Combined Financial Statements of TRUE NORTH HOSTELLING ASSOCIATION
AUDITORS' REPORT To the Members of the True North Hostelling Association We have audited the combined statement of financial position of the True North Hostelling Association, the Canadian Hostelling Association - British Columbia Region, 1025 Granville Street Trust, and the Canadian Hostelling Association - Southern Alberta Region (collectively referred to as the Association) as at March 31, 2008 and the combined statements of operations, changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 combined financial statements present fairly, in all material respects, the financial position of the Association as at March 31, 2008 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Vancouver, Canada May 8, 2008
Combined Statement of Operations, with comparative figures for 2007 Revenue: Overnights $ 8,239,330 $ 7,619,634 Memberships 427,532 408,961 Other, including food, beverage and merchandise 2,587,887 2,508,620 11,254,749 10,537,215 Expenses: Hostels 7,209,086 6,756,386 Administration and membership 1,708,421 1,678,869 Amortization of capital assets 737,073 746,998 9,654,580 9,182,253 Excess of revenue over expenses from operations 1,600,169 1,354,962 Other income (expenses): Interest (114,587) (194,465) Other - 8,656 (114,587) (185,809) Excess of revenue over expenses from continuing operations 1,485,582 1,169,153 Discontinued operations (note 4): Excess of revenue over expenses - 963 Gain on sale of capital assets - 379,317-380,280 Excess of revenue over expenses $ 1,485,582 $ 1,549,433 See accompanying notes to combined financial statements. 2
Combined Statement of Changes in Net Assets, with comparative figures for 2007 Invested in Total Total capital assets Unrestricted (note 7) Balance, beginning of year $ 10,332,495 $ 913,996 $ 11,246,491 $ 9,697,058 Excess (deficiency) of revenue over expenses: Continuing operations (678,871) 2,164,453 1,485,582 1,169,153 Discontinued operations - - - 380,280 Net change in invested in capital assets 969,463 (969,463) - - Balance, beginning of year $ 10,623,087 $ 2,108,986 $ 12,732,073 $ 11,246,491 See accompanying note to combined financial statements. 3
Combined Statement of Cash Flows, with comparative figures for 2007 Cash provided by (used in): Operations: Excess of revenue over expenses from continuing operations $ 1,485,582 $ 1,169,153 Items not involving cash: Amortization of capital assets 737,073 746,998 Amortization of deferred capital contributions (58,202) (58,202) 2,164,453 1,857,949 Changes in non-cash operating working capital: Accounts receivable 22,597 (11,741) Inventory (10,603) 12,389 Prepaid expenses (8,723) (23,173) Accounts payable and accrued liabilities (29,996) 112,739 Unearned revenue and deposits 78,280 41,140 2,216,008 1,989,303 Financing: Repayment of loans payable (488,871) (1,364,888) Investments: Restricted cash - (50,000) Expenditures on capital assets (480,592) (397,976) (480,592) (447,976) Cash provided by discontinued operations (note 4) - 814,073 Increase in cash 1,246,545 990,512 Cash, beginning of year 1,581,622 591,110 Cash, end of year $ 2,828,167 $ 1,581,622 Supplementary information: Interest paid $ 114,587 $ 194,465 See accompanying notes to combined financial statements. 4
Notes to Combined Financial Statements 1. Operations: The True North Hostelling Association, o/a Hostelling International Canada Pacific Mountain Region (the Association) is a group of not-for-profit organizations whose mission is to help all, especially the young, gain greater understanding of people, places and cultures through hostelling. The Association qualifies as not-for-profit organization under the Income Tax Act and accordingly is exempt from income taxes. 2. Significant accounting policies: (a) Basis of presentation: These combined financial statements include the combined accounts of the True North Hostelling Association, the Canadian Hostelling Association - British Columbia Region, 1025 Granville Street Trust, and the Canadian Hostelling Association - Southern Alberta Region. These combined statements have been prepared in accordance with Canadian generally accepted accounting principles for not-for-profit organizations. Transactions between these entities have been eliminated upon combination. The Association accounts for its investment in a 69.57% owned joint venture, which operates as the Canadian Alpine Center and International Hostel at Lake Louise (CAC), by the proportionate consolidation method whereby the Association's proportionate share of the assets, liabilities and the related revenue and expenses of the CAC joint venture are included in the combined financial statements (note 9). (b) Inventory: Inventory is stated at the lower of cost, on a first-in, first-out basis, and net realizable value. (c) Capital assets: Capital assets are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the following periods: Asset Buildings Furniture and equipment Leasehold improvements Rate 20 years 4-10 years Term of lease 5
2. Significant accounting policies (continued): (d) Revenue recognition: Revenue from hostel operations is recognized as services are provided. Revenue from the sale of non-cancelable, non-refundable annual memberships is recognized when the memberships are sold. (e) Deferred capital contributions: Deferred capital contributions represent restricted grants and donations with which certain of the Association s capital assets were originally purchased. These grants and donations are deferred and amortized to income on the same basis as the related capital asset. (f) Contributed services: Volunteers contribute a significant amount of time each year to assist the Association in carrying out its programs and services. Because of the difficulty of determining their fair value, contributed services are not recognized in these financial statements. (g) Financial instruments: On April 1, 2007, the Association adopted Canadian Institute of Chartered Accountants ( CICA ) Handbook Section 3855, Financial Instruments - Recognition and Measurement, and Section 3861, Financial Instruments Disclosure and Presentation. The adoption of these standards had no impact on opening net assets. Upon adoption of these new standards, the Association designated its cash as held for trading and therefore measured this asset at fair value. Accounts receivables are classified as loans and receivables, which are measured at amortized cost. Accounts payable and accrued liabilities and loans payable are classified as other financial liabilities and are measured at amortized cost. (h) Accounting changes: Effective January 1, 2007, the Association adopted CICA Handbook Section 1506, Accounting Changes. Under this section, voluntary changes in accounting policy are allowed only if they result in the financial statements providing reliable and more relevant information and that new disclosures are required in respect of changes in accounting policies, changes in accounting estimates and correction of errors. The Association was not affected by the adoption of this new section. 6
2. Significant accounting policies (continued): (h) Accounting changes (continued): Effective April 1, 2008, the Association will be adopting the following new sections of the CICA Handbook that were issued but not yet effective as of March 31, 2008: (i) Section 3031, Inventories, provides more guidance on the measurement and disclosure requirements for inventories; the new standard allows the reversals of previous writedowns to the net realizable value when there is a subsequent increase in the value of inventories. This accounting standard will be applied retrospectively and is anticipated to have no material impact on the financial statements of the Association. (ii) Sections 3862 and 3863, Financial Instruments Disclosures and Presentation, respectively, establish standards for the presentation of financial instruments and nonfinancial derivatives, and require additional disclosure of the nature and extent of an entity s exposure to risks arising from financial instruments and how the entity manages those risks. (i) Use of estimates: 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 financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. 3. Capital assets: Accumulated Net book Net book Cost amortization value value Land $ 4,382,863 $ - $ 4,382,863 $ 4,382,863 Buildings 9,031,572 4,149,035 4,882,537 5,100,217 Furniture and equipment 3,296,954 2,638,385 658,569 709,993 Leasehold improvements 7,469,587 3,302,863 4,166,724 4,154,101 $ 24,180,976 $ 10,090,283 $ 14,090,693 $ 14,347,174 7
4. Assets held for sale and discontinued operations: For reporting purposes, the results of operations of the business assets sold have been disclosed separately from those of continuing operations for the periods presented, and the carrying value of assets was presented separately on the combined balance sheet as assets held for sale. The excess of revenue over expenses from discontinued operations is as follows: Revenue $ - $ 4,050 Excess of revenue over expenses from discontinued operations $ - $ 380,280 Cash from discontinued operations: Excess of revenue over expenses $ - $ 380,280 Adjustment for gain on sale of capital assets - (379,317) Proceeds from sale of capital assets - 813,110 Cash provided by discontinued operations $ - $ 814,073 5. Loans payable: Demand term loan, bearing interest at 6.58% per annum, maturing May 10, 2008 with blended biweekly payments of $2,991, secured by the Lake Louise Hostel assets, and a debenture covering a fixed charge on the leases for land $ 392,170 $ 476,468 Loan payable, bearing interest at 6.96% per annum, repayable in blended monthly instalments of $21,130 due July 30, 2008, secured by the 1025 Granville St. Hostel 2,247,185 2,343,626 Loan payable, repaid - 308,132 $ 2,639,355 $ 3,128,226 The Association also has an unused line of credit, its share being a maximum of $69,570, bearing interest at prime plus 1% per annum. This line of credit is secured as part of the security provided for the Lake Louise loan noted above. 8
5. Loans payable (continued): Notwithstanding certain of the loans are repayable on demand, the Association is currently scheduled under the above debt agreements to make periodic payments over a period beyond one year. Principal repayments required on loans payable over each of the next five fiscal years, assuming renewal at similar terms and conditions, are estimated as follows: 2009 $ 147,499 2010 157,403 2011 168,022 2012 179,403 2013 191,605 Thereafter 1,795,423 $ 2,639,355 6. Deferred capital contributions: Balance, beginning of year $ 886,453 $ 944,655 Amortization during the year (58,202) (58,202) Balance, end of year $ 828,251 $ 886,453 7. Invested in capital assets: (a) Net assets invested in capital assets are calculated as follows: Capital assets, net book value $ 14,090,693 $ 14,347,174 Amounts financed by: Loans payable (2,639,355) (3,128,226) Deferred capital contributions (828,251) (886,453) $ 10,623,087 $ 10,332,495 9
7. Invested in capital assets (continued): (b) Net change in invested in capital assets Purchase of capital assets $ 480,592 $ 397,976 Repayment of loans payable 488,871 1,364,888 Net value of capital assets sold - (813,110) (c) Deficiency of revenue over expenses: $ 969,463 $ 949,754 Amortization of capital assets $ (737,073) $ (746,998) Amortization of deferred capital contributions 58,202 58,202 $ (678,871) $ (688,796) 8. Commitments: (a) Operating leases: The Association leases certain premises under operating leases that will expire in fiscal 2012. Minimum annual rental payments under these premises leases for the next four years are approximately as follows: 2009 $ 85,744 2010 85,744 2011 85,744 2012 69,506 10
8. Commitments and contingencies (continued): (b) National levy: The Association pays a levy to the Canadian Hostelling Association based on membership sales and overnights recorded for the last complete fiscal year. The levy paid in 2008 totaled $380,349 (2007 - $296,849) and is recorded in Hostels expenses. (c) Letter of credit: A letter of credit of $75,000 has been issued by the Association s bank for the Association s corporate visa cards. The security for the letter of credit has been provided by $50,000 restricted cash on deposit with the bank. (d) Purchase and sale: The Association entered into a purchase and sale agreement with Whistler 2020 Development Corp ( Whistler 2020 ) dated December 13, 2007, and amended March 25, 2008, for the future purchase of a property, consisting of land and building, in Whistler, BC to be used as the Association s new 180 bed Whistler hostel. The anticipated completion of the purchase is expected to take place in the spring of 2010. The purchase price for the land and building has been agreed to be $8,900,000. Concurrently, the Association entered into a sales agreement with the Resort Municipality of Whistler for the sale and lease-back of the Association s existing Whistler hostel. The Association will receive proceeds of $2,700,000 for the existing hostel, and these proceeds will be applied directly as a deposit for the new hostel. In addition, the Association will be allowed the full use of the existing hostel, at an annual rental cost of $1, from the date of completion to the date of move to the new hostel. The completion date for the sale of the existing hostel is ten days following mutual consent of all conditions precedent for the purchase of the new hostel, which is expected to occur during the 2009 fiscal year. Under the terms of the agreement, if the purchase of the new hostel does not complete, the Association will be able to reacquire the existing hotel at no charge and the Resort Municipality of Whistler will be responsible for recovering the proceeds from Whistler 2020. The Association will be reviewing the financial statement presentation and disclosure requirements for these transactions once the completion date is determined. 11
9. Investment in joint ventures: The combined financial statements include the Association s proportionate share of the revenue, expenses, assets and liabilities of the CAC joint venture as follows. Assets: Current assets $ 231,956 $ 197,378 Capital assets 2,542,022 2,608,896 $ 2,773,978 $ 2,806,274 Liabilities and Net Assets: Accounts payable and other current liabilities, excluding current portion of loans payable $ 92,561 $ 145,976 Loan payable 392,170 476,500 Deferred contributions 532,131 555,457 Net assets 1,757,116 1,628,341 $ 2,773,978 $ 2,806,274 Revenue $ 1,495,342 $ 1,354,664 Excess of revenue over expenses $ 198,898 $ 143,299 Cash flow from operations $ 260,530 $ 218,419 Cash flow from financing (172,994) (38,937) Cash flow from investments (50,174) (37,221) 12
10. Financial instruments: (a) Credit risk: Due to the nature of the hostel business, the Association does not face any significant concentrations of credit risk. The Association mitigates its exposure to credit risk by only dealing with reputable third parties. (b) Fair value: The carrying value of the demand term loan payable approximates its fair value due to the relatively short periods to maturity of this item. The carrying values of the revolving line of credit and the demand operating loan approximate their fair values as the loans bear interest at floating. 11. Subsequent event: On March 12, 2008, the members of Hostelling International Northern Alberta ( HI-NA ) voted in favour of merging with True North Hostelling Association ( True North ). The withdrawal of recognition of HI-NA as a region and change in regional boundaries for True North Hostelling Association to incorporate the old HI-NA region was approved by Hostelling International-Canada on March 19, 2008 to be effective April 10, 2008. True North entered into an agreement with HI- NA to begin managing the properties effective April 1, 2008. This will be accounted for by aggregating the financial statement elements of HI-NA with those of the Association. An estimate of the financial effect of the merger cannot be made as the financial information of HI-NA is not currently available. 12. Comparative figures: Certain 2007 comparative figures have been reclassified to conform with the financial statement presentation adopted for the current year. 13