Arctic Glacier Income Fund (CNSX:AG.UN) today announced results for the first
quarter ended March 31, 2012.
Summary (i)
-- Sales increased by $3.0 million or 13% compared to prior year
-- EBITDA improved by $1.4 million compared to prior year
-- Fund delisted from the TSX and listed on the CNSX
-- Finalized agreement to settle Canadian unitholder class action for
$13.75 million, to be entirely funded by the Fund's insurers
-- Initiated court supervised recapitalization in Canada under Companies'
Creditors Arrangement Act and the United States under Chapter 15 of U.S.
Bankruptcy Code
-- Established $50 million debtor-in-possession financing facility to fund
normal business operations during recapitalization process
(i)Dollar amounts in U.S. currency unless otherwise specified
During the first quarter of 2012, Arctic Glacier made substantial progress in
the court-supervised search for a transaction regarding the sale, refinancing or
recapitalization of the business. The search was initiated by way of a sale and
investor solicitation process under the Companies' Creditors Arrangement Act
(CCAA).
The initial order under the CCAA was granted on February 22, 2012 by the
Manitoba Court of Queen's Bench and was followed the next day by an order issued
by the U.S. Bankruptcy Court for the District of Delaware that provisionally
recognized the Canadian proceedings under Chapter 15 of the U.S. Bankruptcy
Code. A final order recognizing the Canadian proceedings was issued by the U.S.
Court on March 16, 2012.
The sale and investor solicitation process involves two phases. Phase 1, which
is complete, solicited and received non-binding letters of intent from several
interested parties to invest in or acquire Arctic Glacier. The potential bidders
were evaluated by the Fund in consultation with the court-appointed Monitor,
together with TD Securities Inc. and the Chief Process Supervisor.
"We are very pleased with the level of interest that surfaced in Phase 1," said
Keith McMahon, President and CEO of Arctic Glacier. "We received indications of
interest from a large group of prospective acquirers and investors. After
evaluating the submissions and conducting discussions, it was determined that a
number of bidders were qualified to participate in Phase 2."
During Phase 2, announced on April 12, 2012, Arctic Glacier provides additional
information to qualified bidders and seeks binding offers to conclude a
transaction with the Fund.
The CCAA court proceedings also provide for a stay of certain creditor claims
and authorize $50 million of specialized debtor-in-possession (DIP) financing
from Arctic Glacier's current lenders to enable normal business operations to be
maintained during the recapitalization process.
The CCAA filing was triggered by notices issued to the Fund on February 21, 2012
by secured lenders demanding immediate repayment of all obligations under the
term loan and revolving term credit facilities. Commencing with the June 30,
2011 reporting period, the Fund had been in breach of certain financial
covenants governing EBITDA levels and other measures under its credit
facilities.
Following extensive discussions and negotiations with secured lenders in an
effort to implement a recapitalization transaction that would improve the Fund's
capital structure, the Trustees determined it was necessary to pursue a
recapitalization under court supervision. The secured lenders supported this
decision and the sale and investment process initiated under the CCAA.
First Quarter 2012 Review
Sales in the first quarter of 2012 totaled $25.3 million, an increase of $3.0
million or 13% from the same period in 2011. Excluding the effects of currency,
sales in existing markets were up by $3.1 million as warmer winter weather this
year drove sales volumes higher. The weaker Canadian dollar decreased the U.S.
dollar value of sales generated in Canadian markets by $0.1 million.
Cost of sales totaled $39.8 million, an increase of $1.0 million or 3% compared
to the same quarter of 2011. Excluding amortization, cost of sales was up by
$1.6 million, primarily due to higher sales volumes. Amortization and
depreciation expense decreased by $0.6 million as certain intangible assets were
written off in 2011. The weaker Canadian dollar decreased the U.S. dollar value
of costs incurred in Canadian markets by $0.1 million.
General and administrative expenses totaled $2.6 million, versus $2.5 million in
the same period of 2011. The change was primarily due to higher staffing costs,
offset by lower professional fees.
Finance costs of $24.4 million were $15.4 million higher than in the same
quarter last year. The increase was driven by non-cash finance costs that mainly
consisted of accrued interest and amortization of deferred financing charges.
Offsetting the increase were lower cash finance costs, which decreased due to
interest payable being accrued rather than paid out.
Other costs for the quarter totaled $21.3 million, comprised almost entirely of
outlays related to reorganization activities. Other costs for the same quarter
of 2011 totaled $10.3 million.
The packaged ice business in Arctic Glacier's markets -- Canada and the
northeastern, central and western U.S. -- is highly seasonal. Demand for
packaged ice in the first quarter is low, characterized by negative EBITDA and
significant losses. Arctic Glacier incurs approximately 25% of its annual fixed
costs in the first quarter, but typically generates less than 10% of its annual
sales during this period. For the first quarter of 2012, EBITDA was negative
$7.9 million, compared with negative $9.2 million for the same quarter last
year.
The Fund's net losses are significantly influenced by reorganization costs, DIP
financing fees, expenses of antitrust investigations and related litigation,
outlays related to the review of financing and strategic alternatives and the
writeoff of deferred finance fees. As these costs are not representative of the
Fund's ongoing operations, a more appropriate measure of operating performance
adjusts results to remove these costs. Accordingly, adjusted loss in the first
quarter of 2012 was $26.7 million, compared to an adjusted loss of $31.9 million
last year. That was equivalent to a loss of $0.08 (basic and diluted) per unit,
compared to $0.82 (basic and diluted) last year. The decrease in adjusted loss
was primarily due to a smaller first-quarter EBITDA deficiency, decreased
amortization expense and an unrealized loss from mark-to-market adjustments of
the fair value of convertible debentures in the first quarter of 2011. These
factors were partly offset by higher finance costs and a reduced income tax
recovery. The loss per unit was impacted by the increased number of units
outstanding following settlement of the convertible debentures in 2011.
Including all expenses, net loss for the first quarter of 2012 totaled $62.7
million or $0.18 (basic and diluted) per unit, compared to a net loss of $35.6
million or $0.91 (basic and diluted) per unit in the same period of 2011. The
difference in per-unit results is partly due to a higher number of units
outstanding in the period just ended, owing to debenture conversion in mid-2011.
Financial Position
During the first quarter of 2012 the Fund arranged a $50.0 million DIP financing
facility with its existing secured lenders as part of the CCAA and U.S. Chapter
15 proceedings. The facility provides funding for ongoing working capital,
capital expenditure requirements and general corporate purposes during the sale
and recapitalization process. At March 31, 2012, draws of $12.0 million had been
made on the DIP facility, leaving the Fund with $38.0 million in undrawn
availability and $5.3 million of cash on hand.
At March 31, 2012, the Fund had a working capital deficiency of $254.5 million.
This resulted primarily from the classification of $219.4 million of long-term
debt as current liabilities at December 31, 2011. The classification was
required because of the Fund's default on secured loan agreements, which
resulted in lenders demanding immediate repayment of all obligations under the
term loan and revolving term credit facilities.
At March 31, 2012, Arctic Glacier's net debt was $236.1 million versus $192.2
million (excluding convertible debentures) at the same time last year. The
Fund's net debt to EBITDA ratio at March 31, 2012 was 5.66 to 1 as defined by
the revolving term credit facility, compared to 4.50 to1 at the same time last
year. The maximum permitted covenant ratio under the revolving term credit
facility and term loan is 5.0 to 1.
U.S. DOJ Investigation and Related Litigation
During the first quarter of 2012, Arctic Glacier took a major step forward in
resolving civil litigation that arose following the antitrust investigations. On
February 2, 2012, the parties agreed to settle the Canadian unitholder class
action for a sum of C$13.75 million, to be entirely funded by the carriers of
the Fund's directors' and officers' liability insurance, without the Fund
admitting liability or making any monetary contribution.
All U.S. Justice Department antitrust investigations have been either settled or
concluded with no action taken. Several state investigations remain outstanding
but there has been no activity in this area for some time.
Outlook
Arctic Glacier's most pressing concern during 2012 will be to complete the
court-supervised recapitalization that commenced in the first quarter through
the initiation of a sale and investor solicitation process via CCAA and U.S.
Chapter 15 proceedings.
The CCAA and Chapter 15 proceedings and the DIP financing facility have provided
the Fund and its subsidiaries with temporary relief and access to financial
resources to enable it to continue to operate with minimal disruption while the
court supervised recapitalization of the business is undertaken. Arctic Glacier
expects to maintain all operations at their normal capacity in both Canada and
the United States during the course of these proceedings. No layoffs or lease
terminations are currently planned and all suppliers of goods and services are
intended to be paid as usual, including amounts owed to such suppliers prior to
the CCAA filing.
On April 12, 2012, the Fund commenced Phase 2 of the sale and investment
solicitation process that is expected to culminate in interested parties
submitting final and binding offers regarding a transaction with the Fund. The
deadline for offers to be received in Phase 2 is June 4, 2012.
Going forward, Arctic Glacier's principal operating activities are focused on:
-- Adding new sales volumes at attractive margins in retail and non-retail
channels in current markets;
-- Working with customers to expand product categories and improve product
mix to increase sales and profitability; and,
-- Pursuing technology-based initiatives in manufacturing and distribution
to improve efficiencies and reduce costs.
At the same time, management will continue to carefully manage the Fund's cash
position, operating costs and capital expenditures to provide liquidity to
support regular operations.
As the Fund moves toward recapitalization, Arctic Glacier's core objectives
remain unchanged: to provide value to customers through superior product quality
and industry leading customer service.
About Arctic Glacier
Arctic Glacier Income Fund, through its operating company, Arctic Glacier Inc.,
is a leading producer, marketer and distributor of high-quality packaged ice in
North America, primarily under the brand name of Arctic Glacier(R) Premium Ice.
Arctic Glacier operates 39 production plants and 47 distribution facilities
across Canada and the northeast, central and western United States servicing
more than 75,000 retail locations.
Arctic Glacier Income Fund trust units are listed on the Canadian National Stock
Exchange under the trading symbol AG.UN. There are 350.3 million trust units
outstanding.
Forward-Looking Statements
This news release contains statements that constitute forward-looking
information within the meaning of applicable securities legislation. All
statements other than statements of historical fact are forward-looking
statements. The forward-looking information in this news release includes,
without limitation, statements regarding: (i) the Fund's CCAA and Chapter 15
proceedings; (ii) the Fund's financing arrangements and ability to meet
obligations; and (iii) the maintenance of normal business operations. Such
forward-looking statements reflect management's current beliefs and are based on
information currently available to management.
Forward-looking information is presented for the purpose of assisting readers of
this news release in understanding the Fund's financial condition and results of
operations and its strategies, priorities and objectives and may not be
appropriate for other purposes. Forward-looking information involves significant
risks and uncertainties. Actual results, events, performances, achievements and
developments are likely to differ, and may differ materially, from those
expressed or implied by the forward-looking information contained in this news
release. The forward-looking information contained in this news release is based
on a number of assumptions which may prove to be incorrect, including, but not
limited to, the potential impact on the Fund of (i) CCAA and Chapter 15
proceedings, (ii) the restructuring of the Fund's debt obligations or (iii) the
ability of the Fund to maintain normal business operations. Although the
forward-looking statements contained in this news release are based upon what
management believes to be reasonable assumptions, the Fund cannot assure readers
that actual results will be consistent with these forward-looking statements.
Note that there can be no assurance that the Fund will successfully complete a
sale or restructuring, or if completed, that such a transaction will be
completed on terms favorable to the Fund or its unit holders. All of the
foregoing indicate the existence of a material uncertainty that may cast
significant doubt on the ability of the Fund to continue as a going concern.
The forward-looking statements contained herein are inherently subject to
significant known and unknown risks and uncertainties and other factors that
could cause actual results or events to differ from historical or anticipated
results or events. These risk factors and others are discussed in the MD&A of
the Fund for the three month period ended March 31, 2012 and the AIF of the Fund
for the year ended December 31, 2011.
The forward-looking statements contained herein are expressly qualified in their
entirety by this cautionary statement. These forward-looking statements are made
as at the date of this news release, and, other than as required by applicable
securities legislation, the Fund assumes no obligation to update or revise them,
either publicly or otherwise, to reflect new events, information or
circumstances, despite the fact that new events, information or circumstances
may cause the Fund's views to change.
Non-IFRS Financial Measures
EBITDA and adjusted earnings (loss) are not recognized measures under
International Financial Reporting Standards (IFRS). EBITDA is defined as
earnings before finance costs, income taxes, depreciation, amortization, gains
or losses on foreign exchange, asset impairment charges and non-operating costs
related to reorganization, antitrust investigations and related litigation,
review of financing and strategic alternatives and other non-recurring expenses.
EBITDA is a performance measure used by many investors to provide an indication
of cash generated from ongoing operations prior to debt service, capital
expenditures and income taxes and is often used to compare companies and income
trusts on the basis of ability to generate cash from ongoing operations.
Adjusted earnings (loss) is defined as earnings (loss) after adding back the
after-tax impact of reorganization costs, debtor in possession financing fees,
costs of antitrust investigations and related litigation, cost of review of
financing and strategic alternatives, asset impairment charges, loan prepayment
penalty and write-off of deferred finance fees. Adjusted earnings (loss) is used
by management to evaluate the ongoing profitability of the Fund by eliminating
the effect of these material non-operating costs. Investors should be cautioned
that EBITDA and adjusted earnings (loss) should not be construed as alternatives
to earnings, cash from operating activities or other financial measures
determined in accordance with IFRS as indicators of the Fund's performance. The
Fund's method of calculating EBITDA and adjusted earnings (loss) may differ from
other companies and income trusts and, accordingly, may not be comparable to
measures used by them.
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statements of Financial Position
As at March 31, 2012 and 2011 (unaudited) and December 31, 2011 (audited)
March 31, March 31, December 31,
(thousands of U.S. dollars) 2012 2011 2011
----------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 5,318 $ 2,156 $ 22,743
Accounts receivable 10,232 9,037 12,109
Inventories 14,015 14,598 10,091
Prepaids 10,273 4,448 5,106
---------------------------------------
39,838 30,239 50,049
Deferred tax asset - 13,470 -
Property, plant and equipment 126,537 135,798 129,183
Intangible assets 69,189 100,806 73,258
Goodwill 44,032 72,303 43,630
---------------------------------------
$ 279,596 $ 352,616 $ 296,120
---------------------------------------
---------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
(DEFICIT)
Current liabilities
Accounts payable and accrued
liabilities $ 13,232 $ 19,236 $ 15,733
Provisions 230 260 309
Antitrust related litigation
settlements 12,005 13,741 11,667
Other financial liabilities 31,060 5,907 11,053
Convertible debentures - 84,248 -
Principal due within one year on
long-term debt 237,816 2,920 207,668
---------------------------------------
294,343 126,312 246,430
Unit options - 182 -
Warrants - 430 -
Long-term debt 3,637 191,401 5,016
Deferred tax liability 511 4,605 663
Unitholders' equity (deficit)
Units 389,922 325,170 389,922
Deficit (401,265) (289,317) (338,577)
Accumulated other comprehensive
loss (7,552) (6,167) (7,334)
---------------------------------------
(18,895) 29,686 44,011
---------------------------------------
$ 279,596 $ 352,616 $ 296,120
---------------------------------------
---------------------------------------
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statements of Operations
Three months ended March 31, 2012 and 2011 (unaudited)
(thousands of U.S. dollars, except per unit
amounts) 2012 2011
----------------------------------------------------------------------------
Sales $ 25,281 $ 22,281
Cost of sales 39,765 38,767
--------------------------
(14,484) (16,486)
General and administrative expenses 2,626 2,491
--------------------------
Operating earnings (17,110) (18,977)
Finance costs 24,386 8,994
Other costs 21,309 10,285
--------------------------
Loss before income taxes (62,805) (38,256)
Income taxes
Current 45 112
Reduction (162) (2,744)
--------------------------
(117) (2,632)
--------------------------
Loss for the period $ (62,688) $ (35,624)
--------------------------
--------------------------
Loss per unit - basic $ (0.18) $ (0.91)
Loss per unit - diluted $ (0.18) $ (0.91)
--------------------------
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statements of Comprehensive Loss
Three months ended March 31, 2012 and 2011 (unaudited)
(thousands of U.S. dollars) 2012 2011
----------------------------------------------------------------------------
Loss for the period $ (62,688) $ (35,624)
------------------------------
Other comprehensive loss
Foreign currency translation adjustments (218) (2,095)
------------------------------
Comprehensive loss for the period $ (62,906) $ (37,719)
------------------------------
------------------------------
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statements of Changes in Unitholders' Equity
(Deficit)
Three months ended March 31, 2012 and 2011 (unaudited)
(thousands of U.S. dollars) 2012 2011
----------------------------------------------------------------------------
Units
Balance, beginning and end of period $ 389,922 $ 325,170
----------------------------
Deficit
Balance, beginning of period (338,577) (253,693)
Loss for the period (62,688) (35,624)
----------------------------
Balance, end of period (401,265) (289,317)
----------------------------
Accumulated other comprehensive loss
Balance, beginning of period (7,334) (4,072)
Other comprehensive loss (218) (2,095)
----------------------------
Balance, end of period (7,552) (6,167)
----------------------------
Total Unitholders' Equity (Deficit) $ (18,895) $ 29,686
----------------------------
----------------------------
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2012 and 2011 (unaudited)
(thousands of U.S. dollars) 2012 2011
----------------------------------------------------------------------------
Cash from (used in):
Operating activities
Loss for the period $ (62,688) $ (35,624)
Adjustments for:
Depreciation and amortization 9,168 9,757
Finance costs 24,386 8,994
Interest paid (778) (9,109)
Debtor-in-possession fees paid to lenders (1,033) -
Loan prepayment penalty 13,505 -
Antitrust related litigation settlements - 1,993
Recognition of rents on a straight-line
basis 22 179
Loss (gain) on disposals of non-current
assets 67 (7)
Unit-based compensation expense - 99
Unrealized loss on convertible debentures - 7,656
Gain on settlement of acquisition payable - (1,091)
Deferred income tax reduction (162) (2,744)
----------------------------
(17,513) (19,897)
Changes in non-cash working capital items (9,828) 2,137
----------------------------
(27,341) (17,760)
----------------------------
Investing activities
Additions to property, plant and equipment (2,059) (2,759)
Proceeds from disposal of property, plant and
equipment 35 80
Additions to intangibles - (23)
----------------------------
(2,024) (2,702)
----------------------------
Financing activities
Proceeds from long-term debt 12,023 17,000
Principal repayments on long-term debt (50) (1,051)
Payment of deferred financing charges - (2,587)
----------------------------
11,973 13,362
----------------------------
Foreign currency translation adjustments (33) 16
----------------------------
Decrease in cash (17,425) (7,084)
Cash, beginning of period 22,743 9,240
----------------------------
Cash, end of period $ 5,318 $ 2,156
----------------------------
----------------------------
ARCTIC GLACIER INCOME FUND
Interim Schedule of Distributable Cash
Three months ended March 31, 2012 and 2011 (unaudited)
(thousands of U.S. dollars, except per unit
amounts) 2012 2011
----------------------------------------------------------------------------
Cash used in operating activities $ (27,341) $ (17,760)
Adjustments:
Changes in working capital items(1) 9,828 (2,137)
Accrued interest(1) (6,514) 1,511
Less sustaining capital expenditures(2) (1,394) (1,584)
---------------------------
Distributable cash deficiency (25,421) (19,970)
Add back reorganization costs 7,733 -
Add back costs of antitrust investigations and
related litigation(3) 71 1,227
Add back costs of review of financing and
strategic alternatives - 500
---------------------------
Distributable cash deficiency before deducting
costs of reorganization, antitrust investigation
and related litigation and review of financing
and strategic alternatives $ (17,617) $ (18,243)
---------------------------
---------------------------
Weighted average number of units 350,318 39,043
Distributable cash deficiency per unit $ (0.07) $ (0.51)
Distributable cash deficiency per unit before
deducting costs of reorganization, antitrust
investigation and related litigation and review
of financing and strategic alternatives $ (0.05) $ (0.47)
(1) Changes in non-cash working capital items and accrued interest have
been excluded from cash from operating activities so as to remove the
effects of timing differences in cash receipts and cash disbursements,
which have significant seasonal fluctuations and vary significantly
across quarters but generally reverse themselves. These fluctuations
are funded from cash resources or the revolving term credit facility,
and thus will not significantly affect the level of cash that would be
available for distribution.
(2) Sustaining capital expenditures represent the replacement of property,
plant and equipment to sustain current business operations and are
funded from operating cash flow.
(3) Net costs of antitrust investigation and related litigation added back
are comprised as follows:
2012 2011
------------------------------------------------------------------
Cost of antitrust investigations and related
litigation $ 71 $ 3,220
Deduct discounted present value of litigation
settlements - (1,993)
------------------
$ 71 $ 1,227
------------------
------------------
ARCTIC GLACIER INCOME FUND
Reconciliation of Adjusted Loss
Three months ended March 31, 2012 and 2011 (unaudited)
(thousands of U.S. dollars, except per unit
amounts) 2012 2011
----------------------------------------------------------------------------
Loss for the period $ (62,688) $ (35,624)
Add:
Reorganization costs 21,238 -
Debtor in possession financing fees 1,033 -
Costs of antitrust investigations and related
expenses(1) 71 3,220
Cost of review of financing and strategic
alternatives - 500
Write off of deferred finance fees(2) 13,601 -
--------------------------
Adjusted loss for the period $ (26,745) $ (31,904)
--------------------------
--------------------------
Loss per unit - basic and diluted $ (0.18) $ (0.91)
Adjusted loss per unit - basic and diluted $ (0.08) $ (0.82)
(1) Net of tax effect of $nil for the three months ended March 31, 2012 and
2011 since future tax recoveries are offset by valuations against
future tax assets in U.S. subsidiaries which may not be fully realized
(2) Net of tax effect of $0.2 million in 2012 (2011 - $nil).
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