�e John Deere Legacy
A Family Tradition Since 1837
Annual Report 2004
Partnership Profile
With John Deere dealerships currently operating in 11 different locations, Cervus Limited Partnership is dedicated
to ensuring the profitability and strong future growth potential of the John Deere brand in Western Canada. Our
commitment to providing genuine customer value at the dealership level is evident in the fact that today, Cervus is
the owner of the largest group of John Deere agricultural equipment dealers in Canada. Recently added to the Alberta
Venture Magazine’s “Top 100 Stock Growth” list, Cervus Limited Partnership is a public limited partnership listed
on the TSX Venture Exchange, trading under the symbol CVL.UN.
Letter to Share holders
2
MD&A
4
Financials
10
Financial Highlights
REVENUE ($ millions)
TOTAL ASSETS ($ millions)
NET INCOME ($ millions)
141.6
33.4
3.7
26.2
2.1
56.4
2003
2004
2003
2004
2003
Years ended December 31,
2004
2003
Revenue ($ millions)
Earnings before taxes ($ millions)
Net earnings ($ millions)
141.6
3.7
3.7
56.4
2.0
2.1
Total assets ($ millions)
Total partners equity ($ millions)
Total long term liabilities ($ millions)
33.4
7.7
7.6
26.2
5.1
5.5
Non cash distributions per unit
Cash distributions per unit
0.30
0.08
0.00
0.00
2004
Le� er � �e Partners
D e a r F e l l ow Pa r t n e r s ,
In 2004, Cervus LP completed its first full year of operations as a Limited Partnership, and as reflected in our operational and
financial results, the Partnership is profitable and well-positioned for continued growth.
Financial Highlights
Cervus LP achieved a strong, balanced performance in 2004, posting
record sales and earnings results. It was a successful year in which each of
our 11 dealerships in Western Canada made important contributions.
Share price increased from $2.00 in the fall of 2004 to a current trading
range of $6.50-$7.00 per share – an impressive increase of 350 percent. In
recognition of this success, we are proud to have earned the 17th position
on Alberta Venture Magazine’s list of the Top 100 Alberta Companies for
Stock Performance.
Revenue was $141.6 million for the year ended December 31, 2004
compared to $56.4 million for the period ended December 31, 2003, an
increase of $85.2 million, while net income for the year was $3.7 million.
On a per unit basis for the year, basic earnings were $0.97 per unit,
compared to basic earnings of $0.57 per unit in 2003.
As a result of these successes, in January 2005, Cervus LP began paying
unitholders a monthly distribution of $0.08 per month per unit - $0.96
per unit on an annualized basis.
In 2004, the Partnership also initiated a DRIP (Dividend ReInvestment
Program), a program that allows unitholders to reinvest their distributions
into additional units from the Limited Partnership. The price is determined
by taking the average 10-day trading price prior to distribution, discounting
that price by 5 percent and issuing units equal in value to the distribution
based on that price. This is an excellent way to acquire additional units
without brokerage fees and at a discount. There are no hold periods and
units acquired in this manner may be sold at any time.
Fiscal 2004 in Review
Fiscal 2004 represented a year of solid execution and growth in almost
all aspects of our business. However, in spite of the Partnership’s strong
financial performance and continuing market leadership, it is vital to note
that many of our customers are still significantly and negatively affected by
economic and political events beyond their control. Such events, including
the ongoing BSE crisis, continue to impact our customers and as a result
impact our sales and profitability.
In agribusiness, weather naturally remains an uncertainty that can affect
our customers businesses, and our own as a result. The frost that occurred
in Saskatchewan in August of 2004 continues to impact cash flow for our
customers. Most of the wheat that was damaged by frost has been graded
as feed wheat and there is a glut of inventory. The Canadian Wheat Board
advance was greater than the current prices that are being obtained, so our
customers are reluctant to deliver grain if it means paying back some funds
to the Wheat Board. In general, grain prices continue to be on the low side,
compounding the problems created by a higher Canadian dollar.
2
Cervus Limited Partnership Annual Report 2004
While these situations negatively affect to our business, we were profitable
last year and expect that we can continue this level of profitability is spite
of these unfortunate conditions.
Operational Highlights
In its first year of operations, our Saskatoon and Rosthern locations had
a very successful year, and we look forward to our business there growing
and adding significant profits to Cervus LP.
Elsewhere, to better utilize the Partnership’s inventories, human resources,
and capital, we have merged all of the five Alberta dealerships to create
a single operating entity called AGRO. Each dealership location is now
identified as an AGRO location (for example, the Calgary, Alberta
location is now called AGRO-Calgary), and we have empowered a senior
management team to oversee the entire dealership operations of the five
stores. We have reaped the immediate benefits of this restructuring; used
inventory is now sold inter-dealership, marketing endeavours for the
group are now planned and executed centrally, and some consolidation of
accounting functions has been put in place. Change always requires effort
and patience, and we would like to thank everyone who has worked to
ensure this transition succeeds.
Acknowledgements
In 2005, Cervus LP’s key stakeholders - customers, employees, and limited
partners - remain at the center of our strategy. We are off to a fine start
for the year and our outlook is optimistic. We remain excited about our
growth opportunities and look forward to translating those opportunities
into increased shareowner value.
Thank you to all of our employees, dealer principals and board members
for their hard work this past year and to our customers for their loyalty and
continued business.
Sincerely,
Peter Lacey
Cervus Limited Partnership
“We are� excited about our grow� opportunities
and look forward � translating
�ose opportunities into increased value.”
Cervus Limited Partnership Annual Report 2004
3
Management’s Discussion and Analysis
For the period from January 1 to December 31, 2004
The following discussion and analysis has been prepared by management and reviewed and approved by the Board of Directors of the general
partner of Cervus LP (“the LP”). The discussion and analysis has been prepared as of April 25, 2005.
This management and discussion analysis (“MD&A”) should be read in conjunction with the audited consolidated financial statements for the
year ended December 31, 2004. The audited consolidated financial statements and financial data contained in the MD&A have been prepared
in accordance with Canadian generally accepted accounting principles.
This MD&A may contain forward-looking information that involve a number of risks and uncertainties that could cause actual results to
differ materially from those anticipated. For this purpose, any statements herein that are not statements of historical fact may be deemed to be
forward–looking statements. Such risks and uncertainties include, but are not limited to: general economic conditions, industry conditions,
commodity prices, currency fluctuations and competition from other agricultural equipment dealers.
The LP is in the business of acquiring and operating authorized John Deere Limited dealerships selling John Deere agricultural and grounds
care equipment. Currently, the LP operates eleven locations in Western Canada.
Commencement of operations
On March 14, 2003, Cervus Corporation announced the creation of a limited partnership to be known as Cervus LP and entered into an
arrangement agreement with Cervus LP. Pursuant to the agreement, the dealerships in Calgary, Ponoka, Stettler and Trochu transferred their
net dealership assets to Cervus LP in exchange for the promissory notes, limited partnership units and fixed value limited partnership units on
April 30, 2003.
On closing of the arrangement, each common shareholder of Cervus Corporation received one limited partnership unit of Cervus LP for each
common share held. Cervus Corporation distributed the limited partnership units to its shareholders via a dividend. Cervus Corporation is
the general partner of Cervus LP.
On January 1, 2004, the LP acquired a 59% interest in Greenline Equipment Ltd. from Cervus Corporation in exchange for a promissory note.
Greenline Equipment had locations in Moosomin - SK, Wawota - SK and Russell - MB.
Key Performance Measures
The LP continuously reviews and monitors its activities and performance measures that are critical to measuring success. Its key financial
performance measures are listed below. Others include measures such as market share, customer satisfaction and used inventory turnover.
Years ended December 31
2004
2003
Revenue growth %
Revenue ($millions)
151%
141.6
56.4
Net earnings ($ millions)
Basic earnings per unit
Return on opening partners’ equity
3.7
0.97
73%
2.1
0.57
71%
Distributions per unit
0.38
0.00
The performance measures indicate success in our strategies. Revenues have increased 151 percent in year over year growth – primarily due to
acquisitions. Net earnings have increased to $3.7 million from $2.1 million, a factor 76 percent. On a per unit basis, earnings have increased
to $0.97 per unit from $0.57 per unit, a factor of 70 percent. The LP’s return on opening equity was 73 percent compared to 71 percent in the
prior year. The LP declared distributions of $0.38 for the year ended 2004, compared to no distributions in the prior year, an increase of $0.38
per unit. In fiscal 2005, the LP has made monthly distributions of $0.08 per month starting in January to April 2005 and intends to maintain
this distribution for the year.
4
Cervus Limited Partnership MD& A
Revenue
Revenue was $31.7 million for the three months of operations ended December 31, 2004 compared to $19.0 million for the three month period
ended December 31, 2003, an increase of $12.7 million. The increase is due to three factors: first, the acquisition of Farm & Garden Centre of
Saskatoon accounted for $4.0 million of additional revenue for the quarter. Second, the acquisition of Greenline Equipment effective January
1, 2004 accounted for $4.7 million in revenue for the quarter. Third, same store sales increased by $4.0 million for the quarter.
Revenue was $141.6 million for the year ended December 31, 2004 compared to $56.4 million for the period ended December 31, 2003, an
increase of $85.2 million. The increase is due to three factors: first, the comparative period contains operations for only eight months from May
1 to December 31, 2003. Second, the acquisition of Farm & Garden Centre of Saskatoon accounted for $24.2 million of additional revenue.
Third, the acquisition of Greenline Equipment effective January 1, 2004 accounted for $28.7 million in sales.
Year to date, new and used equipment sales were $114.3 million representing 81 percent of sales compared to $44.7 million representing 79
percent of sales in the same period last year. Parts and service sales were $26.7 million representing 19 percent of sales compared to $11.5 million
representing 20 percent of sales for the comparative period.
Cost of Sales
Cost of sales were $26.6 million for the three months ended December 31, 2004 compared to $15.7 million for the comparative period. Year
to date cost of sales were $120.5 million compared to $46.9 million. The increase for both periods is consistent with the higher sales activity
from the acquisitions of Farm and Garden Centre and the Greenline Group and twelve months of revenue from the existing stores compared
to eight months in the prior year.
Gross Profit Margins
Year to date, the LP’s overall gross profit margin was 14.9 percent of sales for December 31, 2004 compared to 16.8 percent for the same period
last year. The decrease margin is due to the LP owning the dealerships during January and February of 2004, a period which have low sales
activity, compared to during the growing seasons where sales activity is higher. In the prior year, the LP did not commence operations until
May 1, 2003.
Selling, General and Administrative Expenses
For the three months ended selling, general and administrative expenses were $4.4 million compared with $3.1 million, an increase of $1.3
million. Year to date selling, general and administrative expenses were $16.6 million compared with $7.0 million, an increase of $9.6 million.
The increase for both periods is consistent with the higher sales activity from the acquisitions of Farm and Garden Centre and the Greenline
Group and twelve months of revenue from the existing stores compared to eight months in the prior year.
As a percentage of sales, selling, general and administrative expenses remained consistent for year at 11.7 percent compared with 12.5 percent
for the comparative the prior year.
Depreciation
Year to date, depreciation was $0.3 million compared to $0.1 million in depreciation for the comparative period in 2003. The increase relates
to the fixed assets acquired with the dealerships in Farm and Garden Centre and the Greenline Group. The fixed assets for the other dealerships
are owned by Cervus Corporation and are leased to Cervus LP.
Interest
Year to date, interest expense was $0.8 million compared to $0.4 million in the same period last year. The increase is consistent with the increase
in floor plan payables and notes payable. As a percentage of revenue, interest expense remained consistent for year at 0.6 percent compared with
0.7 percent for the comparative the prior year.
Income Taxes
Income taxes are the responsibility of the individual partners except for the LP’s subsidiary Questus and its subsidiary corporations. During
the year, the LP’s subsidiary paid $10,766 in current tax obligations off set by a future tax recovery of $49,376.
Equity Earnings on Investment
Equity earnings on investments represents earnings on Deer Star Systems Inc., an Alberta based company that sells John Deere sprayers,
101034350 Saskatchewan Ltd. operating Green-Trac Spraymasters, a company that sells John Deere sprayers and Greenway Sprayers, a
Saskatchewan based entity that sells John Deere sprayers. The LP owns 27 percent, 33 percent and 19 percent of these three entities respectively.
The income from these investments was $0.2 million year to date.
Cervus Limited Partnership Annual Report 2004
5
Net Income
The net income for the year was $3.7 million. On a per unit basis for the year, the basic earnings were $0.97 per unit and compared to basic
earnings of $0.57 per unit for the last fiscal year. On a per unit basis for the year, the fully diluted earnings were $0.94 per unit and compared
to basic earnings of $0.56 per unit for the last fiscal year. The weighted average units outstanding totaled 3.8 million units for the twelve months
ended December 31, 2004.
Annual Information
Years ended December 31,
2004
2003
Revenue ($ millions)
Earnings before taxes ($ millions)
Net earnings ($ millions)
141.6
3.7
3.7
56.4
2.0
2.1
Total assets ($ millions)
Total partners equity ($ millions)
Total long term liabilities ($ millions)
33.4
7.7
7.6
26.2
5.1
5.5
Non cash distributions per unit
Cash distributions per unit
0.30
0.08
0.00
0.00
Quarterly Information
2004
2003
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Revenue (thousands $)
Net Earnings (Loss) (thousands $)
31,684
496
47,681
1,890
41,754
1,684
20,498
(369)
18,959
(80)
22,990
1,433
14,459
754
Basic Earnings (Loss) Per Share
Diluted Earnings (Loss) Per Share
0.12
0.09
0.50
0.50
0.45
0.45
(0.10)
(0.10)
(0.02)
(0.02)
0.39
0.38
0.20
0.20
Shares Outstanding (thousands)
Fully Diluted Shares (thousands)
4,017
4,159
3,917
4,059
3,917
3,917
3,702
3,917
3,702
3,917
3,702
3,917
3,702
3,877
L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S
Cash Flows from Operations
In 2004, operating activities generated $1.8 million of cash. Improved earnings were offset by increased investments in working capital.
Cash Flows from Financing
In 2004, financing activities used $3.0 million for the year on a overall basis. Cash from financing included $0.4 million from the exercise of
unit options and from a private placement and $0.1 million from additional new debt for fixed assets purchases.
Cash used for financing activities included $1.4 million repaid in notes payable to Cervus Corporation, $1.7 million repaid on short term
advance from the prior year for the acquisition of Farm & Garden Centre and $0.1 million in long term debt obligations repaid.
Cash Flows from Investing
In 2004, investing activities generated $0.2 million for the year on a overall basis. Cash from investing activities included $1.6 million from
sale of dealership buildings in Saskatoon, Saskatchewan to Cervus Corporation. In addition, the LP acquired a 59 percent ownership interest
in Greenline Equipment from Cervus Corporation on January 1, 2004 which included cash held by Greenline of $0.2 million.
Cash used in investing activities included the purchase $1.2 million of shares in Cervus Corporation in a private placement which it distributed
in kind to its unitholders on July 15, 2004 via a $0.30 per unit distribution. The LP acquired $0.2 million of fixed assets for the year.
6
Cervus Limited Partnership MD& A
Line of Credit, Liquidity and Debt
As of December 31, 2004, the LP had working capital of $12.3 million, an increase of $3.5 million from December 31, 2003. The working
capital ratio improved slightly at 1.7 to 1 at December 31, 2004 compared 1.6 to 1 at December 31, 2003.
On November 8, 2004 the LP finalized a $5 million credit operating facility with its bank secured by current assets. At December 31, 2004,
the LP had $0.2 million drawn on this line leaving $4.8 available for operating purposes.
Long-term liabilities include unsecured and subordinated notes payable to the general partner of $6.8 million. The notes are payable in five
year terms. The notes payable require quarterly interest payments at bank prime rate. In addition, the LP owes $0.7 million to other related
companies that are unsecured, subordinated, and $0.4 million of these notes are payable in 2009.
As of December 31, 2004, the LP’s issued equity consisted of 4,016,510 units and 803,969 fixed value units.
Commitments
Contractual obligations are set out below:
($ millions)
2005
2006
2007
2008
2009
Thereafter
Operating leases
Long term debt
Notes payable Cervus
Other notes payable
1.6
0.1
-
1.6
0.1
-
1.3
-
0.8
3.7
-
0.7
3.1
0.4
1.6
-
Total
1.7
1.7
1.8
4.5
4.2
1.6
Management believes that these obligations will be met through cash generated by operations and through refinancing notes payable with
Cervus Corporation.
Related Party Transaction with Cervus Corporation - Disposition of certain assets of Farm and Garden Centre
On November 1, 2003 the LP in conjunction with Cervus Corporation acquired all of the issued and outstanding shares of Farm and Garden
Centre of Saskatoon Ltd., which operate two authorized John Deere dealerships in Saskatoon and Rosthern, Saskatchewan. The purchase price
for the operating assets was $4.0 million payable by the issuance of four notes payable to John Deere for $0.8 million, Cervus Corp for $1.1
million, notes payable to the dealership managers for $0.4 million, a short term note to Cervus Corporation for $1.7 million.
Cervus LP sold a 20.2% future earnings interest in Farm and Garden Centre Ltd. to two dealership managers of these locations on January
1, 2004 for $1. As part of same transaction, the dealership managers advanced the LP $0.4 million in November 2003. On January 1, 2004,
the LP sold land and dealership buildings to Cervus Corporation for $1.6 million and repaid the short term advance of $1.7 million to Cervus
Corporation with the proceeds. The land and buildings were leased back to the LP from Cervus Corporation.
Related Party Transaction with Cervus Corporation - Acquisition of Greenline Equipment
On January 1, 2004, the LP acquired the 59% interest in Greenline Equipment from Cervus Corporation for the assumption of note payables
to Cervus Corp. for $3.0 million and to other related parties of $0.5 million.
Cervus Limited Partnership Annual Report 2004
7
Related Party Transactions with Cervus Corporation
Under the arrangement agreement and subsequent operational agreement between the LP and Cervus Corporation, the Corporation is entitled
to reimbursement for costs incurred as general partner on behalf of Cervus LP. The agreement provides for a 1% annual charge on assets utilized,
allocation of insurance expenses, allocation of data services expenses, guarantee fees based on 3% of the guarantee amounts to John Deere
payable to either the Corporation or the individual providing the guarantees, interest on any overdraft balances, interest on any outstanding
indebtedness, building lease charges based on 1% per month of the fair market value of the property, and other direct expenses reimbursable
with no handling fees or markup.
During the period from January 1, 2004 to December 31, 2004, the LP had the following transactions relating to the above agreement with
Cervus Corporation:
2004
2003
Equipment and real estate rental
Interest on notes payable
Interest on fixed value units
Monthly management fees
Guarantee fees
General partner profit allocation
$
804,324
424,584
40,200
291,604
97,500
36,584
$
327,612
141,707
20,264
156,404
44,250
19,758
$
1,694,796
$
709,995
On May 5, 2004, the LP acquired 620,000 common shares of Cervus Corporation at a price of $2.00 per common share in a private placement.
The LP distributed $0.30 (on a tax basis) per limited partnership unit on July 15, 2004 to unitholders of record on June 30, 2004. The
distribution was paid in kind by way of 0.15 Cervus Corporation common shares for each unit held.
Other Related Party Transactions
During 2004, the LP paid limited partnership unit holders the following:
Guarantee fees
Equipment and real estate rental
Management fees paid to companies controlled by two dealership managers
Interest on notes payable to companies controlled by two dealership managers
$
2004
2003
115,500
250,836
326,664
20,200
52,000
50,000
3,400
713,200
$
105,400
Change in Accounting Policies
Effective January 1, 2004, the LP adopted the amended Canadian accounting standard for stock-based compensation. The amended standard
requires the LP to measure all unit-based payments using the fair value method of accounting and recognize a compensation expense in the
financial statements. The effect of this change in accounting policy has been recorded retroactively with restatement of the prior period. The
effect of the adoption is 2004 net earnings have decreased by $40,482 (2003 - $3,519) with the offset recorded as contributed surplus.
Future Accounting Standards
The CICA issued issued Accounting Guideline 15 – “Consolidation of Variable Interest Entities”. The Guideline requires enterprises to identify
VIEs in which they have an interest, determine whether they are the primary beneficiary of such entities, and, if so, to consolidate them. The
LP is presently assessing whether this accounting guideline will have an impact on the its financial reporting.
8
Cervus Limited Partnership MD& A
Business Risks and Uncertainties
Authorized John Deere dealerships sell agricultural, lawn and garden and commercial products. The majority of sales are derived from the
agricultural sector. Consequently, grain and livestock prices, weather conditions, Canadian vs. U.S. currency exchange rates, interest rates,
disease, Canadian and U.S. government trade policies and customer confidence have an impact on demand for equipment, parts and service.
The retail farm equipment industry is very competitive. The LP faces a number of competitors, including other “in-line” John Deere dealerships
and other competitors including authorized Agco, Case, Caterpillar, Kubota and New Holland dealerships that may be located in communities
of the LP’s dealerships or are located in surrounding communities to the LP’s dealerships. Although competition can be strong, there are a
number of factors which allow the LP to compete throughout its market areas: ability to complete large deals with large customers due to the
LP’s financial strength, its dealership locations are located in key centers such Calgary and Saskatoon and its dealerships are primarily located
in higher rainfall, more productive farming areas of western Canada.
The LP is dependent on the market acceptance of John Deere’s products. Presently, Deere & Company has a reputation for the manufacture
and delivery of high quality, competitively priced products with excellent brand recognition and customer support. John Deere has the largest
market share of manufacturing and sales of farm equipment in North America. There can be no assurance that John Deere will continue to
manufacture high quality, competitively priced products or maintain its market share in the future.
The success of each dealership is largely dependent on the performance of key employees. Failure of the LP to retain key employees or attract
additional key employees with the necessary skills may have a material adverse effect on the growth and profitability of the LP.
The LP acts as a sales agent for the lease of certain equipment by customers from Deere Credit. Under the terms of its agreement with Deere
Credit, the LP is obligated to purchase the equipment leased to customers by Deere Credit at the end of the lease term. Deere Credit is obligated
to finance these future purchases under dealer floor plan arrangements.
Presently, the agreement with John Deere also provides an arrangement under which John Deere Limited can terminate a John Deere dealership
owned by the LP if such dealership fails to maintain certain performance and equity covenants as agreed to by John Deere Limited and the LP.
Each contract also provides a one year remedy period whereby the LP has one year to restore any deficiencies to a dealership contract. There
can be no guarantee that John Deere Limited will provide its consent to John Deere dealership acquisitions and there can be no guarantee that
circumstances will not arise which give John Deere Limited the right to terminate John Deere dealership contracts owned by the LP. To date
the LP has maintained a good relationship with John Deere and management expects this will continue going forward.
Outlook
Low grain prices and the closed border to live cattle shipments will continue to suppress demand for equipment. Despite this, the partnership
anticipates growth in revenues and profitability and intends to maintain monthly distributions.
SEDAR
Additional information about the LP may be found on the sedar website at www.sedar.com
Cervus Limited Partnership Annual Report 2004
9
Consolidated Annual
Financial Statements of Cervus LP
Year ended December 31, 2004 and the period from March 14, 2003 to December 31, 2003
Management’s Responsibility
TO THE LIMITED PARTNERS
OF CERVUS LIMITED PARTNERSHIP:
Management has responsibility for preparing the accompanying consolidated financial statements. This responsibility
includes selecting appropriate accounting principles and
making objective judgments and estimates in accordance
with Canadian Generally Accepted Accounting Principles.
In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management
designs and maintains the necessary accounting systems
and related internal controls to provide reasonable insurance that transactions are authorized, assets safeguarded
and proper records maintained.
External auditors are appointed by the shareholders to audit
the consolidated financial statements and report directly to
them. Their report follows. The external auditors have full
and free access to, and meet periodically with, management
and the Board of Directors to report their findings.
Peter Lacey
President
Auditors’ Report
to the Limited Partners
We have audited the consolidated balance sheets of Cervus
LP as at December 31, 2004 and 2003 and the consolidated
statements of earnings, accumulated earnings and cash
flows for the year ended December 31, 2004 and for the period
from March 14, 2003 to December 31, 2003. These financial
statements are the responsibility of the general partner of
the partnership. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position
of Cervus LP as at December 31, 2004 and 2003 and the
results of its operations and its cash flows for the year ended
December 31, 2004 and for the period from March 14, 2003
to December 31, 2003 in accordance with Canadian generally
accepted accounting principles.
Howard Bolinger
Chief Financial Officer
Chartered Accountants
Calgary, Canada
April 25, 2005
10
Cervus Limited Partnership Consolidated Annual Financial Statements
Consolidated Balance Sheets
December 31, 2004 and 2003
2004
ASSETS
Current assets:
Cash
Trade accounts receivable
Inventories (note 4)
Prepaids
Income taxes receivable
Land and buildings held for sale (note 18)
$
–
2,626,268
27,594,996
156,529
3,768
–
30,381,561
2003
$
946,751
872,144
803,969
429,598
Building and equipment (note 5)
Finance reserve (note 6)
Goodwill
Investments (note 7)
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Bank indebtedness (note 8)
Accounts payable and accrued liabilities
Floor plan payables (note 9)
Due to Cervus Corporation (note 17)
Future income taxes (note 10)
Distribution payable
Current portion long-term debt (note 11)
886,325
1,433,633
20,064,559
102,725
–
1,865,630
24,352,872
611,573
517,244
803,969
–
$
33,434,023
$
26,285,658
$
164,664
2,225,073
15,281,083
–
–
321,321
67,188
18,059,329
$
–
1,125,492
12,410,972
1,721,129
304,111
–
–
15,561,704
Long-term debt (note 11)
Notes payable to Cervus Corporation (note 12)
Notes payable (note 17)
Future income taxes (note 10)
Partners’ equity:
Partners’ capital (note 13)
Contributed surplus
Accumulated earnings
135,207
6,798,795
714,792
–
–
5,118,307
404,000
116,255
3,389,975
44,000
4,291,925
7,725,900
2,974,975
3,519
2,106,898
5,085,392
Commitments and contingencies (notes 14 and 15)
$
33,434,023
$
26,285,658
See accompanying notes to consolidated financial statements.
Approved by the Board of the General Partner:
Peter Lacey
Director
Graham Drake
Director
Cervus Limited Partnership Annual Report 2004
11
Consolidated Statement of Earnings
Year ended December 31, 2004, with comparative figures for the period from March 14, 2003 to December 31, 2003
2004
Revenue:
Equipment sales
Parts and service
Other
2003
$ 114,296,070
26,709,536
611,255
141,616,861
Cost of sales
Gross profit
Selling, general and administrative expenses
Interest expense
Depreciation expense
$
44,649,384
11,509,451
248,996
56,407,831
120,459,988
21,156,873
46,915,481
9,492,350
16,639,879
805,138
256,645
7,047,884
387,022
60,383
3,455,211
1,997,061
207,314
–
3,662,525
1,997,061
Earnings before the following
Equity in earnings of significantly influenced companies
Earnings before income taxes
Income taxes (recovery) (note 10):
Current
Future
10,766
(49,376)
(38,610)
–
(109,837)
(109,837)
Net earnings
$
3,701,135
$
2,106,898
Net earnings per unit (note 13):
Basic
Diluted
$
$
0.97
0.94
$
$
0.57
0.56
See accompanying notes to consolidated financial statements.
Consolidated Statement of Accumulated Earnings
Year ended December 31, 2004, with comparative figures for the period from March 14, 2003 to December 31, 2003
General
Partner
2003 net earnings, being balance at
December 31, 2003
$
Net earnings
Reduction on acquisition of Cervus Corporation
common shares (note 17(d))
Distributions paid - 587,473 Cervus Corporation
common shares
Distributions declared
Balance, December 31, 2004
47,904
$
77,211
$
2,058,994
Total
$
3,623,924
2,106,898
3,701,135
–
(378,200)
(378,200)
–
–
(816,587)
(321,321)
(816,587)
(321,321)
125,115
See accompanying notes to consolidated financial statements.
12
Limited
Partners
Cervus Limited Partnership Consolidated Annual Financial Statements
$
4,166,810
$
4,291,925
Consolidated Statement of Cash Flows
Year ended December 31, 2004, with comparative figures for the period from March 14, 2003 to December 31, 2003
2004
2003
Cash flows from (used in):
Operations:
Net earnings
Add items not affecting cash:
Depreciation expense
Unit-based compensation expense
Undistributed earnings of significantly influenced companies
Future income taxes (recovery)
$
Net change in non-cash working capital
Financing:
Proceeds on long-term debt
Issuance of limited partnership units
Received from (paid to) Cervus Corporation (note 17)
Issuance (repayment) of notes payable (note 17)
Formation costs
Repayment of long-term debt
Decrease (increase) in finance reserve
Issuance of general partnership unit
Issuance (repayment) of notes payable to Cervus Corporation
Investments:
Purchase of shares of Cervus Corporation (note 17)
Purchase of equipment
Purchase of long-term investments
Bank indebtedness assumed on formation (note 1)
Business acquisition, net of cash acquired (notes 1 and 18)
Proceeds on sale of assets (note 18)
$
60,383
3,519
–
(109,837)
2,060,963
(1,937,365)
1,804,206
122,609
2,183,572
114,271
415,000
(1,721,129)
(171,215)
–
(77,510)
(215,377)
–
(1,378,167)
(3,034,127)
–
–
1,721,129
404,000
(50,000)
–
170,165
100
202,241
2,447,635
(1,240,000)
(249,949)
(89,868)
–
184,400
1,574,349
178,932
–
(2,760)
–
(19,773)
(3,722,349)
–
(3,744,882)
886,325
886,325
Cash, beginning of period
2,106,898
256,645
40,481
(207,314)
(49,376)
3,741,571
(1,050,989)
Increase (decrease) in cash
Cash (bank indebtedness), end of period
3,701,135
–
$
(164,664)
$
886,325
$
838,161
10,766
$
387,022
–
The following cash payments have been included in
the determination of net earnings:
Cash interest paid
Cash income taxes paid
See accompanying notes to consolidated financial statements.
Cervus Limited Partnership Annual Report 2004
13
Notes to the Consolidated Financial Statements
Year ended December 31, 2004
Description of business:
Cervus LP (the “LP”) was incorporated under the laws of Alberta as a limited partnership on March 14, 2003. The
general partner is Cervus Corporation. The LP is a retailer of agricultural equipment primarily supplied by Deere &
Company and products and services pursuant to dealership contracts.
1. B A S I S O F P R E S E N TAT I O N :
In April, 2003 the shareholders of Cervus Corporation approved a plan of arrangement with Cervus Corporation and
the LP. The effective date for the arrangement was April 30, 2003. The arrangement was approved by John Deere and
revised dealership contracts were signed on May 1, 2003. The arrangement received court and regulatory approvals
on May 21, 2003.
Pursuant to the arrangement, four dealerships were transferred to the LP in exchange for notes, limited partnership
units and fixed value limited partnership units. Following the reorganization, Cervus Corporation became the general
partner of the LP.
Option holders were issued an option to purchase one limited partnership unit of the LP for each option previously
held in Cervus Corporation.
For accounting purposes, the sale of the net assets of the dealership was a transfer between entities under common
control and the net assets were recorded at carrying values. The accounting value of the limited partnership units
issued under the arrangement was based on the net carrying values of the dealerships transferred to the LP less the
principal amount of the notes payable and the fixed value limited partnership units.
On January 1, 2004 the LP acquired Cervus Corporation’s interest in three other dealerships in exchange for a note
payable to Cervus Corporation.
The carrying values of the dealerships transferred in 2003 and the dealerships acquired in 2004 and the consideration
paid by the LP are summarized as follows:
2004
Net assets acquired:
Cash
Accounts receivable
Inventories
Prepaids
Finance reserve
Fixed assets
Goodwill
Investment in affiliate
Banks indebtedness
Future income taxes
Accounts payable
Floor plan payables
Long-term debt
Due to Cervus Corporation
Due to related companies
Consideration paid:
Notes payable to Cervus Corporation
Limited partnership units (3,701,510 units)
Limited partnership fixed value units (803,969 units)
14
$
2003
184,401
643,312
7,007,879
32,241
139,523
341,874
–
87,203
–
66,880
(374,721)
(4,422,095)
(165,634)
(3,058,855)
(482,007)
$
–
2,124,686
14,604,158
52,508
535,069
–
803,969
–
(19,773)
–
(1,291,270)
(8,868,406)
–
–
–
$
1
$
7,940,941
$
1
–
–
$
4,916,066
2,220,906
803,969
$
1
$
7,940,941
Cervus Limited Partnership Consolidated Annual Financial Statements
The limited partnership fixed value units are non-voting, redeemable at the option of the LP and entitle Cervus
Corporation to an annual distribution of 5% of the face value.
2 . S I G N I F I C A N T AC C O U N T I N G P O L I C I E S :
(a) Basis of consolidation:
These consolidated financial statements include the accounts of the LP and each of its dealership locations (Agro
Equipment, Farm and Garden Centre Saskatoon and Greenline Equipment) and its subsidiary, Questus Investment
Corp. and its subsidiaries.
(b) Inventories:
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the specific
identification method for new and used equipment and average cost for parts.
(c) Building and equipment:
Building and equipment are recorded at cost. Depreciation is provided using the following methods at rates
intended to depreciate the cost of the assets over their estimated useful lives. The annual rates are as follows:
Building
Automotive
Office equipment
Service equipment
Computer equipment and software
Basis
Rate
Declining balance
Declining balance
Declining balance
Declining balance
Declining balance
4%
30%
20%
20%
30%
Leasehold improvements are depreciated on a straight-line basis over the shorter of the term of the lease or their
estimated life.
(d) Impairment of long-lived assets:
Building and equipment are reviewed for impairment whenever events or changes in circumstance indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset.
(e) Goodwill:
Goodwill is the residual amount that results when the purchase price of an acquired dealership exceeded the sum
of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.
Goodwill is not amortized and is tested for impairment annually, or more frequently, if events or changes in
circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the
first step, the carrying amount of a dealership is compared with its fair value. When the fair value of a dealership
exceeds its carrying amount, goodwill is considered not to be impaired and the second step of the impairment
test is unnecessary.
The second step is carried out when the carrying amount of a dealership exceeds its fair value, in which case, the
implied fair value of the goodwill is compared with its carrying amount to measure the amount of the impairment
loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is
determined in a business combination described in the preceding paragraph, using the fair value of the dealership
as if it was the purchase price. When the carrying amount of dealership goodwill exceeds the implied fair value
of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate
line item in the statement of earnings before extraordinary items and discontinued operations.
(f) Long-term investments:
The investments in significantly influenced companies are accounted for using the equity method. Under the
equity method, the original cost of the shares is adjusted for the LP’s share of post-acquisition earnings or
losses less dividends.
Cervus Limited Partnership Annual Report 2004
15
(g) Income taxes:
Income taxes are the responsibility of the individual partners and accordingly are not reflected in these financial
statements, except for income taxes of the subsidiaries. The subsidiaries follow the liability method of accounting
for corporate income taxes. Under the liability method, future tax assets and liabilities are determined based
on differences between the financial reporting and tax bases of assets and liabilities, and measured using the
substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse.
(h) Per unit amounts:
Basic per unit amounts are computed by dividing earnings by the weighted average number of units outstanding
for the period. Diluted per unit amounts are calculated giving effect to the potential dilution that would occur if
stock options or other dilutive instruments were exercised or converted to units. The treasury stock method is
used to determine the dilutive effect of stock options and other dilutive instruments. This method assumes that
any proceeds upon the exercise or conversion of dilutive instruments, for which market prices exceed exercise
price, would be used to purchase units at the average market price of the units during the period.
(i)
Unit-based compensation:
The LP has a unit-based compensation plan, which is described in note 13. The LP accounts for employee unit
options granted on or after January 1, 2002, using the fair value based method. Consideration paid by employees
on the exercise of unit options is recorded as partners’ capital and contributed surplus. For awards that vest at
the end of the vesting period, compensation cost is recognized on a straight-line basis; for awards that vest on a
graded basis, compensation cost is recognized on a pro-rata basis over the vesting period.
(j)
Revenue recognition:
Revenue on equipment and parts sales is recognized upon delivery to customers. Rental and service revenue are
recognized at the time the service is performed. Revenue is not recognized before there is persuasive evidence
that an arrangement exists, delivery has occurred, the rate is fixed and determinable, and the collectibility of
outstanding amounts is considered probable. The LP considers persuasive evidence to exist when a formal
contract or purchase order is signed. Sales terms do not include provision for post service obligations.
(k) Use of estimates:
The preparation of financial statements in conformity with Canadian generally accepted accounting principles
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 financial statements and the reported amounts
of revenue and expenses during the reported period. Actual results could differ from these estimates.
Significant areas requiring the use of management estimates relate to the valuation allowance for trade accounts
receivable, the net realizable value of inventories, recovery of goodwill, the useful life of building and equipment
for depreciation purposes and evaluation of their net recoverable amount and the determination of the valuation
allowance related to future income tax assets. Consequently, actual results could differ from those estimates.
3 . C H A N G E I N AC C O U N T I N G P O L I CY:
Effective January 1, 2004, the LP adopted the amended Canadian accounting standard for stock-based compensation.
The amended standard requires the LP to measure all unit-based payments using the fair value method of accounting
and recognize a compensation expense in the financial statements.
The effect of this change in accounting policy has been recorded retroactively with restatement of the prior period.
The effect of the adoption is 2004 net earnings have decreased by $40,481 (2003 - $3,519) with the offset recorded as
contributed surplus.
16
Cervus Limited Partnership Consolidated Annual Financial Statements
4. INVENTORIES :
2004
Used equipment
New equipment, net of items on consignment
Parts and accessories
Work-in-progress
2003
$
12,761,008
9,421,634
4,837,962
574,392
$
8,372,326
7,694,722
3,229,556
767,955
$
27,594,996
$
20,064,559
Included in new equipment inventories and floor plan payables are deposits for items on consignment in the amount
of $788,589 (2003 - $44,047).
5 . B U I L D I N G A N D EQ U I P M E N T:
2004
Building
Automotive
Office equipment
Service equipment
Computer equipment and software
Leasehold improvements
$
66,273
678,382
606,367
378,146
346,090
97,034
$
2,172,292
2003
Automotive
Office equipment
Service equipment
Computer equipment and software
Leasehold improvements
Accumulated
depreciation
Cost
$
Net book
value
1,657
387,430
283,974
230,764
272,320
49,396
$
64,616
290,952
322,393
147,382
73,770
47,638
$ 1,225,541
$
946,751
Accumulated
depreciation
Cost
Net book
value
$
174,938
215,707
221,406
34,472
8,270
$
14,717
15,966
6,895
5,249
393
$
160,221
199,741
214,511
29,223
7,877
$
654,793
$
43,220
$
611,573
6. FINANCE RESERVE :
John Deere Credit Inc. (“Deere Credit”) provides and administers financing for retail purchases and leases of new and
used equipment. Under the retail financing and lease plans, Deere Credit retains the security interest in the financed
equipment. Deere Credit also retains a finance and lease reserve for amounts that the LP may be obligated to pay
Deere Credit, by retaining 1% of the face amount of each contract financed or leased under the dealer accounts. The
finance reserve is capped at 3% of the total dollar amount of the lease finance contracts outstanding. In the event
a customer defaults and there is a deficiency in the amount owed to Deere Credit, the LP uses its finance reserve to
cover the deficiency.
The maximum liability that may arise related to these contingencies is limited to the finance reserve of $872,144 (2003
- $517,244). Deere Credit reviews the reserve account balances with the LP quarterly and if the reserve balances
exceed the minimum requirements, Deere Credit pays the difference to the LP.
Cervus Limited Partnership Annual Report 2004
17
7. LO N G -T E R M I N V E S T M E N T S :
2004
Investment in significantly influenced companies, at equity
101034350 Saskatchewan Ltd. (33% interest)
Deer Star Systems Inc. (27% interest)
$
2003
166,363
143,159
Investment in companies, at cost
Greenway Sprayers (19% interest)
Cervus Corporation (market value - $52,044)
$
74,863
45,213
$
–
–
–
–
429,598
$
–
In 2004, the LP earned management fees in the amount of $74,867 and commissions of $35,567 from 101034350
Saskatchewan Ltd., Deere Star Systems Inc. and Greenway Sprayers of which $23,934 is in trade accounts receivable
at December 31, 2004.
8. BANK INDEBTEDNESS:
At December 31, 2004 the LP has an operating bank line of credit in the amount of $5,000,000. The operating line
of credit bears interest at bank prime plus 0.5% and is secured by a general security agreement, trade accounts
receivable, unencumbered inventories, assignment of insurance, guarantees from the LP’s subsidiaries and a general
security agreement and postponement of claim in the amount of $5,000,000 from Cervus Corporation. At December
31, 2004 the LP had drawn $164,664 (2003 - $nil) on this line.
9 . F LO O R P L A N PAYA B L E S :
Floor plan payables are financing arrangements for inventory. The terms of these arrangements may include a one
to ten month interest-free term followed by a term during which interest is charged at prime plus 1%. Settlement
of the floor plan liability generally occurs at the earlier of sale of the inventory or in accordance with terms of the
financing arrangement. Floor plan payables are secured by new and used equipment. A portion of amounts owed
are personally guaranteed by four unit holders, an officer of the general partner and the general partner.
10 . I N C O M E TA X E S :
The future income tax liability is comprised of the following temporary differences:
2004
Current:
Land and buildings held for sale
Long-term:
Building and equipment
Non-capital losses carried forward
Valuation allowance
$
$
–
(160,981)
269,610
(108,629)
$
18
2003
Cervus Limited Partnership Consolidated Annual Financial Statements
–
$
(304,111)
$
(196,987)
80,732
–
$
(116,255)
The provision for income taxes (recovery) differs from that calculated from using the federal and provincial statutory
rates due to the following:
Combined statutory tax rates
Income taxes calculated at above rate
Impact of flow thru partnership income and equity earnings
Change in valuation allowance
2004
2003
39.1%
35.0%
$
1,432,042
(1,579,281)
108,629
$
698,971
(808,808)
–
$
(38,610)
$
(109,837)
Subsidiaries have non-capital loss carryforwards of $690,000 (2003 - $207,000) available to use against future earnings.
These losses begin to expire in 2008.
11. LO N G -T E R M D E B T:
2004
Finance contracts and fixed rate bank loans payable in
monthly installments of $6,075 including interest up to
7.25%, secured by various related equipment due prior to
2009.
$
202,395
2003
$
67,188
Less: current portion
$
135,207
–
–
$
–
Estimated principal repayments are as follows:
2005
2006
2007
2008
2009
$
67,188
47,321
41,563
31,125
15,198
$
202,395
Interest on long-term debt of $10,200 has been included in interest expense.
Cervus Limited Partnership Annual Report 2004
19
12 . N O T E S PAYA B L E T O C E R V U S C O R P O R AT I O N :
Note on plan of arrangement, due 2008
Reduction in note
Advances
$
Balance, December 31, 2003
4,916,066
(243,038)
445,279
5,118,307
Note on acquisition of dealerships, due 2009
Repayment of notes
3,058,655
(1,378,167)
Balance, December 31, 2004
$
6,798,795
The notes are subordinated and unsecured. The notes have five-year terms, are repayable in advance without penalty
and require quarterly interest payments at a bank prime rate.
13 . PA R T N E R S ’ EQ U I T Y:
(a) Authorized:
Unlimited number of partnership units.
(b) Limited partnership fixed value units:
The fixed value units are non-voting and entitle the holder to an annual distribution of 5% of the face value and
are redeemable at the option of the LP.
(c) Issued:
Number of
units
Issued on plan of arrangement
Limited partnership fixed value units
Units issued to limited partners on
plan of arrangement
Formation costs
3,701,509
–
–
–
Balance December 31, 2003
3,701,510
Issued on exercise of unit options
Issued for cash on a private
placement to directors and
a dealership manager
Balance December 31, 2004
20
1
–
General
partner
$
100
803,969
Limited
partners
$
–
–
Total
$
100
803,969
2,220,906
(50,000)
2,220,906
(50,000)
804,069
2,170,906
2,974,975
215,000
–
215,000
215,000
100,000
–
200,000
200,000
4,016,510
$
804,069
Cervus Limited Partnership Consolidated Annual Financial Statements
$
2,585,906
$
3,389,975
d)
Unit options:
The LP has a unit option plan available to officers, directors and employees with grants under the plan approved
from time to time by the board of directors of the general partner. The exercise price of each option equals the
market price of the partnership units at the date of grant. The plan provides for vesting, at the discretion of the
board, and the options expire after five years from the date of grant.
Changes in the outstanding options are as follows:
Number
outstanding
Granted in 2003, outstanding, December 31, 2003
Exercised
Granted under unit option plan
215,000
Weighted average
exercise price
$
(215,000)
142,500
Outstanding, December 31, 2004
142,500
1.00
1.00
2.00
$
2.00
The weighted average remaining life of the options is 5.80 years (2003 - 2.50 years).
The fair value of options issued in 2004 was $0.26 per option (2003 - $0.10 per option). The following weighted
average assumptions were used to determine the fair value of options on date of grant:
Risk free interest rate
Expected life
Maximum life
Expected dividend
Expected unit price volatility
4%
3 years
3 years
nil
50%
Compensation expense for the year ended was $40,481 (2003 - $3,519).
(e) Per unit amounts:
The earnings per unit have been calculated based on the weighted average number of units outstanding for the
period ended December 31, 2004 of 3,823,250 (2003 - 3,701,510). In computing diluted per unit amounts 101,786
(2003 - 43,000) units were added to the weighted average number of units for the dilutive effect of unit options.
(f) Distribution reinvestment plan:
In 2004, the LP instituted a Distribution Reinvestment Plan (“DRIP”) entitling limited partners to reinvest cash
distributions in additional units. The DRIP program allows limited partners to reinvest distributions into new
units at 95 percent of the average unit price of the previous 10 trading days prior to distribution.
Cervus Limited Partnership Annual Report 2004
21
14 . C O M M I T M E N T S A N D C O N T I N G E N C I E S :
(a) The LP acts as a sales agent for the lease of certain equipment by customers from Deere Credit. Under the terms
of its agreement with Deere Credit, the LP is obligated to purchase the equipment leased to customers by Deere
Credit at the end of the lease term at a predetermined amount under the terms of the respective leases. Deere
Credit is obligated to finance these future purchases under dealer floor plan arrangements. The total future
purchase commitments aggregate approximately $21,500,000 at December 31, 2004 (2003 - $15,000,000).
(b) Deere Credit provides financing to certain of the LP’s customers. A portion of this financing is with recourse to
the LP if the amounts are uncollectible. As at December 31, 2004 this amount was approximately $384,000 (2003
- $246,000).
(c) The LP is committed to the following rental payments under operating leases for equipment and land and
buildings:
2005
2006
2007
2008
2009
Thereafter
$
1,558,143
1,508,143
1,307,005
815,257
694,836
1,644,709
$
7,528,093
15 . E C O N O M I C D E P E N D E N C E :
The LP’s primary source of income is from the sale of farm equipment and products and services pursuant to
agreements to act as an authorized dealer for John Deere Limited. The agreement with John Deere Limited provides
a framework under which John Deere Limited can terminate a John Deere dealership if such dealership fails to
maintain certain performance and equity covenants. Each contract also provides a one-year remedy period whereby
the LP has one year to restore any deficiencies. There can be no guarantee that circumstances will not arise which
gives John Deere Limited the right to terminate John Deere dealership agreements.
Cervus Corporation, as general partner, is considered a co-borrower and guarantor of the indebtedness of the LP.
16 . F I N A N C I A L I N S T R U M E N T S :
(a) Fair values:
The fair values of cash, trade accounts receivable, income taxes receivable, bank indebtedness, accounts payable
and accrued liabilities and distribution payable approximate their carrying amounts due to the short term maturity
of those instruments.
The fair value of notes payable approximates the carrying amount due to the floating interest rate on the notes.
The fair value of long-term debt approximates carrying amount as the interest rates are not significantly different
from current rates awarded to the LP for debt with similar terms and conditions.
(b) Credit risk:
A substantial portion of the trade accounts receivable is with customers who are dependent upon the agriculture
industry, and are subject to normal industry credit risks. At December 31, 2004 there was no significant allowance
for uncollectible amounts.
(c) Currency risk:
The LP may be exposed to foreign currency fluctuations as some products sold are referenced to U.S. dollar
denominated prices.
(d) Interest rate risk:
The LP is exposed to interest rate fluctuations on its floating-rate debt and notes payable.
22
Cervus Limited Partnership Consolidated Annual Financial Statements
17. R E L AT E D PA R T Y T R A N SAC T I O N S :
(a) Under the arrangement agreement and subsequent operational agreement between the LP and Cervus Corporation,
Cervus Corporation is entitled to reimbursement for costs incurred as general partner. The agreement provides
for an allocation of insurance costs, allocation of data services, guarantee fees based on 3% of the guarantee
amounts to John Deere payable to either Cervus Corporation or the individual providing the guarantees, interest
on any overdraft balances, interest on any outstanding indebtedness, building lease charges based on 1% per
month of the fair market value of the property, and other direct expenses reimbursable with no handling fees or
markup.
During the year ended December 31, 2004 and 2003, the LP had the following transactions with Cervus
Corporation:
2004
Equipment and real estate rentals
Interest on notes payable
Interest on fixed value units
Monthly management fees
Guarantee fees
General partner profit allocation
2003
$
804,324
424,584
40,200
291,604
97,500
36,584
$
327,612
141,707
20,264
156,404
44,250
19,758
$
1,694,796
$
709,995
As at December 31, 2004, the LP owed $nil (2003 - $1,721,129) to Cervus Corporation.
Certain limited partnership unit holders and the general partner have provided guarantees to John Deere, relating
to dealership agreements, aggregating $10,050,000 (2003 - $5,750,000). During 2004, the LP paid these individuals
and the general partner $213,000 (2003 -$96,250) for providing these guarantees.
(b) During the year, equipment and real estate rentals of $361,236 (2003 - $150,000) and guarantee fees of $115,500
(2003 - $50,000) were paid to officers, directors and unit holders of the LP. During the year, management fees of
$162,500 (2003 - $nil) were paid to companies controlled by dealership managers.
(c) Notes payable to other related parties:
2004
5% notes payable, unsecured
$
404,000
2003
$
310,792
Note payable, non-interest bearing and unsecured
$
714,792
404,000
–
$
404,000
The notes payable to other related parties are to companies controlled by dealership managers. The 5% notes
payable have a five year term, maturing January 1, 2009, and are repayable in advance without penalty. The noninterest note payable has no maturity and is repayable in advance without penalty. During the year, interest of
$20,200 (2003 - $3,400) was paid on the notes.
(d) Reduction on acquisition of Cervus Corporation common shares:
On May 5, 2004 the LP acquired 620,000 common shares of Cervus Corporation at $2.00 per share from Cervus
Corporation. On the date of the issue, the carrying value of Cervus Corporation common shares was $1.39 per
share. As the transaction was with a related party, the amount paid for the shares in excess of Cervus Corporation’s
carrying value of the shares has been recorded as a reduction of the limited partners’ accumulated earnings.
Cervus Limited Partnership Annual Report 2004
23
18 . AC Q U I S I T I O N O F FA R M A N D G A R D E N C E N T R E O F SA S K ATO O N LT D. :
In November 2003 the LP acquired two Saskatchewan-based John Deere dealerships, in Saskatoon and in Rosthem.
On January 1, 2004, the LP sold certain of the acquired assets to Cervus Corporation for $1,575,000, being the carrying
value of the assets. The fair value of assets acquired and the carrying value of assets sold are as follows:
Assets
Subsequently
Sold
Assets
Acquired
Cash
Accounts receivable
Inventories
Prepaid expenses
Land, buildings and equipment
Finance reserve
Accounts payable and accrued liabilities
Floor plan payables
Income taxes payable
Future income taxes
$
275,423
324,404
3,595,958
17,493
2,534,826
152,340
(256,754)
(2,098,193)
(17,522)
(530,203)
$
(651)
(12,830)
–
–
(1,865,630)
–
–
–
–
304,111
$
274,772
311,574
3,595,958
17,493
669,196
152,340
(256,754)
(2,098,193)
(17,522)
(226,092)
$
3,997,772
$
(1,575,000)
$
2,422,772
Financed by:
Advance from Cervus Corporation
Notes payable to Cervus Corporation
Notes payable to other related parties
Floor plan payables
Net Acquisition
Total
$
1,660,000
1,116,772
404,000
817,000
$
3,997,772
On January 1, 2004 the LP sold dealership managers a 20.2% interest in future earnings of the acquired dealerships
for $1. As part of the same transaction, the dealership managers had advanced the LP $404,000. Future earnings will
be distributed by way of management fees (see note 17(b)).
24
Cervus Limited Partnership Annual Report 2004
Corporate Information
General Partner
Directors and Senior Officers
Peter Lacey
Director and Chief Executive Officer
Howard Bolinger
Chief Financial Officer
Principal Bank
TD Canada Trust
Auditors
KPMG LLP
Graham Drake
Director and Vice President
General Manager AGRO
Legal Counsel
Steven Collicutt
Director
CEO - Collicutt Energy Services Ltd.
Gary Harris
Director
President - Westward Parts Ltd.
Shea, Nerland, Calnan
Calgary, Alberta
Transfer Agent
Computershare Trust
Company of Canada
David Heide
Director
President - Heide Farms Ltd.
Trading Symbol
“CVL.UN” TSX Venture Exchange
Annual Special Meeting
May 31st, 2005
4:00 p.m.
Black Knight Inn
Red Deer, Alberta
Annual Report 2004
# 2 6 7 8 7 5 4 8 th A v e
R e d D e e r, A B
T4 P 2 B 2
P: 403-342-6892
F: 403-352-2292