Exhibit 99.4
DUNDEE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE THREE MONTHS ENDED MARCH 31, 2009
DUNDEE CORPORATION
CONSOLIDATED BALANCE SHEETS
| As at March 31, 2009 and December 31, 2008 | ||||||||
| (expressed in thousands of Canadian dollars) (unaudited) | ||||||||
| March 31, 2009 | December 31, 2008 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 141,642 | $ | 167,584 | ||||
| Accounts receivable | 393,528 | 406,076 | ||||||
| Client accounts receivable (note 3) | 437,227 | 389,282 | ||||||
| Trading securities owned (note 4) | 327,440 | 161,882 | ||||||
| Available-for-sale securities (note 5) | 142,695 | 294,730 | ||||||
| Equity accounted investments (note 6) | 157,708 | 160,339 | ||||||
| Deferred sales commissions (note 7) | 230,472 | 234,027 | ||||||
| Capital, real estate and other assets (note 8) | 522,013 | 526,256 | ||||||
| Goodwill and other intangible assets (note 9) | 739,806 | 740,784 | ||||||
| Future income tax assets (note 18) | 7,433 | - | ||||||
| TOTAL ASSETS | $ | 3,099,964 | $ | 3,080,960 | ||||
| LIABILITIES | ||||||||
| Bank indebtedness (note 10) | $ | 2,146 | $ | - | ||||
| Accounts payable and accrued liabilities | 259,653 | 291,029 | ||||||
| Client deposits and related liabilities (note 11) | 469,021 | 408,647 | ||||||
| Trading securities sold short (note 4) | 36,743 | 43,951 | ||||||
| Income taxes payable | 6,550 | 8,472 | ||||||
| Corporate debt (note 12) | 528,542 | 529,507 | ||||||
| Series 1 preference shares, DundeeWealth (note 13) | 153,059 | 152,978 | ||||||
| Preference shares, series 1 (note 13) | 147,459 | 147,371 | ||||||
| Future income tax liabilities (note 18) | - | 3,024 | ||||||
| 1,603,173 | 1,584,979 | |||||||
| NON-CONTROLLING INTEREST | 613,287 | 615,142 | ||||||
| SHAREHOLDERS' EQUITY | ||||||||
| Share capital (note 14) | ||||||||
| Common shares | 288,517 | 288,398 | ||||||
| Contributed surplus | 11,897 | 11,549 | ||||||
| Retained earnings | 595,817 | 604,075 | ||||||
| Accumulated other comprehensive loss (note 15) | (12,727 | ) | (23,183 | ) | ||||
| 883,504 | 880,839 | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 3,099,964 | $ | 3,080,960 | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
Commitments, contingencies and off-balance sheet arrangements (note 21)
DUNDEE CORPORATION
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DUNDEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended March 31, 2009 and 2008 | ||||||||
| (expressed in thousands of Canadian dollars, except per share amounts) (unaudited) | ||||||||
| March 31, 2009 | March 31, 2008 | |||||||
| REVENUES | ||||||||
| Management fees | $ | 89,578 | $ | 117,999 | ||||
| Redemption fees | 3,667 | 3,848 | ||||||
| Financial services | 60,870 | 88,496 | ||||||
| Real estate revenues | 44,711 | 50,648 | ||||||
| 198,826 | 260,991 | |||||||
| Investment income (note 16) | 860 | 7,023 | ||||||
| 199,686 | 268,014 | |||||||
| EXPENSES | ||||||||
| Selling, general and administrative | 69,181 | 86,532 | ||||||
| Variable compensation | 40,897 | 61,004 | ||||||
| Trailer service fees | 25,935 | 34,279 | ||||||
| Operating costs, real estate | 31,129 | 34,870 | ||||||
| 167,142 | 216,685 | |||||||
| OPERATING EARNINGS BEFORE INTEREST, | ||||||||
| TAXES, AND OTHER NON-CASH ITEMS | 32,544 | 51,329 | ||||||
| Amortization of deferred sales commissions | 21,580 | 18,974 | ||||||
| Depreciation, depletion and amortization | 5,106 | 4,801 | ||||||
| Interest expense | 11,868 | 6,410 | ||||||
| Share of losses of equity accounted investees (note 16) | 1,963 | 340 | ||||||
| Fair value adjustments (note 5) | 9,046 | 75,885 | ||||||
| Foreign exchange loss | 860 | 3,064 | ||||||
| Unrealized gain on exchangeable debentures | - | (507 | ) | |||||
| OPERATING LOSS BEFORE UNDERNOTED ITEMS | (17,879 | ) | (57,638 | ) | ||||
| Dilution gains | 252 | 423 | ||||||
| (17,627 | ) | (57,215 | ) | |||||
| Income taxes (note 18) | ||||||||
| Current | 10,842 | 31,825 | ||||||
| Future | (14,061 | ) | (48,263 | ) | ||||
| (3,219 | ) | (16,438 | ) | |||||
| Non-controlling interest | (6,164 | ) | (24,444 | ) | ||||
| NET LOSS FROM CONTINUING OPERATIONS | (8,244 | ) | (16,333 | ) | ||||
| Earnings from discontinued operations of DundeeWealth, | ||||||||
| net of tax and non-controlling interest | - | 69 | ||||||
| NET LOSS FOR THE PERIOD | $ | (8,244 | ) | $ | (16,264 | ) | ||
| NET LOSS PER SHARE (note 19) | ||||||||
| Basic | $ | (0.11 | ) | $ | (0.22 | ) | ||
| Diluted | $ | (0.11 | ) | $ | (0.22 | ) | ||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
DUNDEE CORPORATION
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DUNDEE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| For the three months ended March 31, 2009 and 2008 | ||||||||||||
| (expressed in thousands of Canadian dollars) (unaudited) | ||||||||||||
| ref | March 31, 2009 | March 31, 2008 | ||||||||||
| NET LOSS FOR THE PERIOD | $ | (8,244 | ) | $ | (16,264 | ) | ||||||
| Other comprehensive (loss) income | ||||||||||||
| Unrealized earnings (losses) on available-for-sale securities | a | 3,858 | (75,837 | ) | ||||||||
| Transfer of unrealized losses to net earnings | b | 8,047 | 53,137 | |||||||||
| Unrealized foreign currency gain on forward contract | c | 79 | 318 | |||||||||
| Unrealized foreign currency translation | d | (514 | ) | 4,858 | ||||||||
| Transfer of unrealized loss from foreign currency translation to net earnings | e | 609 | - | |||||||||
| Share of other comprehensive gain (loss) of equity accounted investees | f | 1,186 | (369 | ) | ||||||||
| Non-controlling interest | (2,809 | ) | 7,590 | |||||||||
| Other comprehensive income (loss) from operations | 10,456 | (10,303 | ) | |||||||||
| COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD | $ | 2,212 | $ | (26,567 | ) | |||||||
| a) Net of taxes of | $ | (130 | ) | $ | 31,176 | |||||||
| b) Net of taxes of | $ | (3,286 | ) | $ | (21,705 | ) | ||||||
| c) Net of taxes of | $ | (8 | ) | $ | (143 | ) | ||||||
| d) Net of taxes of | $ | 350 | $ | (1,787 | ) | |||||||
| e) Net of taxes of | $ | (249 | ) | $ | - | |||||||
| f) Net of taxes of | $ | (470 | ) | $ | 159 | |||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
DUNDEE CORPORATION
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DUNDEE CORPORATION
CONSOLIDATED STATMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
| For the three months ended March 31, 2009 and the year ended December 31, 2008 | ||||||||||||||||
| (expressed in thousands of Canadian dollars) (unaudited) | �� | |||||||||||||||
| Accumulated | ||||||||||||||||
| Other | ||||||||||||||||
| Common | Contributed | Retained | Comprehensive | |||||||||||||
| Shares | Surplus | Earnings | Loss | Total | ||||||||||||
| Balance, January 1, 2008 | $ | 292,538 | $ | 7,513 | $ | 814,405 | $ | 1,320 | $ | 1,115,776 | ||||||
| Net loss | - | - | (196,192 | ) | - | (196,192 | ) | |||||||||
| Other comprehensive loss | - | - | - | (24,503 | ) | (24,503 | ) | |||||||||
| Acquisition of Class A subordinate shares for cancellation | (6,374 | ) | - | (13,979 | ) | - | (20,353 | ) | ||||||||
| Issuance of Class A subordinate shares for cash | 121 | - | - | - | 121 | |||||||||||
| Issuance of Class A subordinate shares for non-cash consideration | 45 | - | - | - | 45 | |||||||||||
| Stock based compensation | - | 4,072 | (159 | ) | - | 3,913 | ||||||||||
| Exercise of options | 2,068 | (36 | ) | - | - | 2,032 | ||||||||||
| Balance, December 31, 2008 | 288,398 | 11,549 | 604,075 | (23,183 | ) | 880,839 | ||||||||||
| Net loss | - | - | (8,244 | ) | - | (8,244 | ) | |||||||||
| Other comprehensive income | - | - | - | 10,456 | 10,456 | |||||||||||
| Acquisition of Class A subordinate shares for cancellation | (1,041 | ) | - | (14 | ) | - | (1,055 | ) | ||||||||
| Stock based compensation | - | 348 | - | - | 348 | |||||||||||
| Exercise of options | 1,160 | - | - | - | 1,160 | |||||||||||
| Balance, March 31, 2009 | $ | 288,517 | $ | 11,897 | $ | 595,817 | $ | (12,727 | ) | $ | 883,504 | |||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||
DUNDEE CORPORATION
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DUNDEE CORPORATION
CONSOLIDATED STATMENTS OF CASH FLOWS
| For the three months ended March 31, 2009 and 2008 | ||||||||
| (expressed in thousands of Canadian dollars) (unaudited) | ||||||||
| March 31, 2009 | March 31, 2008 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss from continuing operations for the period | $ | (8,244 | ) | $ | (16,333 | ) | ||
| Non-cash items in net loss: | ||||||||
| Depreciation, depletion and amortization | 26,686 | 23,775 | ||||||
| Net investment loss (gains) | 2,914 | (1,567 | ) | |||||
| Share of losses of equity accounted investees | 1,963 | 340 | ||||||
| Fair value adjustments | 9,046 | 75,885 | ||||||
| Unrealized gain on exchangeable debentures | - | (507 | ) | |||||
| Dilution gains | (252 | ) | (423 | ) | ||||
| Future income taxes | (14,061 | ) | (48,263 | ) | ||||
| Non-controlling interest | (6,164 | ) | (24,444 | ) | ||||
| Stock based compensation | 4,898 | 5,649 | ||||||
| Other | 5,565 | 298 | ||||||
| 22,351 | 14,410 | |||||||
| Changes in: | ||||||||
| Accounts receivable | 14,513 | 112,863 | ||||||
| Accounts payable and accrued liabilities | (12,223 | ) | (83,334 | ) | ||||
| Bank indebtedness | 2,146 | 85,547 | ||||||
| Income taxes payable | (2,183 | ) | (18,451 | ) | ||||
| Trading securities owned and sold short, net | (3,306 | ) | 81,087 | |||||
| Client accounts receivable, net of client deposits and related liabilities | 12,429 | (110,268 | ) | |||||
| Development of land, housing and condominium inventory | (18,056 | ) | (11,414 | ) | ||||
| Other real estate working capital | 2,290 | 15,277 | ||||||
| CASH PROVIDED FROM OPERATING ACTIVITIES | 17,961 | 85,717 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Net investment in real estate assets | (4,201 | ) | (9,752 | ) | ||||
| Sales commissions incurred on distribution of mutual funds | (18,025 | ) | (31,604 | ) | ||||
| Proceeds from dispositions of corporate investments | 3,694 | 101,757 | ||||||
| Acquisitions of corporate investments | (17,370 | ) | (22,762 | ) | ||||
| Acquisition of shares from non-controlling interests | - | (70,679 | ) | |||||
| Acquisitions of capital and other tangible assets | (338 | ) | (7,270 | ) | ||||
| CASH USED IN INVESTING ACTIVITIES | (36,240 | ) | (40,310 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Change in corporate debt | (6,550 | ) | (19,523 | ) | ||||
| Issuance of Class A subordinate shares, net of issue costs | 1,160 | 142 | ||||||
| Amounts deposited by non-controlling shareholders | - | 5,000 | ||||||
| Acquisition of Class A subordinate shares, net of costs | (1,055 | ) | - | |||||
| Net issuance (cancellation) of shares by subsidiaries | 277 | (588 | ) | |||||
| Dividends paid by subsidiaries to non-controlling shareholders | (1,495 | ) | (1,481 | ) | ||||
| CASH USED IN FINANCING ACTIVITIES | (7,663 | ) | (16,450 | ) | ||||
| NET (DECREASE) INCREASE IN CASH DURING THE PERIOD | (25,942 | ) | 28,957 | |||||
| Cash and cash equivalents, beginning of period | 167,584 | 126,915 | ||||||
| Change in net cash relating to discontinued operations | - | 200 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 141,642 | $ | 156,072 | ||||
| Cash flows from operating activities include the following: | ||||||||
| Interest paid | $ | 11,868 | $ | 6,410 | ||||
| Taxes paid | $ | 13,695 | $ | 51,680 | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
DUNDEE CORPORATION
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DUNDEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at and for the three months ended March 31, 2009 and 2008
(tabular dollar amounts in thousands of Canadian dollars, except per share amounts)
(unaudited)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| AND BASIS OF PRESENTATION |
These interim consolidated financial statements of Dundee Corporation (the “Company” or “Dundee Corporation”) have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Other than as described herein, these interim consolidated financial statements follow the same accounting principles and methods of application as those disclosed in notes 1 and 2 to the Company’s audited consolidated financial statements as at and for the year ended December 31, 2008 (“2008 Audited Consolidated Financial Statements”). The Company’s interim consolidated financial statements do not include all disclosures required by Canadian GAAP for annual consolidated financial statements and accordingly, should be read in conjunction with the 2008 Audited Consolidated Financial Statements.
The preparation of interim consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingencies as at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Changes in Accounting Policies
On January 1, 2009, the Company adopted the amendments to the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1000, “Financial Statement Concepts” and the new CICA Handbook Section 3064, “Goodwill and Intangible Assets”, which replaced CICA Handbook Section 3062, “Goodwill and Other Intangible Assets”. This guidance reinforces the principle-based approach to the recognition of assets only in accordance with the definition of an asset and the criteria for asset recognition. Under the amendments to CICA Handbook Section 1000, effective January 1, 2009, the deferral and matching of operating expenses over future revenues is no longer appropriate. The adoption of this new guidance had no impact on the reported results of the Company.
The consolidated financial statements for the comparative period ended March 31, 2008 have been reclassified to conform to the presentation adopted for 2009.
| 2. | BUSINESS COMBINATIONS, DISPOSITIONS AND REORGANIZATIONS |
The Company did not complete any business combinations, dispositions or reorganizations during the three months ended March 31, 2009.
In the first quarter of the prior year, the Company purchased 5,322,687 shares of DundeeWealth Inc. (“DundeeWealth”) for cash of $70,679,000. The transaction was accounted for as a step acquisition in DundeeWealth, with the aggregate purchase price allocated to the fair value of the assets acquired. The amount allocated to investment management contracts was included in “Goodwill and other intangible assets”. The investment management contracts have an indefinite life and are therefore not subject to amortization.
DUNDEE CORPORATION
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| Net assets acquired | ||||
| Investment management contracts | $ | 69,676 | ||
| Other net assets | 20,974 | |||
| Future income tax liabilities | (19,971 | ) | ||
| $ | 70,679 | |||
| Aggregate purchase price | ||||
| Cash | $ | 70,679 | ||
| 3. | CLIENT ACCOUNTS RECEIVABLE |
| March 31, 2009 | December 31, 2008 | ||||||
| Client accounts | $ | 231,260 | $ | 232,563 | |||
| Brokers' and dealers' balances | 87,387 | 55,056 | |||||
| Securities borrowed | 118,580 | 101,663 | |||||
| $ | 437,227 | $ | 389,282 | ||||
DundeeWealth is holding collateral with a market value of $119,235,000 (December 31, 2008 – $101,537,000) against amounts receivable pursuant to securities borrowing arrangements.
| 4. | TRADING SECURITIES OWNED AND SECURITIES SOLD SHORT |
| March 31, 2009 | December 31, 2008 | |||||||||||||||
| Trading Securities | Securities | Trading Securities | Securities | |||||||||||||
| Owned | Sold Short | Owned | Sold Short | |||||||||||||
| Bonds | $ | 132,044 | $ | 33,805 | $ | 142,333 | $ | 39,925 | ||||||||
| Equities and convertible debentures | 38,181 | 2,938 | 19,549 | 4,026 | ||||||||||||
| Floating rate notes from restructuring of ABCP | 157,215 | - | - | - | ||||||||||||
| $ | 327,440 | $ | 36,743 | $ | 161,882 | $ | 43,951 | |||||||||
Bonds include $75,549,000 in guaranteed investment certificates and discounted notes held by the resources segment. These amounts have been deposited with a Canadian Schedule I Chartered Bank. Bond maturities range from 2009 to 2108 (December 31, 2008 – from 2009 to 2052) and have annual interest yields ranging from 0% to 12.5% (December 31, 2008 – 0% to 12.5%).
From time to time, DundeeWealth’s brokerage subsidiary may sell securities that it does not own and will therefore be obligated to purchase such securities at a future date. The subsidiary may incur a loss if the market value of these securities subsequently increases.
Exchange of Asset-backed Commercial Paper for Floating Rate Notes
On completion of the restructuring plan for non-bank sponsored asset-backed commercial paper (“ABCP”) on January 21, 2009 (note 20), DundeeWealth received certain floating rate notes (“FRNs”), which have been designated as held-for-trading.
DUNDEE CORPORATION
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| 5. | AVAILABLE-FOR-SALE SECURITIES |
| March 31, 2009 | December 31, 2008 | |||||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
| Asset-backed commercial paper (note 4) | $ | - | $ | - | $ | 169,478 | $ | 169,478 | ||||||||
| Mutual funds managed by a subsidiary | 85,639 | 68,308 | 91,719 | 68,194 | ||||||||||||
| Collateralized loan obligations and other structured products (note 20) | 7,599 | 7,599 | 16,645 | 16,645 | ||||||||||||
| Other portfolio investments | 74,374 | 66,788 | 56,779 | 40,413 | ||||||||||||
| $ | 167,612 | $ | 142,695 | $ | 334,621 | $ | 294,730 | |||||||||
During the three months ended March 31, 2009, DundeeWealth recognized an other-than-temporary impairment in its portfolio of available-for-sale (“AFS”) securities of $9,046,000 (2008 – $75,885,000). The prior period other-than-temporary impairment related to DundeeWealth’s ABCP investments which were exchanged for FRNs and subsequently classified as held-for-trading during the quarter (note 20).
| 6. | EQUITY ACCOUNTED INVESTMENTS |
Details of the Company’s ownership and carrying values of its equity accounted investments are included in the following table. The aggregate fair value of the Company’s equity accounted investments as at March 31, 2009 was $106,654,000 (December 31, 2008 – $106,027,000).
| March 31, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| Ownership | Value | Ownership | Value | |||||||||||||
| Breakwater Resources Ltd. | 25 | % | $ | 14,188 | 25 | % | $ | 13,560 | ||||||||
| Dundee Precious Metals Inc. | 20 | % | 39,292 | 20 | % | 37,952 | ||||||||||
| Dundee Real Estate Investment Trust | 20 | % | 93,456 | 21 | % | 96,337 | ||||||||||
| Escal UGS S.L. | 33 | % | 5,975 | 33 | % | 5,975 | ||||||||||
| Odyssey Resources Limited | 43 | % | 1,478 | 43 | % | 2,842 | ||||||||||
| Other | 3,319 | 3,673 | ||||||||||||||
| $ | 157,708 | $ | 160,339 | |||||||||||||
The Company's investment in Dundee Real Estate Investment Trust (“Dundee REIT”) is partially held through limited partnership units of Dundee Properties Limited Partnership (“DPLP”). The limited partnership units are convertible, at the Company's option, into publicly traded Dundee REIT units on a one-for-one basis. The Company has placed sufficient units of DPLP into escrow to meet its potential obligation to deliver up to a maximum of 321,000 units pursuant to the exchange feature of its outstanding exchangeable debentures.
| 7. | DEFERRED SALES COMMISSIONS |
| As at and for the | As at and for the | |||||||
| three months ended | year ended | |||||||
| March 31, 2009 | December 31, 2008 | |||||||
| Deferred sales commissions, beginning of period | $ | 234,027 | $ | 207,005 | ||||
| Commissions funded during the period | 18,025 | 108,890 | ||||||
| Amortization during the period | (21,580 | ) | (81,868 | |||||
| Deferred sales commissions, end of period | $ | 230,472 | $ | 234,027 | ||||
DUNDEE CORPORATION
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| 8. | CAPITAL, REAL ESTATE AND OTHER ASSETS |
| March 31, 2009 | December 31, 2008 | |||||||
| Real estate assets | ||||||||
| Land under development | $ | 125,879 | $ | 125,298 | ||||
| Land held for development | 162,048 | 160,048 | ||||||
| Housing and condominiums | 92,947 | 96,929 | ||||||
| Revenue properties | 67,659 | 63,951 | ||||||
| Oil and gas properties | ||||||||
| Tunisia | 17,825 | 17,825 | ||||||
| Other | 464 | 464 | ||||||
| Capital and other assets | 55,191 | 61,741 | ||||||
| $ | 522,013 | $ | 526,256 | |||||
| 9. | GOODWILL AND OTHER INTANGIBLE ASSETS |
| March 31, 2009 | December 31, 2008 | |||||||||||||||
| Accumulated | Net Book | Net Book | ||||||||||||||
| Cost | Amortization | Value | Value | |||||||||||||
| Goodwill | $ | 375,967 | $ | - | $ | 375,967 | $ | 375,967 | ||||||||
| Indefinite life intangible assets | ||||||||||||||||
| Investment management contracts | 336,548 | - | 336,548 | 336,548 | ||||||||||||
| Definite life intangible assets | ||||||||||||||||
| Institutional management contracts | 16,417 | 1,231 | 15,186 | 15,596 | ||||||||||||
| Funds under administration | 15,795 | 6,571 | 9,224 | 9,460 | ||||||||||||
| Customer relationships | 6,651 | 3,770 | 2,881 | 3,213 | ||||||||||||
| $ | 751,378 | $ | 11,572 | $ | 739,806 | $ | 740,784 | |||||||||
| 10. | BANK INDEBTEDNESS |
At March 31, 2009, DundeeWealth’s brokerage subsidiary had borrowed $2,146,000 (December 31, 2008 – $nil) pursuant to credit facilities provided by two Canadian chartered banks. During the three months ended March 31, 2009, the interest rate on these facilities ranged from 1.75% to 2.75% on Canadian funds (December 31, 2008 – 2.75% to 5.00%) and was 2.75% on U.S. funds (December 31, 2008 – 2.6% to 5.25%).
From time to time, and to facilitate the securities settlement process for both client and principal securities transactions, DundeeWealth’s brokerage subsidiary may utilize call loans, of which $93,300,000 in facilities was available at March 31, 2009 (December 31, 2008 – $93,300,000). The use of call loans is customary to facilitate the securities settlement process or to fund margin lending and these loans are collateralized by securities.
DUNDEE CORPORATION
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| 11. | CLIENT DEPOSITS AND RELATED LIABILITIES |
| March 31, 2009 | December 31, 2008 | |||||||
| Client accounts | $ | 378,238 | $ | 356,898 | ||||
| Brokers' and dealers' balances | 81,721 | 35,061 | ||||||
| Securities loaned | 2,482 | 7,629 | ||||||
| International banking client accounts | 6,580 | 9,059 | ||||||
| $ | 469,021 | $ | 408,647 | |||||
DundeeWealth has pledged securities with a fair value of $2,220,000 (December 31, 2008 – $7,610,000) as collateral for the cash deposited on loan.
| 12. | CORPORATE DEBT |
| March 31, 2009 | December 31, 2008 | |||||
| Corporate | ||||||
| $ | 150 million revolving term credit facility due September 9, 2009 | $ | 97,709 | $ | 81,960 | |
| $ | 9.5 million, 5.85% exchangeable unsecured subordinated debentures due June 30, 2015 | 9,183 | 9,168 | |||
| Subsidiaries | ||||||
| $ | 500 million revolving term credit facility, DundeeWealth due September 9, 2009 | 131,641 | 169,606 | |||
| $ | 150 million revolving term credit facility, Dundee Realty due November 30, 2009 | 92,908 | 85,408 | |||
| Other real estate debt | 197,101 | 183,365 | ||||
| $ | 528,542 | $ | 529,507 | |||
$150,000,000 – Revolving Term Credit Facility, Corporate
During 2008, the Company renewed its revolving term credit facility with a Canadian chartered bank, extending the expiry date to September 9, 2009, subject to certain amendments. The facility provides for a tiered interest rate structure based on the Company’s public debt rating. Based on the Company’s current debt rating, draws on the credit facility bear interest, at the Company’s option, at either the bank’s prime lending rate plus 0.25% for loans or, for bankers’ acceptances at the bank’s then prevailing bankers’ acceptance rate plus 1.25%. The Company is subject to a standby fee of 0.375% on unused amounts under the facility.
The facility is subject to certain covenants, including maintenance of minimum levels of assets, restrictions on the existence of secured indebtedness, restrictions on the redemption, purchase or repayment of the exchangeable unsecured subordinated debentures (“Exchangeable Debentures”) and restrictions on the prepayment and payment of interest on the Exchangeable Debentures.
For the three months ended March 31, 2009, interest expense relating to this revolving term credit facility was $639,000 (2008 – $86,000).
DUNDEE CORPORATION
10
$500,000,000 – Revolving Term Credit Facility, DundeeWealth
During 2008, DundeeWealth renewed its revolving term credit facility with a Canadian chartered bank, extending the expiry date to September 9, 2009. If the facility is not renewed at the expiry date, it will convert into a four-year term loan and any amounts borrowed as at the date of expiry will be due four years after the scheduled expiry date. For Canadian dollar borrowings, the facility bears interest, at DundeeWealth’s option, at a rate per annum equal to either the bank’s prime lending rate for loans or, for bankers' acceptances at the bank’s then prevailing bankers’ acceptance rate plus 0.95%. For U.S. dollar borrowings, the facility bears interest, at DundeeWealth’s option, either at the bank's prevailing Alternate Base Rate Canada for loans, or at LIBOR plus 0.95%. Euro borrowings under the credit facility bear interest at EURIBOR plus 0.95%. Unused amounts available under the facility are subject to a standby fee of 0.325% per annum.
The credit facility is secured by a general security agreement over all the assets of DundeeWealth and certain of its subsidiaries, including DWM Inc. and Goodman & Company, Investment Counsel Ltd.
The facility is subject to certain covenants, including maintenance of minimum levels of assets under management and earnings before interest, taxes, depreciation, amortization and other non-cash items, restrictions on the existence of secured indebtedness and restrictions on the disposition of assets in excess of a specified amount by certain subsidiaries.
For the three months ended March 31, 2009, interest expense relating to this corporate debt was $1,546,000 (2008 – $1,406,000).
$150,000,000 Revolving Term Credit Facility, Dundee Realty Corporation (“Dundee Realty”)
Dundee Realty has established a demand revolving term credit facility with a Canadian chartered bank, available up to a formula-based maximum not to exceed $150,000,000 (2008 – $150,000,000). The facility bears interest, at Dundee Realty’s option, at a rate per annum equal to either the bank’s prime lending rate plus 0.625% or at the bank’s then prevailing bankers’ acceptance rate plus 2.125%. The facility expires on November 30, 2009 and is secured by a general security agreement and a first charge against various assets in western Canada. At March 31, 2009, Dundee Realty had drawn $129,436,000 (December 31, 2008 – $121,146,000) against this facility, including $36,528,000 (December 31, 2008 –$35,738,000) in the form of letters of credit.
For the three months ended March 31, 2009, interest expense relating to this revolving term credit facility was $802,000 (2008 – $821,000).
Other Real Estate Debt
Real estate debt is secured by charges on specific properties to which the debt relates. Mortgages, including land mortgages, are secured on specific properties. Housing advances are secured by charges on specific land and housing and condominiums under development or land held for development. Term debt is secured by charges on specific capital equipment. At March 31, 2009, the weighted average interest rate on fixed rate debt at Dundee Realty was 6.85% (December 31, 2008 – 6.26%) and on variable rate debt, including in respect of its demand revolving term credit facilities, was 3.42% (December 31, 2008 – 4.29%). Fixed rate debt matures between 2009 and 2030. Variable rate debt, including demand revolving term credit facilities, matures between 2009 and 2018.
DUNDEE CORPORATION
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| 13. | PREFERENCE SHARES |
Issued and Outstanding Preference Shares, First Series, Series 1
| Number | Par | Issue | Net Book | |||||||||||||||||
| of Shares | Value | Costs | Premium | Value | ||||||||||||||||
| Balance as at December 31, 2008 | 6,000,000 | $ | 150,000 | $ | (3,556 | ) | $ | 927 | $ | 147,371 | ||||||||||
| Amortization during the period | - | - | 119 | (31 | ) | 88 | ||||||||||||||
| Balance as at March 31, 2009 | 6,000,000 | $ | 150,000 | $ | (3,437 | ) | $ | 896 | $ | 147,459 | ||||||||||
As at March 31, 2009, the Company’s Preference Shares, Series 1, had a fair value based on market prices of $87,660,000 (December 31, 2008 – $75,000,000). The Preference Shares, Series 1, pay an annual dividend of 5.00% and are retractable by the holder at any time after June 30, 2016 for cash of $25.00 per share.
Series 1 Preference Shares, DundeeWealth
As at March 31, 2009, the Series 1 preference shares of DundeeWealth had a fair value based on market prices of $101,156,000 (December 31, 2008 – $84,038,000). The Series 1 preference shares of DundeeWealth pay an annual dividend of 4.75% and are retractable by the holder at any time after March 13, 2017 for cash of $25.00 per share.
| 14. | SHARE CAPITAL |
Issued and Outstanding
| Subordinate Shares | Class B Shares | Total | ||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | |||||||||||||||||||
| Total Share Capital | ||||||||||||||||||||||||
| Outstanding December 31, 2008 | 71,139,788 | $ | 280,232 | 3,119,788 | $ | 8,166 | 74,259,576 | $ | 288,398 | |||||||||||||||
| Issued (redeemed) during the period | ||||||||||||||||||||||||
| ended March 31, 2009 | ||||||||||||||||||||||||
| Redeemed pursuant to issuer bid | (260,700 | ) | (1,041 | ) | - | - | (260,700 | ) | (1,041 | |||||||||||||||
| Options exercised | 240,000 | 1,160 | - | - | 240,000 | 1,160 | ||||||||||||||||||
| Total Share Capital | ||||||||||||||||||||||||
| Outstanding March 31, 2009 | 71,119,088 | $ | 280,351 | 3,119,788 | $ | 8,166 | 74,238,876 | $ | 288,517 | |||||||||||||||
Normal Course Issuer Bid
On March 30, 2009, the Company received approval from The Toronto Stock Exchange respecting its intention to continue to purchase its Subordinate Shares in the market for cancellation pursuant to its normal course issuer bid from April 1, 2009 to March 31, 2010.
During the first three months of 2009, the Company purchased 260,700 Subordinate Shares, having an aggregate stated capital value of $1,041,000 for cancellation pursuant to its normal course issuer bid. The Company paid $1,055,000 to retire these shares. The excess of the purchase price over the value of stated capital, which totalled $14,000, has been recorded as a reduction of retained earnings.
DUNDEE CORPORATION
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Share Purchase Plan
As at March 31, 2009, 1,980,000 Subordinate Shares were approved for issuance pursuant to the Company’s share purchase plan, of which 1,087,571 Subordinate Shares were issued since the plan’s inception and 892,429 Subordinate Shares remain available for issuance from treasury to eligible participants.
Share Loans Receivable in DundeeWealth
At March 31, 2009, the aggregate loan amount pursuant to the DundeeWealth share loan plan was $28,735,708 (December 31, 2008 – $29,813,726). During the three months ended March 31, 2009, DundeeWealth recognized compensation expense of $293,000 (2008 – $943,000) in respect of these share loans.
| 15. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
| Net unrealized gains (loss), net of taxes | ||||||||||||||||||||
| Available- | Equity | Foreign | Non- | |||||||||||||||||
| for-Sale | Accounted | Currency | controlling | |||||||||||||||||
| Securities | Investees | Translation | Interest | Total | ||||||||||||||||
| Balance at December 31, 2007 | $ | 2,655 | $ | (1,869 | ) | $ | (8,772 | ) | $ | 9,306 | $ | 1,320 | ||||||||
| Transactions during the year ended December 31, 2008 | ||||||||||||||||||||
| Other comprehensive loss | (32,141 | ) | (1,174 | ) | 12,720 | (3,908 | ) | (24,503 | ) | |||||||||||
| Balance at December 31, 2008 | (29,486 | ) | (3,043 | ) | 3,948 | 5,398 | (23,183 | ) | ||||||||||||
| Transactions during the period ended March 31, 2009 | ||||||||||||||||||||
| Other comprehensive income | 11,905 | 1,186 | 174 | (2,809 | ) | 10,456 | ||||||||||||||
| Balance at March 31, 2009 | $ | (17,581 | ) | $ | (1,857 | ) | $ | 4,122 | $ | 2,589 | $ | (12,727 | ) | |||||||
| 16. | INVESTMENT INCOME AND INCOME FROM EQUITY ACCOUNTED INVESTEES |
Investment Income
| For the three months ended March 31, | 2009 | 2008 | ||||
| Interest, dividends, and cash distributions | $ | 3,774 | $ | 5,456 | ||
| Realized investment (losses) gains | (2,914 | ) | 1,552 | |||
| Other gains | - | 15 | ||||
| $ | 860 | $ | 7,023 | |||
Share of Earnings (Loss) from Equity Accounted Investees
| For the three months ended March 31, | 2009 | 2008 | ||||||
| Share of (loss) earnings | $ | (866 | ) | $ | 174 | |||
| Loss from dilutions of interest | (1,097 | ) | (514 | ) | ||||
| $ | (1,963 | ) | $ | (340 | ) | |||
DUNDEE CORPORATION
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| 17. | STOCK BASED COMPENSATION |
The terms of the Company’s stock based compensation plans are summarized in notes 15 and 19 to the 2008 Audited Consolidated Financial Statements.
Share Incentive Plans
During the three months ended March 31, 2009, the Company, before considering stock based compensation of subsidiaries described below, recognized stock based compensation expense of $348,000 (2008 – $381,000) related to share based compensation arrangements.
| For the three months ended March 31, | 2009 | 2008 | ||||||
| Share option plan | $ | 210 | $ | 203 | ||||
| Deferred share unit plan | 138 | 178 | ||||||
| $ | 348 | $ | 381 | |||||
Share Option Plan
A summary of the status of the Company’s share option plan as at March 31, 2009 and December 31, 2008, and the changes during the periods then ended, is as follows:
| March 31, 2009 | December 31, 2008 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Number of | Average | Number of | Average | |||||||||||||
| Options | Exercise Price | Options | Exercise Price | |||||||||||||
| Outstanding, beginning of period | 3,559,644 | $ | 6.63 | 3,864,644 | $ | 6.67 | ||||||||||
| Exercised | (240,000 | ) | $ | 4.83 | (275,000 | ) | $ | 7.39 | ||||||||
| Cancelled | (700,032 | ) | $ | 4.83 | (30,000 | ) | $ | 4.95 | ||||||||
| Outstanding, end of period | 2,619,612 | $ | 7.28 | 3,559,644 | $ | 6.63 | ||||||||||
| Exercisable options | 2,328,612 | $ | 7.04 | 3,268,644 | $ | 6.41 | ||||||||||
| Weighted | ||||||||
| Average | ||||||||
| Weighted | Remaining | |||||||
| Options | Average | Contractual | Options | |||||
| Exercise Price Range | Outstanding | Exercise Price | Life (Years) | Exercisable | ||||
| $4.38 to $4.83 | 120,000 | $ | 4.38 | 2.65 | 120,000 | |||
| $4.90 to $5.42 | 1,044,612 | $ | 4.98 | 1.32 | 1,044,612 | |||
| At $9.17 | 1,455,000 | $ | 9.17 | 0.52 | 1,164,000 |
Share Incentive Plans and Other Stock Based Plans of DundeeWealth
During the three month period ended March 31, 2009, DundeeWealth recognized stock based compensation expense of $4,518,000 (2008 – $5,183,000) in respect of its share incentive arrangements. As at March 31, 2009, DundeeWealth had granted 6,503,246 (December 31, 2008 – 6,984,960) options at a weighted average exercise price of $9.14 (December 31, 2008 – $9.06) of which 5,748,546 (December 31, 2008 – 5,811,636) were exercisable at March 31, 2009. At March 31, 2009, DundeeWealth had granted awards for the future issuance of 2,105,278 common shares of DundeeWealth, which issuance is conditional on certain criteria being met, and it had granted an aggregate of 894,461 deferred share units.
DUNDEE CORPORATION
14
Stock Option Plan of Eurogas Corporation (“Eurogas”)
As at March 31, 2009, Eurogas had granted 5,205,000 (December 31, 2008 – 5,205,000) options at a weighted average exercise price of $1.21 (December 31, 2008 – $1.21) of which 4,214,997 (December 31, 2008 – 4,214,997) stock options were exercisable at March 31, 2009. Eurogas also has a deferred share unit plan of which 315,000 (December 31, 2008 – 315,000) awards have been issued.
Stock Based Compensation of Dundee Realty
The non-controlling shareholder of Dundee Realty was granted an option through the issuance of a class of Dundee Realty shares that will enable the non-controlling shareholder to acquire additional shares of Dundee Realty over a six-year period at a cost of approximately $10,700,000. If exercised, the option will increase the non-controlling shareholder’s interest to 30%. The option purchase will vest in equal annual installments over the six-year period which commenced in 2006 and is subject to the non-controlling shareholder remaining an employee of Dundee Realty. In the first quarter of 2009, Dundee Realty recognized stock based compensation expense of $32,000 (2008 – $61,000) in respect of these option arrangements.
| 18. | INCOME TAXES |
The Company's income tax recovery from continuing operations differs from the amount that would be computed by applying the combined Canadian federal and provincial statutory income tax rate as a result of the following:
| March 31, 2009 | March 31, 2008 | |||||||
| Anticipated income tax recovery based on a combined Canadian federal and provincial | ||||||||
| statutory income tax rate of 33% (2008 - 33.5%) | $ | (5,816 | ) | $ | (19,167 | ) | ||
| Non deductible expenses | 4,548 | 3,233 | ||||||
| Non taxable dilution gains | (83 | ) | (141 | ) | ||||
| Change in valuation allowance | (346 | ) | (1,501 | ) | ||||
| Remeasurement of future income taxes | 110 | 3,677 | ||||||
| Net income tax benefits not previously recognized | (1,398 | ) | - | |||||
| Other | (234 | ) | (2,539 | ) | ||||
| Income tax recovery | $ | (3,219 | ) | $ | (16,438 | ) | ||
Significant components of the Company's future income tax assets and liabilities as at March 31, 2009 and December 31, 2008 are as follows:
| March 31, 2009 | December 31, 2008 | |||||||
| Future income tax assets | ||||||||
| Tax loss carry forwards | $ | 182,603 | $ | 184,838 | ||||
| Capital assets | 16,982 | 16,346 | ||||||
| Accrued liabilities | 10,913 | 10,838 | ||||||
| Non deductible reserves | 5,353 | 6,370 | ||||||
| Other comprehensive income | 4,073 | 5,618 | ||||||
| Other | 5,584 | 5,525 | ||||||
| 225,508 | 229,535 | |||||||
| Valuation allowance | (15,813 | ) | (17,131 | ) | ||||
| Total future income tax assets | 209,695 | 212,404 | ||||||
| Future income tax liabilities | ||||||||
| Deferred sales commissions | 72,169 | 73,770 | ||||||
| Management contracts | 101,684 | 101,885 | ||||||
| Investment portfolio, including equity accounted investments | 118 | 5,068 | ||||||
| Real estate assets | 1,676 | 12,769 | ||||||
| Funds under administration | 3,670 | 3,857 | ||||||
| Other | 22,945 | 18,079 | ||||||
| Total future income tax liabilities | 202,262 | 215,428 | ||||||
| Net future income tax assets (liabilities) | $ | 7,433 | $ | (3,024 | ) | |||
DUNDEE CORPORATION
15
The future income tax assets arise from available income tax loss carry forwards from current and prior years and future income tax deductions. A valuation allowance is recorded in respect of the total future income tax assets when management believes it is more likely than not that some or all of the future tax assets will not be realized. After consideration of estimated future taxable income, expected reversal of future tax liabilities, the nature of the future tax assets and potential tax planning strategies, the Company has determined that a valuation allowance of $15,813,000 (December 31, 2008 – $17,131,000) is required in respect of its future income tax assets as at March 31, 2009.
DundeeWealth realized a capital loss in 2007 on the sale of a subsidiary. While the tax benefit of $14,500,000 in respect of this loss was not recognized in the consolidated financial statements or the table above, the loss can be carried forward indefinitely to offset future capital gains.
As at March 31, 2009, the Company and its subsidiaries had operating loss carry forwards of $627,523,000 (December 31, 2008 – $683,500,000).
| Year of Expiry: | ||||
| 2009 | $ | 11,540 | ||
| 2010 | 9,974 | |||
| 2011 | 5,034 | |||
| 2012 | - | |||
| 2013 | 1,773 | |||
| Thereafter | 599,202 | |||
| $ | 627,523 |
| 19. | NET LOSS PER SHARE |
| For the three months ended March 31, | 2009 | 2008 | ||||||
| Net (loss) earnings available to Subordinate and Class B Shareholders | ||||||||
| Continuing operations | $ | (8,244 | ) | $ | (16,333 | ) | ||
| Discontinued operations | $ | - | $ | 69 | ||||
| Weighted average number of shares outstanding | 74,243,619 | 75,576,361 | ||||||
| Loss per share | ||||||||
| Basic | $ | (0.11 | ) | $ | (0.22 | ) | ||
| Diluted | $ | (0.11 | ) | $ | (0.22 | ) | ||
| 20. | FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT |
Risks Associated with Financial Instruments
The Company’s financial instruments are exposed to market risk, credit risk and liquidity risk. Detailed disclosures on the Company’s financial instruments are included in note 22 to the 2008 Audited Consolidated Financial Statements and in the Managing Risk section of the Company’s Management’s Discussion and Analysis for the year ended December 31, 2008.
The following table illustrates the Company’s financial instruments which are recorded on the consolidated balance sheet at fair value and are exposed to fair value risk. The table demonstrates the sensitivity of the Company’s earnings before taxes and other comprehensive income (“OCI”) before taxes, net of associated expenses, for the three months ended March 31, 2009 to reasonably possible changes in fair value of those instruments. Amounts illustrated are before providing for allocation of earnings or OCI to non-controlling interests.
DUNDEE CORPORATION
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Earnings before taxes and other comprehensive income before taxes, net of associated expenses, for the three months ended March 31, 2009
| Effect of 3% | ||||||||||||
| Effect of 3% | absolute | |||||||||||
| absolute | change in | |||||||||||
| change in | fair value on | |||||||||||
| fair value on | other | |||||||||||
| Carrying | earnings | comprehensive | ||||||||||
| value | before taxes | income (i) | ||||||||||
| Trading securities owned, net of trading securities sold short | $ | 290,697 | $ | 8,512 | n/a | |||||||
| Available-for-sale securities (ii): | ||||||||||||
| Collateralized loan obligations (iii) | 7,599 | 228 | n/a | |||||||||
| Mutual fund investments managed by a subsidiary | 68,308 | n/a | $ | 2,049 | ||||||||
| Other portfolio investments | 66,788 | n/a | 2,004 | |||||||||
| (i) | Before taxes. |
| (ii) | Other-than-temporary impairments in the fair value of AFS securities are recorded in net earnings. |
| (iii) | During the first quarter of 2009, the decline in fair values related to CLOs was considered an other-than-temporary impairment and therefore, changes in fair values are charged to net earnings. |
The Company also incurs fair value risk in its Exchangeable Debentures (note 12). The carrying value of the Exchangeable Debentures is adjusted in the consolidated financial statements to reflect the market value of the underlying Dundee REIT units, provided that such adjustment does not result in a carrying value that is below the principal value of the Exchangeable Debentures outstanding. Any change in the carrying value of the Exchangeable Debentures resulting from such adjustment is recorded in net earnings. At March 31, 2009, the Exchangeable Debentures were carried at their principal value.
The Company incurs interest rate risk and currency risk related to its portfolio of collateralized loan obligation (“CLO”) investments. Additional details of the CLO investments are discussed below under the “Specific Risks Associated with Operating Segments – Wealth Management” section. The following table demonstrates the sensitivity of the Company’s earnings before taxes for the three months ended March 31, 2009, to reasonably possible changes in market interest rates and foreign exchange rates. The foreign exchange rate portion of the table reflects the effect of a revised average quarterly exchange rate used to translate the related investment income which is reflected in net earnings.
Earnings before taxes for the three months ended March 31, 2009
Effect on earnings before taxes assuming 50 basis point absolute change in market interest rates | Effect on earnings before taxes assuming a 3% absolute change in foreign exchange rates | |||||||
| U.S. dollars | $ | 94 | $ | 75 | ||||
| Euros | $ | 11 | $ | 5 | ||||
DundeeWealth borrowed in U.S. and Euro currencies in order to economically protect itself against foreign exchange fluctuations in its foreign-currency-denominated CLO investments. At March 31, 2009, approximately 45% of the par value of U.S. dollar denominated CLOs and 26% of the par value of Euro denominated CLOs were economically hedged using foreign-currency-denominated debt. DundeeWealth has elected not to apply hedge accounting to these strategies.
The Company also incurs interest rate risk through its variable rate corporate debt and client account margin loans and credit balances and, to a lesser extent, cash and cash equivalents and amounts related to securities borrowing activities. In general, for every 50 basis point change in market interest rates, earnings before taxes and non-controlling interest related to variable rate corporate debt, excluding real estate debt, for the three months ended March 31, 2009 would change by approximately $251,000. In general, for every 50 basis point change in market interest rates, earnings before taxes related to client account margin loans and credit balances for the three months ended March 31, 2009 would change by approximately $187,000. The Company’s exposure to its variable rate real estate debt is discussed under the “Specific Risks Associated with Operating Segments – Real Estate” section.
DUNDEE CORPORATION
17
DundeeWealth incurs currency risk primarily on its U.S. dollar and Euro denominated CLOs and its $500,000,000 revolving term credit facility to the extent that it is drawn in U.S. dollars and Euros. DundeeWealth’s exposure to currency risk related to its foreign-currency-denominated debt is illustrated in the following table, which demonstrates the sensitivity of earnings before taxes and non-controlling interest to a reasonably possible change in U.S. dollar and Euro exchange rates, with all other variables held constant. The effect on earnings before taxes reflects (i) the revaluation of the debt at March 31, 2009 using a revised spot rate and (ii) the effect of a revised average quarterly exchange rate used to translate the related interest expense for the three months ended March 31, 2009.
Earnings before taxes for the three months ended March 31, 2009
| Effect on earnings before taxes | ||
| assuming a 3% absolute change | ||
| in exchange rates | ||
| U.S. dollars | $ | 1,519 |
| Euros | $ | 1,163 |
Assets under management (“AUM”) are exposed to various forms of market risk, including, but not limited to, fair value risk, interest rate risk and currency risk. DundeeWealth does not quantify its exposure to these risks in isolation; however, in general, for every 3% change in the net asset value of AUM, earnings before taxes and non-controlling interest, defined as revenues less trailer service fees, for the three months ended March 31, 2009 would change by approximately $1,836,000, before accounting for any changes in performance fees that may be generated by such a change in fair value.
The following table, which includes a breakdown of March 31, 2009 AUM by asset type and base currency, provides additional insight regarding DundeeWealth’s exposure to various forms of market risk.
| AUM by Asset Type | AUM by Base Currency | |||||||||
| Equity | $ | 17,773,000 | Canadian dollars | $ | 19,400,000 | |||||
| Fixed income and cash | 7,838,000 | U.S. dollars | 4,635,000 | |||||||
| Other | 1,576,000 | |||||||||
| Total | $ | 25,611,000 | Total | $ | 25,611,000 | |||||
DundeeWealth also incurs market risk through its exposure to fluctuations in assets under administration (“AUA”). Adverse global market conditions may impact the Company’s AUA and net earnings through a reduction in client trading and underwriting activity. While DundeeWealth does not quantify its exposure to these risks in isolation, it does monitor the portion of its AUA of $15,420,000,000 which is subject to trailer fees and therefore directly impacts trailer fee revenue. In general, for every 3% change in the net asset value of AUA invested in mutual funds, earnings before taxes and non-controlling interest, net of associated expenses, for the three months ended March 31, 2009 would change by approximately $141,000.
Credit Risk
The Company manages its credit risk in certain types of trading activities through the establishment of aggregate limits by individual counterparty, reviewing security and loan concentrations and marking to market collateral provided on certain transactions. For the three months ended March 31, 2009, and historically, the Company has not incurred any material loss arising from a counterparty default.
Additionally, the real estate segment manages its exposure to credit risk by attracting tenants and land buyers of sound financial standing, diversifying its mix of tenants and ensuring adequate security has been provided in support of loans.
DUNDEE CORPORATION
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Liquidity Risk
The following table summarizes the maturity profile of the Company’s financial liabilities as at March 31, 2009.
| Carrying Amount | Contractual Term to Maturity | ||||
| Bank indebtedness (note 10) | $ | 2,146 | No fixed term to maturity | ||
| Accounts payable and accrued liabilities | 259,653 | Typically due within 20 to 90 days | |||
| Client deposits and related liabilities (note 11) | 469,021 | Due on demand | |||
| Corporate debt (i) (note 12) | 528,542 | Subject to term facilities | |||
| Series 1 preference shares, DundeeWealth (note 13) | 153,059 | Retractable by the holder after March 13, 2017 | |||
| Preference shares, series 1 (note 13) | 147,459 | Retractable by the holder after June 30, 2016 | |||
| Total | $ | 1,559,880 | |||
(i) Contractual term to maturity related to the real estate debt is disclosed below under the “Specific Risks Associated with Operating Segments – RealEstate” section.
Specific Risks Associated with Operating Segments
Wealth Management
Restructured Asset-Backed Commercial Paper
At December 31, 2008, DundeeWealth held ABCP with a par value at maturity of $379,425,000. On January 21, 2009, as part of the restructuring plan granted by the Superior Court of Ontario, DundeeWealth exchanged its ABCP for longer-term, FRNs designed to match the maturities of the underlying assets. At closing, DundeeWealth received $145,739,000 MAV2 Class A-1 notes, $123,577,000 MAV2 Class A-2 notes, $22,433,000 MAV2 Class B notes, $9,023,000 MAV2 Class C notes, $26,827,000 MAV2 IA tracking notes, $14,152,000 MAV3 IA tracking notes and $29,600,000 MAV3 TA tracking notes. In addition, following the completion of the restructuring plan, DundeeWealth received accrued interest of $12,263,000 in respect of its ABCP holdings which, when received, was recorded as a reduction in the carrying value of DundeeWealth’s investment in ABCP. DundeeWealth has classified the FRNs as held-for-trading.
There are currently no market quotations available for the FRNs. In order to determine fair value of these financial assets DundeeWealth applied a valuation approach using publicly available information to determine the type and characteristics of assets in each of the affected trusts. Using a valuation technique, DundeeWealth assigned values to each asset type, after which an overall dollar weighted average valuation across all FRNs was then calculated.
DundeeWealth’s determination of fair value of traditional assets continues to be based primarily on discussions with third party dealers or, where available, the most recent trading prices of similar securities. As proxy for the fair value of hybrid securitized assets, DundeeWealth considered credit indices on structured finance products including the ABX, TABX and CMBX indices. Fair value of leveraged and unleveraged corporate CDOs is determined using a pricing model which requires inputs of initial and current credit spreads, a risky annuity and a leverage factor.
At March 31, 2009, DundeeWealth determined that the fair value of the FRNs was $157,215,000, consistent with the fair value determination at December 31, 2008, adjusted for interest received of $12,263,000. There is no assurance that the pricing of these FRNs will not increase or decline in future periods or that the FRNs will trade at a market value which is the same as their fair value. Furthermore, there is no assurance that DundeeWealth’s investment will trade at a value equivalent to the fair value of the FRNs. As a result of these uncertainties, and the fact that DundeeWealth’s valuation methodology was based on incomplete information, these estimates may change materially in subsequent reporting periods.
DUNDEE CORPORATION
19
Collateralized Loan Obligations
At March 31, 2009, DundeeWealth held 27 positions in CLOs, including U.S. dollar denominated CLOs with a par value of US$88,550,000 and Euro denominated CLOs with a par value of €15,500,000. For the three months ended March 31, 2009, DundeeWealth earned interest of $2,656,000 (2008 – $3,338,000) from its portfolio of CLO investments. This interest has been included in investment income in the Company’s statements of operations.
During the first quarter of 2009, the credit quality of the loans supporting DundeeWealth’s CLO investments continued to deteriorate. In addition, a number of factors continued to exert downward pressure on CLO pricing which resulted in limited trading, despite the significant supply of CLO products. Based on its analysis, DundeeWealth determined that there was objective evidence of increasing financial difficulty within the collateral supporting each CLO investment. As a result, as at March 31, 2009, DundeeWealth determined that its CLO investments continued to be impaired on an other-than-temporary basis and recognized in net earnings a fair value adjustment of $9,046,000 against the carrying value of its CLO investments. However, given the current economic environment and potential variability of the various measures used to assess credit quality of the loans supporting the CLO investments, material changes in DundeeWealth’s valuation of the CLOs may result in future periods.
Real Estate
Interest Rate Risk
The Company incurs interest rate risk through the real estate segment’s variable rate real estate debt. This exposure arises principally on changes in Canadian dollar interest rates. In general, for every 50 basis point change in market interest rates, earnings before taxes related to variable rate real estate debt for the three months ended March 31, 2009 would change by approximately $130,000.
Liquidity Risk
The following table summarizes the scheduled principal repayments and debt maturities in respect of real estate debt.
| Principal Repayments | Mortgages | Land Mortgages | Housing Advances | Term Debt | TOTAL | |||||||||||||||
| 2009 | $ | 3,760 | $ | 10,697 | $ | 123,113 | $ | 1,389 | $ | 138,959 | ||||||||||
| 2010 | 834 | 3,826 | 300 | 945 | 5,905 | |||||||||||||||
| 2011 | 867 | 801 | 75 | 1,267 | 3,010 | |||||||||||||||
| 2012 | 913 | 1 | - | 1,418 | 2,332 | |||||||||||||||
| 2013 | 961 | 142 | - | 1,484 | 2,587 | |||||||||||||||
| 2014 and thereafter | 29,967 | - | - | 16,048 | 46,015 | |||||||||||||||
| TOTAL | $ | 37,302 | $ | 15,467 | $ | 123,488 | $ | 22,551 | $ | 198,808 | ||||||||||
| Adjusted for: | ||||||||||||||||||||
| Acquisition date fair value debt adjustment | (1,457 | ) | ||||||||||||||||||
| Deferred financing | (250 | ) | ||||||||||||||||||
| As at March 31, 2009 | $ | 197,101 | ||||||||||||||||||
Currency Risk
The Company’s real estate segment has entered into a foreign exchange forward contract to purchase a total of US$13,464,000 of currency at specific dates, which commenced on September 2, 2008 and ends on February 1, 2010. The foreign exchange forward contract hedges the real estate segment’s exposure to foreign currency risk related to its future funding obligations for capital projects. As of March 31, 2009, the balance to be purchased under this foreign exchange forward contract was US$8,976,000. There is no ineffectiveness relating to this hedging relationship, therefore no amount of gain or loss was recognized in net earnings for the reporting period. As determined using a derivative valuation model, a 3% change in foreign exchange rates would result in an approximate $333,000 adjustment to OCI before non-controlling interest.
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Resources
Interest Rate Risk
Eurogas incurs interest rate risk through its discounted notes and GICs and, to a lesser extent, its cash position. The investments in discounted notes and GICs are designated as held-for-trading financial instruments and are measured at fair value. As a result, the effect of interest rate changes are recognized in net income in the period incurred. For every 50 basis point change in market interest rates, net earnings before income taxes related to discounted notes and GICs would change by approximately $30,000. Notes receivable are at fixed rates of interest and therefore are not subject to interest rate risk.
Currency Risk
Eurogas periodically has accounts receivable and accounts payable denominated in foreign currencies, primarily Euros and US dollars. A 3% change in the foreign exchange translation rate of Euros and US dollars to Canadian dollars relating to these activities would result in a change to net earnings of approximately $20,000.
Eurogas’ equity investment in Escal is considered a self-sustaining operation and the current method is used for translating the results of its operations with unrealized foreign currency translation adjustments included in OCI. A 3% change in the foreign exchange translation rate of Euros to Canadian dollars would change the value of the equity investment in Escal by approximately $13,000, with the unrealized foreign exchange amount recognized in OCI.
Eurogas also has certain cash balances that are denominated in US dollars in order to facilitate US dollar transactions. Eurogas does not incur significant currency risk in respect of these balances, as the amount of cash held in foreign currency is not significant.
Equity Accounted Investments
The various risk factors discussed above may impact the Company’s equity accounted investments and therefore impact future net earnings and OCI. The Company, however, does not measure or monitor these risks in isolation.
Capital Management
The Company defines the capital that it manages as the aggregate of its shareholders’ equity and interest bearing debt, including outstanding preference shares. Detailed disclosures of the Company’s capital, including its objectives when managing capital and regulatory capital requirements are included in note 23 to the 2008 Audited Consolidated Financial Statements and in the Liquidity and Capital Resources section of the Company’s Management’s Discussion and Analysis for the year ended December 31, 2008.
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| 21. | COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS |
Other than as disclosed below, there have been no substantive changes to the description and nature of commitments, contingencies and off-balance sheet arrangements from those described in note 24 to the 2008 Audited Consolidated Financial Statements. The Company and its subsidiaries are defendants in various legal actions. The Company intends to vigorously defend itself against these claims. Although the ultimate outcome of these matters cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management, based on information currently available, that these are not material liabilities, adequate provisions have been made for any liabilities and the resolution of these matters will not have a material adverse effect on the financial position of the Company.
Land Purchase Agreements and Estimated Costs to Complete
Dundee Realty has commitments under land purchase agreements totalling $2,832,000 as at March 31, 2009 (December 31, 2008 – $2,832,000) which will become payable in future periods upon the satisfaction of certain conditions pursuant to these agreements. Estimated costs to complete land and housing and condominium projects which have not been accrued at March 31, 2009 were $5,656,000 (December 31, 2008 – $8,265,000).
Wind Turbine Purchase Agreement
Dundee Realty has commitments under a wind turbine purchase agreement through its joint venture investment in the windmill development project for $8,974,000 which will become payable upon delivery and installation of certain equipment.
Joint Ventures and Co-ownerships
Dundee Realty may conduct its real estate activities from time to time through joint ventures with third party partners. Dundee Realty is contingently liable for the obligations of the other owners of the unincorporated joint ventures in the amount of $9,218,000 as at March 31, 2009 (December 31, 2008 – $9,861,000). The Company would have available to it the other venturers’ share of assets to satisfy the obligations, if any, that may arise.
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| 22. | SEGMENTED INFORMATION |
Segmented Statements of Operations for the three months ended March 31, 2009 and 2008
Wealth Management | Real Estate | Resources | Other Investments and Corporate Costs | Intersegment | TOTAL | |||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
| SEGMENTED OPERATIONS | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 153,325 | $ | 215,151 | $ | 44,561 | $ | 50,513 | $ | 350 | $ | 529 | $ | 3,630 | $ | 4,839 | $ | (2,180 | ) | $ | (3,018 | ) | $ | 199,686 | $ | 268,014 | ||||||||||
| Expenses | 132,532 | 176,887 | 32,206 | 36,639 | 450 | 605 | 2,207 | 2,991 | (253 | ) | (437 | ) | 167,142 | 216,685 | ||||||||||||||||||||||
| 20,793 | 38,264 | 12,355 | 13,874 | (100 | ) | (76 | ) | 1,423 | 1,848 | (1,927 | ) | (2,581 | ) | 32,544 | 51,329 | |||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||
| Depreciation, depletion and amortization | 24,937 | 22,157 | 1,250 | 953 | 15 | 49 | 484 | 616 | - | - | 26,686 | 23,775 | ||||||||||||||||||||||||
| Interest expense | 6,766 | 5,562 | 2,075 | 2,530 | 785 | 1,080 | 4,987 | 637 | (2,745 | ) | (3,399 | ) | 11,868 | 6,410 | ||||||||||||||||||||||
| Share of losses (earnings) of equity accounted investees | - | - | 592 | (640 | ) | 1,371 | 980 | - | - | - | - | 1,963 | 340 | |||||||||||||||||||||||
| Fair value adjustments | 9,046 | 75,885 | - | - | - | - | - | - | - | - | 9,046 | 75,885 | ||||||||||||||||||||||||
| Foreign exchange loss (gains) | 848 | 2,890 | - | - | - | (14 | ) | 12 | 188 | - | - | 860 | 3,064 | |||||||||||||||||||||||
| Unrealized gain on exchangeable debentures | - | - | - | - | - | - | - | (507 | ) | - | - | - | (507 | ) | ||||||||||||||||||||||
| OPERATING (LOSS) EARNINGS BEFORE | ||||||||||||||||||||||||||||||||||||
| UNDERNOTED ITEMS | (20,804 | ) | (68,230 | ) | 8,438 | 11,031 | (2,271 | ) | (2,171 | ) | (4,060 | ) | 914 | 818 | 818 | (17,879 | ) | (57,638 | ) | |||||||||||||||||
| Non-controlling interest | 7,493 | 25,586 | (1,329 | ) | (1,357 | ) | - | 215 | - | - | - | - | 6,164 | 24,444 | ||||||||||||||||||||||
| NET (LOSS) EARNINGS BEFORE | ||||||||||||||||||||||||||||||||||||
| NON-SEGMENTED ITEMS | (13,311 | ) | (42,644 | ) | 7,109 | 9,674 | (2,271 | ) | (1,956 | ) | (4,060 | ) | 914 | 818 | 818 | (11,715 | ) | (33,194 | ) | |||||||||||||||||
| Dilution gains | 252 | 423 | ||||||||||||||||||||||||||||||||||
| Income taxes | 3,219 | 16,438 | ||||||||||||||||||||||||||||||||||
| NET (LOSS) EARNINGS FROM CONTINUING OPERATIONS | (13,311 | ) | (42,644 | ) | 7,109 | 9,674 | (2,271 | ) | (1,956 | ) | (4,060 | ) | 914 | 818 | 818 | (8,244 | ) | (16,333 | ) | |||||||||||||||||
| Earnings from discontinued operations of DundeeWealth, | ||||||||||||||||||||||||||||||||||||
| net of tax and non-controlling interest | - | 69 | - | - | - | - | - | - | - | - | - | 69 | ||||||||||||||||||||||||
| NET (LOSS) EARNINGS FOR THE PERIOD | $ | (13,311 | ) | $ | (42,575 | ) | $ | 7,109 | $ | 9,674 | $ | (2,271 | ) | $ | (1,956 | ) | $ | (4,060 | ) | $ | 914 | $ | 818 | $ | 818 | $ | (8,244 | ) | $ | (16,264 | ) | |||||
Segmented Statements of Assets as at March 31, 2009 and December 31, 2008
| Wealth | Other Investments and | |||||||||||||||||||||||||||||||||||||||
| Management | Real Estate | Resources | Corporate Costs | Intersegment | TOTAL | |||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 120,991 | $ | 147,113 | $ | 16,855 | $ | 16,506 | $ | 2,805 | $ | 2,688 | $ | 991 | $ | 1,277 | $ | - | $ | - | $ | 141,642 | $ | 167,584 | ||||||||||||||||
| Goodwill | 375,967 | 375,967 | - | - | - | - | - | - | - | - | 375,967 | 375,967 | ||||||||||||||||||||||||||||
| Other assets | 1,463,358 | 1,474,894 | 814,371 | 832,921 | 201,985 | 183,903 | 102,641 | 45,691 | - | - | 2,582,355 | 2,537,409 | ||||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 1,960,316 | $ | 1,997,974 | $ | 831,226 | $ | 849,427 | $ | 204,790 | $ | 186,591 | $ | 103,632 | $ | 46,968 | $ | - | $ | - | $ | 3,099,964 | $ | 3,080,960 | ||||||||||||||||
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| 23. | FUTURE ACCOUNTING CHANGES |
Business Combinations
In January 2009, the CICA issued CICA Handbook Section 1582, “Business Combinations”, Section 1601, “Consolidations”, and Section 1602, “Non-controlling Interests”. These sections replace the former CICA Handbook Section 1581, “Business Combinations” and Section 1600, “Consolidated Financial Statements” and establish a new section for accounting for a non-controlling interest in a subsidiary.
CICA Handbook Section 1582 establishes standards for the accounting of a business combination. It provides the Canadian equivalent to International Financial Reporting Standard (“IFRS”) 3, “Business Combinations” (January 2008). The section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. CICA Handbook Section 1601 establishes standards for the preparation of consolidated financial statements. CICA Handbook Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS IAS 27, “Consolidated and Separate Financial Statements” (January 2008).
CICA Handbook Section 1601 and Section 1602 apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption of these sections is permitted as of the beginning of a fiscal year. All three sections must be adopted concurrently. The Company is currently evaluating the impact of the adoption of these sections.
International Financial Reporting Standards
In February 2008, the CICA Accounting Standards Board confirmed that Canadian GAAP for publicly accountable enterprises will be converged with IFRS in calendar year 2011. IFRS uses a conceptual framework similar to Canadian GAAP, but there may be significant differences on recognition, measurement and disclosure that may materially impact the Company's consolidated financial statements.
The implementation of IFRS will apply to the Company's interim and annual financial statements beginning on January 1, 2011, including the restatement of comparative amounts for 2010. As a result, the Company has established an IFRS implementation committee with a mandate to oversee the conversion process, including any impact that the conversion may have on business practices, systems and internal controls over financial reporting. The IFRS implementation committee consists of senior management from accounting and finance, internal audit, information technology, and business operations. During 2008, the implementation committee completed an initial analysis of the significant differences between IFRS and the Company's current accounting policies, including an assessment of the impact of various accounting alternatives offered pursuant to IFRS. The implementation committee also implemented an education program for key employees responsible for financial reporting. Key elements of the IFRS conversion process that are currently in progress include, but are not limited to:
| · | A detailed assessment of key differences between IFRS and the Company's current accounting policies and the related impact on business activities. |
| · | A detailed assessment of the application of IFRS 1 “First-time Adoption of International Financial Reporting Standards”, which provides guidance for an entity’s initial adoption of IFRS, and provides for limited optional exemptions in specified areas of certain IFRS standards. |
| · | The development of solutions to address identified issues and documentation of recommended accounting policies. |
| · | The development of an ongoing education program for key employees responsible for financial reporting. |
| · | The review and preparation of IFRS disclosure requirements. |
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As the Company continues to assess the impact of IFRS adoption on its business activities, processes and accounting policies, it will implement a communication strategy, as appropriate, aimed at all stakeholders, including employees, rating agencies, and shareholders, to assist in their understanding of its transition to IFRS. Additionally, the IFRS implementation committee will continue to revisit the conversion plan and accordingly, changes to the plan may be required, as more information on the Company’s adoption of IFRS becomes known.
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