method for the amortization of any transaction
costs or fees, premiums or discounts earned or incurred for financial
instruments measured at amortized cost.
Section 3865 specifies criteria under which hedge accounting can be applied.
Section 3861, Financial Instruments - Disclosure and Presentation of financial
instruments establishes standards for presentation of financial instruments and
non-financial derivatives and identifies the information that should be
disclosed about them.
FUTURE ACCOUNTING CHANGES
Capital disclosures
In December 2006, the Canadian Institute of Chartered Accountants ("CICA")
issued Section 1535, Capital Disclosures. This Section established standards for
disclosing information about an entity's capital and how it is managed. This
Section is effective for fiscal periods beginning on or after October 1, 2007.
The new standard relates to disclosure only and will not impact the
Corporation's financial results.
Financial instruments - disclosure and presentation
In December 2006, the CICA issued Section 3862, Financial Instruments -
Disclosure, and Section 3863, Financial Instruments - Presentation. These
Sections are effective for fiscal periods beginning on or after October 1, 2007.
These Sections replace existing Section 3861, Financial Instruments - Disclosure
and Presentation. Disclosure standards are enhanced and expanded to complement
the changes in accounting policy adopted in accordance with Section 3855,
Financial Instruments - Recognitions and Measurement.
International financial reporting standards
In 2005, the Accounting Standards Board of Canada ("AcSB") announced that
accounting standards in Canada are to converge with International Financial
Reporting Standards ("IFRS"). In May 2007, the CICA published an updated version
of its "Implementating Plan for Incorporation International Financial Reporting
Standards into Canadian GAAP". This plan includes an outline of the key
decisions that the CICA will need to make as it implements the Strategic Plan
for publicly accountable enterprises that will converge Canadian generally
accepted accounting standards with IFRS by January 1, 2011.
This plan was confirmed on February 13, 2008. While IFRS uses a conceptual
framework similar to Canadian GAAP, there are significant differences in
accounting policy which must be addressed. The Corporation is currently
assessing the future impact of these new standards on its consolidated financial
statements.
3. DISCONTINUED BUSINESSES
a) Leasing
On March 8, 2006, the Corporation completed the asset sale of its leasing
business together with a substantial portion of its lease portfolio to ICON
Capital Corporation ("ICON") an arms-length third party. During Fiscal 2007, the
Corporation completed further sale transactions with ICON involving
approximately $29 million of leases. Effective March 31, 2007, the Corporation
liquidated the remaining investment in its lease portfolio to a partnership
owned by two officers of the Corporation. The transaction involved approximately
$3.5 million of financing contracts and the assumption of certain related
liabilities. The cash portion was initially financed by the Corporation and is
shown as Loans from Officers in the balance sheet at March 31, 2007. The loan
was repaid in Fiscal 2008.
As at March 31, 2008, no discontinued leasing assets or discontinued leasing
liabilities were reflected in the statements.
The following outlines the revenues, income before taxes and net income for the
discontinued leasing business:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Revenues $ - $ 1,297
Income before tax - 554
Gain on sales of discontinued leases: -
Consideration - cash - 9,789
- non-cash -
----------------------------------------------------------------------------
- 9,789
- liabilities assumed - 22,922
----------------------------------------------------------------------------
- 32,711
Assets sold 32,997
----------------------------------------------------------------------------
Loss on sale - (286)
Costs and expenses - 17
----------------------------------------------------------------------------
Net loss on sale - (303)
Total income from discontinued leasing business
before income taxes - 251
Income taxes - 94
----------------------------------------------------------------------------
Net income from discontinued leasing business $ - $ 157
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Trading
The Corporation made a strategic decision in Fiscal 2008 to explore avenues to
sell the trading business which resulted in exclusive negotiations with the
management group of the trading business. In June 2008, all requirements to
complete the sale of the trading business to a special purpose LLC owned jointly
by a significant shareholder of the Corporation and the trading management group
were finalized. The business parameters involved selling the operating assets,
essentially inventory and receivables, at fair value which approximates net book
value, and assuming the accounts payable and accrued liabilities.
As at March 31, the discontinued trading business comprised the following:
----------------------------------------------------------------------------
Discontinued Trading Assets: 2008 2007
----------------------------------------------------------------------------
Receivables $ 3,316 $ 4,860
Inventory 2,207 2,535
Capital assets 47 146
----------------------------------------------------------------------------
$ 5,570 $ 7,541
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Discontinued Trading Liabilities:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 1,830 $ 2,286
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following outlines the revenues, income before taxes and net income of
the discontinued trading business:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Revenues $ 29,165 $ 35,581
Income before tax 1,400 1,548
Income taxes 532 407
----------------------------------------------------------------------------
Net Income from Discontinued Trading Business $ 868 $ 1,141
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. BRIDGE LOAN INVESTMENTS
The bridge loan investments comprise:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Bridge loans $ 1,958 $ 15,858
Convertible debentures 4,382 -
Common shares 3,499 -
----------------------------------------------------------------------------
$ 9,839 $ 15,858
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bridge loans represent funds advanced on relatively short term, mezzanine loans.
The loans are secured through charges on the underlying assets. The fair value
of these loans is assumed to approximate their carrying value as they generally
involve variable rates that reprice frequently. The Corporation has no loans
currently classified as impaired (March 31, 2007 - $3,845). No allowance for
impairment was taken in respect of these loans during Fiscal 2007 as management
anticipated full collection of principal and interest. The Corporation is
committed to invest a further $1,500 (2007 - $4,000) in bridge lending depending
on customer activity.
The convertible debenture embedded derivatives are recorded at their fair market
value based on the quoted market price with changes in market value reflected in
income. The debenture value approximates carrying value given variable rates
which re-price frequently.
The common shares investment is recorded at fair market value based on the
quoted market value with changes in value reflected in other comprehensive
income.
In Fiscal 2008, the Corporation recognized $4,452 in investment income related
to the embedded derivatives on bridge loan investments.
5. CAPITAL ASSETS
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Cost $ 829 $ 703
Accumulated amortization (453) (375)
----------------------------------------------------------------------------
$ 376 $ 328
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amortization charges recorded in the statements of income with respect to
capital assets amounted to $78 (2007 - nil). Current year additions relate
primarily to the costs of a new computer system.
6. SHARE CAPITAL
The Corporation is authorized to issue:
Common Shares
An unlimited number of common shares.
Preferred Shares
An unlimited number of Class A cumulative, redeemable, convertible and voting
preferred shares;
An unlimited number of Class B non-voting, preferred shares, issuable in series;
and
An unlimited number of Class C redeemable, retractable and non-voting preferred
shares.
----------------------------------------------------------------------------
ISSUED COMMON SHARES
Number of Shares Amount
----------------------------------------------------------------------------
Balance as at March 31, 2006 8,846,260 $ 48,002
Issued 20,000 30
Purchased for cancellation (175,000) (954)
Reduction of capital (26,000)
----------------------------------------------------------------------------
Balance as at March 31, 2007 8,691,260 21,078
Issued - -
Purchased for cancellation (83,962) (208)
----------------------------------------------------------------------------
Balance as at March 31, 2008 8,607,298 $ 20,870
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a) Earnings per common share data
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Weighted average number of common shares 8,643,880 8,737,718
Diluted number of common shares 8,643,880 8,737,718
----------------------------------------------------------------------------
b) Changes in the year
The Corporation issued 20,000 common shares in 2007 as a result of stock options
being exercised.
The Corporation purchased 83,962 (2007 - 175,000) common shares for cancellation
for cash consideration of $173 (2007 - $1,905) under the normal course issuer
bid program. The resulting excess of stated capital over the purchase price of
$35 has been added to retained earnings.
In 2007, the purchase price was in excess of the stated capital, resulting in a
reduction in retained earnings of $951.
c) Distributions
There were no distributions in the current year.
Last year, the Corporation declared a dividend of $0.10 per common share for
shareholders of record on June 30, 2006 (dividend paid on July 14, 2006). A
special dividend of $7.00 per common share was paid to the shareholders of
record as of August 31, 2006 (dividend paid on September 15, 2006).
Pursuant to shareholder approval granting the Board of Directors authority to
reduce the Corporation's stated capital, the Corporation returned $26 million
(approximately $3.00 per share) to shareholders as a capital reduction with a
record date of March 22, 2007, (paid on March 30, 2007).
7. STOCK OPTION PLAN
The Corporation operates a stock option plan, pursuant to which it can currently
reserve up to 860,750 common shares for issuance to employees and directors of
the Corporation, at the discretion of the Board of Directors. The option vesting
period is set at the discretion of the Board of Directors at inception. Options
are exercisable for a period not exceeding 7 years from the grant date.
Since inception of the plan, the Corporation has issued 784,500 options of which
nil are outstanding as at March 31, 2008. A summary of the status of the
Corporation's stock option plan as of March 31, 2008 and 2007 and changes during
the years ending on those dates is presented below:
2008 2007
----------------------------------------------------------------------------
Weighted- Weighted-
average average
Exercise Exercise
Options Price Options Price
----------------------------------------------------------------------------
Outstanding, beginning of year - - 55,000 13.01
Granted - - - -
Exercised - - (20,000) 1.50
Forfeited - - (35,000) 13.88
----------------------------------------------------------------------------
Outstanding, end of year - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable, end of year - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The price of the exercised options was adjusted to reflect the capital
distributions during the year.
8. INCOME TAXES
The components of the income tax provision (recovery) charged to operations
are as follows:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Current $ 830 $ 195
Future (555) 5
----------------------------------------------------------------------------
$ 275 $ 200
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table reconciles tax expense calculated at statutory rates
with the actual income tax expense:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Income tax provision at combined federal
and provincial statutory rates of 35.5%
(2006 - 36.12%) $ 219 $ 193
Changes resulting from:
Other items 56 7
----------------------------------------------------------------------------
$ 275 $ 200
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Significant components of the Corporation's future income tax liabilities
and assets are as follows:
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Future income tax liabilities:
Difference in tax and accounting basis of assets $ 976 $ 2,821
Future income tax assets:
Net operating losses available for carry forward - 1,290
----------------------------------------------------------------------------
Future income tax liabilities $ 976 $ 1,531
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. CONTINGENCIES AND COMMITMENTS
a) Litigation matters
No settlements occurred during this year.
No new material litigation matters were commenced against the Corporation in the
year. Ongoing litigation involves:
In July of 2004, the Corporation received a third party claim from the Province
of Nova Scotia in relation to the lease financing of a $23 million emergency
service system which commenced in 1999 and was directly assigned by the
Corporation to a third party financial intermediary with the Province's explicit
acknowledgement. The financial institution commenced an action against the
Province when it short paid its rental obligation starting in 2004. The claim
against the Corporation seeks rectification and/or damages of an unspecified
value based on alleged misrepresentations of the contract's inherent lease rate.
The Corporation believes the contracts represent valid and binding agreements
that are complete on their face and reflect normal commercial terms with
reasonable financing costs. A mediation in the first quarter of Fiscal 2007
proved unsuccessful. Discoveries are in process and negotiations between the
parties occurred in the fourth quarter with limited success. All parties have
agreed to a second mediation effort in the near future.
In October of 2004, the Corporation received a third party claim from the former
CFO of the City of Waterloo concerning the City's claim against him. Further,
the City of Waterloo has also commenced litigation against several officers and
employees of the Corporation who have rights of indemnity against the
Corporation. A formal indemnification agreement was undertaken in the year. As
the Corporation reached a settlement with the City in respect of these matters
in early 2002, it has no understanding as to the rationale of these claims. The
Corporation believes these actions to be without merit and will vigorously
defend itself against this and similar claims. The issue was ruled upon in July
of 2006 with the judge finding in favour of the Corporation indicating that the
City could not effectively seek additional compensation over the settlement
already obtained. The City decided to appeal the ruling. An appeal of the ruling
found in favour of the City in October of 2007 based on procedural grounds
rather than on the merits of the case. Discoveries are scheduled for the summer
of 2008. The Corporation also believes it may have potential indemnification
rights in respect of the original release.
The Corporation established a liability for litigation matters representing the
estimated costs to the Corporation of settling all remaining litigation in a
reasonable manner applying principles consistent with those established in
earlier settlements. In 2003, a special provision of $25 million was recorded
which was increased in 2005 by $20 million to reflect current expectations.
Historical settlements which have drawn down these values, have been consistent
with this strategy , and within the financial parameters of the reserves.
Significant risk exists that this methodology may not have similar applicability
in the two remaining circumstances. In that context, the
Corporation has increased its reserves in the year.
Should the Corporation be unsuccessful in its defense or settlement of one or
more of these legal actions, there could be a materially adverse effect on the
Corporation's financial position, future operations and cash flows.
The Corporation continues to defend certain other litigation arising in the
normal course of business. Management is of the opinion that any resulting
settlements with respect to these other matters would not have a material effect
on the financial position of the Corporation.
b) Income tax reassessments
In March 2000, the Corporation received federal income tax reassessments
covering the fiscal years ended March 31, 1994 and 1995 which disallow capital
cost allowance and certain other deductions claimed by the Corporation with
respect to a particular lease transaction. Provincial reassessments for the
fiscal years in question have also been received, mirroring the federal
position. The Corporation disagrees with these reassessments and has filed
Notices of Objection where applicable. Both management and tax counsel believe
that the Corporation's technical position is supportable.
In April 2003, the Corporation received federal income tax reassessments
covering the fiscal years 1996 and 1997 which disallow capital cost allowance
and certain other deductions in respect of a second lease transaction based on
similar facts and circumstances. Provincial reassessments mirroring the federal
position have also been received. The Corporation disagrees with these
reassessments and has filed Notices of Objection where applicable. Both
management and tax counsel believe that the Corporation's technical position is
similarly supportable in this transaction.
There are no other lease transactions of a similar nature to those that have
been reassessed. Taxes and interest with respect to the March 2000 reassessment
approximate $9 million and $13 million, respectively. Pursuant to legislative
requirements, the Corporation has paid $13 million pending the outcome of the
Corporation's objection. With respect to the April 2003 reassessment, taxes and
interest are estimated at $18 million and $9 million, respectively. The
Corporation has paid $18 million pending the outcome of the Corporation's
objection.
As a result of a GAAR decision finding in favour of another taxpayer in a
similar case, the transaction structure has been accepted. The remaining issues
now deal with the valuation of software and the tax treatment of the difference
between this value and the amount actually paid. Related capital tax matters
must also be resolved. Valuation of similar type software has been made in other
cases and should provide some indication of value. Following an unsuccessful
attempt to negotiate a settlement with CRA, the original assessments were
confirmed. The Corporation believes its case has validity and has decided to
appeal the decision to tax court. The appeal was filed after year-end.
Management is actively monitoring this situation to ensure that the anticipated
interest exposure arising from these matters is adequately provided for in the
accounts and has increased its reserve accordingly. The ultimate outcome,
however, could differ materially from the recorded amounts. To the extent that
the final cost with respect to interest exceeds amounts currently provided for
in the financial statements, the difference will be charged to income.
c) Management Agreement
In March of 2007, Renasant signed a management services agreement pursuant to
which a wholly owned subsidiary of Morguard Corporation will render management
and consulting services to the Corporation and its subsidiaries. The Chairman of
the Board of Renasant, controls, through various subsidiaries, approximately 45%
of the issued and outstanding common shares of Morguard Corporation.
Accordingly, the Board of Directors of Renasant established a special committee
of independent directors to consider and negotiate the terms of the Management
Services Agreement.
The management services agreement began April 1, 2007 and continues until
terminated. Costs are expected to approximate $50,000 per month. Renasant may
terminate the management services agreement at any time upon sixty days prior
written notice to provider.
d) Guarantees
In the normal course of operations, the Corporation may execute agreements that
provide for indemnification and guarantees to third parties in transactions such
as sale of assets, sale of services, securitization agreements and funding
agreements. Certain representations and warranties associated with the sale of
the leasing business would constitute an indemnification. The maximum exposure
to ICON is capped at $10 million. The Corporation has also agreed to indemnify
its directors and certain of its officers and employees. The nature of many of
the guarantee and indemnification undertakings precludes the possibility of
making a reasonable estimate of the maximum potential amount the Corporation
could be required to pay third parties as the agreements often do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, the Corporation has not made any significant payments
nor do they expect to make any significant payments under such indemnification
agreements.
10. SUPPLEMENTAL CASH FLOW DATA
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2008 2007
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Continuing Operations $ $
Cash paid during the year for:
Interest - -
Income taxes 1,350 2,788
Discontinued Operations
Cash paid during the year for:
Interest - 381
Income taxes - -
11. FINANCIAL INSTRUMENTS
The following methods and assumptions were utilized to estimate the fair values
of the Corporation's financial instruments:
Financial instruments valued at carrying value
Loans, receivables, accounts payable and accrued charges, and the discontinued
trading assets and liabilities are considered current financial instruments and
the carrying values approximate their fair values.
The determination of fair value requires estimations utilizing present value
techniques which can be significantly affected by interest rate assumptions.
Furthermore, these fair value estimates are restricted to those assets and
liabilities which have been categorized as financial instruments and do not
reflect the comprehensive value of all of the Corporation's assets and
liabilities. Due to the subjectivity of the estimation techniques and the nature
of certain of the underlying contractual agreements, the fair values should not
be interpreted as being realizable in an immediate settlement of the
instruments.
12. RELATED PARTY TRANSACTIONS
During the course of the year, the Corporation entered into transactions with
related entities. These transactions are measured at the exchange amount. The
Corporation has access to bridge loan investments (Note 4) through an entity
under control of one of the shareholders of the Corporation. The Corporation
also has entered into a management agreement with a related entity (see Note 9).
Amounts due from related parties as at March 31, 2008 are $NIL (2007 - $2,081) -
see Note 3.
13. COMPARATIVES
Certain comparative figures related to the Discontinued Trading Business, have
been reclassified to conform with current year's presentation.
14. SUBSEQUENT EVENT
In June 2008, all requirements to complete the sale of the Trading Business were
finalized. The net purchase price, with effect at April 1, 2008, was
approximately $3,725 plus the assumption of $1,833 in liabilities. No material
gain or loss will result from the sale. The cash purchase price was reduced by a
holdback balance of $500 pending the completion of confirmatory due diligence
over a 60 day period from closing.
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