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Patronage Allocation UFA distributes a portion of its current fiscal period earnings to its members in the form of a patronage allocation. The allocation must be ratified by UFA’s elected delegates at their annual meeting held in March of the following period. As part of the ratification of the patronage allocation and as provided for under UFA’s by-laws, the delegates also approve the distribution of the current period allocation to member shares, non-interest bearing revolving equity, Class A Investment shares and the amount to be paid in cash. 2011 2010 Balance, beginning of period $ – $ – Current period allocation 7,000 – Balance, end of period $ 7,000 $ – Revolving Equity Revolving equity is non-interest bearing, non-redeemable by the member except in specific circumstances and is converted into Class A Investment shares on a straight-line basis over a 12 year period. 2011 2010 Balance, beginning of period $ 84,661 $ 99,587 Conversion to Class A Investment shares (12,222) (12,644) Senior Members conversion to Class A Investment shares (1,288) (1,706) Repayment (574) (576) Balance, end of period $ 70,577 $ 84,661 Class A Investment Shares Class A Investment shares are non-voting, have a par value of $100.00 and are redeemable at par value at the option of the holder subject to Board approval. The Board has the authority to restrict redemptions in any given year, even in situations where such redemptions are not unfavorable to UFA. Class A Investment shares are retractable at par value at the option of UFA and provide a dividend at bank prime rate less 0.5%. Dividends of $2.5 million (2010 – $1.9 million) on the investment shares are charged against retained earnings. The minimum required for a dividend cheque to be issued is $50 per member and the amount owing is held in investment shares until the minimum is met. 2011 2010 Investment shares issued: Number Amount Number Amount Balance, beginning of period $ 93,932 $ 84,070 Conversion from revolving equity 122 12,209 126 12,644 Senior Members conversion from revolving equity 13 1,288 17 1,706 Senior Members conversion from member shares 6 596 7 662 Redemption (53) (5,300) (55) (5,489) Less than minimum and unclaimed 295 339 Balance, end of period $ 103,020 $ 93,932 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 UFA 2011 Unabridged Annual Report 48
17. Financial Instruments UFA’s risk exposures and the impact on UFA’s financial instruments are summarized below: Credit Risk Credit risk is the risk of loss associated with a counter-party’s inability to fulfill its payment obligations. UFA is exposed to the credit risk on its accounts receivable from members and customers. The accounts receivable are net of applicable allowances for doubtful accounts, which are established based on the specific credit risks associated with individual members and customers and other relevant information. Concentration of credit risk with respect to receivables is limited, due to the large number of members and customers. Liquidity Risk UFA’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they come due. At December 25, 2011, UFA had current assets of $362.5 million (2010 – $377.7 million) to settle current liabilities of $145.8 million (2010 – $155.6 million). All of UFA’s accounts payable, accrued liabilities and deferred revenue are subject to normal trade terms. (See notes 10 and 12 for information on payment terms of member loans and current and long-term debt.) Market Risk Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates, and commodity prices. These fluctuations may be significant. Interest Rate Risk UFA is exposed to interest rate risk under the Asset-Based Credit Agreement as the rate is based on its Fixed Charge Coverage Ratio. As of December 25, 2011, the interest rates paid on Canadian dollar advances and US dollar advances were Canadian Prime Rate or US Prime Rate plus 0.75% (2010 – Canadian or US Prime Rate plus 2.75%). For Banker’s Acceptances the interest rate was BA’s plus 2.25% (2010 – no Banker’s Acceptances existed). Further, the amortized transaction costs impacted the interest rate by 0.3% (2010 – 0.2%) making the effective interest rate to be 3.82%. A 1% change in the Prime Rate may have an annual before income taxes impact of approximately $2.0 million. UFA is not exposed to interest rate risk on capital lease obligations as the rates are fixed. Foreign Currency Risk UFA is exposed to foreign currency risk on exchange fluctuations related to its US dollar borrowings through the company’s Asset-Based Credit Agreement (see note 12) for funds advanced to its US-based subsidiary, Wholesale Sports USA, Inc., and short-term payables related to foreign suppliers. The foreign currency risk is considered minimal as these assets and liabilities are not of significant value, and all transactions are with trade vendors with typical payment terms. In 2011, UFA incurred a gain $1.2 million (2010 – loss of $1.2 million) due to changes in the value of the US-CDN exchange rate. UFA is also exposed to foreign currency risk in the operations of its US-based subsidiary, Wholesale Sports USA, Inc. However, since Wholesale Sports USA, Inc. is a self-sustaining subsidiary, revenues are generated in US dollars, which exceeds the natural hedge provided by the purchases of goods and services which are denominated in US dollars. US dollar exchange differences on the investment in Wholesale Sports USA, Inc. will be unrealized until the investment is disposed of. Exchange differences that occur during the period are recorded in the cumulative translation adjustment account in members’ equity. 22 NOTES TO CONSOLODIATED FINANCIAL STATEMENTS UFA 2011 Unabridged Annual Report 49
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