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Resolve Business Outsourcing Income Fund Reports Its Third Quarter Results TORONTO, ONTARIO--(MARKET WIRE)--Nov 4, 2008 -- Attention Business and Financial Editors: Resolve Business Outsourcing Income Fund (the "Fund") (Toronto:RBO-UN.TO - News) today announced its third quarter financial results for the three months ended September 30, 2008. All amounts are in Canadian dollars. The Fund generated revenue for the third quarter of $92.5 million compared to $95.2 million in the same period last year, a decrease of 3%. Year to date revenue of $279.0 million increased $39.7 million or 17% over the same period last year. Adjusted EBITDA for the third quarter was $11.9 million compared to $15.0 million last year. The third quarter was impacted by certain costs that are more fully discussed in the results of operations section of Management's Discussion and Analysis of the consolidated interim financial statements. Adjusted EBITDA year to date was $32.2 million compared to $33.8 million for the same six-month period last year. Cash flow provided from operations, less maintenance capital expenditures, for the nine-month period was $35.7 million or $1.10 per unit compared to $27.4 million or $0.84 per unit for the same period last year. Revenues for the trailing twelve-month period ended September 30, 2008, were $371.2 million. Adjusted EBITDA for the same period was $41.8 million or $1.28 per unit. Cash flow provided from operations less maintenance capital expenditures for the trailing twelve-month period was $60.9 million or $1.87 per unit. The Fund announced today that, while its Board is continuing to review strategic alternatives to enhance unitholder value, it has decided at this time that it is not in the best interest of unitholders to pursue the alternative of a sale of the business in the current market environment. The Board is continuing to assess alternatives in the context of the impending change in taxation rules at the end of 2010. No decision has been made at this time with respect to any specific alternative. The Fund will provide further updates as circumstances warrant. The Fund is required to maintain certain financial covenants under the terms of both its credit facilities. These financial covenants are based on the calculation of EBITDA which is defined in the Fund's credit agreement as net income excluding, amongst other things, all extraordinary and, where satisfactory to the Majority Lenders (as defined in the credit agreement) acting reasonably, unusual and all other non-recurring items. The Fund has requested and obtained the approval of the Majority Lenders to treat the expected strategic review costs as unusual and non-recurring items for purposes of the covenant calculations under the credit agreement in respect of 2008. "The current global economic uncertainties are affecting all businesses. The Fund contends that the long-term economic uncertainty positively impacts the business as companies seek to reduce their cost structure," said Lawrence Zimmering, president and CEO of Resolve Corporation. "The impact is not expected to positively contribute to revenue for a few quarters, but the pace of investigation, discussion and proposal for new solutions continues to be strong," added Zimmering. About Resolve Resolve works with businesses as an outsourced resource taking on critical processes and managing them better, faster and more cost-effectively. We have over 35 years experience managing processes for Fortune 500 clients in the financial services, retail, government, consumer goods and communications industries. Headquartered in Toronto, Canada, Resolve employs more than 5,100 people in 29 locations and is listed on the Toronto Stock Exchange as Resolve Business Outsourcing Income Fund, symbol RBO.UN. For more information, visit www.resolve.com. Conference Call A conference call hosted by Lawrence Zimmering, president and CEO, and Jamie Hyde, executive vice president and CFO, will be held at 10:00 a.m. (EST) on November 5, 2008, to review these results and answer any questions. To participate in the conference call, please dial 416-641-6122 or 1-866-542-4262. A live audio webcast will also be available at www.investorcalendar.com/IC/CEPage.asp?ID=136532. For anyone unable to access the scheduled call, a taped rebroadcast will be available until November 19, 2008, by dialing 416-695-5800 or 1-800-408-3053. The access code for the rebroadcast is 3274028#. CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION This press release may include certain statements that constitute forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Fund or Resolve, or industry results, to be materially different from any future results, performance or achievements or opportunities expressed or implied by such forward-looking statements. When used in this press release, such statements use such words such as "may," "will," "expect," "believe," "intend," "plan," "could" and other similar terminology. These statements reflect current expectations regarding future events and operating performance. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, loss of key customer contracts or reduction of services purchased by key customers, foreign exchange rates, increases in costs to Resolve that cannot be passed on to customers, disputes with key customers, competition, the ability of Resolve to manage operations and execute growth strategies, stability of internal and government information systems and technology, technological changes, the ability to maintain software licences, changes in privacy laws and risks inherent in bidding on government contracts. Although the forward-looking statements contained in this press release are based upon what management believes are reasonable assumptions, neither the Fund nor Resolve can assure that actual results will be consistent with this forward-looking statements. These forward-looking statements are made as of the date of this press release. Neither the Fund nor Resolve has any obligation to update or amend the forward-looking statements in this press release except as required by law.
RESOLVE BUSINESS OUTSOURCING INCOME FUND
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
September 30, December 31,
As at 2008 2007
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(in thousand of dollars, unaudited) $ $
ASSETS
Current
Cash and cash equivalents 32,660 24,852
Accounts receivable 66,784 67,220
Inventories 2,502 2,508
Prepaid expenses and other assets 4,682 4,538
Income taxes recoverable 831 18
Future income taxes 725 490
Fair value of derivatives 455 2,272
Assets related to settlement (note 9) 500 600
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Total current assets 109,139 102,498
Capital assets 29,948 28,560
Future income taxes 23,751 21,217
Intangible assets and deferred charges (note 3) 184,170 202,346
Goodwill 184,918 182,214
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Total assets 531,926 536,835
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LIABILITIES AND UNITHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 50,504 42,566
Customer deposits 21,778 18,125
Distributions payable 2,714 2,714
Future income taxes 1,095 1,536
Deferred revenue 17,140 14,064
Fair value of derivatives 1,302 413
Liabilities related to settlement (note 9) 500 600
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Total current liabilities 95,033 80,018
Long-term debt (note 4) 99,526 99,378
Deferred revenue - non-current 34,597 28,997
Future income taxes 57,442 61,408
Accrued post-retirement benefit liability (note 8) 4,016 3,825
Other non-current liabilities 3,747 3,426
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Total liabilities 294,361 277,052
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Non-controlling interest (note 5) 69,637 76,273
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Unitholders' equity
Fund units (note 5) 219,464 218,464
Accumulated distributions (60,069) (42,156)
Accumulated earnings 12,059 11,944
Accumulated other comprehensive loss (3,526) (4,742)
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Total unitholders' equity 167,928 183,510
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Total liabilities, non-controlling interest
and unitholders' equity 531,926 536,835
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See accompanying notes to consolidated interim financial statements.
RESOLVE BUSINESS OUTSOURCING INCOME FUND
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF EARNINGS
Three Months Nine Months
Ended Ended
September 30 September 30
2008 2007 2008 2007
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(in thousands of dollars, except per unit
amounts, unaudited) $ $ $ $
Revenues 92,474 95,220 278,983 239,303
Direct costs 64,183 65,962 194,792 170,755
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Gross profit 28,291 29,258 84,191 68,548
Operating expenses (note 9) 18,845 18,571 58,820 48,713
Depreciation 2,249 2,122 6,700 5,979
Amortization 6,386 5,921 18,691 17,699
Interest expense - short-term 108 368 353 499
Interest expense - long-term 1,581 1,472 4,791 4,233
Strategic review costs (note 10) 799 - 1,866 -
Mark-to-market on derivative instruments 545 (1,032) 1,817 (3,479)
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Earnings (loss) before income taxes,
non-controlling interest, discontinued
operations and extraordinary item (2,222) 1,836 (8,847) (5,096)
Recovery of income taxes (2,496) (1,873) (9,341) (9,869)
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Earnings before non-controlling interest,
discontinued operations and
extraordinary item 274 3,709 494 4,773
Non-controlling interest 135 908 379 1,050
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Earnings before discontinued operations
and extraordinary item 139 2,801 115 3,723
Earnings from discontinued operations, net
of income taxes and non-controlling
interest (note 11) - - - 101
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Net earnings before extraordinary item 139 2,801 115 3,824
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Gain on purchase of Edulinx, net of income
taxes and non controlling interest (note 12) - 73 - 1,332
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Net earnings 139 2,874 115 5,156
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Basic earnings per unit
Continuing operations 0.01 0.12 0.01 0.15
Discontinued operations - - - 0.01
Gain on purchase of Edulinx - - - 0.05
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Basic earnings per unit (note 5) 0.01 0.12 0.01 0.21
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Diluted earnings per unit
Continuing operations 0.01 0.11 0.02 0.15
Discontinued operations - - - -
Gain on purchase of Edulinx - - - 0.05
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Diluted earnings per unit (note 5) 0.01 0.11 0.02 0.20
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See accompanying notes to consolidated interim financial statements.
RESOLVE BUSINESS OUTSOURCING INCOME FUND
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
---------------------------------------------------------------------------
(in thousands of dollars,
unaudited) $ $ $ $
OPERATING ACTIVITIES
Net earnings before discontinued
operations and extraordinary item 139 2,801 115 3,723
Items not affecting cash:
Depreciation 2,249 2,122 6,700 5,979
Amortization 6,386 5,921 18,691 17,699
Amortized financing costs 80 70 226 211
Future income taxes (2,734) (1,850) (9,241) (10,094)
Non-controlling interest 135 908 379 1,093
Mark-to-market on derivative
instruments 545 (1,032) 1,817 (3,479)
Changes in operating assets and
liabilities:
Accounts receivable (3,735) (1,832) 436 (775)
Inventories (101) 68 5 (229)
Prepaid expenses and other assets 812 521 (141) 1,277
Accounts payable and accrued
liabilities 14,562 2,787 11,654 698
Deferred revenues 3,301 4,351 8,675 13,978
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Cash provided by operating
activities 21,639 14,835 39,316 30,081
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INVESTING ACTIVITIES
Acquisition of businesses, net of
cash acquired (note 12) - - - (4,801)
Addition to deferred charges - (161) (516) (2,211)
Purchase of capital assets (2,729) (5,999) (7,902) (11,650)
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Cash used in investing activities (2,729) (6,160) (8,418) (18,662)
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FINANCING ACTIVITIES
Increase in bank indebtedness - - - 13,000
Increase (decrease) in capital
lease obligation (41) (21) (41) 96
Distributions paid to unitholders (5,937) (5,956) (17,734) (17,621)
Distributions paid to
non-controlling interest (2,206) (2,186) (6,695) (6,807)
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Cash used in financing activities (8,184) (8,163) (24,470) (11,332)
----------------------------------------------------------------------------
Cash provided by discontinued
operations (note 11) - - - 1,377
----------------------------------------------------------------------------
Effect of exchange rate changes 620 (1,197) 1,380 (2,034)
----------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents during
the period 11,346 (685) 7,808 (570)
Cash and cash equivalents,
beginning of period 21,314 8,911 24,852 8,796
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period 32,660 8,226 32,660 8,226
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid (received) -
short-term 54 172 (50) 216
Interest paid - long-term 1,112 1,612 4,222 4,419
Income taxes paid (recovered) (174) 4,096 462 3,896
See accompanying notes to consolidated interim financial statements.
RESOLVE BUSINESS OUTSOURCING INCOME FUND
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF UNITHOLDERS' EQUITY
Accum-
ulated
Other
Accum- Compre-
ulated Accum- hensive
For the nine months ended Fund Distri- ulated Income
September 30, 2008 Units butions Earnings (Loss) Total
----------------------------------------------------------------------------
(in thousands of dollars,
unaudited) $ $ $ $ $
Balance, December 31, 2007 218,464 (42,156) 11,944 (4,742) 183,510
Units issued on Class B LP
conversion 1,000 - - - 1,000
Distributions - (17,734) - - (17,734)
Distributions for Class B LP
conversion - (179) - - (179)
----------------------------------------------------------------------------
219,464 (60,069) 11,944 (4,742) 166,597
----------------------------------------------------------------------------
Comprehensive earnings:
Net earnings for the period - - 115 - 115
Foreign currency translation
adjustment - - - 2,105 2,105
Unrealized loss on cash flow
hedge - - - (889) (889)
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Comprehensive earnings 1,331
----------------------------------------------------------------------------
Balance, September 30, 2008 219,464 (60,069) 12,059 (3,526) 167,928
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accum-
ulated
Other
Accum- Compre-
ulated Accum- hensive
For the nine months ended Fund Distri- ulated Income
September 30, 2007 Units butions Earnings (Loss) Total
----------------------------------------------------------------------------
(in thousands of dollars,
unaudited) $ $ $ $ $
Balance, December 31, 2006 214,175 (18,272) 4,634 380 200,917
Units issued on Class B LP
conversion 3,789 - - - 3,789
Distributions - (17,621) - - (17,621)
Distributions for Class B LP
conversion - (299) - - (299)
----------------------------------------------------------------------------
217,964 (36,192) 4,634 380 186,786
----------------------------------------------------------------------------
Comprehensive earnings:
Net earnings for the period - - 5,156 - 5,156
Foreign currency translation
adjustment - - - (6,142) (6,142)
Unrealized net loss on cash flow
hedge as at December 31, 2006 - - - (625) (625)
Unrealized gain on cash flow
hedge - - - 759 759
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Comprehensive earnings (852)
----------------------------------------------------------------------------
Balance, September 30, 2007 217,964 (36,192) 9,790 (5,628) 185,934
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See accompanying notes to consolidated interim financial statements.NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS September 30, 2008 (in thousands of dollars, except unit and per unit amounts, unaudited) 1. BASIS OF PRESENTATION The Fund prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles (GAAP). These unaudited consolidated interim statements do not include all of the information and notes required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Fund's Annual Report for the year ended December 31, 2007. These unaudited consolidated interim financial statements reflect the results of operations for the three months and for the nine months ended September 30, 2008, and September 30, 2007. The preparation of financial data is based on accounting policies and practices consistent with those used in the preparation of the 2007 audited annual consolidated financial statements. During the first quarter, the Fund adopted the new requirements of CICA 3862 - Financial Instruments Disclosure, CICA 1535 - Capital Disclosure and CICA 3031 - Inventory Disclosure, the impact of which has been enhanced disclosure as included below. Prior period direct costs and operating expenses have been reclassified to conform to the current presentation of financial information. An amount of $2,592 and $3,110 has been reclassified to operating expenses from direct costs for the three and nine months ended September 30, 2007. 2. FINANCIAL INSTRUMENTS The Fund's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, customer deposits, distributions payable to unitholders, foreign exchange contracts, interest rate swaps and long-term debt. The Fund does not enter into financial instruments for trading or speculative purposes. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, customer deposits and distributions payable approximate their fair values due to the immediate or short-term maturity of these financial instruments. The fair value of the Fund's long-term debt approximates its carrying value. The fair value of the foreign exchange contracts is estimated based on the amount that would need to be paid or would be received to terminate the contracts as of the consolidated interim balance sheet date with the unrealized gains or losses recorded in the consolidated interim statement of earnings. The interest rate swap agreements are designated as a compliant hedge, and the unrealized gain or loss is recognized as a component of other comprehensive income until realized, at which time it is recorded in the consolidated interim statement of earnings. The Fund has exposure to market, credit and liquidity risks and uses various risk management strategies to assist in managing these risks. The Fund's primary risk management objective is to protect earnings and cash flow and, ultimately, unitholder value. Market Risk The Fund is subject to interest rate risks as its credit facilities bear interest at rates that depend on certain financial ratios of the Fund and vary in accordance with borrowing rates in Canada. The Fund manages its interest rate risks through the use of interest rate swaps. As at September 30, 2008, the Fund has entered into interest rate swap contracts with its lenders such that the borrowing rates on $65,000 or 65% of outstanding term debt is effectively fixed at 6.49%. The following table presents a sensitivity analysis to hypothetical changes in market interest rates and their potential impact on the Fund as at September 30, 2008:
+100 bps -100 bps
---------------------------------------------------------------------------
$ $
Increase (decrease) in interest expense 263 (263)
---------------------------------------------------------------------------
Increase (decrease) in net earnings (263) 263
Change to net unrealized (gain) loss on interest
rate swaps (786) 802
---------------------------------------------------------------------------
Increase (decrease) in total comprehensive earnings 523 (539)
---------------------------------------------------------------------------
---------------------------------------------------------------------------The Fund is party to foreign exchange contracts used to manage the risk of US-dollar revenues relative to Canadian-dollar expenses. As these foreign exchange contracts do not qualify for hedge accounting, the unrealized gain or loss is recorded as mark-to-market on derivative instruments in the consolidated interim financial statements. The following table presents a summary of the unrealized gain on the foreign exchange contracts as at September 30, 2008:
Maturity date Amount Gain
--------------------------------------------------------------------------
$ $
October 30, 2008 1,000 65
November 26, 2008 1,000 65
December 30, 2008 1,000 65
January 29, 2009 1,000 65
February 26, 2009 1,000 65
March 30, 2009 1,000 65
April 29, 2009 1,000 65
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Total 7,000 455
--------------------------------------------------------------------------
--------------------------------------------------------------------------The following table presents a sensitivity analysis to hypothetical changes in the foreign exchange between the Canadian and US dollar as at September 30, 2008:
+$0.05 CAD -$0.05 CAD
per USD per USD
-------------------------------------------------------------------------
$ $
Increase (decrease) in earnings 90 (90)
Unrealized gain (loss) on mark-to-market on
foreign exchange contracts (308) 308
-------------------------------------------------------------------------
Total increase (decrease) in net earnings (218) 218
-------------------------------------------------------------------------
-------------------------------------------------------------------------Assets and liabilities of the Fund's subsidiary operations, which are measured in US dollars, are translated into Canadian dollars at the exchange rates prevailing at the period-end and revenues and expenses at the weighted average exchange rates for the period. Exchange gains and losses on monetary assets and liabilities are included in earnings. Included in operating expenses for the three- and nine-month periods ended September 30, 2008, are foreign exchange gains/(losses) of $228 (2007 - $74) and $1,169 (2007 - $(241)) respectively. Currency translation adjustments are a component of accumulated other comprehensive income and reported in unitholders' equity. Credit Risk The Fund is exposed to credit risk with respect to its accounts receivable; however, this risk is minimized by the Fund's large customer base, which covers a diverse range of business sectors in Canada and the United States. The Fund follows a program of credit evaluations of customers and limits the amount of credit extended when deemed necessary. The Fund maintains provisions for potential credit losses, and any such losses to date have not been significant. Liquidity Risk The Fund has available two senior secured credit facilities comprising a revolving credit facility of up to $25,000 and a term credit facility of $100,000. The two facilities mature March 16, 2010. 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 facilities or to refinance outstanding debt. In order to reduce liquidity risk, management closely monitors its financial covenants applicable to the credit facilities. Management has also carefully planned the cash requirements of the Fund through its 12-month forecast and has historically made changes to its credit facilities in advance of any additional capital requirement. As at September 30, 2008, the Fund remains undrawn on its $25,000 revolving credit facility. Capital Structure The Fund manages its capital structure in a manner consistent with the risk characteristics of the underlying assets. The primary objective of capital management is to ensure that the Fund is adequately capitalized to support its business and growth objectives, which will ultimately maximize unitholder value. The Fund's management considers its capital structure to consist of net debt, non-controlling interest and unitholders' equity. The capital structure at September 30, 2008, is as follows:
--------------------------------------------
$
Long-term debt - non-current 99,526
Cash and cash equivalents (32,660)
--------------------------------------------
Net debt 66,866
--------------------------------------------
Non-controlling interest 69,637
Unitholders' equity 167,928
--------------------------------------------
Total equity 237,565
--------------------------------------------
Total capital 304,431
--------------------------------------------
--------------------------------------------
3. INTANGIBLE ASSETS AND DEFERRED CHARGES
September 30, 2008 December 31, 2007
------------------ -----------------
Accumulated Cost Accumulated
Cost Amortization Net Amortization Net
---------------------------------------------------------------------------
$ $ $ $ $ $
Deferred charges 3,002 1,275 1,727 2,486 169 2,317
Customer
relationships 146,000 24,723 121,277 146,000 17,423 128,577
Software 55,000 19,957 35,043 55,000 14,064 40,936
Technology 41,000 14,877 26,123 41,000 10,484 30,516
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Total 245,002 60,832 184,170 244,486 42,140 202,346
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---------------------------------------------------------------------------
4. LONG-TERM DEBT
As at September 30, 2008
------------------------------------------------------
$
Long-term debt 100,000
Deferred financing costs (474)
------------------------------------------------------
Total 99,526
------------------------------------------------------
------------------------------------------------------The Fund has available two senior secured credit facilities comprising a revolving credit facility of up to $25,000 and a term credit facility of $100,000. The two facilities mature March 16, 2010. At September 30, 2008, there were no draws against the revolving credit facility. The Fund's borrowing capacity under the revolving credit facility is also reduced by $64 in respect of letters of credit outstanding at September 30, 2008. The term and revolving credit facilities bear interest at variable rates as set out in the Credit Agreement. To mitigate exposure to variable interest rates, the Fund entered into an interest rate swap agreement. The swap agreement fixes the interest rate on $65,000 of the term facility, resulting in an effective interest rate of 6.49% . The swap agreement's maturity date is set to coincide with the maturity of the term facility. The effective interest rate as at September 30, 2008, on the credit facilities, including the interest rate swap, was 6.10% . The Fund is required to maintain certain financial covenants under the terms of both its credit facilities. These financial covenants are based on the calculation of EBITDA which is defined in the Fund's credit agreement as net income excluding, amongst other things, all extraordinary and, where satisfactory to the Majority Lenders (as defined in the credit agreement) acting reasonably, unusual and all other non-recurring items. The Fund has requested and obtained the approval of the Majority Lenders to treat the expected strategic review costs as unusual and non-recurring items for purposes of the covenant calculations under the credit agreement in respect of 2008. 5. FUND UNITS AND NON-CONTROLLING INTEREST During the nine-month period ended September 30, 2008, 100,000 Class B LP Units were exchanged for an equal number of Units of the Fund. Fund units issued Units $ ---------------------------------------------------------------------- Balance, December 31, 2007 23,554,659 218,464 Fund units issued for Class B LP conversion 100,000 1,000 ---------------------------------------------------------------------- Balance, September 30, 2008 23,654,659 219,464 ---------------------------------------------------------------------- ---------------------------------------------------------------------- The Fund established during 2007 a Phantom Unit Plan that allows Trustees and Directors to elect to receive certain of their compensation in the form of phantom units. The Fund established a replacement long-term incentive plan (LTIP) during 2007 for senior management participants. On September 16, 2008, the Fund amended the Phantom Unit Plan and the LTIP so as to permit grants to be satisfied in cash only. The Class B LP Units can be exchanged on a one-for-one basis for Fund Units. Certain of the terms under the exchange agreement for the Class B LP Units do not meet the accounting rules for inclusion of the Class B LP Units as part of unitholders' equity. These exchangeable units are presented as a non-controlling interest in the consolidated interim financial statements. Non-controlling interest Units $ ---------------------------------------------------------------------------- Balance, December 31, 2007 9,029,841 76,273 Class B LP Units converted to Fund Units (100,000) (1,000) Distributions - (6,695) Distributions reclassified for converted Class B LP Units - 179 Non-controlling interest share of net earnings - 379 Allocated share of accumulated other comprehensive income - 501 ---------------------------------------------------------------------------- Balance, September 30, 2008 8,929,841 69,637 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The weighted average units for calculation of basic earnings per unit for the three- and nine-month periods ended September 30, 2008, were 23,637,992 and 23,615,770 respectively. The only dilutive factor is the Class B LP Units. The weighted average units for the three- and nine-month periods ended September 30, 2008, for the Class B LP Units were 8,946,508 and 8,968,730 respectively. 6. ACCUMULATED DISTRIBUTIONS DECLARED Distributions are declared each month to holders of Units and Class B LP Units on the last business day of each month. Distributions of $0.0833 per unit per month were declared for an aggregate of $0.75 per unit for the nine-month period ended September 30 (2007 - $0.75) . Total distributions declared on Units and Class B LP Units for the nine-month period ended September 30 were $24,429 (2007 - $24,429). 7. SEGMENT INFORMATION The Fund operates in one industry segment, business process outsourcing. The Fund derives its revenue from a large base of customers across North America. During the nine months ended September 30, 2008, one customer under a long-term contract accounted for 21% of the total revenue and approximately 13% of accounts receivable at September 30, 2008. Revenues in each geographic segment are reported by customer location.
Three Months Nine Months Ended
Ended September 30 September 30
Revenues 2008 2007 2008 2007
----------------------------------------------------------------
$ $ $ $
Canada 77,358 75,650 236,259 185,117
United States 15,116 19,570 42,724 54,185
----------------------------------------------------------------
Total 92,474 95,220 278,983 239,303
----------------------------------------------------------------
----------------------------------------------------------------
September 30
Capital Assets 2008 2007
----------------------------------------------------------------
$ $
Canada 27,118 24,644
United States 2,830 3,255
----------------------------------------------------------------
Total 29,948 27,899
----------------------------------------------------------------
----------------------------------------------------------------8. POST-RETIREMENT BENEFIT LIABILITY The Fund is the sponsor of a post-retirement benefit plan. The cost of providing benefits through this post-retirement plan is actuarially determined and recognized in earnings using the projected benefit method pro-rated on service. The costs associated with this post-retirement benefit plan for the nine months ended September 30, 2008, are service costs of $44, interest costs of $156 and benefits paid of $86. 9. COMMITMENTS AND CONTINGENCIES The commitments as at June 30, 2008, are as follows:
Operating Leases Term Facility Software Licences
-------------------------------------------------------------------------
$ $ $
2008 (3 months) 3,859 - -
2009 10,875 - 760
2010 8,197 100,000 713
2011 6,314 - 668
2012 4,725 - 630
Thereafter 6,864 - -
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Total 40,834 100,000 2,771
-------------------------------------------------------------------------
-------------------------------------------------------------------------As at September 30, 2008, the Fund has outstanding letters of credit in the amount of $64 as part of normal business operations and commitments totalling $81 to acquire capital assets. Pursuant to an indemnity agreement in favour of CSRS, the former shareholders of CSRS paid a portion of a claim against CSRS by the former shareholders of CCNS Corporate Services Ltd. ("CCNS"), an entity acquired by CSRS. The estimated remaining cost of settling this dispute, which is fully indemnified by the former shareholders of CSRS, was recorded at September 30, 2008, as both a current asset and current liability in the amount of $500. As at September 30, 2008, the Fund had outstanding foreign exchange contracts to purchase $7,000 over a period from October 2008 to April 2009, at an average rate of $1.1350. These contracts as at September 30, 2008, had a fair value of $455, and an unrealized loss of $1,817 has been recorded in the consolidated interim statement of earnings. In the normal course of operations, the Fund and its subsidiaries become involved in various claims, indemnifications under contracts and legal proceedings. In certain cases the dollar amounts are not known or cannot be reasonably determined. While the final outcome with respect to such matters cannot be predicted with certainty, it is the opinion of management that adequate provisions have been made in the accounts where amounts are reasonably determinable and that the ultimate resolution of such contingencies will not have a materially adverse effect on the Fund's consolidated financial position or results of operations. In the second quarter of 2008, the Fund provided $2,500 for a potential claim for which it intends to pursue recovery through insurance. The provision will be reviewed on an ongoing basis. Also during the quarter, the Fund had a favourable settlement of a litigation claim for $400. As a result of this settlement, a provision established at the opening balance sheet at initial public offering of $1,332 was reversed into income. The net of these two amounts of $1,168 is reflected in operating expenses in the consolidated interim statement of earnings and accounts payable and accrued liabilities in the consolidated interim balance sheets. 10. STRATEGIC REVIEW COSTS On May 27, 2008, the Fund announced that its Board of Trustees had initiated a process to evaluate strategic alternatives to enhance unitholder value. The expenses associated with this process are $799 and $1,866 for the three- and nine-month periods ended September 30, 2008, respectively. These expenses primarily consist of legal, investment advisory and other associated expenses. The Board is continuing to assess alternatives in the context of the impending change in the taxation rules at the end of 2010. No decision has been made at this time with respect to any specific alternative. 11. DISCONTINUED OPERATIONS On May 1, 2006, the Fund sold travel-related client lists and contracts to a third party. During the period ended June 30, 2007, the Fund had recognized $101, after non-controlling interest and taxation, of additional income after finalization of outstanding liabilities. 12. ACQUISITION OF BUSINESS On May 25, 2007, the Fund acquired all of the shares of Edulinx Canada Corporation ("Edulinx"), a leading provider of student loan services in Canada. Under the terms of the acquisition agreement, Resolve purchased all of the shares of Edulinx for $13,000. Costs of the acquisition for the period were $285, and additional anticipated consideration of $74 had been accrued in these consolidated interim financial statements. In connection with the acquisition, the Fund also committed to payments of US$3,000 for certain software licences, and this discounted liability has been recorded at the date of acquisition. In addition, under the terms of the acquisition, future payments were made based on a percentage of net after-tax incentive revenues earned from the date of acquisition up to March 2008. The acquisition was accounted for by the purchase method, whereby the purchase consideration was allocated to the estimated fair values of the assets acquired and liabilities assumed at the effective date of the purchase. The results of Edulinx's operations have been included in the Fund's earnings from the date of acquisition. As the fair value of acquired net assets exceeded the cost of the purchase, an extraordinary gain of $1,847 was recorded in the current period along with applicable non-controlling interest of $515 for a net amount of $1,332. The preliminary purchase price allocation at September 30, 2007, was as follows:
Preliminary September 30, 2007
----------------------------------------------------------------------------
$
Purchase consideration 13,074
Acquisition costs 285
----------------------------------------------------------------------------
Net purchase consideration 13,359
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Allocation:
Cash 8,199
Net working capital 1,885
Future income taxes 5,122
----------------------------------------------------------------------------
Net assets acquired 15,206
----------------------------------------------------------------------------
Extraordinary gain on purchase (1,847)
----------------------------------------------------------------------------
Total 13,359
----------------------------------------------------------------------------
----------------------------------------------------------------------------RESOLVE BUSINESS OUTSOURCING INCOME FUND CONDENSED MANAGEMENT'S DISCUSSION AND ANALYSIS INTRODUCTION The following is management's discussion and analysis (MD&A) of Resolve Business Outsourcing Income Fund's (the "Fund") results of operations, changes in cash flow and distributable cash(1) for the three months and nine months ended September 30, 2008, and of its financial position as at September 30, 2008. The MD&A should be read in conjunction with the audited consolidated financial statements and MD&A for the year ended December 31, 2007. The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP). All financial information provided in this MD&A is also in accordance with Canadian GAAP unless otherwise noted. All dollar amounts referred to are in Canadian dollars unless otherwise noted. All dollar amounts are in thousand of dollars, except per unit amounts. (1) Distributable cash is a non-GAAP measure. See below for a definition. NON-GAAP FINANCIAL MEASURES EBITDA or earnings before interest, taxes, depreciation and amortization is not a recognized financial measure under Canadian GAAP and does not have a standardized meaning prescribed by GAAP. The Fund's definition of EBITDA may not be comparable to similar measures presented by other funds. The Fund defines EBITDA as earnings or loss before income taxes plus interest expense, amortization, depreciation and unrealized loss on mark-to-market derivative instruments and less unrealized gain on mark-to-market derivative instruments. Management believes EBITDA is a reasonable operating measure as it looks at earnings prior to certain significant non-cash expenses. Adjusted EBITDA is not a recognized financial measure under Canadian GAAP. EBITDA adjusted for the change in deferred revenue is referred to as adjusted EBITDA and is used by management to evaluate performance, to measure compliance with debt covenants and to make decisions relating to distributions to unitholders. Distributable cash is not a recognized financial measure under Canadian GAAP and does not have a standardized meaning prescribed by GAAP. Canadian open-ended trusts, such as the Fund, use distributable cash and distributable cash per unit as indicators of financial performance. Distributable cash and distributable cash per unit may differ from similar computations reported by other entities and, accordingly, may not be comparable to similar distributable cash and distributable cash per unit reported by such entities. On July 6, 2007, the Canadian Securities Administrators (CSA) replaced National Policy 41-201, Income Trusts and Other Indirect Offerings. The new policy is intended to promote transparent disclosure for investors with respect to presentation of distributable cash. Management believes that distributable cash and distributable cash per unit are useful supplemental measures that may assist investors in assessing financial performance and cash generated by the Fund that is available to unitholders for distribution. Although the Canadian Securities Administrators issued revised guidance related to disclosure of distributable cash, a range of alternative disclosures and definitions persist in practice. Other income trusts and the investment community, including analysts covering Resolve, employ definitions and calculations of distributable cash and the distribution percentage that can produce significantly differing results. Resolve is continuing to disclose distributable cash information in accordance with the CSA guidance as adopted for Q3 2007. Gross revenues is not a recognized financial measure under Canadian GAAP. Under Canadian GAAP, the Fund recognizes Personal Property Security Act (PPSA) fee registration revenue, one of Resolve's sources of revenue, as revenue on a straight-line basis over the average contractual term of the registrations. As a result of the purchase accounting impact on deferred revenue, it is difficult to compare revenue period over period. Gross revenue presents revenue other than PPSA fee registration revenue on a GAAP basis and PPSA fee registration revenue on a billed basis. Management uses gross revenues to assist in evaluating performance. Gross revenues assist investors in assessing the revenue generation of the business that may not be readily evident due to the writedown of deferred revenue as a result of purchase accounting at the time of the IPO on March 17, 2006. Comparability is further impacted by the timing of revenue recognition of PPSA fee registration revenue. DESCRIPTION OF BUSINESS Resolve Business Outsourcing Income Fund was established on February 12, 2006. On March 17, 2006, the Fund completed an initial public offering (IPO) of units and through Resolve Business Outsourcing Limited Partnership (the "Partnership") acquired two businesses, Resolve Corporation and CSRS Holdings, Ltd., for cash and a 29.5% interest in the Partnership. The interests of the prior shareholders of Resolve Corporation and CSRS Holdings, Ltd. in the Partnership may be exchanged for units of the Fund pursuant to the terms of the Exchange Agreement. On May 25, 2007, Resolve Corporation acquired Edulinx Canada Corporation, a competitor in the delivery of student loan services in Canada. On July 5, 2007, Resolve Corporation, CSRS Holdings, Ltd. and Edulinx Canada Corporation ("Edulinx") were amalgamated under the laws of the Province of Ontario to form Resolve Corporation. The amalgamated business operations are collectively referred to as "Resolve" or the "Business." On January 1, 2008, Canadian Securities Registration Systems, a partnership, and CSRS Partnership Holding Inc., a minority partner in the Partnership, were wound up into Resolve Corporation to further simplify the corporate structure. On May 27, 2008, the Fund announced that it had initiated a process to evaluate strategic alternatives to enhance unitholder value. On September 19, 2008, the Fund announced that its previously disclosed review of strategic alternatives to enhance unitholder value was continuing, that no decision had been made regarding any specific alternative, and that there can be no assurance that this process would lead to any transaction. Subsequent to quarter end, the Fund announced that, while its Board is continuing to review strategic alternatives to enhance unitholder value, it has decided at this time that it is not in the best interest of unitholders to pursue the alternative of a sale of the business in the current market environment. The Board is continuing to assess alternatives in the context of the impending change in taxation rules at the end of 2010. No decision has been made at this time with respect to any specific alternative. The Fund will provide further updates as circumstances warrant. Resolve operates in one business segment - business process outsourcing (BPO). The Business provides customized BPO solutions primarily to large businesses and governments in North America. The solutions provided by Resolve increasingly include a combination of the Business's core competencies in financial transaction-related processing, customer relationship management (or "contact centre") and supply chain management in an integrated service offering. Resolve has become a leading provider of customized business process outsourcing services to businesses and governments across Canada, focusing on financial and administrative services. Increasingly, Resolve's financial and administrative service offering is being supported with contact services and supply chain management services to create integrated, end-to-end outsourcing solutions. Since the establishment of the Fund on March 17, 2006, Resolve has invested significantly in people, processes and technology to create a world-class business platform to support its integrated service offerings. The improvements that Resolve has made to the business platform have been responsive to client expectations and were designed to take advantage of the large and growing BPO market. The improvements are key to the achievement of predictable and sustainable operational service delivery to our clients and consequent predicable long-term revenue and EBITDA growth of the new Resolve business platform. OVERALL PERFORMANCE OF THE BUSINESS The Fund is achieving the revenue consistency it expected as a result of the changes in the business post- IPO. Third quarter revenue matched that generated in the second quarter. Revenue for Q3 2008 declined 3% compared to Q3 2007 primarily as a result of the reduced pricing under the new CSLP contract that came into effect in March 2008 and due to the transitioning out of certain less profitable contact centre customers in prior quarters. Revenue in the supply chain management service area increased over the same quarter last year primarily due to the signing and implementation of the Telus contract in late 2007. There were no significant new business implementations during the quarter. On a year-to-date basis, revenue increased 17% over the same nine-month period last year. Revenue from all significant lines of business is up over the comparable period last year. The acquisition of Edulinx on May 25, 2007, is an important part of the year-to-date increase over the same period last year. The Fund continues to have a strong list of new business opportunities that are expected to result in additional revenue in late Q4 and in the first half of 2009. The Fund announced on May 27, 2008, that it had initiated a process to evaluate strategic alternatives. That process and other events have resulted in certain costs to the Fund that have impacted EBITDA and adjusted EBITDA for the quarter and year to date as discussed further under "Results of Operations." Adjusted EBITDA for the quarter prior to any adjustments was $11,949, an increase over that generated during the first two quarters of the year, but less than the same quarter last year. On a year-to-date basis, adjusted EBITDA is $32,181 or 5% less than the same period last year. Deducting certain usual items incurred in 2008, as summarized later, increases adjusted EBITDA to $36,839 or an increase of 8% over the same period last year. The average exchange rates for the three- and nine-month periods were 0% and 8% respectively greater than for the same periods last year. The impact of this on EBITDA was offset as a result of realized gains on foreign exchange contracts. Conversion of the US-dollar-denominated sales for the quarter and year to date at the same average rates for the same periods in 2007 would have resulted in higher reported revenues of $48 for Q3 and $3,680 year to date. Cash provided by operating activities less maintenance capital expenditures year to date was $35,749 or $1.10 per unit. On a trailing 12-month basis, cash provided by operating activities less maintenance capital expenditures was $60,880 or $1.87 per unit. Distributions were declared of $0.25 per unit for the quarter, $0.75 per unit for the nine months to date and $1.00 per unit on a trailing 12-month basis. The distribution percentage on a trailing 12-month basis ranges from 53% including working capital changes to 108% excluding working capital changes. The distribution percentage excluding working capital has been adversely affected by costs summarized under "Results of Operations." Excluding these costs, the distributable percentage excluding working capital would have been 89%. FINANCIAL POSITION, RESULTS OF OPERATIONS, CASH PROVIDED BY OPERATIONS AND DISTRIBUTABLE CASH The following is an overview of Resolve's financial position as at September 30, 2008, compared to December 31, 2007, and to December 31, 2006. The results of operations, cash provided by operations and distributable cash for the three- and nine-month periods ended September 30, 2008, have been compared to the same periods ended September 30, 2007. Further details, comments and analysis are included under "Results of Operations," "Liquidity" and "Capital Resources." Financial Position
Change
September 30, December 31, Increase December 31,
2008 2007 (Decrease) 2006
----------------------------------------------------------------------------
$ $ $ $
Working capital,
excluding
deferred
revenue 31,246 36,544 (5,298) 30,187
Intangible assets
and deferred charges 184,170 202,346 (18,176) 224,736
Deferred revenue,
current and long-term 51,737 43,061 8,676 25,543
Future income
tax liability, net 34,061 41,237 (7,176) 65,845
Unitholders' equity 167,928 183,510 (15,582) 200,917Working capital, excluding the current portion of deferred revenue, decreased by $5,298 from December 31, 2007. The decrease in working capital is represented by an increase in accounts payable and accrued liabilities and in customer deposits. The increase in accounts payables relates to amounts due to textbook publishers that were settled after quarter-end. Intangible assets and deferred charges decreased by $18,176. Amortization of intangible assets of $18,691 for the nine-month period represents substantially all of the change. Deferred revenue increased by $8,676 from December 31, 2007, to $51,737. However, deferred revenue recognized on new PPSA registrations that have replaced PPSA registrations on which the deferred revenue had been written down under purchase accounting at IPO increased $9,756 during the period, but was partially offset by a reduction in deferred revenue not related to PPSA registrations. The net future income tax liability has decreased by $7,176 since December 31, 2007. The decrease is primarily the result of loss carryforwards recognized in the underlying businesses that can be utilized in the future to reduce income taxes payable. Unitholders' equity has decreased by $15,582 from December 31, 2007. The components of the change are an increase of $1,000 resulting from the conversion of Class B LP units to Fund units, an increase due to net earnings of $115 for the period and a decrease of $17,913 from distributions to Fund unitholders. The financial statements of Resolve's US operations were translated into Canadian dollars at the period-end rate. The Canadian dollar has weakened relative to the US dollar by approximately 6% since December 31, 2007. As a result, a positive currency translation adjustment of $2,105 has been recorded in accumulated other comprehensive income (loss). This is partially offset by an unrealized loss on interest rate swap of $889, also recorded in accumulated other comprehensive income (loss).
Results of Operations
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
$ $ $ $ $ $
Gross revenues(1) 95,812 99,897 (4,085) 288,739 253,239 35,500
Revenues 92,474 95,220 (2,746) 278,983 239,303 39,680
Direct costs (64,183) (65,962) 1,779 (194,792) (170,756) (24,036)
Gross profit 28,291 29,258 (967) 84,191 68,547 15,644
Operating expenses (18,845) (18,571) (274) 58,820 (48,712) (10,108)
Operating profit
or EBITDA(1) 8,647 10,687 (2,040) 23,505 19,835 3,670
Adjusted EBITDA(1) 11,949 15,038 (3,089) 32,181 33,813 (1,632)
Earnings (loss)
before income
taxes,
non-controlling
interest,
discontinued
operations and
extraordinary item (2,222) 1,836 (4,058) (8,847) (5,096) (3,751)
Net earnings for
the period 139 2,874 (2,735) 115 5,156 (5,041)(1) Gross revenues, EBITDA and adjusted EBITDA are non-GAAP measures. See above for definitions. Revenues for the three-month period ended September 30, 2008, decreased $2,746 or 3%. The year-to-date revenue increase was $39,680 or 17%. As previously noted, there were no significant new implementations during the quarter. The decrease in third quarter revenue compared to third quarter revenue last year is a net of an increase in supply chain revenue related to Telus, a decrease in contact centre revenue as a result of the transition of certain less profitable clients earlier in the year and a decrease in student loan revenue related to the revised pricing under the new contract that was implemented in March 2007. On a year-to-date basis, revenue increased in all significant lines of business. The change in pricing under the CSLP contract in March 2008 was partially offset by increased revenue from the other customers of Edulinx acquired in May 2007. The change in student loan pricing is based on a new contractual service delivery model and the resulting transition to a web-based delivery mechanism. This new service model will provide students with on line functionality and will result in lower service costs by Resolve. Revenues as reported in the consolidated interim financial statements are impacted by purchase accounting related to the deferred revenue for PPSA registration services and by the amortization of PPSA fee registration revenue. Therefore, gross revenue information has been provided to assist users in understanding revenue generation by quarter. Direct costs as a percentage of revenues remained the same in the quarter compared to the same period last year but decreased year to date compared to last year. Consolidation of student loan portfolios, changes in contact centre operations and the efficiencies being realized on prior year new contract implementations are being realized and reflected in the direct cost as a percentage of revenue. Generally, costs related to new implementations, impending implementations and lower efficiency at the commencement of new contracts typically impact direct costs and the direct cost percentage reported in a quarter. Gross profit as a percentage of revenues for the quarter and same quarter last year was 31% and 30% year to date compared to 29% over the same nine-month period last year. Operating expenses include a provision for a potential claim, customer adjustments and service level penalties and an offset as a result of a gain on settlement of a claim provided for at IPO, all of which amounted to $2,792. Excluding these amounts, the operating expenses for the quarter and year to date were $18,430 (Q3 2007 - $18,252) and $56,028 (2007 year to date - $48,393) respectively. Operating expenses as a percentage of revenue, excluding the above amounts, are 20% for the quarter and year to date compared to 19% for Q3 2007 and 20% year to date 2007. The increase in operating expenses, excluding the above noted items, is related to additional operating expenses assumed on the acquisition of Edulinx on May 25, 2007, and from an investment in additional people, processes and technology during late 2007 and early 2008. The investment in people, processes and technology was undertaken to further strengthen the operations of the business. The business has evolved since the IPO in terms of the complexity of new contracts and the changing expectations of customers under existing contracts. The changes implemented have improved the operational delivery side of the business and significantly lower the risk of reoccurrence of the circumstances that gave rise to the potential claim and to the penalties. Expenses related to the strategic review announced by the Board of Trustees on May 27, 2008, were $1,866 year to date and $799 for Q3. There were no similar expenses in the same periods last year. A provision of $2,500 for a potential claim and $1,624 related to service level and customer adjustments have been expensed year to date. Last year $319 relating to customer adjustments and service level penalties was expensed in Q3 compared to $415 in Q3 2008. As a result of the investments noted above, the events that gave rise to the potential claim and the penalties are not expected to reoccur. A portion of the potential claim may be recovered through insurance, but the amount, if any, is not currently reasonably determinable. A gain of $1,332 on settlement of a claim provided for at IPO has been netted against operating expenses in Q2. There was no similar item in the same periods last year. Adjusted EBITDA for the three-month period was $11,949 and year to date was $32,181, a decrease of $3,089 over Q3 2007 and a decrease of $1,632 over the nine-month period last year. Excluding the expenses related to the strategic review, the provision for customer adjustments and service level penalties, the potential claim, the long-term incentive provision and the gain on settlement of a potential claim, the adjusted EBITDA for the three months would have been $13,163 compared to $15,357 for Q3 2007 and for the nine months $36,839 compared to $34,132 for the same period in 2007 as summarized below. As noted above, as a result of the investments we have made in the business in terms of people, processes and technology, the risk of reoccurrence of the events that gave rise to the potential claim, customer adjustments and service level penalties has been significantly reduced.
Trailing 12-
Three-Months Nine-Months Month Period
Ended Ended Ended
September 30, September 30, September 30,
2008 2007 2008 2007 2008
----------------------------------------------------------------------------
$ $ $ $ $
Adjusted EBITDA 11,949 15,038 32,181 33,813 41,833
----------------------------------------------------------------------------
Costs described above
Strategic review costs 799 - 1,866 - 2,039
Customer adjustments
and service
level penalties 415 319 1,624 319 2,481
Potential claim - - 2,500 - 2,500
Gain on
settlement of claim - - (1,332) - (1,332)
----------------------------------------------------------------------------
1,214 319 4,658 319 5,688
----------------------------------------------------------------------------
Adjusted EBITDA,
excluding above costs 13,163 15,357 36,839 34,132 47,521
----------------------------------------------------------------------------
----------------------------------------------------------------------------Operating profit or EBITDA calculated from the consolidated interim statement of earnings does not present the normalized EBITDA of the business due to purchase accounting for deferred revenue acquired at the time of the IPO. As a result, adjusted EBITDA has been presented to normalize the impact of purchase accounting. Earnings (loss) before income taxes, non-controlling interest, discontinued operations and extraordinary item was $(2,222) for the quarter and $(8,847) year to date compared to earnings of $1,836 and a loss of $(5,096) in the same periods last year. Depreciation increased related to asset acquisitions over the period. Amortization is relatively constant quarter to quarter. Interest expense increased as a result of the increase in the term facility by $14,000 in December 2007. The unrealized loss recorded on forward foreign exchange contracts was $1,567 greater in the quarter and $5,296 greater year to date compared to the same periods last year. Net earnings for the quarter decreased $2,735 over the same quarter last year and decreased $5,041 year to date compared to last year. The prior year's year to date net earnings (loss) included a gain on acquisition of Edulinx of $1,322 and unrealized mark-to-market gains on derivative instruments of $3,479. The current year includes unrealized mark-to-market losses on derivatives of $1,817. This accounts for a change year over year of $6,618. Cash Provided by Operations
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
------------------------------------------------
Per Per Per Per
$ Unit $ Unit $ Unit $ Unit
Earnings before income
taxes, non-controlling
interest, discontinued
operations and
extraordinary item 139 - 2,801 0.09 115 - 3,723 0.11
Items not affecting cash 6,661 0.20 6,139 0.19 18,572 0.57 11,409 0.35
Change in deferred revenue 3,301 0.10 4,351 0.13 8,675 0.27 13,978 0.43
----------------------------------------------------------------------------
Cash provided before
changes in other
operating assets and
liabilities 10,101 0.30 13,291 0.41 27,362 0.84 29,110 0.89
Change in operating
assets and liabilities,
excluding
deferred revenue 11,538 0.35 1,544 0.05 11,954 0.37 971 0.03
----------------------------------------------------------------------------
Cash provided by
operating activities 21,639 0.65 14,835 0.46 39,316 1.21 30,081 0.92
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trailing 12-Month Period Ended
September 30, 2008
--------------------------------
Per
$ Unit
Earnings before income taxes, non-controlling
interest, discontinued operations and
extraordinary item 2,269 0.07
Items not affecting cash 21,248 0.65
Change in deferred revenue 11,551 0.35
----------------------------------------------------------------------------
Cash provided before changes in other
operating assets and liabilities 35,068 1.07
Change in operating assets and liabilities,
excluding deferred revenue 30,511 0.94
----------------------------------------------------------------------------
Cash provided by operating activities 65,579 2.01
----------------------------------------------------------------------------
----------------------------------------------------------------------------Cash provided by operating activities is determined by adjusting net earnings (loss) from continuing operations for non-cash items that were charged to net earnings (loss) and for changes in operating assets and liabilities, which is also referred to as changes in working capital. The change in working capital has historically been impacted by the timing of collection of accounts receivable and payment of accounts payable. A $326 increase or decrease in working capital represents a $0.01 per unit impact on cash available for distribution. In December 2007, a reduction in working capital occurred as a result of year-end cash management activities. Management estimated that $10,500 of the working capital reduction at year-end would reverse in 2008. This occurred in the first two months of 2008. As a result of third-quarter-end cash management activities, the net impact of the reversal for the nine months ended September 30, 2008, was $4,500. Trailing 12-month cash flow from operations is presented as it reduces the impact of the quarterly working capital swings and better presents the cash generation abilities of the business. Management has previously stated that one of its objectives is revenue growth. Growth requires working capital and in many instances investment in implementation costs and capital assets related to new customers. Cash provided by operating activities for the nine-month period before changes in operating assets and liabilities, other than deferred revenue, was $27,362 or $0.84 per unit compared to $29,110 or $0.89 per unit for the same period last year. Changes in working capital year to date were $0.37 per unit compared to $0.03 per unit in the same period last year. As noted previously, quarterly working capital swings can be material. Cash provided by operating activities for the trailing 12-month period before changes in operating assets and liabilities, other than deferred revenue, was $35,068 or $1.07 per unit. Changes in working capital added $0.94 per unit to cash provided by operating activities for the trailing 12-month period. Distributable Cash Cash Available for Distribution Resolve adopted revised disclosure for distributable cash as of Q3 2007 in accordance with the new guidance. As noted previously, NP 41-201 issued on July 6, 2007, provided new guidance regarding the disclosure of distributable cash.
Distributable Cash Presentation - CSA Guidance
Three Months Ended Nine Months Ended
September 30 September 30
2008 2007 2008 2007
------------------------------------------------------------
$ Per $ Per $ Per $ Per
Unit Unit Unit Unit
Cash provided
by operating
activities 21,639 0.65 14,835 0.46 39,316 1.21 30,081 0.92
Capital
adjustment
- maintenance
capital
expenditures (1,725) (0.05) (860) (0.03) (3,567) (0.11) (2,717) (0.08)
----------------------------------------------------------------------------
Cash available
for
distribution
before
capital
adjustment
for growth
capital
expenditures,
non-recurring
adjustments
and other
adjustments 19,914 0.60 13,975 0.43 35,749 1.10 27,364 0.84
Capital
adjustment
- growth
capital
expenditures (1,004) (0.03) (5,602) (0.17) (4,335) (0.13) (8,933) (0.27)
----------------------------------------------------------------------------
Cash available
for
distribution
before non-
recurring
and other 18,910 0.57 8,373 0.26 31,414 0.97 18,431 0.57
adjustments
Non-recurring
adjustments (9,890) (0.30) - - (9,890) (0.30) - -
Other
adjustments (500) (0.02) - - 4,500 0.14 - -
----------------------------------------------------------------------------
Cash
available
for
distribution 8,520 0.25 8,373 0.26 26,024 0.81 18,431 0.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Distributions
declared
per unit 0.25 0.25 0.75 0.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trailing 12-Month Period
Ended
September 30, 2008
-------------------------
$ Per
Unit
Cash provided by operating
activities 65,579 2.01
Capital adjustment - maintenance
capital expenditures (4,699) (0.14)
----------------------------------------------------------------------------
Cash available for distribution before
capital adjustment for growth capital
expenditures, non-recurring
adjustments and other adjustments (A) 60,880 1.87
Capital adjustment - growth capital
expenditures (6,079) (0.19)
----------------------------------------------------------------------------
Cash available for distribution before
non-recurring and other adjustments 54,801 1.68
Non-recurring adjustments (9,890) 0.30
Other adjustments (6,000) (0.18)
----------------------------------------------------------------------------
Cash available for distribution 38,911 1.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Distributions declared per unit 1.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Distributions declared as a
percentage of (A) 53%
----------------------------------------------------------------------------
----------------------------------------------------------------------------Cash provided by operating activities less maintenance capital expenditures was $60,880 or $1.87 per unit for the trailing 12-month period ended September 30, 2008. This resulted in a distribution percentage of 53% for the 12-month period. Capital Adjustments Resolve had previously provided estimated capital expenditure requirements for 2008 of approximately $7,800 for maintenance expenditures and of approximately $7,500 for growth capital expenditures. Maintenance capital expenditures year to date 2008 are $3,567 or $0.11 per unit are not reflective of the annual estimate as certain expenditures were deferred. The original estimate for the year of $7,800 will not be achieved due to the timing of certain planned expenditures. The maintenance capital expenditure estimate for the year has been revised to $6,314. Growth capital expenditures year to date are $4,335 or $0.13 per unit. Growth capital expenditures during the period related primarily to the new CSLP contract. The growth capital expenditure estimate for the year has been revised to $7,211. Non-Recurring Adjustments Cash on hand at September 30, 2008, included $9,890 of cash due to textbook publishers as part of the annual book depository program. The amount was paid in early October 2008. Other Adjustments As noted above under cash provided by operations, working capital has fluctuated between quarters due to the timing of collection of accounts receivable, seasonality of certain accounts, growth in working capital related to new business and timing of disbursements. As previously noted, Resolve's distributable cash is highly sensitive to working capital changes. A $326 increase or decrease in working capital impacts distributable cash by $0.01 per unit. Management estimated that $10,500 of the working capital reduction at December 31, 2007, would reverse in Q1 2008. The reversal occurred during January and February 2008 and has been presented as an adjustment in 2008. Approximately $6,000 accounts receivable cash was collected at September 30, 2008, that was not due until Q4. This early accounts receivable collection has been reflected as an adjustment. This is partially offset by $4,500 collected in Q2 that related to Q3. The distribution percentage on a trailing 12-month basis is 53%. The calculation of the distribution percentage including working capital has been positively impacted by the non-recurring item and by early collection of certain customer accounts receivable. Excluding these items, the Fund generated $0.25, $0.81 and $1.20 of cash in the quarter, year to date and on a trailing 12-month basis respectively to fund its distributions in those periods. Distributions Declared Distributions were declared of $0.25 per unit for the quarter, $0.75 per unit for the nine months to date and $1.00 per unit on a trailing 12-month basis. The distributable cash disclosure provided above is consistent with the guidance issued by the Canadian Securities Administrators and has been consistently presented by the Fund since adopted for Q3 2007. Other income trusts and the investment community, including analysts covering Resolve, utilize other definitions of distributable cash that have caused some confusion in reviewing analyst reports or comparing the Fund to other income trusts. Several analysts covering the Fund excluded working capital changes from their calculations of distributable cash, which is similar to the approach taken by most income trusts prior to the issuance of guidance by the Canadian Securities Administrators. In another situation, the approach was taken of deducting all capital expenditures rather than just maintenance capital expenditures. Management disagrees with the deduction of all capital expenditures as business entities, whether an income trust or not, would not expect to finance their growth through operating cash flows. Below is an illustrative calculation of distributable cash excluding working capital changes.
Distributable Cash Presentation - Excluding Working Capital
Trailing
12-Month
Period
Three Months Ended Nine Months Ended Ended
September 30 September 30 September
2008 2007 2008 2007 30, 2008
----------------------------------------------------------------------------
Per Per Per Per Per
$ Unit $ Unit $ Unit $ Unit $ Unit
Cash provided
by
operating
activ-
ities 21,639 0.65 14,835 0.46 39,316 1.21 30,081 0.92 65,579 2.01
Change in
operating
assets
and
liabilities,
excluding
deferred
revenue (11,538)(0.35)14,544 0.45(11,954)(0.37) 573 0.02(30,511)(0.94)
Capital
adjustment -
maintenance
capital
expend-
itures (1,333)(0.04) (934)(0.03)(1,842)(0.06)(1,857)(0.06)(4,699)(0.14)
----------------------------------------------------------------------------
Distrib-
utable
cash,
excluding
working
capital
(A) 8,768 0.26 28,445 0.88 25,520 0.78 28,797 0.88 30,369 0.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Distrib-
utions
declared
per unit 0.25 0.25 0.75 0.75 1.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Distrib-
utions
declared
as a
percentage
of (A) 108%
----------------------------------------------------------------------------
----------------------------------------------------------------------------The distribution percentage on a trailing 12-month basis ranges from 53% including working capital changes to 108% excluding working capital changes. Distributable cash excluding working capital has been negatively impacted by the non-recurring operating expenses summarized under "Result of Operations." Excluding these expenses, the distribution percentage excluding working capital would have been 89%. Both approaches, excluding the unusual expenses, demonstrate that the Fund is generating sufficient cash flow to fund its distributions and is not utilizing any of its available credit to fund its distribution payments. Distributions National Policy 41-201 recommends the inclusion of additional information that compares cash provided by operating activities and net earnings from continuing operations to distributions paid or declared.
Period
Three Months Nine Months From March
Ended Ended Year Ended 17, 2006, to
September 30, September 30, December 31, December 31,
2008 2008 2007 2006
----------------------------------------------------------------------------
Per Per Per Per
$ Unit $ Unit $ Unit $ Unit
Net earnings
from
continuing
operations(A) 139 - 115 - 5,877 0.18 3,927 0.12
----------------------------------------------------------------------------
Cash provided
by operating
activities
(B) 21,639 0.65 39,316 1.21 56,344 1.73 32,695 1.00
----------------------------------------------------------------------------
Actual cash
distributions
paid or
payable
Unitholders (5,937) (0.18) (17,734) (0.54) (23,545) (0.72) (16,346) (0.50)
Non
-controlling
interests (2,206) (0.07) (6,695) (0.21) (9,026) (0.28) (6,685) (0.21)
----------------------------------------------------------------------------
Total
distributions
© (8,143) (0.25) (24,429) (0.75) (32,571) (1.00) (23,031) (0.71)
----------------------------------------------------------------------------
Shortfall of
net earnings
from
continuing
operations
to total
distrib-
utions
(A) - © (8,004) (0.25) (24,314) (0.75) (26,694) (0.82) (19,104) (0.59)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Excess of
cash
provided
by
operating
activities
to total
distributions
(B) - © 13,496 0.41 14,887 0.46 23,773 0.73 9,664 0.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------An excess of cash provided by operating activities compared to total distributions is provided for each of the periods presented in the table. Therefore, Resolve has been generating, and expects to continue to generate, cash from operating activities to fund distributions at the current level. A shortfall of net earnings from continuing operations, compared to total distributions, occurs in each of the periods presented. This is not a meaningful measure as Resolve has significant recurring non-cash items and purchase accounting adjustments that reduce net earnings. These adjustments include depreciation, amortization, non-controlling interest in income, mark-to-market on derivatives, future income tax recovery and adjustments to deferred revenue. For the current quarter, year to date, the year ended December 31, 2007, and the period to December 31, 2006, as presented above, these amounts totalled $9,962, $27,247, $30,939 and $30,046 respectively. Taking into consideration the net non-cash expense and the impact of purchase accounting on revenue recognition, no shortfall would exist. A shortfall as presented in the table above is expected to continue until such time as amortization related to intangible assets acquired at the time of the IPO is substantially amortized and the impact of purchase accounting is eliminated as pre-IPO PPSA registrations are discharged and replaced by new post-IPO PPSA registrations. The impact of purchase accounting on deferred revenue is expected to be insignificant in early fiscal 2009.
SUMMARY OF QUARTERLY RESULTS
Consolidated Statements of Earnings
Period
March 17,
2006, to
December
Q1 2006(i) Q2 2006 Q3 2006 Q4 2006 31, 2006
----------------------------------------------------------------------------
$ $ $ $ $
Gross revenues 12,762 75,426 74,092 69,183 231,463
GAAP adjustment (902) (6,279) (5,660) (3,868) (16,709)
----------------------------------------------------------------------------
Revenues (GAAP) 11,860 69,147 68,432 65,315 214,754
Direct costs 7,637 49,381 47,274 46,760 151,052
----------------------------------------------------------------------------
Gross profit 4,223 19,766 21,158 18,555 63,702
Gross profit % 36% 29% 31% 28% 30%
Operating expenses 2,245 13,704 12,130 14,105 42,184
----------------------------------------------------------------------------
Operating profit 1,978 6,062 9,028 4,450 21,518
Depreciation and
amortization 1,252 7,733 7,735 7,722 24,442
Interest expense 216 1,162 1,449 1,226 4,053
----------------------------------------------------------------------------
Earnings (loss) before
the following: 510 (2,833) (156) (4,498) (6,977)
Mark-to-market on
derivative instruments 1,006 (2,484) 263 1,890 675
----------------------------------------------------------------------------
Earnings (loss) before
income taxes, non-
controlling interest,
discontinued
operations and
extraordinary item (496) (349) (419) (6,388) (7,652)
Recovery of income taxes (401) (6,039) (3,098) (3,386) (12,924)
----------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest, discontinued
operations and
extraordinary item (95) 5,690 2,679 (3,002) 5,272
Non-controlling interest (30) 1,680 513 (818) 1,345
----------------------------------------------------------------------------
Earnings (loss) before
discontinued
operations and
extraordinary item (65) 4,010 2,166 (2,184) 3,927
Earnings (loss) from
discontinued
operations, net of
income taxes and non-
controlling interest (54) 677 84 - 707
----------------------------------------------------------------------------
Earnings (loss) before
extraordinary item (119) 4,687 2,250 (2,184) 4,634
Gain on purchase of
Edulinx, net of income
taxes and
non-controlling interest - - - - -
----------------------------------------------------------------------------
Net earnings (loss)
for the period (119) 4,687 2,250 (2,184) 4,634
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per
unit from continuing
operations
Basic 0.00 0.17 0.10 (0.10) 0.17
Diluted 0.00 0.17 0.08 (0.09) 0.16
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss)
per unit
Basic 0.00 0.20 0.10 (0.10) 0.20
Diluted 0.00 0.20 0.08 (0.09) 0.19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i)15-day period (March 17, 2006, to March 31, 2006)
Year
Ended
December
Q1 2007 Q2 2007 Q3 2007 Q4 2007 31, 2007
----------------------------------------------------------------------------
$ $ $ $ $
Gross revenues 67,281 86,060 99,897 94,814 348,052
GAAP adjustment (3,482) (5,776) (4,677) (2,644) (16,579)
----------------------------------------------------------------------------
Revenues (GAAP) 63,799 80,284 95,220 92,170 331,473
Direct costs(i) 46,770 58,024 65,962 64,827 235,583
----------------------------------------------------------------------------
Gross profit 17,029 22,260 29,258 27,343 95,890
Gross profit % 27% 28% 31% 30% 29%
Operating expenses(i) 13,522 16,619 18,571 20,567 69,279
----------------------------------------------------------------------------
Operating profit 3,507 5,641 10,687 6,776 26,611
Depreciation and
amortization 7,697 7,936 8,043 8,102 31,778
Interest expense 1,313 1,578 1,840 1,573 6,304
----------------------------------------------------------------------------
Earnings (loss)
before the following: (5,503) (3,873) 804 (2,899) (11,471)
Mark-to-market on
derivative instruments (364) (2,082) (1,032) 532 (2,946)
----------------------------------------------------------------------------
Earnings (loss) before
income taxes, non-
controlling interest,
discontinued
operations and
extraordinary item (5,139) (1,791) 1,836 (3,431) (8,525)
Recovery of income
taxes (4,771) (3,225) (1,873) (6,301) (16,170)
----------------------------------------------------------------------------
Earnings (loss)
before non-controlling
interest, discontinued
operations and
extraordinary item (368) 1,434 3,709 2,870 7,645
Non-controlling interest (214) 358 908 716 1,768
----------------------------------------------------------------------------
Earnings (loss) before
discontinued
operations and
extraordinary item (154) 1,076 2,801 2,154 5,877
Earnings (loss) from
discontinued
operations, net of
income taxes and non-
controlling interest - 102 - (1) 101
----------------------------------------------------------------------------
Earnings (loss) before
extraordinary item (154) 1,178 2,801 2,153 5,978
Gain on purchase of
Edulinx, net of
income taxes and
non-controlling interest - 1,259 73 - 1,332
----------------------------------------------------------------------------
Net earnings (loss)
for the period (154) 2,437 2,874 2,153 7,310
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per
unit from continuing
operations
Basic (0.01) 0.10 0.12 0.04 0.25
Diluted (0.01) 0.10 0.11 0.04 0.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss)
per unit
Basic (0.01) 0.11 0.12 0.09 0.31
Diluted (0.01) 0.10 0.11 0.10 0.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Certain expenses have been reclassified between direct costs and
operating expense to provide comparability to the current quarter
presentation.
Trailing
12-Month
Period
Ended
September
Q1 2008 Q2 2008 Q3 2008 30, 2008
----------------------------------------------------------------------------
$ $ $
Gross revenues 96,080 96,847 95,812 383,553
GAAP adjustment (2,283) (4,135) (3,338) (12,400)
----------------------------------------------------------------------------
Revenues (GAAP) 93,797 92,712 92,474 371,153
Direct costs 65,633 64,976 64,183 259,619
----------------------------------------------------------------------------
Gross profit 28,164 27,736 28,291 111,534
Gross profit % 30% 30% 31% 30%
Operating expenses 18,991 22,051 19,644 81,253
----------------------------------------------------------------------------
Operating profit 9,173 5,685 8,647 30,281
Depreciation and amortization 8,107 8,649 8,635 33,491
Interest expense 1,695 1,760 1,689 6,716
----------------------------------------------------------------------------
Earnings (loss) before the following: (629) (4,724) (1,677) (9,926)
Mark-to-market on derivative
instruments 1,031 241 545 2,350
----------------------------------------------------------------------------
Earnings (loss) before income
taxes, non-controlling interest,
discontinued operations
and extraordinary item (1,660) (4,965) (2,222) (12,276)
Recovery of income taxes (3,334) (3,511) (2,496) (15,642)
----------------------------------------------------------------------------
Earnings (loss) before
non-controlling interest,
discontinued operations and
extraordinary item 1,674 (1,454) 274 3,366
Non-controlling interest 381 (137) 135 1,097
----------------------------------------------------------------------------
Earnings (loss) before
discontinued operations and
extraordinary item 1,293 (1,317) 139 2,269
Earnings (loss) from discontinued
operations, net of income taxes
and non-controlling interest - - - -
----------------------------------------------------------------------------
Earnings (loss) before
extraordinary item 1,293 (1,317) 139 2,269
Gain on purchase of Edulinx,
net of income taxes and
non-controlling interest - - - -
----------------------------------------------------------------------------
Net earnings (loss) for the
period 1,293 (1,317) 139 2,269
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per unit from
continuing operations
Basic 0.05 (0.05) 0.01 0.05
Diluted 0.05 (0.04) 0.01 0.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) per unit
Basic 0.05 (0.05) 0.01 0.05
Diluted 0.05 (0.04) 0.01 0.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------Prior to May 2007, the seasonality of certain revenue streams generated by the business was more pronounced. Search and registration billings and the resulting revenue are impacted by the timing of buying decisions for vehicles and other equipment. The first and fourth quarters of the year historically have been less active periods for searches and registrations. A certain component of Contact Centre Services revenue is generated from clients in the retail sector who tend to have activity levels that increase significantly in the fourth quarter related to holiday season programs and then drop off rapidly early in the first quarter. The Supply Chain Management operations are also impacted by fourth quarter holiday programs in the retail sector and in the second and third quarter by book distribution programs in certain US states. The acquisition of Edulinx in May 2007 and the addition of a number of new significant customers during 2007 have diluted the impact of the seasonal revenue fluctuations and results in greater consistency and predictability of quarterly revenues. Adjusted EBITDA The following is a quarterly reconciliation of operating profit or EBITDA to adjusted EBITDA.
Period March
17, 2006, to
December 31,
Q1 2006(i) Q2 2006 Q3 2006 Q4 2006 2006
----------------------------------------------------------------------------
$ $ $ $ $
Operating profit or EBITDA 1,978 6,062 9,028 4,450 21,518
Changes in deferred revenue 725 6,902 5,485 3,617 16,729
----------------------------------------------------------------------------
Adjusted EBITDA 2,703 12,964 14,513 8,067 38,247
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted EBITDA per unit 0.08 0.39 0.45 0.25 1.17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i)15-day period (March 17, 2006, to March 31, 2006)
Year Ended
December 31,
Q1 2007 Q2 2007 Q3 2007 Q4 2007 2007
----------------------------------------------------------------------------
$ $ $ $ $
Operating profit or EBITDA 3,507 5,641 10,687 6,776 26,611
Changes in deferred revenue 3,459 6,168 4,351 2,876 16,854
----------------------------------------------------------------------------
Adjusted EBITDA 6,966 11,809 15,038 9,652 43,465
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted EBITDA per unit 0.21 0.36 0.46 0.30 1.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trailing 12-
Month Period
Ended
September 30,
Q1 2008 Q2 2008 Q3 2008 2008
----------------------------------------------------------------------------
$ $ $ $
Operating profit or EBITDA 9,173 5,685 8,647 30,281
Changes in deferred revenue 1,321 4,053 3,302 11,552
----------------------------------------------------------------------------
Adjusted EBITDA 10,494 9,738 11,949 41,833
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted EBITDA per unit 0.32 0.30 0.37 1.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------Adjusted EBITDA above is after deduction for the unusual costs. Adjusted EBITDA prior to the unusual costs would be greater. LIQUIDITY The Fund generated $65,597 in cash from operations for the trailing 12-month period ended September 30, 2008. This operating cash flow was used to fund distributions during the 12-month period of $32,585, maintenance capital expenditures of $4,699 and implementation costs for the CSLP contracts of $791. The Fund has revised its maintenance capital estimate for the year and does not expect to exceed $6,000. Maintenance capital expenditures year to date are $3,567 and are $4,699 on a trailing 12-month basis. Growth capital expenditures for fiscal 2008 are expected to decrease from $10,214 on a trailing 12-month basis to $7,500. Year to date growth capital expenditures are $4,335 and are $6,079 on a trailing 12-month basis. The Fund has generated sufficient cash flow, substantially through operations, to fund its distribution to unitholders and its maintenance capital expenditures. Growth, including the acquisition of Edulinx in May 2007 and growth capital expenditures, has been funded to date from operating cash flows and bank borrowing facilities. CONTRACTUAL OBLIGATIONS There have been no material changes in the contractual obligations presented by the Fund as at December 31, 2007, that are outside the ordinary course of business. As at September 30, 2008, the Fund had commitments totalling $81 to acquire capital assets. FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS The Fund uses financial instruments as part of its strategy to manage the risk associated with currency exchange rates and interest rate risks. The Fund does not use financial instruments for trading or speculative purposes. Forward foreign exchange contracts are used primarily to fix the value of estimated US-dollar-denominated revenue generated by operations located in Canada. As at September 30, 2008, the Fund had outstanding contracts to purchase $7,000 ($3,000 - 2008; $4,000 - 2009) over a period from October 2008 to July 2009, at an average rate of 1.1350. An unrealized gain of $455 on these contracts has been recorded in the consolidated interim statement of earnings. The Fund entered into an interest rate swap to fix the interest rate on $65,000 of its variable-rate term debt at 6.49% . The interest rate swap is accounted for as a hedge. At September 30, 2008, the fair value of the interest rate swap agreement is an unrealized loss of $1,302. CAPITAL RESOURCES The Fund has cash on hand at September 30, 2008, of $32,660. The Partnership has an available operating facility of $25,000. No amount was drawn on the operating facility as at September 30, 2008. Letters of credit outstanding at September 30, 2008, in the amount of $64 reduce availability under the credit facility. As of September 30, 2008, the Partnership has $100,000 drawn under its term facility. The term facility matures on March 16, 2010. The term facility has a variable interest rate, but the Partnership has entered into an interest rate swap agreement that fixes the interest rate on $65,000 of the term debt. DISCLOSURE CONTROLS AND PROCEDURES The Fund's Chief Executive Officer and its Executive Vice President and Chief Financial Officer are responsible for establishing and maintaining the Fund's disclosure controls and procedures. The Fund's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified under Canadian securities laws. The internal controls and procedures include controls and procedures that are designed to ensure that information is accumulated and presented to the Disclosure Committee to allow timely decisions regarding required disclosure. The Disclosure Committee, comprised of the Chief Executive Officer and the Executive Vice President and Chief Financial Officer, has after evaluation of the effectiveness of the Fund's disclosure controls and procedures as at September 30, 2008, concluded that the Fund's disclosure controls and procedures are adequate and effective to ensure the material information relating to the Fund and its subsidiaries would have been known. INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated interim financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations. Therefore, internal control systems that are determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. The Disclosure Committee has evaluated whether there were changes to internal controls over financial reporting during the period ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting and concluded there were no changes. CRITICAL ACCOUNTING ESTIMATES The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated interim financial statements and the accompanying notes. These estimates are based on management's assessment of available information. Actual results could differ from these estimates. Management has identified service fee revenue, goodwill and intangible asset valuation, amortization of intangible assets, accounts receivable allowances, accounting for income taxes and contingencies as critical accounting estimates. CHANGES IN ACCOUNTING POLICY The Fund reviews all revisions to The Canadian Institute of Chartered Accountants (CICA) Handbook when issued. The Fund adopted new standards regarding capital disclosure and financial instrument disclosure and presentation that became effective for fiscal years beginning on or after October 1, 2007. The Fund adopted these new standards as of January 1, 2008. The effect of adopting these new standards is disclosed in the notes to the consolidated interim financial statements. RECENT ACCOUNTING DEVELOPMENTS International Financial Reporting Standards The Canadian Accounting Standards Board has confirmed that the use of International Financial Reporting Standards (IFRS) will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative IFRS information for the previous fiscal year. Starting in the first quarter of fiscal year 2012, we will publish consolidated financial statements prepared in accordance with IFRS. We are currently evaluating the impact of adoption on our consolidated financial statements and establishing a transition plan. There are no other recent accounting developments that are expected to have a material impact on the Fund. RELATED-PARTY TRANSACTIONS A director of the General Partner of the Partnership controls a company that owns the Burnaby, British Columbia, property occupied by the search and registration operations. In addition, the director has an interest in a company that provides and purchases search and registration fee services to/from Resolve. An officer and director of the General Partner of the Partnership holds a minority interest in three properties in Ontario occupied by Resolve. For the three- and nine-month periods ended September 30, 2008, rent paid on the Burnaby property was $144 and $431 ($126 and $408 - 2007), search and registration services purchased were $150 and $461 ($156 and $457 - 2007) and search and registration revenue was $12 and $36 ($12 and $41 - 2007). Rent paid for the three- and nine-month periods ended September 30, 2008, on three Ontario properties was $164 and $493 ($164 and $492 - 2007). RISKS The Fund is subject to a number of business and Fund structure risks that are summarized in the Fund's MD&A for the period ended December 31, 2007. On June 22, 2007, the Canadian Senate approved Bill 52, which includes the trust tax rules that will subject the Fund to taxation as of January 1, 2011. The future tax assets and liabilities that are reflected in the Fund's financial statements represent temporary differences existing on the date the respective asset or liability was acquired, adjusted for changes in subsequent periods. The enactment of this legislation has not required any additional future tax assets or liabilities to be recognized. The Fund is affected by changes in foreign exchange rates on the revenue generated in US dollars by its Canadian operations, on the translation of the financial statements of its US-based operations into Canadian dollars and on net monetary assets held by the Fund denominated in US dollars. The Fund entered into foreign currency contracts to assist managing the impact of fluctuations in foreign exchange. The Canadian operations generated US-dollar revenue of US$9,981 for the nine-month period. The impact of conversion of the revenue into Canadian dollars at the average rate for the nine-month period compared to the average rate last year reduced revenue and EBITDA by $875. Revenue generated by the US-based operations for the nine-month period was US$31,987. The impact of translation of the US operations resulted in a reduction in revenue of $2,805 and a decrease in EBITDA of $132. Net monetary assets held by the Canadian operations in US dollars or settled into Canadian dollars during the period positively impacted EBITDA by $10. Realized gains on foreign currency contracts settled during the period positively impacted EBITDA by $1,186. Unrealized gains of $1,000 have been recorded on the $10,000 of foreign exchange contracts outstanding at September 30, 2008. The mark-to-market adjustment recognized year to date in the statement of earnings on these derivative instruments was an unrealized loss of $1,817. Unrealized gains or losses on the foreign exchange contracts are not included in EBITDA until realized. The Fund is required to maintain certain financial covenants under the terms of both of its credit facilities. These financial covenants are based on the calculation of EBITDA which is defined in the Fund's credit agreement as net income excluding, amongst other things, all extraordinary and, where satisfactory to the Majority Lenders (as defined in the credit agreement) acting reasonably, unusual and all other non-recurring items. The Fund has requested and obtained the approval of the Majority Lenders to treat the expected strategic review costs as unusual and non-recurring items for purposes of the covenant calculations under the credit agreement in respect of 2008. There have been no other material changes to the risks as outlined in that document. OUTLOOK Management believes that it has made significant progress with its investment in people, processes and technology to create a world-class business platform to support its integrated service offerings. Given the expectations of Resolve's current and target client base, the improvements that Resolve has made to the business platform have been responsive to client expectations and were designed to take advantage of the requirements of the BPO market. The achievement of predictable and sustainable operational service delivery to our clients and consequent predicable long-term revenue and EBITDA are the drivers of the new Resolve business platform. The current global economic uncertainties are affecting all businesses. The Fund contends that economic uncertainty positively impacts the Business as companies seek to reduce their cost structure. While the current economic uncertainty appears to confirm that contention as the pace of investigation, discussion and proposal for potential solutions with existing and potential customers continues to be strong, the impact is not expected to positively contribute to revenue for a few quarters. In a drive to further improve Resolve's EBITDA position, management continues to work on a number of consolidation and efficiency opportunities. Resolve has worked hard in 2008 to realize cost savings and efficiencies on the consolidation of our student loan operations that has offset the estimated revenue decline under the new CSLP contract. Our original estimate of a $9,400 revenue decline in 2008 related to the new contract has been reduced to $3,700 as a result of volume increases and incentive and project revenue. The change in pricing will also impact 2009. Resolve expects to realize similar cost savings and efficiencies in 2009 that will reduce the estimated impact on 2009 revenue of $6,100. The reorganization of our contact centres has not progressed at the pace planned by management. A number of benefits were achieved in the first half of the year, however, the benefits expected in the third quarter did not come to fruition. Management continues to work on a number of initiatives related to new customer revenue, facilities consolidation and the generation of other efficiencies to improve the overall profitability of our contact centre operations. Lastly, the company remains committed to its continuing objective to grow revenue and earnings through a combination of operational consolidation, organic growth and selective acquisitions. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This MD&A may include certain statements that constitute forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Fund or Resolve, or industry results, to be materially different from any future results, performance or achievements or opportunities expressed or implied by such forward-looking statements. When used in this MD&A, such statements use such words such as "may," "will," "expect," "believe," "intend," "plan," "could" and other similar terminology. These statements reflect current expectations regarding future events and operating performance. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, loss of key customer contracts or reduction of services purchased by key customers, foreign exchange rates, increases in costs to Resolve that cannot be passed on to customers, disputes with key customers, competition, the ability of Resolve to manage operations and execute growth strategies, stability of internal and government information systems and technology, technological changes, the ability to maintain software licences, changes in privacy laws and risks inherent in bidding on government contracts. Although the forward-looking statements contained in this MD&A are based upon what management believes are reasonable assumptions, neither the Fund nor Resolve can assure that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this MD&A. Neither the Fund nor Resolve has any obligation to update or amend the forward-looking statements in this MD&A except as required by law. ADDITIONAL INFORMATION Details of the Fund's authorized and outstanding unit data are as follows: The Fund may issue an unlimited number of ordinary trust units and an unlimited number of special voting units. Each ordinary trust unit is transferable and represents an equal undivided beneficial interest in any distribution from the Fund. Except for the right to vote, each special voting unit does not confer any other rights. As at September 30, 2008, there were 23,654,659 ordinary trust units and 8,929,841 special voting units outstanding. As at September 30, 2008, the 8,929,841 special voting unitholders also held 8,979,841 Class B LP units of the Partnership. The Class B LP units can be exchanged on a one-for-one basis, subject to the terms of the Exchange Agreement. For each Class B LP unit exchanged, one special voting unit is cancelled. Assuming full conversion of the Class B LP units of the Partnership, the Fund will have 32,584,500 ordinary trust units outstanding and no special voting units. There have been no Class B LP units converted and no new ordinary trust units issued between October 1, 2008, and the date of the MD&A. Additional information relating to the Fund, including the Fund's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com. The comments and analysis contained in the MD&A are as of November 4, 2008. SUPPLEMENTAL FINANCIAL INFORMATION Distribution History Distributions are declared each month to holders of Units and Class B LP Units on the last business day of each month. Distributions of $0.0833 per unit per month were declared for an aggregate of $0.75 per unit for the nine-month period ended September 30 (2007 - $0.75).
Tax Allocation of Distributions
2007 2006
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% %
Foreign non-business income 7.2 7.6
Interest income 87.4 91.4
Return of capital 5.4 1.0
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Total distributions for the period 100.0 100.0
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Trading Prices and Volume
2008 2007
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Month High Low Volume High Low Volume
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$ $ $ $
January 8.00 7.16 491,623 8.89 8.25 2,376,421
February 8.24 7.26 554,758 9.43 8.60 1,853,685
March 8.05 7.20 318,776 9.14 8.30 1,636,725
April 7.81 7.25 623,197 8.94 8.40 1,222,408
May 8.45 7.40 569,022 9.48 8.71 1,060,612
June 8.40 7.75 972,794 9.39 8.70 553,871
July 8.20 7.40 471,815 9.25 8.61 650,780
August 7.70 7.25 500,722 8.75 7.60 549,026
September 7.45 5.02 340,053 8.48 7.90 578,235
October 8.30 7.80 830,180
November 8.25 7.10 891,382
December 8.10 7.37 2,027,861Contact: Contacts:
Resolve Corporation
Jamie Hyde
Chief Financial Officer
(905) 306-6200
Website: http://www.resolve.com
Source: Resolve Business Outsourcing Income Fund
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