LE 10 MAI 2006 - 20:00 ET
TORONTO, ONTARIO--(CCNMatthews - 10 mai 2006) - Fonds de revenu Morneau
Sobeco (TSX:MSI.UN) :
NE PAS ACHEMINER AUX FILS DE PRESSE AMERICAINS NI DISTRIBUER AUX
ETATS-UNIS
Points saillants :
- Début d'année positif
- Croissance des revenus de 5,7 % par rapport à 2005
- Amélioration continue des marges
- Première acquisition sélectionnée favorable pour l'encaisse
distribuable
Le Fonds de revenu Morneau Sobeco (TSX:MSI.UN) (le "Fonds") a annoncé
aujourd'hui des résultats d'exploitation favorables pour la période
terminée le 31 mars 2006. Il s'agit de la troisième période de résultats
pour le Fonds depuis son premier appel public à l'épargne ("PAPE"), qui
s'est conclu le 30 septembre 2005. Dans le but de donner aux
investisseurs une évaluation plus significative du rendement du Fonds,
et aux fins de comparaison, les résultats de 2005 comprennent ceux de la
société remplacée par la Fonds, soit W.F. Morneau Services Inc.
Les revenus pour la période de trois mois terminée le 31 mars 2006 ont
augmenté de 1,7 million de dollars, c'est-à-dire 5,7 %, passant à 32,1
millions de dollars par rapport à 30,4 millions pour la même période en
2005. Cette augmentation des revenus est attribuable à de nouveaux
mandats pour divers clients dans les secteurs des services-conseils et
des services d'impartition, dont un de ces clients a généré une
augmentation des revenus de 1,2 million de dollars.
"Nous sommes très satisfaits de nos résultats du premier trimestre",
déclare Bill Morneau, président et chef de la direction. "Ces résultats
reflètent nos mandats récurrents pour nos clients ainsi que le travail
accompli dans le cadre de plusieurs nouveaux mandats de
services-conseils ou de mise en oeuvre de projets d'impartition qui nous
ont été confiés en 2005."
Le bénéfice avant intérêts, impôts et amortissements, rajusté pour tenir
compte des changements touchant la rémunération, les dépenses en
immobilisations et les crédits d'impôts liés à la nouvelle identité
publique du cabinet (le "BAIIA rajusté") a augmenté de 0,6 million de
dollars, soit 8,7 %, passant à 7,2 millions de dollars pour la période
de trois mois terminée le 31 mars 2006, en comparaison avec 6,6 millions
pour la même période en 2005. Cette augmentation du BAIIA tient
principalement de la hausse de revenus de 1,7 million, laquelle a été
partiellement neutralisée par une augmentation de 0,9 million de dollars
des coûts d'exploitation, ce à quoi la direction s'attendait. Les marges
du BAIIA rajusté ont continué d'augmenter pour ainsi atteindre 22,5 % au
31 mars 2006, comparativement à 21,8 % pour la même période l'an dernier.
L'encaisse distribuable a augmenté de 0,3 million de dollars, soit 5,4
%, pour atteindre 6,6 millions de dollars pour la période terminée le 31
mars 2006, par rapport à 6,3 millions de dollars pour la même période en
2005. Cette augmentation est principalement attribuable à un BAIIA
rajusté en hausse de 0,6 million de dollars, comme il est indiqué
précédemment, et à une baisse d'impôt de 0,1 million de dollars,
neutralisés en partie par des intérêts en hausse de 0,4 million de
dollars. Le premier trimestre de 2006 a connu un très bon rendement, ce
qui a permis d'obtenir un ratio de distribution de l'encaisse
distribuable de 86 % (où le ratio de distribution correspond aux
distributions déclarées divisées par l'encaisse distribuable).
Après le trimestre, le Fonds a annoncé que l'une de ses filiales avait
conclu une entente d'acquisition de toutes les actions émises et en
circulation de Heath experts conseils en avantages sociaux ("Heath"). Il
est prévu que la transaction proposée se finalise le 31 mai 2006. Selon
les modalités de l'entente, le prix d'achat sera fondé sur les revenus
des activités de Heath dans l'avenir. Morneau Sobeco s'attend à un prix
d'achat d'environ 15,5 millions de dollars, devant être réglé au moyen
de la prise en charge de la dette actuelle d'environ 4,7 millions de
dollars de Heath et de l'émission de parts du Fonds de revenu Morneau
Sobeco ou de titres échangeables contre de telles parts.
"Cette acquisition sera positive d'un point de vue financier pour les
détenteurs de parts du Fonds de revenu Morneau Sobeco", déclarait M.
Morneau au moment de l'annonce. "Il s'agit d'une transaction importante
sur le plan stratégique qui est toute indiquée pour Morneau Sobeco",
ajoute-t-il. La transaction proposée agira comme tremplin pour permettre
au cabinet d'accroître considérablement sa présence dans l'Ouest
canadien. Une fois la consolidation avec Heath concrétisée, le nouveau
bureau de Vancouver de Morneau Sobeco sera son troisième bureau en
importance, après ceux de Montréal et de Toronto.
Les résultats du premier trimestre de 2006 du Fonds de revenu Morneau
Sobeco feront l'objet d'une discussion, lors d'une conférence
téléphonique avec Bill Morneau, président et chef de la direction, et
Nancy Reid, chef des finances, demain matin, le jeudi 11 mai 2006, à 11
h HNE. La conférence téléphonique est ouverte à toutes les personnes qui
souhaitent y prendre part, et une période de questions est prévue à la
fin de la présentation. Les personnes qui souhaitent participer à la
conférence peuvent appeler au 416 641-6110, de la région de Toronto, ou
au 1 866 542-4237 d'ailleurs au Canada. L'appel sera rediffusé sur le
site Web de Morneau Sobeco à www.morneausobeco.com.
A propos de Morneau Sobeco
Morneau Sobeco est le plus important cabinet de services-conseils et
d'impartition en régimes de retraite et d'assurance collective détenu
par des intérêts canadiens, offrant ses services à des entreprises de
partout au Canada et aux Etats-Unis. Comptant environ 950 employés
répartis dans 11 villes nord-américaines, Morneau Sobeco met l'accent
sur l'intégration de la conception et de l'administration de régimes de
retraite et d'assurance collective depuis plus de 40 ans. Les parts du
Fonds de revenu Morneau Sobeco sont négociées à la Bourse de Toronto
sous le symbole MSI.UN. De plus amples renseignements sur Morneau Sobeco
sont disponibles sur le site Web du cabinet, à l'adresse
www.morneausobeco.com.
Mesures financières non conformes aux PCGR
Le BAIIA rajusté et l'encaisse distribuable ne constituent pas des
mesures reconnues des bénéfices selon les principes comptables
généralement reconnus (PCGR) et n'ont aucune signification normalisée
prescrite par ceux-ci. Par conséquent, ces données ne peuvent être
comparées à des mesures semblables proposées par d'autres entités. Les
investisseurs doivent se tenir avertis de ne pas considérer le BAIIA
rajusté comme un équivalent des bénéfices nets ou des pertes nettes
obtenus en se conformant aux PCGR à titre d'indicateurs de rendement du
Fonds ou des flux de trésorerie provenant des activités d'exploitation,
d'investissement et de financement comme mesure des liquidités et des
flux de trésorerie.
Enoncés prospectifs
Certaines déclarations contenues dans le présent communiqué ont un
caractère prospectif au sens des lois sur les valeurs mobilières
applicables, comme les énoncés à l'égard de la date de clôture prévue
pour l'acquisition et les bienfaits financiers de cette transaction pour
Morneau Sobeco ainsi que les énoncés semblables au sujet d'événements,
de résultats, de circonstances, de rendements ou de prévisions futurs
anticipés qui ne sont pas des faits historiques. Ces énoncés ne
sauraient garantir tout rendement futur et sont assujettis à de nombreux
risques et de nombreuses incertitudes, dont ceux décrit dans notre
notice annuelle. Ces risques et incertitudes comprennent la dépendance à
l'égard des systèmes d'information et de la technologie, la réputation,
la dépendance à l'égard de clients et de spécialistes clés et les
conditions économiques générales. Un grand nombre de ces risques et
incertitudes peuvent influencer nos résultats réels et faire en sorte
que ceux-ci diffèrent considérablement de ceux exprimés explicitement ou
implicitement dans tout énoncé prospectif émis par nous ou en notre nom.
Tous les énoncés prospectifs du présent communiqué de presse sont faits
sous réserve de la présente mise en garde. Ces énoncés sont faits en
date du présent communiqué de presse et, sauf pour nous conformer aux
lois applicables, nous n'assumons aucune obligation de mettre à jour ou
de réviser publiquement tout énoncé prospectif en raison de nouveaux
renseignements, d'événements futurs ou pour toute autre raison. De plus,
nous n'assumons aucune obligation de commenter toute analyse, prévision
ou tout énoncé émis par une tierce partie à l'égard de Morneau Sobeco,
de ses résultats financiers ou d'exploitation ou encore de son titre.
(Nota : Les états financiers et le rapport de gestion du Fonds de revenu
Morneau Sobeco pour le premier trimestre de 2006 ne sont présentement
disponibles qu'en anglais. Certains documents financiers seront
disponibles sous peu en français sur le site Web de Morneau Sobeco, à
www.morneausobeco.com.)
Consolidated Financial Statements of
MORNEAU SOBECO INCOME FUND
For the quarter ended March 31, 2006
MORNEAU SOBECO INCOME FUND
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2006
(unaudited)
(In thousands of dollars)
---------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2006 2005
---------------------------------------------------------------------
Assets
Current assets:
Cash $ - $ 4,348
Accounts receivable 25,812 22,562
Unbilled fees 3,681 4,482
Income taxes recoverable 519 659
Prepaid expenses and other 1,748 1,807
----------------------------
31,760 33,858
Future income taxes (note 10) 632 600
Capital assets (note 3) 10,933 11,291
Intangible assets (note 4) 127,917 131,458
Goodwill 126,511 126,511
----------------------------
$ 297,753 $ 303,718
----------------------------
----------------------------
Liabilities and Unitholders' Equity
Current liabilities:
Bank Indebtedness $ 719 $ -
Accounts payable and accrued
liabilities 3,843 4,179
Accrued compensation and related
benefits 2,393 5,764
Unitholder distributions payable
(including non-controlling) 2,452 2,461
----------------------------
9,407 12,404
Insurance premium liabilities:
Payable to insurance companies 5,826 5,413
Less related cash and investments held (5,826) (5,413)
----------------------------
- -
Long-term debt (note 5) 35,000 35,000
Non-controlling Interest (note 7) 53,729 54,322
Unitholders' Equity:
Fund Units (note 6) 204,476 204,476
Deficit (4,859) (2,484)
----------------------------
199,617 201,992
----------------------------
$ 297,753 $ 303,718
----------------------------
----------------------------
Commitments (note 12)
Contingencies (note 13)
"Robert Chisholm" "William Morneau"
Robert Chisholm William Morneau Jr.
Trustee, Audit Committee Chair Trustee, President and CEO
See accompanying notes to consolidated financial statements
MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
For the quarter ended March 31, 2006
(unaudited)
(In thousands of dollars except unit and per unit amounts)
---------------------------------------------------------------------
MARCH 31,
2006
Revenue
Fees $29,296
Commissions 2,761
Other 121
--------------
32,178
Expenses
Salaries and benefits 18,898
Other operating 6,052
Amortization of capital assets (note 3) 498
Amortization of intangible assets (note 4) 3,542
Interest 461
--------------
29,451
Income before income taxes 2,727
Income taxes (recovery) (note 10)
Current 61
Future (32)
--------------
29
--------------
Income before non-controlling interest 2,698
Non-controlling interest (540)
--------------
Net income 2,158
Deficit, beginning of period (2,484)
Distributions declared (note 8) (4,533)
--------------
Deficit, end of period (4,859)
--------------
--------------
Net income per Unit - (basic and diluted) $0.09821
--------------
--------------
See accompanying notes to consolidated financial statements
MORNEAU SOBECO INCOME FUND
CONSOLIDATED STATEMENT OF CASH FLOWS
For the quarter ended March 31, 2006
(unaudited)
(In thousands of dollars)
---------------------------------------------------------------------
MARCH 31,
Cash provided by (used in): 2006
Operating activities
Net income $2,158
Items not involving cash:
Amortization 4,040
Non-controlling interest of Class B LP Units 540
Future income taxes (32)
-------------
6,706
Change in non-cash operating working capital:
Accounts receivable (3,250)
Income taxes recoverable 140
Unbilled fees 801
Prepaid expenses and other 58
Accrued compensation and related benefits (3,371)
Accounts payable and accrued liabilities (336)
-------------
748
Financing activities
Distributions paid (5,675)
Investing activities
Purchase of capital assets (140)
-------------
Net increase/(decrease) in cash (5,067)
Cash, beginning of period 4,348
-------------
Cash indebtedness, end of period (719)
-------------
-------------
Supplemental disclosures:
Interest paid 455
Income taxes paid 42
Income tax refund (2)
See accompanying notes to consolidated financial statements.
MORNEAU SOBECO INCOME FUND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the quarter ended March 31, 2006
(unaudited)
(In thousands of dollars except unit and per unit amounts)
1. ORGANIZATION AND NATURE OF THE BUSINESS
Morneau Sobeco Income Fund (the "Fund") is an unincorporated,
open-ended, limited purpose trust established under the laws of the
Province of Ontario by a Declaration of Trust made as of August 22,
2005. The Fund was established through the issuance of one unit for ten
dollars.
On September 30, 2005, the Fund completed an initial public offering
("IPO") and the sale of 19,979,284 trust units ("Units") for $10.00 per
Unit, for total gross proceeds of $199,793. On October 18, 2005 the
over-allotment option of the Fund's IPO was exercised resulting in the
issuance of an additional 1,997,928 Units, for gross proceeds of $19,979.
The Fund is a leading Canadian-owned pension and benefits consulting and
outsourcing firm, providing services to organizations across Canada and
in the United States. The Fund focuses on the integrated design and
delivery of retirement and employee compensation and benefit programs.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Fund have been prepared by
management in accordance with Canadian generally accepted accounting
principles and the significant accounting policies are summarized below:
(a) Basis of presentation
These consolidated financial statements include the assets, liabilities,
revenue and expenses of the following entities:
% Ownership
------------
------------
Morneau Sobeco Limited Partnership ("MSLP") 80%
Morneau Sobeco Group Limited Partnership ("MS Group LP") 80%
Morneau Sobeco, Ltd. ("MSUS") 80%
Morneau Sobeco Corporation ("MS Corp") 80%
Morneau Sobeco Trust ("Trust") 100%
Morneau Sobeco GP Inc. ("MS GP") 100%
As the Fund was established on August 22, 2005 and had no revenue or
expenses until September 30, 2005 when the Fund acquired W.F. Morneau
Services Inc., the Consolidated Statement of Income and Deficit and
Consolidated Statement of Cash Flows do not reflect any comparable
results for 2005.
(b) Financial instruments
The fair value of the Fund's financial assets and liabilities
approximate carrying values due to their short-term nature or with
respect to the long-term debt instruments, because they bear interest at
market rates. The Fund does not enter into financial instruments for
trading or speculative purposes.
Interest rate swap agreements are used as part of the Fund's program to
manage the fixed and floating interest rate mix of the Fund's total debt
outstanding and related overall cost of borrowing. The interest-rate
swap agreements involve the periodic exchange of payments without the
exchange of the notional principal amount upon which the payments are
based and are recorded as an adjustment of interest expenses on the
related debt instrument. The related amount payable to, or receivable
from, swap counterparties is included as an adjustment to accrued
interest.
(c) Measurement uncertainties
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(d) Revenue recognition and unbilled fees
Fees for administrative, actuarial and consulting services are
recognized when the services are rendered.
Unbilled fees are recorded at the lower of unbilled hours worked at
normal billing rates and the amount, which is estimated to be
recoverable upon invoicing.
Commissions are recognized when earned which is at the later of the
billing or effective date of the policy, net of a provision for return
commissions due to policy cancellation.
Investment income is recorded on the accrual basis.
(e) Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies have
been translated into Canadian dollars at the exchange rate prevailing at
the consolidated balance sheet dates.
Non-monetary items have been translated into Canadian dollars at the
exchange rate prevailing when the assets were acquired or obligations
incurred. Revenue and expenses have been translated at rates in effect
on the transaction dates. Exchange gains or losses are reflected in
income for the period.
(f) Capital assets
Capital assets are stated at their initial capital cost less accumulated
amortization. Amortization is provided over the assets' estimated useful
lives as follows:
Asset Basis Rate
---------------------- ------------------ -----------------------
---------------------- ------------------ -----------------------
Computer equipment Declining balance 30%
Furniture and equipment Declining balance 20%
Leasehold improvements Straight-line Over term of the lease
(g) Intangible assets and goodwill
Intangible assets consisting principally of customer relationships,
proprietary software and customer contracts have been recognized on
acquisition, based on management's best estimate of the relative fair
values. These intangible assets are being amortized on a straight-line
basis over their estimated useful lives of twenty, five and three years
respectively.
Goodwill is not amortized and is subject to an impairment test. Goodwill
impairment is assessed based on a comparison of the estimated fair value
of the Fund and the carrying value of its net assets including goodwill.
An impairment loss will be recognized if the carrying amount of the
Fund's net assets exceeds its estimated fair value.
(h) Impairment of long-lived assets
The Fund periodically reviews the useful lives and the carrying values
of its long-lived assets for continued appropriateness. The Fund reviews
long-lived assets for impairment annually or whenever events or changes
in circumstances indicate that the carrying amount of the assets may not
be recoverable. An impairment loss is measured at the amount by which
the carrying amount of the long-lived asset exceeds its fair value.
(i) Insurance premium liabilities and related cash and investments
In its capacity as consultants, the Fund collects premiums from insureds
and remits premiums, net of agreed deductions, such as taxes and
commissions, to insurance underwriters. These are considered
flow-through items for the Fund and, as such, the cash and investment
balances relating to these liabilities are deducted from the related
liability in the consolidated balance sheet.
(j) Employee future benefits
The Fund has a pension benefit plan covering its employees, which
includes a defined benefit option and a defined contribution option.
The defined benefit option was closed effective January 1, 1998 and
includes 9 employees, 3 retirees and 55 deferred vested members as at
March 31, 2006. All other employees are covered by the defined
contribution option of the plan.
The Fund accrues its obligations under the defined benefit option of the
plan as the employees render the services necessary to earn the pension.
For the defined contribution option, the Fund matches member
contributions and may be required to make additional contributions at
the option of the member, up to the limits defined in the plan text.
(k) Income taxes
The Fund uses the asset and liability method of accounting for income
taxes. Under this method of tax allocation, future tax assets and
liabilities are recognized on the basis of future tax consequences
attributable to differences between the carrying amounts of assets and
liabilities as recorded in the consolidated financial statements and
their respective tax bases. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to
apply to taxable income in the years in which temporary differences are
expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the
period in which the date of enactment or substantive enactment occurs.
3. CAPITAL ASSETS
The Fund's capital assets are comprised of:
--------------------------------------------------
Accumulated Net Book Net Book
Amortization Value Value
March 31, March 31, December 31,
Cost 2006 2006 2005
--------------------------------------------------
Computer equipment $1,553 ($200) $1,353 $ 1,385
Furniture and
equipment 2,756 (252) 2,504 2,573
Leasehold
improvements 7,605 (529) 7,076 7,333
--------------------------------------------------
$11,914 ($981) $10,933 $ 11,291
--------------------------------------------------
--------------------------------------------------
Amortization during the quarter ended March 31, 2006 was $498.
4. INTANGIBLE ASSETS
The Fund's intangible assets are comprised of:
--------------------------------------------------
Accumulated Net Book Net Book
Amortization Value Value
March 31, March 31, December 31,
Cost 2006 2006 2005
--------------------------------------------------
Customer
relationships $ 90,000 ($2,250) $87,750 $ 88,875
Customer contracts 5,000 (833) 4,167 4,583
Proprietary
software 40,000 (4,000) 36,000 38,000
--------------------------------------------------
$135,000 ($7,083) $127,917 $131,458
--------------------------------------------------
--------------------------------------------------
Amortization during the quarter ended March 31, 2006 was $3,542.
5. BANK INDEBTEDNESS AND LONG-TERM DEBT
At March 31, 2006, the Fund has a secured term loan of $35,000 with two
Canadian chartered banks repayable in full on September 30, 2009. The
term loan bears interest at the bankers' acceptance rate plus 1%. The
Fund has entered into interest rate swap agreements in order to fix the
interest rate at 4.4% for the duration of the loan. The fair value of
the interest rate swap at March 31, 2006 is $730.
The Fund also has available a secured operating line of credit for
$15,000 with $719 drawn at March 31, 2006. The line of credit bears
interest at the bankers' acceptance rate plus 1% and the undrawn portion
incurs a stand-by fee of 0.20%. The bank indebtedness and term loan are
secured by a general assignment of the assets of the Fund.
6. FUND UNITS
The Fund is authorized to issue an unlimited number of Units. The Fund
is also authorized to issue an unlimited number of special voting units
("Special Voting Units"). Special Voting Units are not entitled to any
beneficial interest in any distribution from the Fund. The following
voting units were issued and outstanding:
March 31, 2006 December 31, 2005
Units Issued Amount Units Issued Amount
---------------------------------------------------
Units 21,977,212 $204,476 21,977,212 $204,476
Special Voting
Units 5,494,303 - 5,494,303 -
---------------------------------------------------
27,471,515 $204,476 27,471,515 $204,476
---------------------------------------------------
---------------------------------------------------
7. NON-CONTROLLING INTEREST
The former shareholders of Morneau Sobeco retained 5,494,303 Class B LP
Units of MS Group LP after over-allotment. The LP Units are fully
exchangeable for equal Units in the Fund, subject to certain
restrictions and provide the former shareholders of Morneau Sobeco with
a non-controlling interest of 20% in the Fund. Some of the Class B LP
Units are subordinated in their rights to receive distributions.
March 31, 2006 December 31, 2005
Units Issued Amount Units Issued Amount
---------------------------------------------------
Subordinated
Class B LP Units 4,095,060 $40,951 4,095,060 $40,951
Non-subordinated
Class B LP Units 1,399,243 13,992 1,399,243 13,992
---------------------------------------------------
Net deficit from
prior period 5,494,303 54,943 5,494,303 54,943
(621)
---------------------------------------------------
Balance,
beginning
of period 54,322 54,943
Share of net
income for the
quarter/period 540 525
Distributions for
the quarter/period
(note 8) (1,133) (1,146)
---------- ---------
Balance, end of
quarter/period $53,729 $54,322
---------- ---------
Distributions on the Subordinated Class B LP Units will be subordinated
in favour of the Fund Units and the Non-subordinated Class B LP Units.
These distributions will be paid at the end of a fiscal quarter to the
extent that an average monthly distribution of at least $0.06875 per
Unit and Non-subordinated Class B LP Unit in respect of that quarter has
been paid, and any deficiency in such distributions to holders of Units
and Non-subordinated Class B LP Units during the subordination period,
has been satisfied.
The subordination provisions of the Subordinated Class B LP Units apply
until the date on which both of the following conditions have been
satisfied: (i) for four consecutive fiscal quarters of the Fund
beginning on December 31, 2006, the Fund has earned EBITDA of at least
$25,169 during such period; and (ii) commencing with the 12 month period
ending September 30, 2007, the Fund and MS Group LP have respectively
paid an average distribution of at least $0.06875 per Unit and per Class
B LP Unit per month for the preceding 12 month period. "EBITDA" is
defined as earnings before interest, income taxes, depreciation and
amortization.
8. DISTRIBUTIONS TO UNITHOLDERS
The Board of Trustees determines the amount of distributions.
Distributions announced during the quarter ended March 31, 2006 were as
follows:
Trust Units
Unitholder
record date Total Per Unit Paid or payable
January 31, 2006 $1,511 $0.06875 February 15, 2006
February 28, 2006 1,511 0.06875 March 15, 2006
March 31, 2006 1,511 0.06875 April 17, 2006
----------------------
$4,533 $0.20625
----------------------
Class B LP Units
Unitholder
record date Total Per Unit Paid or payable
Non-subordinated
January 31, 2006 $ 96 $0.06875 February 15, 2006
February 28, 2006 96 0.06875 March 15, 2006
March 31, 2006 96 0.06875 April 17, 2006
---------
288
---------
Subordinated
March 31, 2006 845 0.20625 April 17, 2006
----------------------
$1,133 $0.20625
----------------------
9. LONG-TERM INCENTIVE PLAN
Executives are eligible to participate in Morneau Sobeco's Long-Term
Incentive Plan (LTIP), which is designed to align compensation with
distributable cash earned by the Fund's subsidiaries. The LTIP provides
compensation opportunities for performance resulting in the Fund
exceeding its distributable cash targets. The Fund's Compensation,
Nominating and Corporate Governance Committee of the Board of Trustees
(the "Committee") will determine (i) who will participate in the LTIP;
(ii) the level of participation; and (iii) the time or times when LTIP
awards will vest or be paid to each participant.
Pursuant to the LTIP, Morneau Sobeco will set aside a pool of funds
based upon the amount, if any, by which the distributable cash per Unit
(fully diluted) exceeds certain defined threshold amounts. Morneau
Sobeco or a Trustee will purchase Units in the market with this pool of
funds and will hold the Units until such time as ownership vests to each
participant. Generally, one-third of these Units will vest equally over
the three years following the grant of the awards. LTIP participants
will be entitled to receive distributions on all Units held for their
account prior to the applicable vesting date. Unvested Units held by the
Trustee for an LTIP participant will be forfeited if the participant
resigns or is terminated prior to the applicable vesting date and those
Units will be sold and the proceeds returned to Morneau Sobeco.
Initially, the LTIP provides for awards that may be earned based on the
amount by which distributable cash per Unit exceeds a base distribution
threshold of $0.825 per Unit per annum. The percentage amount of that
excess, which forms the LTIP incentive pool, will be determined in
accordance with the table below:
Percentage by which Maximum Proportion of Excess
Distributable Cash Distributable Cash Available
per Unit Exceeds Base for LTIP Payments
Threshold(1)
5% or less 10%
over 5% to 10% 15% of any excess over 5% to 10%
greater than 10% 20% of any excess over 10%
(1) Annualized for fiscal periods of less than 12 months.
The base distribution threshold will be subject to review by the
Committee at least annually.
The Committee decided that the initial LTIP awards will be determined
following the completion of the first complete fiscal year to December
31, 2006. At that time, the Committee will consider performance for the
past fifteen months in order to determine an allocation for the LTIP.
10. INCOME TAXES
Income tax obligations relating to distributions from the Fund are
obligations of the unitholders and, accordingly, no provision for income
taxes has been made in respect of income of the Fund. A provision for
income taxes is recognized for the Fund's subsidiaries that are subject
to tax, including Large Corporations Tax.
The difference between income taxes calculated using the Fund's
effective income tax rates and the amounts that would result from the
application of the statutory income tax rates arises from the following:
Income taxes at statutory rates: MARCH 31, DECEMBER 31,
2006 2005
Federal 22.12% 22.12%
Provincial 11.84% 11.98%
-------------------------
33.96% 34.10%
-------------------------
-------------------------
Income tax provision applied to
earnings before income taxes:
Combined basic federal and provincial
income taxes at statutory rates applied
to earnings from continuing operations $794 $ 955
Earnings taxed in the hands of
the unitholders (1,623) (1,774)
Non-deductible expenses 27 38
Non-deductible intangibles 1,041 1,045
Financing cost deductible for tax purposes (248) (252)
Effect of higher tax rates in non-Canadian
jurisdictions 3 26
Non-capital loss carried forward - (79)
Other 35 60
-------------------------
$ 29 $ 19
-------------------------
-------------------------
Future income tax assets and liabilities are provided for temporary
differences between the financial statement carrying values of
existing assets and liabilities and their respective tax bases. The
significant components of future income taxes are as follows:
Future income tax assets:
Excess of tax bases of capital assets and
intangibles over their carrying values $632 $589
Non-capital losses - 11
-------------------------
Net future income tax asset $632 $600
-------------------------
-------------------------
11. EMPLOYEE FUTURE BENEFITS
The Fund has a pension benefit plan covering its employees, which
includes a defined benefit option and a defined contribution option. The
defined benefit option was closed to new members
effective January 1, 1998.
As of January 1, 1998, all new members participate in a defined
contribution option, whereby the Fund matches member contributions and
may be required to make additional contributions at the option of the
members up to a limit prescribed under the Income Tax Act (Canada).
Under the defined contribution option, each member is required to
contribute a specific dollar amount based on the member's job level
classification. Each member may elect to make an optional contribution
of between 50% and 300% of the member's required contribution. The Fund
matches required contributions. For employees with less than 10 years of
service, the Fund contributes 50% of optional contributions and for
members with 10 or more years, 75% of optional contributions.
Information about the pension plan's defined benefit option is as
follows:
MARCH 31, DECEMBER 31,
2006 2005
Fair value of plan assets $2,344 $2,954
Accrued benefit obligation 3,000 3,896
---------------------------
Funded status - deficit ($656) ($942)
---------------------------
---------------------------
Accrued benefit obligation:
Balance, beginning of period $3,896 $3,687
Current service cost 23 18
Interest cost 42 47
Benefits paid (845) (7)
Actuarial (losses)/gains (116) 151
---------------------------
Balance, end of period $3,000 $3,896
---------------------------
---------------------------
Plan assets:
Fair value, beginning of period $2,954 $2,854
Actual return on plan assets 80 65
Employer contributions 155 42
Benefits paid (845) (7)
---------------------------
Fair value, end of period $2,344 $2,954
---------------------------
---------------------------
Reconciliation of accrued benefit
obligation to accrued benefit asset,
end of period: $2,344 $2,954
Plan assets at fair value
Accrued benefit obligation 3,000 3,896
---------------------------
Funding status - plan deficit (656) (942)
Unamortized net actuarial loss 258 410
Unamortized transitional obligation 516 539
---------------------------
Accrued benefit asset: $118 $7
---------------------------
---------------------------
End of period allocation of fair value
of plan assets (%)
Pooled balanced fund
(60% equities, 40% bonds) 90% 90%
Pooled bond fund 10% 10%
---------------------------
100% 100%
---------------------------
---------------------------
MARCH 31, DECEMBER 31,
2006 2005
Pension plan cost
Current service cost $23 $18
Interest cost on accrued benefit
obligation 42 47
Return on plan assets (80) (65)
Actuarial (losses)/gains during the
period on accrued benefit obligation (116) 151
---------------------------
(131) 151
Other adjustments to allocate cost to
period in which service is rendered,
specifically indicating:
Difference between actual and expected
return on plan assets 35 19
Amortization of actuarial gains/(losses) 117 (151)
Transitional amounts 23 22
---------------------------
Net pension plan expense $44 $41
---------------------------
---------------------------
Other information about the Fund's
defined benefit option is as follows:
Employer contributions $155 $42
Benefits paid 845 7
The net expense for the Fund's defined benefit option for the period
ended March 31, 2006 is $44 and for the defined contribution option is
$389.
Actuarial valuations:
Actuarial valuation for the Fund's pension plan is generally required
every three years. The most recent actuarial valuation of the Fund's
pension plan was conducted as of December 31, 2003.
Weighted average assumptions:
Weighted average of the amounts assumed
in accounting for the plan:
Discount rate at the end of the current
fiscal period used to determine the
accrued benefit obligation 5.00% 4.75%
Discount rate at the end of preceding
period used to determine the benefit cost 4.75% 5.75%
Rate of compensation increase used to
determine the accrued benefit obligation 2.50% 2.50%
Rate of compensation increase used to
determine the benefit cost 2.50% 2.50%
Expected long-term rate of return on
plan assets 7.00% 7.00%
12. COMMITMENTS
The Fund has lease commitments for office premises and equipment with
options for renewal. Minimum payments not including operating expenses,
due in each of the next five years and thereafter, are expected to be as
follows for each year or period ending December 31:
MARCH 31, DECEMBER 31,
2006 2005
2006 $3,351 $ 4,445
2007 4,173 4,057
2008 3,967 3,824
2009 3,469 3,328
2010 2,944 2,796
Thereafter 5,852 5,754
--------------------------
Total $23,756 $24,204
--------------------------
--------------------------
13. CONTINGENCIES
From time to time, the Fund is involved in routine litigation incidental
to the Fund's business. Management believes that adequate provisions
have been made where required and the ultimate resolution with respect
to any claim will not have a material adverse effect on the financial
position or results of operations of the Fund.
14. ECONOMIC DEPENDENCE
The Fund's largest client accounts for approximately 11% of the Fund's
revenue and its top 10 clients, in aggregate, account for approximately
34% of revenue. As clients may terminate engagements on minimal notice,
there can be no assurance that the Fund will be able to retain its
relationships with its largest clients. Moreover, there can be no
assurance that such clients will continue to use the services of the
Fund in the future. Any negative change involving any of the Fund's
largest clients, including but not limited to a client's financial
condition or desire to continue using the Fund's services, could result
in a significant reduction in business, which could have a material
adverse effect on the Fund's business, results of operations and
financial condition and the ability of the Fund to make distributions on
the Units.
15. SEGMENTED INFORMATION
The Fund's operations consist of one reporting segment, which provides
employee pension and benefits consulting and outsourcing services.
Geographic data are as follows:
--------------------------
Canada United States
--------------------------
Revenue $ 30,605 $ 1,573
--------------------------
--------------------------
Assets held in the United States consist of cash, accounts receivable,
prepaids, computer equipment, furniture and office equipment and
liabilities includes miscellaneous payables, accrued compensations, and
income tax payable, had a book value as follows:
--------------------------
MARCH 31, DECEMBER 31,
2006 2005
--------------------------
Assets $ 1,836 $1,962
Liabilities $190 $325
--------------------------
16. SUBSEQUENT EVENT
On April 24, 2006, The Fund's signed an agreement to acquire all of the
issued and outstanding shares of Heath Benefits Consulting Inc.
("Heath"), a Vancouver-based benefits consulting firm with 93 employees
across Canada. The transaction is expected to close on May 31, 2006, and
is subject to the fulfilment of a number of conditions, including the
completion of final due diligence by Morneau Sobeco, completion of
definitive documentation and approval of the Toronto Stock Exchange and
other regulatory authorities.
The purchase price will be based on revenue from the Heath business
going forward. Morneau Sobeco expects the purchase price to be
approximately $15.5 million. The purchase price is expected to be
satisfied through the assumption of the current Heath debt of about $4.7
million, and the issuance of units of Morneau Sobeco Income Fund or
securities exchangeable for such units. The purchase price will be paid
in three installments, the first on closing and the second and third
installments conditional upon the success in retaining and growing
revenue from current Heath clients, as well as achieving targeted cost
efficiencies.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Morneau Sobeco Income Fund (the "Fund") was formed on August 22, 2005
and commenced operations on September 30, 2005 when it completed an
initial public offering ("IPO"). Using the proceeds from the IPO, the
Fund indirectly acquired a controlling interest in Morneau Sobeco Group
Limited Partnership ("MS Group LP"), which in turn acquired Morneau
Sobeco Corporation ("Morneau Sobeco"), the successor to W.F. Morneau
Services, Inc. ("WFMS").
This Management's Discussion and Analysis ("MD&A") and accompanying
consolidated financial statements of the Fund and notes thereto, cover
the Fund for the first quarter ended March 31, 2006. Since the Fund
formed on August 22, 2005, no comparative information is provided in the
Fund's unaudited consolidated statement of income and deficit and
unaudited consolidated statement of cash flows. In order to provide
meaningful information to the user, the following MD&A includes
financial data of WFMS, which carried on the Morneau Sobeco business
prior to September 30, 2005. WFMS data was used to provide operating
data for the quarter ended March 31, 2005 for comparison to quarter
ended March 31, 2006.
All financial information is presented in Canadian dollars and in
accordance with Canadian generally accepted accounting principles
("GAAP") unless otherwise noted. Certain totals, subtotals and
percentages may not reconcile due to rounding.
This MD&A contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of various
factors, including those discussed under "Risk and Uncertainties". This
discussion also makes reference to certain non-GAAP measures such as
EBITDA, Adjusted EBITDA and Distributable Cash to assist investors in
assessing the Fund's financial performance. (See footnotes to the
"Results of Operations" chart and the section entitled "Non-GAAP
financial measures: EBITDA, Adjusted EBITDA and Distributable Cash" for
definitions.) Non-GAAP measures do not have any standard meaning
prescribed by GAAP and therefore, may not be comparable to similar
measures presented by other issuers.
Formation and Ownership Structure of the Fund
On September 30, 2005, the Fund completed an IPO of 19,979,284 trust
units ("Units") at a price of $10.00 per Unit, for total net proceeds of
$184,496,842. The proceeds were used to indirectly acquire a 72.7%
interest in Morneau Sobeco with the previous shareholders retaining the
balance of the interest. On October 18, 2005, the over-allotment option
of the Fund's IPO was exercised resulting in the issuance of an
additional 1,997,928 Units. These proceeds were used to reduce the
non-controlling interest in Morneau Sobeco to 20%. No additional Units
have been issued since that date and thus, there remains a total of
21,977,212 Units issued and outstanding.
The previous owners of Morneau Sobeco own the non-controlling interest
in Morneau Sobeco through a combination of 5,494,303 Class B Limited
Partnership units ("Class B LP Units") of MS Group LP and an equal
number of special voting units of the Fund, which together are
exchangeable into Units provided that the Fund achieves certain
objectives.
To reduce Unitholder risk, approximately 75% of the Class B LP Units are
subordinated in their rights to distributions until Unitholders of the
Fund receive their target distributions. This subordination is in place
until September 30, 2007, or later if the Fund has not made its target
distributions.
Business Overview
Morneau Sobeco is the largest Canadian-owned pension and benefits
consulting and outsourcing firm, providing services to organizations
across Canada and in the United States. We focus on the integrated
design and delivery of retirement, employee compensation and benefit
programs. We have approximately 950 professionals and support staff with
offices in 11 cities across North America. Our clients are primarily
large and medium-sized organizations in Canada and the United States,
which typically utilize our services on a recurring or contracted basis
over a long term.
We derive our revenue primarily from fees charged to clients for pension
and benefits consulting and outsourcing engagements. For some benefit
consulting assignments which involve insurance, we may be paid
commissions (in lieu of fees) by the client's insurance company, which
is a common practice in the industry. These commissions are typically
disclosed to the client and are based on a percentage of the premiums
paid by the client to the insurance company. We assume no underwriting
risk as the insurance policy is underwritten by the insurance company.
In addition, we earn interest income from our cash balances which is
included in other revenue. Fees from consulting engagements are charged
based on billable hours or a fee-for-service basis. In some cases,
consulting engagements can also be billed on a fixed-fee basis, although
these engagements are typically much smaller and the services are
delivered over a shorter period of time. Outsourcing engagements are
generally based on negotiated fees or a formula tied to the nature of
the service being provided. Our outsourcing business is characterized by
fixed contracts, which usually have three to five year terms. Most
outsourcing contracts contain an upfront implementation fee and an
ongoing monthly service fee. Implementations usually take three to
twelve months and involve transferring the administration of a client's
pension and/or benefits plans onto our systems, tailoring our systems
and training our employees. Additional services provided that are
outside the scope of the outsourcing contract are usually paid on a
fee-for-service basis.
Our largest operating expense is compensation and related costs. This
includes salaries, annual performance-based bonuses, benefits (e.g.,
pension, health, dental), payroll taxes and temporary staffing services.
For the comparable operating results of WFMS contained in this MD&A,
compensation expense also includes distributions paid as bonuses to
employee-shareholders. Other operating expenses include occupancy costs,
technology costs (equipment leases, telecommunications and software),
non-recoverable client service costs (such as printing, travel and
third-party professional services), training, marketing, office costs,
professional services (legal and audit) and insurance.
Overview and Outlook
The first quarter of 2006 saw solid performance with revenue growth of
5.7%, an EBITDA margin of 22.5% and Distributable Cash Payout Ratio(1)
of 86%.
We are continuing to execute our business strategy which includes
focusing on our core services and striving to deliver high quality
services in the most efficient and cost effective manner. Our strategy
for future growth encompasses expanding relationships with current
clients, continuing to attract new clients especially in the growing
outsourcing market, targeting underserved markets and pursuing selected
acquisitions.
On April 24, 2006, we signed an agreement to purchase Heath Benefits
Consulting Inc. This acquisition is strategically important for Morneau
Sobeco. Combining our operations provides a platform to enable us to
grow in Western Canada. Through this transaction, the new Morneau Sobeco
Vancouver office will be the third largest in our organization, after
Montreal and Toronto.
Footnotes:
(1) Payout Ratio is defined as declared distributions divided by
Distributable Cash (see definition on page 3).
Analysis of 2006 Quarterly Operating Results
---------------------------------------------------------------------
Results of Operations
Selected Unaudited Consolidated Quarter ended
Financial Information March 31
---------------------------------------------------------------------
(In thousands of dollars) 2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue $32,178 $ 30,440
---------------------------------------------------------------------
Salaries and benefits expense 18,898 20,253
---------------------------------------------------------------------
Other operating expense 6,052 5,105
---------------------------------------------------------------------
Partnership distributions - 5,119
---------------------------------------------------------------------
Net income/(loss) before non-controlling
interest for the period 2,698 (818)
---------------------------------------------------------------------
---------------------------------------------------------------------
Add (Deduct):
---------------------------------------------------------------------
Amortization 4,040 589
---------------------------------------------------------------------
Taxes 29 155
---------------------------------------------------------------------
Interest 461 37
---------------------------------------------------------------------
EBITDA(1) 7,228 (37)
---------------------------------------------------------------------
Adjustments:
---------------------------------------------------------------------
Executive compensation and
employee-shareholder and partner
distributions adjustments(2) - 6,688
---------------------------------------------------------------------
Adjusted EBITDA(3) 7,228 6,651
---------------------------------------------------------------------
Adjusted EBITDA Margin 22.5% 21.8%
---------------------------------------------------------------------
---------------------------------------------------------------------
Deduct:
---------------------------------------------------------------------
Interest $461 $37
---------------------------------------------------------------------
Current Taxes 29 155
---------------------------------------------------------------------
Capital expenditures(4) 140 199
---------------------------------------------------------------------
Total Distributable Cash(5) $6,598 $6,260
---------------------------------------------------------------------
Distributable Cash available to
non-controlling interest $1,320 n/a
---------------------------------------------------------------------
Distributable Cash available for Unitholders $5,278 n/a
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income per Unit (basic and diluted) $0.09821 n/a
---------------------------------------------------------------------
Distributable Cash per Unit
(basic and diluted) $0.24016 n/a
---------------------------------------------------------------------
Distributions declared per Unit
(basic and diluted) $0.20625 n/a
---------------------------------------------------------------------
Payout ratio 86% n/a
---------------------------------------------------------------------
Footnotes:
(1) "EBITDA" is defined as earnings before interest expense, income
taxes, depreciation, amortization and non-controlling interest.
(2) Represents the difference between historical executive
compensation (including employee-shareholder and partner
distributions) and compensation arrangements in place since the
acquisition of Morneau Sobeco by the Fund.
(3) "Adjusted EBITDA" is EBITDA adjusted for items that were
applicable prior to the acquisition of Morneau Sobeco by the Fund
in order to make historical comparisons more meaningful.
(4) Non-maintenance capital expenditures are not shown as a reduction
from Distributable Cash for the periods prior to September 30,
2005 since these expenditures are considered non-recurring. The
amounts shown for periods prior to September 30, 2005 reflect
estimated capital expenditure requirements as a public company
or $600,000 per year.
(5) "Distributable Cash" is defined as net income for the period
adjusted for specific non-cash items, including amortization,
future income taxes and maintenance capital expenditures. In the
comparable data for the periods prior to September 30, 2005,
Distributable Cash has also been adjusted for items that were
applicable prior to the acquisition of Morneau Sobeco by the Fund
in order to make historical comparisons more meaningful.
Non-GAAP Financial Measures: EBITDA, Adjusted EBITDA and Distributable
Cash
We believe that Adjusted EBITDA is a useful measure in evaluating the
performance of the Fund as certain previous arrangements are
non-recurring and will differ materially from ongoing arrangements as a
public entity. We also believe that Distributable Cash is a useful
supplemental measure of performance as it is generally used by Canadian
open-ended business income funds as an indicator of financial
performance.
In order to make historical data of WFMS more comparable to the ongoing
performance data of the Fund, we have made the following two adjustments
to EBITDA and to Distributable Cash:
(i) As a private company, WFMS historically paid out substantial amounts
of pre-tax income as distributions to its shareholders and partners each
year. Distributions to employee-shareholders were reflected as salary
expenses. Distributions to partners were reflected as partnership
earnings. Since the practice of paying such distributions has been
discontinued effective September 30, 2005, we believe that an adjustment
to historical EBITDA to account for such distributions should be made to
arrive at an adjusted amount of EBITDA. As the new executive
compensation arrangements effective October 1, 2005 differ materially
from the previous arrangements, we believe that adjustments relating to
the new executive compensation arrangements are a more useful reflection
of the results of operations of WFMS. To provide consistency,
adjustments have been made to executive compensation arrangements as if
the new compensation arrangements had been in place for all of 2005.
(ii) We have also adjusted EBITDA in comparable WFMS data to remove the
impact of a tax credit in relation to certain 'e-commerce' activities
for which Morneau Sobeco is no longer eligible. This credit was
historically recorded as a reduction to salaries and benefits expense.
Distributions to Unitholders
Monthly distributions are declared by the Fund for Unitholders of record
on the last business day of each month and are paid on about the 15th
day of the following month.
Analysis of 2006 First Quarter Results
Revenue
Revenue for the three months ended March 31, 2006 increased by $1.7
million, or 5.7%, to $32.1 million compared to $30.4 million for the
same period in 2005. The increase in revenue was a result of additional
consulting and outsourcing business from a variety of clients, with one
client increasing our revenue by $1.2 million. This was partially offset
by reduced outsourcing fees of $1.1 million for one large client due to
a special project being completed in 2005, a change in fee structure for
another large outsourcing client resulting in a shift in the timing of
fees of $0.6 million, and a $1.1 million reduction in outsourcing fees
related to the termination of two contracts in the U.S. in 2005.
Salaries and Benefits
Salaries and benefits for the three months ended March 31, 2006
decreased by $1.3 million, or 6.7%, to $18.9 million compared to $20.2
million for the same period in 2005. The decrease was attributable to
the elimination of employee-shareholder distributions and reduced
executive compensation of $2.0 million partially offset by salary
increases of $0.7 million or 3.6%.
Other Operating Expenses
Other operating expenses for the three months ended March 31, 2006
increased by $0.9 million, or 18.6%, to $6.0 million compared to $5.1
million for the same period in 2005. The increase is primarily
attributable to increased technology spending of $0.2 million, increased
legal and public company costs of $0.2 million, increased outsourcing
audit fees of $0.2 million, and increased travel costs of $0.1 million.
Interest Expense
Interest expense for the three months ended March 31, 2006 increased by
$0.4 million to $0.5 million as a result of the debt restructuring in
connection with the change in ownership of the business on September 30,
2005 and the formation of the Fund. On September 30, 2005, the Fund
entered into a new term credit facility of $35 million. The operating
line was also drawn to $0.4 million for 3 days during the quarter. This
compares to an average debt of $4.0 million for the three months ended
March 31, 2005.
Amortization
Amortization for the three months ended March 31, 2006 increased by $3.4
million, or 586%, to $4.0 million compared to $0.6 million for the same
period in 2005. The increase was attributable to the increase in
intangible assets as a result of the purchase of WFMS by the Fund.
Partnership Distributions
Distributions from WFMS's limited partnership subsidiary for the three
months ended March 31, 2006 was $nil compared to $5.1 million for the
same period in 2005.
Income Tax Expense
Income tax expense for the three months ended March 31, 2006 decreased
by $125 thousand, to $29 thousand compared to $155 thousand for the same
period in 2005. The changes in tax expense are primarily attributable to
changes in partner and trust distributions.
Net Income Before Non-controlling Interest
As a result of the changes in revenue and expenses described above, net
income for the three months ended March 31, 2006 increased by $3.5
million to $2.7 million compared to a loss of $0.8 million for the same
period in 2005.
Non-GAAP Financial Measures: EBITDA, Adjusted EBITDA and Distributable
Cash
Adjusted EBITDA
Adjusted EBITDA increased $0.6 million, or 8.7%, to $7.2 million for the
three months ended March 31, 2006 compared to $6.6 million for the same
period in 2005. The increase is due to increased revenue of $1.7 million
partially offset by increased operating cost of $0.9 million.
Total Distributable Cash
Total Distributable Cash increased by $0.3 million, or 5.4% to $6.6
million for the three months ended March 31, 2006 relative to $6.3
million for the same period in 2005. This increase is primarily due to
increased Adjusted EBITDA of $0.6 million as discussed above and lower
taxes of $0.1 million, partially offset by higher interest of $0.4
million.
Liquidity and Capital Resources
Cash Flows
The following table provides an overview of the Fund's cash flows for
the periods indicated.
---------------------------------------------------------------------
Cash Flow Information
Selected Unaudited Consolidated Quarter Ended
Financial Information March 31
---------------------------------------------------------------------
(In thousands of dollars) 2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating Activities $ 748 $ (4,943)
---------------------------------------------------------------------
Less employee-shareholder distributions
and one-time bonuses - (5,979)
---------------------------------------------------------------------
Adjusted Operating Activities 748 1,036
---------------------------------------------------------------------
Investing Activities (140) (199)
---------------------------------------------------------------------
Financing Activities (5,675) 5,119
---------------------------------------------------------------------
Less partner distributions - 2,619
---------------------------------------------------------------------
Adjusted Financing Activities (5,675) 2,500
---------------------------------------------------------------------
(Decrease) increase in cash before
employee-shareholder and partner
distributions and one-time bonuses (5,067) 3,337
---------------------------------------------------------------------
Employee-shareholder and partner distributions
and one-time bonuses(1) - (3,360)
---------------------------------------------------------------------
(Decrease) increase in cash after
employee-shareholder and partner distributions
and one-time bonuses $ (5,067) $ (23)
---------------------------------------------------------------------
(1) Represents the sum of the aggregate employee-shareholder and
partner distributions and one-time bonuses deducted from
Operating Activities and Financing Activities.
2006 First Quarter Results
Cash inflows from adjusted operating activities decreased by $0.3
million, or 27.8%, to $0.7 million for the three months ended March 31,
2006 from $1.0 million for the same period in 2005. This decrease was
primarily due to increased receivable and unbilled balances of $3.1
million partially offset by improved profits of $0.6 million, increased
payables of $1.5 million, and tax recoveries of $0.6 million.
Cash outflows from investing activities remained flat for the three
months ended March 31, 2006 from the same period in 2005. Cash outflows
from adjusted financing activities increased by $8.1 million for the
three months ended March 31, 2006 due to distribution payments of $5.7
million in the quarter and postponed payments to partners in 2005 for
$2.6 million.
Capital Expenditures
Pension and benefits consulting and outsourcing is not a capital
intensive business. Historically, capital expenditures have included
office furniture, facility improvements, and information technology
software and hardware. Over the two-year period ended December 31, 2005,
we undertook non-recurring capital expenditures relating to buildings,
office furniture, facility improvements and information technology
software totaling $2.7 million. Going forward, we expect that the
capital expenditures required to maintain our current platform will be
approximately $600,000 per year, principally related to information
technology hardware and telecommunications equipment, which over the
last three years have averaged less than $450,000 per year. Additional
capital expenditure requirements may result from significant business
expansion. Such amounts are expected to be funded from our operating
cash flow.
Contractual Obligations
We lease office space and selected equipment under operating lease
agreements with terms ranging from one to nine years. We also have a
term loan described under "Capital Resources". Future expected payments
are as follows:
Summary of Contractual Obligations
Selected Unaudited Consolidated Financial Information
(In thousands of dollars)
Total 2006 to 2008 2009 to 2010 Beyond 2010
Term Loan $35,000 - $35,000 -
Operating
Leases $23,756 $11,491 $6,413 $5,852
--------------------------------------------------------
Total $58,756 $11,491 $41,413 $5,852
--------------------------------------------------------
The Fund has no material contractual obligations other than those
described in this MD&A and has no off-balance sheet financing
arrangements.
Capital Resources
We have historically utilized cash from operations to finance working
capital requirements and fund growth. As at March 31, 2006, the Fund's
working capital (current assets minus current liabilities) was
approximately $22.4 million. Liabilities consist mainly of accounts
payable and accrued liabilities of $3.8 million, accrued compensation
and related benefits of $2.4 million, and Unitholder distributions
payable of $2.5 million.
We have also maintained credit facilities to manage working capital
requirements throughout the year. The Fund's credit facilities include a
term loan of $35 million repayable in full on September 30, 2009. The
term loan bears interest at bankers' acceptance rates plus 1%, which
have been fixed at 4.4% using an interest rate swap. The credit
facilities also include a secured operating line of credit of up to $15
million bearing interest at bankers' acceptance rates plus 1% and a
stand-by fee of 0.2% on the undrawn portion.
As at March 31, 2006, the operating line was drawn and the Fund had bank
indebtedness of $0.7 million.
The following table provides an overview of the Fund's capital resources.
Capital Resources
Selected Unaudited Consolidated
Financial Information As at March As at December
(In thousands of dollars) 31, 2006 31, 2005
Cash - $4,348
Bank indebtedness $719 -
Long-term debt $35,000 $35,000
Working capital $22,354 $21,454
Unitholders' equity $199,617 $201,992
Selected Balance Sheet Data
The balance sheet is not comparable to periods prior to the IPO because,
at that time, financing was restructured and long-term assets were
revalued to market value. Total Assets at March 31, 2006 were $297.8
million.
Critical Accounting Policies and Estimates
The preparation of financial statements, in accordance with GAAP,
requires us to make estimates and assumptions that affect the reported
values of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. These
estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they
become known. Accordingly, actual results could differ from these
estimates. The accounting policies and estimates that are critical to
the Fund's business relate to the following:
Revenue Recognition
We earn fee-for-service revenue based on hourly rates and the time spent
delivering those services. We also earn contracted revenue based on
negotiated fixed amounts or on a formula tied to the nature of the
service, rather than the time spent. Revenue is recognized in the period
that the service is rendered, irrespective of when it is invoiced.
Unbilled fees are recorded at the lower of unbilled hours worked at
standard billing rates and the amount which we estimate can be recovered
upon invoicing. Expenses are recognized as incurred. Losses on fixed fee
contracts are recognized during the period in which the loss becomes
probable. Billings in excess of revenue are recorded as a deferred
revenue liability, included with accounts payable and accrued
liabilities, until services are rendered. Revenue does not include
reimbursements for recoverable expenses, such as employee travel
expenses, outside printing and third-party professional services.
Reimbursements are accounted for as a reduction to expenses.
We also earn commission revenue as payment for the provision of benefits
consulting services to clients, as a percentage of insurance premiums
paid by our clients. Commission revenue is received annually,
semi-annually, quarterly or monthly. Annual fees are typically paid at
the beginning of the insurance policy period and are recognized as
income at the later of the billing or effective date of the policy, net
of a provision for return commissions due to policy cancellations.
Amortization of Finite-life Intangible Assets
We have accounted for our acquisition of WFMS using the purchase method
of accounting. Intangible assets consisting principally of customer
relationships, proprietary software and customer contracts have been
recognized on acquisition based on our best estimate of the relative
fair values. These finite-life intangible assets are being amortized
over their estimated useful lives of twenty, five and three years
respectively. Impairment is assessed annually, or when events or changes
in circumstances indicate the carrying amount of assets may not be
recoverable.
Goodwill is not amortized and is subject to an impairment test. Goodwill
impairment is assessed based on a comparison of the fair value of the
Fund and its net assets including goodwill. An impairment loss will be
recognized if the carrying amount of the Fund's net assets exceeds its
fair value.
Allowance for Doubtful Accounts
A provision for accounts receivable resulting from the potential risk
that the receivable will not be collected has been recorded. We
continually monitor past due accounts to assess the likelihood of
collection to estimate the required provision.
Litigation and Claims
We are involved in litigation and other claims arising in the normal
course of business. We must use judgment to determine whether or not a
claim has any merit, the amount of the claims and whether to record a
provision, which is dependent upon the potential success of the claim.
We believe that none of the current claims will have a material adverse
impact on the financial position of the Fund.
Future Income Tax
We use the asset and liability method of accounting for income taxes.
Future income tax assets are recognized only to the extent that we
determine it is more likely than not that the future income tax assets
will be realized. Prior to the legal restructuring of the Morneau Sobeco
business in connection with the IPO, income taxes recoverable related to
a tax credit for "e-commerce" activities which is no longer available.
Financial Instruments and Other Instruments
The Fund's financial instruments consist of cash, accounts receivable,
accounts payable and accrued liabilities, Unitholders' distributions
payable, interest rate swaps and a term loan.
We have a term loan of $35 million with two Canadian chartered banks
repayable on September 30, 2009. We have entered into interest rate swap
agreements to fix the interest rate at 4.4% for the 4-year term. We also
have available a secured operating line of credit for $15 million. The
line of credit bears interest at the bankers' acceptance rate plus 1%.
There was $0.7 million drawn on the line of credit at March 31, 2006.
The carrying value of the financial instruments approximates their fair
values due to their short-term nature or, in the case of the term loan,
due to the interest rate swap agreements in place.
We are not engaged in currency hedging activities and does not own other
instruments that may be settled by the delivery of non-financial assets.
We realize a portion of our sales in U.S. dollars and are thus exposed
to fluctuations in the value of the U.S. dollar relative to the Canadian
dollar. The net revenue exposure after accounting for related expenses
denominated in U.S. dollars was approximately US$0.6 million for the
three months ended March 31, 2006.
In our view, the Fund is not exposed to significant interest, currency
or credit risks arising from financial instruments.
Risks and Uncertainties
The result of operations, business prospects and financial condition of
the Fund are subject to a number of risks and uncertainties and are
affected by a number of factors outside our control.
Ability to Maintain Profitability and Manage Growth
There can be no assurance that we will be able to sustain profitability
in future periods. Our future operating results will depend on a number
of factors, including our ability to continue to execute our strategy
successfully.
There can be no assurance that we will be successful in achieving our
strategic plan, or that our strategic plan will enable us to maintain
our historical revenue growth rates or to sustain profitability. Failure
to execute any material part of our strategic plan successfully could
have a material adverse effect on our business, financial condition and
operating results and the ability of the Fund to make distributions on
the Units.
There can be no assurance that we will be able to manage our growth
effectively, and any failure to do so could have a material adverse
effect on our business, financial condition and results of operations
and the ability of the Fund to make distributions on the Units.
Reliance on Information Systems and Technology
Information systems are an integral part of our business and the
products and services offered to our clients. We rely on systems to
maintain accurate records and to carry out required administrative
functions in accordance with the terms of our contractual obligations to
our clients. We rely on the Internet as a key mechanism for delivering
our services to our clients and achieving efficiencies in our service
model. Any disruptions in our systems, the failure of our systems to
operate as expected or our ability to use the Internet effectively to
deliver our services could, depending on the magnitude of the problem,
result in a loss of current or future business and/or potential claims
against the Fund, all of which could materially adversely affect our
business, financial condition and results of operations and the ability
of the Fund to make distributions on the Units.
Reputational Risk
We depend to a large extent on our relationships with our clients and
our reputation for high-quality outsourcing and consulting services. As
a result, if a client is not satisfied with our services or products, it
may be more damaging to our business than to other businesses. Moreover,
if we fail to meet our contractual obligations, we could be subject to
legal liability or loss of client relationships.
Dependence on Key Clients
For the three months ended March 31, 2006, our largest client accounted
for approximately 11% of revenue and our top 10 clients, in the
aggregate, accounted for approximately 34% of revenue. As clients may
terminate engagements with minimal notice, there can be no assurance
that we will be able to retain our relationships with our largest
clients. Moreover, there can be no assurance that such clients will
continue to use our services in the future. Any negative change
involving any of our largest clients, including but not limited to a
client's financial condition or desire to continue using our services,
could result in a significant reduction in revenue, which could have a
material adverse effect on our business, results of operations and
financial condition and the ability of the Fund to make distributions on
the Units.
Risk of Future Legal Proceedings
We may be threatened with, or may be named as a defendant in, or may
become subject to various legal proceedings in the ordinary course of
conducting our business, including lawsuits based upon professional
errors and omissions. The nature of our business involves assumptions
and estimates concerning future events, the actual outcome of which we
cannot know with certainty in advance. In addition, we could make
computational, software programming or data management errors. Our
exposure to liability on a particular project may be greater than the
profit opportunity of the project. For example, possible claims may
include, without limitation: (i) a client's assertion that actuarial
assumptions used in a pension plan were unreasonable, leading to plan
underfunding; (ii) a claim arising out of the use of inaccurate data,
which could lead to an underestimation of plan liabilities; and (iii) a
claim that employee benefits plan documents were misinterpreted or plan
amendments were misstated in plan documents, leading to overpayments to
beneficiaries. Defending lawsuits of this nature or arising out of any
of the services that we provide could require substantial amounts of
management attention, which could divert their focus from operations and
could materially adversely affect our financial condition. Any such
claims may produce negative publicity that could hurt our reputation and
business. A significant judgment against us or the imposition of a
significant fine or penalty as a result of a finding that we failed to
comply with laws or regulations could have a significant adverse impact
on our business, financial condition and results of operations and the
ability of the Fund to make distributions on the Units.
Reliance on Key Professionals
Our operations are dependent on the abilities, experience and efforts of
our professionals, many of whom have significant reputations and
contacts in the industry in which we operate. Our business depends, in
part, on our professionals' ability to develop and maintain alliances
with businesses such as brokerage firms, financial services companies,
health care organizations, insurance companies, business process
outsourcing organizations and other companies in order to develop,
market and deliver our services. If our strategic alliances are
discontinued, due to the loss of professional staff or otherwise, or if
we have difficulty developing new alliances, profitability could be
negatively impacted. Should any members of our professional staff be
unable or unwilling to continue their relationship with us, our
business, financial condition and operating results and the ability of
the Fund to make distributions on the Units could be materially
adversely impacted.
Competition
We operate in a highly competitive North American market in our service
areas. As a result, we compete with many domestic and international
firms. Some of our competitors have achieved substantially more market
penetration in certain of the areas in which we compete. In addition,
some of our competitors have substantially more financial resources
and/or financial flexibility than us. These competitive forces could
have a material adverse effect on our business, financial condition and
results of operations and the ability of the Fund to make distributions
on the Units by reducing our current market share in the area we serve.
Further details are provided in the "Risk Factors" section of the Annual
Information Form available on the SEDAR Web site (www.sedar.com).
Supplemental Summary of Quarterly Results
Operating results, distribution summary and condensed balance sheet
history are as follows:
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Operating results, Distribution and Condensed Balance Sheet
Selected Unaudited Consolidated Financial Information
(in thousand dollars)
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Quarter ended Quarter ended
March 31 December 31
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2006 2005
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Revenue $32,178 $30,071
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Net Income 2,698 2,624
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EBITDA 7,228 7,146
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EBITDA Margin 22.5% 23.8%
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Distributable cash 6,598 6,543
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Distributions declared 5,666 5,729
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Net income per Unit (basic and diluted) $0.09821 $0.09553
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Distributable Cash per Unit
(basic and diluted) $0.24016 $0.23817
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Distributions declared per Unit
(basic and diluted) $0.20625 $0.20854
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Payout ratio 86% 88%
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Total Assets $297,753 $303,718
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Total Long-term debt $35,000 $35,000
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Disclosure Controls
As of March 31, 2006, an evaluation of the effectiveness of disclosure
controls and procedures (as defined under Multilateral Instrument
52-109) was carried out by our management team under the supervision of
the Chief Executive Officer and the Chief Financial Officer. Based on
the evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the design and operation of these disclosure
controls and procedures were effective.
Additional Information
The Fund's Units trade on the Toronto Stock Exchange under the symbol
MSI.UN. Additional information relating to the Fund, including all
public filings, is available on the SEDAR Web site (www.sedar.com) and
on our own Web site at www.morneausobeco.com.
The content of this MD&A reflects information known as of May 10, 2006.
POUR PLUS D'INFORMATIONS, COMMUNIQUER AVEC:
POUR PLUS D'INFORMATIONS, COMMUNIQUER AVEC:
Fonds de revenu Morneau Sobeco
W.F. (Bill) Morneau, Jr.
Président et chef de la direction
(416) 445-2700
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Circ.
