REPORT OF INDEPENDENT AUDITORS
To the Directors of
Dundee Bancorp Inc.
In our report to the shareholders ofDundee Bancorp Inc. dated March 30, 2004, we reported on the consolidated balance sheets ofDundee Bancorp Inc. as at December 31, 2003 and 2002 and the consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended, as included in this Form 40-F. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related supplemental note entitled “Differences Between Canadian and United States Generally Accepted Accounting Principles” as set forth in the Form 40-F. This supplemental note is the responsibility of the Company’s management. Our responsibility is to express an opinion on this supplemental note based on our audit.
In our opinion, such supplemental note, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
| Toronto, Canada March 30, 2004 |  |
| Chartered Accountants |
RECONCILIATION TO US GAAP
CONSOLIDATED DUNDEE BANCORP INC.
For the years ended December 31, 2003 and 2002
(tabular amounts in thousands of Canadian dollars, except per share amounts)
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Dundee Bancorp Inc. (“Dundee Bancorp” or the “Company”) is primarily a holding company dedicated to wealth management, real estate and resources. The Company’s domestic wealth management activities are carried out through its 68% owned subsidiary, Dundee Wealth Management Inc. (“Dundee Wealth”). Dundee Bancorp also provides financial services internationally through offices in Bermuda and the Cayman Islands. Together, these domestic and international financial services operations provide a broad range of financial products and services to individuals, institutions and corporations. Real estate operations are carried out through the Company’s 85% owned subsidiary, Dundee Realty Corporation (“Dundee Realty”). Dundee Bancorp also holds and manages its own investments which include both publicly listed and private companies in a variety of sectors, including real estate, resources and financial services. The Company trades on the Toron to Stock Exchange (“TSX”).
The Company’s 2003 and 2002 audited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). These principles differ, in the following material respects, with those principles that the Company would have followed had its audited consolidated financial statements been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). Canadian GAAP in respect of the statement of cash flows complies with US GAAP requirements.
CORPORATE INVESTMENTS
The Company’s corporate investments, detailed in note 4 to the audited consolidated financial statements for the year ended December 31, 2003, include both equity accounted investments and investments carried at cost. Statement of Financial Accounting Standard (“SFAS”) No. 115 requires that cost accounted investments which meet the available for sale criteria be reported at their fair value, with unrealized gains and losses, net of taxes, reported as part of comprehensive income. Unrealized losses on available for sale securities that are determined to be other than temporary are included in operations.
The Company has determined that, as of December 31, 2003, it holds securities accounted for on a cost basis with a carrying value of approximately CDN$170,000,000 (2002 - CDN$219,000,000) and a fair value of approximately CDN$264,000,000 (2002 -CDN$294,000,000), that meet the available for sale criteria. Accordingly, to comply with US GAAP, the Company would separately present the available for sale securities on its balance sheet and record the unrealized gains or temporary losses, net of tax, in comprehensive income.
STOCK BASED COMPENSATION
In previous years, the Company implemented the principles of Accounting Principles Board (“APB”) No. 25 for purposes of measuring stock based compensation under US GAAP. Under this method, any compensation expense, measured as the excess, if any, of the quoted market price of the Company’s shares at the measurement date over the award’s exercise price, would have to be reflected over the vesting periods of these awards. In previous years, no such compensation expense was recorded under Canadian GAAP. In 2001, the Company amended its share incentive plan with the result that an employee’s right to exercise a stock appreciation right or to tender an option back to the Company for cash settlement is no longer available. As awards are granted with an exercise price equal to market value and as a result of the amendments made to the share incentive plan, no further compensation expense will be recognized. The liability reported in respect of stock based compensa tion issued prior to the amendment has been recalculated to reflect the market value of the underlying shares as at December 31, 2003 and 2002 with the resulting adjustment recorded in the consolidated statement of operations.
SFAS No. 123, issued in 1996, encourages, but does not require companies to record compensation costs for stock based employee compensation plans at fair value. Effective January 1, 2002, the Company adopted the Canadian Institute of Chartered Accountants Handbook (“CICA”) Handbook Section 3870, “Stock Based Compensation” which, similar to SFAS No. 123, requires the disclosure of stock based compensation plans at fair value for stock compensation arrangements awarded during the year ended December 31, 2002 and requires the recognition of the fair value of stock options granted on or after January 1, 2003. The amount of compensation expense the Company would have reported in 2002 had the requirements of CICA Handbook Section 3870 been applied retroactively and the compensation expense recognized under Canadian GAAP during 2003, are insignificant.
DUNDEE BANCORP INC.
RECONCILIATION TO US GAAP
ASSET RETIREMENT OBLIGATIONS
SFAS No. 143, “Accounting for Asset Retirement Obligations” establishes standards for the recognition, measurement and disclosure of asset retirement obligations and related asset retirement costs. These obligations are initially measured at fair value, which is the discounted future value of the liability. This fair value is capitalized as part of the cost of the related asset and amortized to expense over its useful life. The liability accretes until the Company expects to settle the retirement obligation. As required by SFAS No. 143, the Company implemented the new standard on January 1, 2003, on a retroactive basis with the cumulative effect of this accounting change on prior years reflected in the consolidated statement of operations.
Under Canadian GAAP, these costs are generally estimated and provided for by a unit-of-production method and are included in depletion and depreciation expense. Actual costs are charged to the accumulated provision when incurred. The Company will adopt the requirements of CICA Section 3110, “Asset Retirement Obligations” on January 1, 2004, with retroactive restatement. CICA Section 3110 is consistent with the requirements of SFAS 143 and will therefore eliminate future differences between Canadian and US GAAP in respect of these obligations.
DEPRECIATION OF REAL ESTATE ASSETS
During the year ended December 31, 2003 and in prior years, Canadian GAAP permitted the use of the sinking fund method of depreciating certain assets. Under US GAAP, amortization using the sinking fund method is not permitted. As Canadian GAAP will no longer permit the use of the sinking fund method of depreciation for years beginning on or after January 1, 2004, future differences between Canadian and US GAAP in respect of depreciation of these assets will be eliminated.
REVENUE RECOGNITION FOR REAL ESTATE REVENUE PROPERTIES
During the year ended December 31, 2003 and in prior years, Canadian GAAP permitted the recognition of revenues from real estate leases that included contractual increases in basic rents on a straight-line basis only where such increases exceeded expected increases in the Canadian Consumer Price Index. Under US GAAP, the total amount of revenue from these real estate leases must be accounted for on a straight-line basis over the term of the respective lease. As Canadian GAAP will require the recognition of lease revenues on a straight-line basis over the term of the respective lease for years beginning on or after January 1, 2004, future differences between Canadian and US GAAP in respect of revenue recognition of real estate leases will be eliminated.
OTHER DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES THAT AFFECT EQUITY ACCOUNTED INVESTEES.
The following describes other differences between Canadian and US GAAP which, during the reporting period, directly affect the Company’s carrying value in its equity accounted investees and its share of income from these investments.
DUNDEE BANCORP INC.
RECONCILIATION TO US GAAP
STATEMENT OF COMPREHENSIVE INCOME
SFAS Statement No. 130 requires companies to report comprehensive income as a measure of overall performance. Comprehensive income includes net income and all other changes in equity, exclusive of shareholders’ contributions or any distributions to shareholders. Under US GAAP, a minimum pension liability is required to be recorded in comprehensive income for the fair value of the benefit obligation over the pension liability.
EFFECT OF DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Application of the above referenced standards, as previously described, would have the following approximate effects on the audited consolidated balance sheets and the audited consolidated statements of operations of the Company as at and for the years ended December 31, 2003 and 2002:
| BALANCE SHEET DIFFERENCES | 2003 | 2002 | ||||
| Decrease in investment portfolio pursuant to SFAS 115 and pursuant to differences | ||||||
| between Canadian and US GAAP adopted by Equity Accounted Investees | $ | (210,793) | $ | (244,290) | ||
| Increase in available for sale securities pursuant to SFAS 115 | 263,905 | 294,332 | ||||
| Increase in capital and other assets pursuant to SFAS 143 | 673 | - | ||||
| Increase in amounts payable and accrued liabilities pursuant to APB 25 | 16,220 | 1,810 | ||||
| Increase in associated future income tax liabilities | 18,500 | 7,982 | ||||
| Decrease in non controlling interest | (491) | - | ||||
| Decrease in retained earnings | (59,785) | (38,460) | ||||
| Increase in accumulated comprehensive income | 79,343 | 78,710 | ||||
As of December 31, 2003, the Company’s shareholders’ equity, prepared in accordance with US GAAP would have been CDN$616,000,000 (2002 - CDN$519,000,000).
The following summarizes the statement of operations amounts in accordance with US GAAP, where such items differ from the amounts reported under Canadian GAAP, all as described above.
| 2003 | 2002 | |||||
| Net earnings under Canadian GAAP | $ | 120,910 | $ | 50,256 | ||
| Adjustments for US GAAP | ||||||
| Available for sale securities | (5,114) | (9,885) | ||||
| Adjustment for revenue recognition on real estate leases | 116 | - | ||||
| Amortization of real estate assets | 358 | - | ||||
| Adjustment to stock based compensation liability | (14,410) | 4,756 | ||||
| Adjustments to share of earnings from equity accounted investees | (4,535) | (3,660) | ||||
| Effect on non controlling interest in earnings | 244 | - | ||||
| Tax effect related thereto | 5,156 | 3,884 | ||||
| Net earnings before cumulative effect on changes in accounting principles under US GAAP | 102,725 | 45,351 | ||||
| Cumulative effect of changes in accounting principles, net of tax | (3,262) | (6,070) | ||||
| Net earnings under US GAAP | $ | 99,463 | $ | 39,281 | ||
DUNDEE BANCORP INC.
RECONCILIATION TO US GAAP
The effect of the above changes to the calculation of earnings per share is detailed below.
Canadian GAAP | US GAAP | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
| Earnings per share before extraordinary gain and | ||||||||||||
| cumulative effect of changes in accounting principles | ||||||||||||
| Basic | $ | 4.00 | $ | 1.98 | $ | 3.28 | $ | 1.78 | ||||
| Diluted | $ | 3.96 | $ | 1.96 | $ | 3.25 | $ | 1.77 | ||||
| Earnings per share after extraordinary gain but before | ||||||||||||
| cumulative effect of changes in accounting principles | ||||||||||||
| Basic | $ | 4.79 | $ | 1.98 | $ | 4.07 | $ | 1.78 | ||||
| Diluted | $ | 4.75 | $ | 1.96 | $ | 4.03 | $ | 1.77 | ||||
| Earnings per share | ||||||||||||
| Basic | $ | 4.79 | $ | 1.98 | $ | 3.94 | $ | 1.54 | ||||
| Diluted | $ | 4.75 | $ | 1.96 | $ | 3.90 | $ | 1.53 | ||||
US GAAP requires a statement of comprehensive income as follows:
| 2003 | 2002 | |||||
| Net earnings under US GAAP | $ | 99,463 | $ | 39,281 | ||
| Change in unrealized gains and temporary unrealized losses on investments | 5,175 | 47,548 | ||||
| Change in foreign currency translation adjustments | (4,423) | (842) | ||||
| Change in additional minimum pension liability | - | 1,004 | ||||
| Comprehensive income under US GAAP | $ | 100,215 | $ | 86,991 | ||
DUNDEE BANCORP INC.
