DUNDEE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2009
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Independent Auditors’ Report
To the Directors of Dundee Corporation:
We have completed integrated audits of Dundee Corporation’s (the “Company”) 2009 and 2008 consolidated financial statements and of its internal control over financial reporting as at December 31, 2009. Our opinions, based on our audits, are presented below.
Consolidated Financial statements
We have audited the accompanying consolidated balance sheets of the Company as at December 31, 2009 and 2008 and the consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of the Company’s consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the years then ended in accordance with Canadian generally accepted accounting principles.
Internal control over financial reporting
We have also audited Dundee Corporation’s internal control over financial reporting as at December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control Over Financial Reporting”, which appears on Page 2 of the Company’s Annual Report on Form 40-F. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumsta nces. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2009 based on criteria established in Internal Control — Integrated Framework issued by the COSO.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
April 1, 2010
| DUNDEE CORPORATION | | | | | |
| CONSOLIDATED BALANCE SHEETS | | | | | |
| As at December 31, 2009 and 2008 | | | | | |
| (expressed in thousands of Canadian dollars) | | | | | |
| | | 2009 | | | 2008 | |
| ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 480,175 | | | $ | 167,584 | |
| Accounts receivable | | | 297,572 | | | | 406,076 | |
| Client accounts receivable (note 4) | | | 401,780 | | | | 389,282 | |
| Trading securities owned (note 5) | | | 198,391 | | | | 161,882 | |
| Available-for-sale securities (note 6) | | | 257,494 | | | | 294,730 | |
| Equity accounted investments (note 7) | | | 158,963 | | | | 160,339 | |
| Deferred sales commissions (note 8) | | | 236,981 | | | | 234,027 | |
| Real estate, capital and other assets (note 9) | | | 523,487 | | | | 526,256 | |
| Goodwill and other intangible assets (note 10) | | | 736,355 | | | | 740,784 | |
| TOTAL ASSETS | | $ | 3,291,198 | | | $ | 3,080,960 | |
| LIABILITIES | | | | | | | | |
| Bank indebtedness (note 11) | | $ | 4,821 | | | $ | - | |
| Accounts payable and accrued liabilities | | | 262,413 | | | | 291,029 | |
| Client deposits and related liabilities (note 12) | | | 476,820 | | | | 408,647 | |
| Trading securities sold short (note 5) | | | 23,127 | | | | 43,951 | |
| Income taxes payable | | | 6,936 | | | | 8,472 | |
| Corporate debt (note 13) | | | 388,017 | | | | 529,507 | |
| Series 1 preference shares, DundeeWealth (note 14) | | | 153,301 | | | | 152,978 | |
| Preference shares, series 1 (note 16) | | | 147,722 | | | | 147,371 | |
| Future income tax liabilities (note 22) | | | 40,188 | | | | 3,024 | |
| | | | 1,503,345 | | | | 1,584,979 | |
| NON-CONTROLLING INTEREST (note 15) | | | 667,871 | | | | 615,142 | |
| SHAREHOLDERS' EQUITY | | | | | | | | |
| Share capital (notes 16 and 17) | | | | | | | | |
| Common shares | | | 289,207 | | | | 288,398 | |
| Preference shares, series 2 | | | 127,085 | | | | - | |
| Contributed surplus | | | 8,498 | | | | 11,549 | |
| Retained earnings | | | 666,774 | | | | 604,075 | |
| Accumulated other comprehensive income (loss) (note 18) | | | 28,418 | | | | (23,183 | ) |
| | | | 1,119,982 | | | | 880,839 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 3,291,198 | | | $ | 3,080,960 | |
The accompanying notes are an integral part of these consolidated financial statements.
Commitments, contingencies and off-balance sheet arrangements (note 26)
Approved by the Board:
(signed) Ned Goodman (signed) Garth A.C. MacRae
Director Director
DUNDEE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the years ended December 31, 2009 and 2008 | | | | | | |
| (expressed in thousands of Canadian dollars, except per share amounts) | | | | | | |
| | | 2009 | | | 2008 | |
| REVENUES | | | | | | |
| Management fees | | $ | 466,648 | | | $ | 464,288 | |
| Redemption fees | | | 13,978 | | | | 16,833 | |
| Financial services | | | 293,609 | | | | 325,360 | |
| Real estate revenues | | | 243,136 | | | | 400,925 | |
| | | | 1,017,371 | | | | 1,207,406 | |
| Investment income (note 19) | | | 20,714 | | | | 21,249 | |
| | | | 1,038,085 | | | | 1,228,655 | |
| EXPENSES | | | | | | | | |
| Selling, general and administrative (note 20) | | | 306,155 | | | | 343,157 | |
| Variable compensation | | | 180,825 | | | | 229,137 | |
| Trailer service fees | | | 127,513 | | | | 134,234 | |
| Operating costs, real estate | | | 173,169 | | | | 286,538 | |
| | | | 787,662 | | | | 993,066 | |
| OPERATING EARNINGS BEFORE INTEREST, | | | | | | | | |
| TAXES, AND OTHER NON-CASH ITEMS | | | 250,423 | | | | 235,589 | |
| Amortization of deferred sales commissions | | | 88,689 | | | | 81,868 | |
| Depreciation, depletion and amortization | | | 19,925 | | | | 21,409 | |
| Interest expense | | | 37,760 | | | | 31,908 | |
| Share of (earnings) loss of equity accounted investees (note 19) | | | (6,294 | ) | | | 35,690 | |
| Fair value adjustments (notes 5, 6, 7 and 24) | | | (14,125 | ) | | | 385,292 | |
| Foreign exchange (gain) loss | | | (8,933 | ) | | | 12,593 | |
| Unrealized gain on exchangeable debentures (note 13) | | | - | | | | (1,314 | ) |
| OPERATING EARNINGS (LOSS) BEFORE UNDERNOTED ITEMS | | | 133,401 | | | | (331,857 | ) |
| Dilution gains, net (note 3) | | | 1,244 | | | | 578 | |
| Loss on sale of subsidiary (note 3) | | | - | | | | (17,679 | ) |
| | | | 134,645 | | | | (348,958 | ) |
| Income taxes (note 22) | | | | | | | | |
| Current | | | 26,894 | | | | 62,461 | |
| Future | | | 11,377 | | | | (140,850 | ) |
| | | | 38,271 | | | | (78,389 | ) |
| Non-controlling interest | | | 33,923 | | | | (74,308 | ) |
| NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | | | 62,451 | | | | (196,261 | ) |
| Earnings from discontinued operations of DundeeWealth, | | | | | | | | |
| net of tax and non-controlling interest | | | - | | | | 69 | |
| NET EARNINGS (LOSS) FOR THE YEAR | | $ | 62,451 | | | $ | (196,192 | ) |
| | | | | | | | | |
| NET EARNINGS (LOSS) PER SHARE (note 23) | | | | | | | | |
| Basic | | $ | 0.81 | | | $ | (2.62 | ) |
| Diluted | | $ | 0.77 | | | $ | (2.62 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
DUNDEE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| For the years ended December 31, 2009 and 2008 | | | | | | | | | |
| (expressed in thousands of Canadian dollars) | | | | | | | | | |
| | | ref | | | 2009 | | | 2008 | |
| NET EARNINGS (LOSS) FOR THE YEAR | | | | | $ | 62,451 | | | $ | (196,192 | ) |
| Other comprehensive income (loss) | | | | | | | | | | | |
| Unrealized earnings (losses) on available-for-sale securities | | | a | | | | 84,707 | | | | (231,590 | ) |
| Transfer of unrealized losses to net earnings (loss) | | | b | | | | 1,070 | | | | 198,772 | |
| Reversal of unrealized losses on available-for-sale securities | | | c | | | | - | | | | 677 | |
| Unrealized foreign currency (loss) gain on forward contract | | | d | | | | 64 | | | | 1,516 | |
| Unrealized (loss) gains from foreign currency translation | | | e | | | | (8,812 | ) | | | 12,488 | |
| Transfer of unrealized loss (gain) from foreign currency translation to net earnings (loss) | | | f | | | | 1,007 | | | | (1,284 | ) |
| Transfer of unrealized gain from foreign currency translation to other assets | | | g | | | | (1,566 | ) | | | - | |
| Share of other comprehensive loss of equity accounted investees | | | h | | | | (1,978 | ) | | | (1,174 | ) |
| Non-controlling interest | | | | | | | (22,891 | ) | | | (3,908 | ) |
| Other comprehensive income (loss) from operations | | | | | | | 51,601 | | | | (24,503 | ) |
| COMPREHENSIVE INCOME (LOSS) FOR THE YEAR | | | | | | $ | 114,052 | | | $ | (220,695 | ) |
| a) Net of taxes of | | | | | | $ | (30,343 | ) | | $ | 89,697 | |
| b) Net of taxes of | | | | | | $ | (580 | ) | | $ | (74,642 | ) |
| c) Net of taxes of | | | | | | $ | - | | | $ | (310 | ) |
| d) Net of taxes of | | | | | | $ | (29 | ) | | $ | (679 | ) |
| e) Net of taxes of | | | | | | $ | 1,890 | | | $ | (3,680 | ) |
| f) Net of taxes of | | | | | | $ | (336 | ) | | $ | 524 | |
| g) Net of taxes of | | | | | | $ | 703 | | | $ | - | |
| h) Net of taxes of | | | | | | $ | 594 | | | $ | 628 | |
The accompanying notes are an integral part of these consolidated financial statements.
DUNDEE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| As at and for the years ended December 31, 2009 and 2008 | | | | | | | | | | | | | | | | | | |
| (expressed in thousands of Canadian dollars) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | Preference | | | | | | | | | Other | | | | |
| | | Common | | | Shares, | | | Contributed | | | Retained | | | Comprehensive | | | | |
| | | Shares | | | Series 2 | | | Surplus | | | Earnings | | | Income (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 earnings | | | - | | | | - | | | | - | | | | 62,451 | | | | - | | | | 62,451 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 51,601 | | | | 51,601 | |
| Acquisition of Class A subordinate shares for cancellation | (1,041 | ) | | | - | | | | - | | | | (14 | ) | | | - | | | | (1,055 | ) |
| Issuance of Class A subordinate shares for non-cash consideration | 90 | | | | - | | | | - | | | | - | | | | - | | | | 90 | |
| Issuance of Class A subordinate shares for cash | 90 | | | | - | | | | - | | | | - | | | | - | | | | 90 | |
| Issuance of Preference shares, series 2, net of issue costs | - | | | | 127,085 | | | | - | | | | - | | | | - | | | | 127,085 | |
| Dividends on Preference shares, series 2 | - | | | | - | | | | - | | | | (2,571 | ) | | | - | | | | (2,571 | ) |
| Stock based compensation | | | - | | | | - | | | | 1,207 | | | | - | | | | - | | | | 1,207 | |
| Share incentive arrangements | | | - | | | | - | | | | (4,170 | ) | | | 2,833 | | | | - | | | | (1,337 | ) |
| Exercise of options | | | 1,670 | | | | - | | | | (88 | ) | | | - | | | | - | | | | 1,582 | |
| Balance, December 31, 2009 | | $ | 289,207 | | | $ | 127,085 | | | $ | 8,498 | | | $ | 666,774 | | | $ | 28,418 | | | $ | 1,119,982 | |
The accompanying notes are an integral part of these consolidated financial statements.
DUNDEE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ended December 31, 2009 and 2008 | | | | | | |
| (expressed in thousands of Canadian dollars) | | | | | | |
| | | 2009 | | | 2008 | |
| OPERATING ACTIVITIES: | | | | | | |
| Net earnings (loss) from continuing operations for the year | | $ | 62,451 | | | $ | (196,261 | ) |
| Non-cash items: | | | | | | | | |
| Depreciation, depletion and amortization | | | 108,614 | | | | 103,277 | |
| Net investment (gains) loss | | | (6,268 | ) | | | 1,163 | |
| Share of (earnings) losses of equity accounted investees | | | (6,294 | ) | | | 35,690 | |
| Fair value adjustments | | | (14,125 | ) | | | 385,292 | |
| Unrealized gain on exchangeable debentures | | | - | | | | (1,314 | ) |
| Loss on sale of subsidiary | | | - | | | | 17,679 | |
| Dilution gains, net | | | (1,244 | ) | | | (578 | ) |
| Future income taxes | | | 11,377 | | | | (140,850 | ) |
| Non-controlling interest | | | 33,923 | | | | (74,308 | ) |
| Stock based compensation | | | 18,858 | | | | 23,935 | |
| Other | | | 5,247 | | | | 17,822 | |
| | | | 212,539 | | | | 171,547 | |
| Changes in: | | | | | | | | |
| Accounts receivable | | | (35,265 | ) | | | 109,225 | |
| Accounts payable and accrued liabilities | | | 32,400 | | | | (77,417 | ) |
| Bank indebtedness | | | 4,821 | | | | (43,125 | ) |
| Income taxes payable | | | (3,797 | ) | | | (35,210 | ) |
| Trading securities owned and sold short, net | | | (4,809 | ) | | | 48,889 | |
| Client accounts receivable, net of client deposits and related liabilities | | | 55,675 | | | | 4,823 | |
| Land, housing and condominium inventory | | | (37,451 | ) | | | 28,965 | |
| Other real estate working capital | | | 31,346 | | | | (75,829 | ) |
| CASH PROVIDED FROM OPERATING ACTIVITIES | | | 255,459 | | | | 131,868 | |
| INVESTING ACTIVITIES: | | | | | | |
| Net investment in real estate assets | | | (41,180 | ) | | | (29,960 | ) |
| (Investment in) proceeds from oil and gas properties, net | | | (1,249 | ) | | | 45,151 | |
| Sales commissions incurred on distribution of mutual funds | | | (91,643 | ) | | | (108,890 | ) |
| Proceeds from dispositions of corporate investments | | | 164,928 | | | | 116,629 | |
| Acquisitions of corporate investments | | | (53,321 | ) | | | (102,945 | ) |
| Cash disbursed in business combinations (note 3) | | | (5,210 | ) | | | (64,455 | ) |
| Net changes in capital and other tangible assets | | | (5,538 | ) | | | (5,750 | ) |
| CASH USED IN INVESTING ACTIVITIES | | | (33,213 | ) | | | (150,220 | ) |
| FINANCING ACTIVITIES: | | | | | | | | |
| Change in corporate debt | | | (224,717 | ) | | | 108,511 | |
| Issuance of Series 1 Notes by DundeeWealth, net of discount and issue costs (note 13) | | | 197,838 | | | | - | |
| Issuance of Class A subordinate shares, net of issue costs | | | 1,672 | | | | 2,153 | |
| Amounts repaid to non-controlling shareholder of a subsidiary | | | - | | | | (7,134 | ) |
| Acquisition of Class A subordinate shares, net of costs | | | (1,055 | ) | | | (20,353 | ) |
| Net issuance (cancellation) of shares by subsidiaries | | | 3,613 | | | | (16,614 | ) |
| Issuance of Preference shares, series 2, net of issue costs (note 16) | | | 125,906 | | | | - | |
| Dividends paid on Preference shares, series 2 | | | (2,571 | ) | | | - | |
| Dividends paid by subsidiaries to non-controlling shareholders | | | (10,341 | ) | | | (7,742 | ) |
| CASH PROVIDED FROM FINANCING ACTIVITIES | | | 90,345 | | | | 58,821 | |
| NET INCREASE IN CASH DURING THE YEAR | | | 312,591 | | | | 40,469 | |
| Cash and cash equivalents, beginning of year | | | 167,584 | | | | 126,915 | |
| Change in net cash relating to discontinued operations | | | - | | | | 200 | |
| CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 480,175 | | | $ | 167,584 | |
| Cash flows from operating activities include the following: | | | | | | | | |
| Interest paid | | $ | 37,760 | | | $ | 31,908 | |
| Taxes paid | | $ | 34,024 | | | $ | 101,899 | |
The accompanying notes are an integral part of these consolidated financial statements.
DUNDEE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
(tabular dollar amounts in thousands of Canadian dollars, except per share amounts)
Dundee Corporation (the “Company” or “Dundee Corporation”) is an independent publicly traded Canadian asset management company. The Company’s core focus is in the areas of wealth management, real estate and resources. Third-party asset management activities are carried out by Ned Goodman Investment Counsel Limited (formerly Ravensden Asset Management Inc.) (“NGIC”), a registered portfolio manager in the province of Ontario, and by Dundee Real Estate Asset Management (“DREAM”), the asset management division of Dundee Realty Corporation (“Dundee Realty”), a 74% owned subsidiary of the Company.
Dundee Corporation also owns and manages its own direct investments in these core focus areas, through ownership of both publicly listed and private companies. The Company’s investment in wealth management is primarily through its 62% controlled subsidiary, DundeeWealth Inc. (“DundeeWealth”), as well as through operations carried out in Bermuda and in the Cayman Islands. These domestic and international wealth management operations provide a broad range of financial products and services to financial advisors, institutions, corporations and foundations. Real estate operations are carried out through the Company’s investment in Dundee Realty, an owner and developer of residential and recreational pr operties in North America. Real estate operations also include an 18% interest in Dundee Real Estate Investment Trust (“Dundee REIT”), a Canadian real estate investment trust. Resource investments are managed through Dundee Resources Limited (“Dundee Resources”), a wholly owned subsidiary of the Company, and include the Company’s 54% investment in Eurogas Corporation (“Eurogas”), an oil and natural gas company with a mandate to create long-term value through the development of high impact energy projects. Dundee Resources also manages several other equity-accounted investments.
The Company is listed on The Toronto Stock Exchange (“TSX”) under the symbol “DC.A”.
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION |
The consolidated financial statements of the Company are prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary as well as the Company’s proportionate share of assets, liabilities, revenues and expenses of joint ventures in which it participates. The Company’s major operating subsidiaries include:
| | | Year ended December 31, 2009 | | | Year ended December 31, 2008 | |
| | | Opening | | | Ending | | | Opening | | | Ending | |
| | | Ownership | | | Ownership | | | Ownership | | | Ownership | |
| DundeeWealth* | | | 49 | % | | | 49 | % | | | 45 | % | | | 49 | % |
| Dundee Realty | | | 75 | % | | | 74 | % | | | 77 | % | | | 75 | % |
| Eurogas Corporation | | | 53 | % | | | 54 | % | | | 51 | % | | | 53 | % |
*The Company holds a 62% voting interest in DundeeWealth at December 31, 2009.
All intercompany transactions have been eliminated in these consolidated financial statements. When the Company does not own all of the equity of the subsidiary, the minority shareholders’ interest in the net book value of the subsidiary and in its net earnings are disclosed as a separate line item in the consolidated balance sheets and consolidated statements of operations as non-controlling interest.
Acquisitions
The Company accounts for business acquisitions as purchase transactions. Accordingly, the purchase price of a business acquisition is allocated to its identifiable net assets on the basis of estimated fair values as at the date of purchase, including identifiable intangible assets, with any excess being assigned to goodwill. When the net of the amounts assigned to identifiable net assets exceeds the cost of the purchase (“negative goodwill”), the excess is eliminated, to the extent possible, by a pro-rata allocation to certain non-current assets, with the balance presented as an extraordinary gain. The interest of minority shareholders is stated at the minority shareholders’ proportionate share of the p re-acquisition carrying values of the acquired net assets. For interests acquired during the year, purchase accounting is applied on a prospective basis from the date of acquisition.
Any contingent consideration in relation to a business acquisition is recorded when the outcome of the contingency is resolved. When the outcome of a contingency is resolved, consideration recognized, if any, will be allocated to goodwill and other intangible assets.
Use of Estimates
The preparation of the consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are made based on information available as at the date of issuance of the financial statements. Actual results could differ materially from those estimates.
Key areas of estimation, where management has made difficult, complex or subjective judgments, often about matters that are inherently uncertain, include the determination of fair values of net assets acquired in a business combination, including the identification of intangible assets; the determination of fair values of equity accounted investments; the determination of fair values of financial instruments, including the Company's portfolio of asset-backed commercial paper (“ABCP”) and associated floating rate notes (“FRNs”) as well as its portfolio of collateralized loan obligations (“CLOs”); the determination of other-than-temporary impairment in fair value of other assets; allowances for credit losses; income tax es; stock based compensation; the amortization period for deferred sales commissions; the valuation of goodwill and other intangible assets; the consolidation of VIEs; the valuation of and determination of useful lives for real estate, capital and other assets; the determination of cost of sale of and cost to complete real estate assets; fair values of oil and gas properties and gas storage facilities; the determination of the liability associated with future site reclamation costs; and the determination of contingencies.
Foreign Currency Translation
Foreign currency denominated amounts are translated into Canadian dollars using average rates for the year for items included in the consolidated statements of operations, the rates in effect at the consolidated balance sheet dates for monetary assets and liabilities included in the consolidated balance sheet and historical rates for other items.
Translation gains or losses are generally included in the determination of net earnings. Translation gains or losses arising on translation of accounts of foreign subsidiaries which are considered self-sustaining and those arising from the translation of foreign denominated equity accounted securities are included in other comprehensive income (“OCI”) until there has been a realized reduction in the investment.
Consolidation of Variable Interest Entities
The Company is required to consolidate any VIEs in which it is the primary beneficiary. An entity is a VIE when, by design, one or both of the following conditions exist: (a) total equity investment at risk is insufficient to permit the entity to finance its activities without additional subordinated support from others; or (b) as a group, the holders of the equity investment at risk lack certain essential characteristics of a controlling financial interest. The primary beneficiary is the entity that is exposed, through variable interests, to a majority of the VIE’s expected losses or is entitled to a majority of the VIE’s expected residual returns, or both.
The Company has reviewed its relationships and determined that there were no VIEs for which it was considered the primary beneficiary as at December 31, 2009.
At December 31, 2008 the Company held a 50% interest in the Distillery Historic District (the “co-ownership”). The co-ownership was considered a VIE for which Dundee Realty was considered the primary beneficiary. During 2009, and following repayment of amounts previously advanced to the co-owners, the co-ownership was determined to no longer be a VIE and accordingly, the Company deconsolidated 50% of the co-ownership.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost, which approximates fair value. Cash equivalents may include short-term financial instruments and investments in money market products, all of which are highly liquid and immediately exchangeable into known amounts of cash.
Client Accounts
Client accounts receivable include both clients’ trading accounts and brokers’ and dealers’ trading accounts. Client deposits and related liabilities include clients’ cash and clients’ and brokers’ and dealers’ trading balances.
DundeeWealth operations include activities of a full service securities dealer and member of the Investment Industry Regulatory Organization of Canada (“brokerage subsidiary”). In accordance with brokerage industry practice, client transactions are entered into on either a cash or a margin basis and are recorded on a trade-date basis. If transactions are conducted on a margin basis, DundeeWealth’s brokerage subsidiary may extend credit to a client to purchase securities and such securities purchased and/or other securities in the client’s account are held as collateral for the amounts loaned. Amounts due from clients are carried at the contractual amount receivable, net of any allowance for credit losses. DundeeWealth’s brokerage subsidiary engages in securities borrowing and lending transactions. Cash received or delivered as collateral against these transactions is included in client accounts.
Allowance for Credit Losses
The Company maintains an allowance for credit losses which management considers adequate to absorb all credit-related losses. It does not record a general allowance for credit losses. However, specific allowances for credit losses are established as a result of detailed reviews of individual collateral positions securing the client accounts receivable. Should the value of the underlying collateral decline by an amount significant enough that it becomes insufficient to repay the margin loan in full and the client is unable or unwilling to deposit additional collateral, a specific allowance is recorded in the amount equivalent to these unsecured balances, without limiting any recourse to collecting from the clients.
Financial Instruments
All financial instruments are classified as trading, available-for-sale (“AFS”), held-to-maturity (“HTM”), loans and receivables or other financial liabilities. Transaction costs that are directly attributable to the acquisition or issue of a financial instrument classified as other than trading are added to the carrying amount.
All financial assets are measured at fair value with the exception of loans and receivables, debt securities classified as HTM and AFS equities that do not have quoted market values in active markets. The fair value of a financial instrument represents the Company’s estimate of the price at which the instrument could be exchanged between knowledgeable and willing parties in an orderly arm’s length transaction. Fair value is generally determined based on market value or, where market prices are not readily available, on quoted market prices for similar securities or other third party evidence. However, even where a fair value of a financial instrument is derived from independent broker or dealer price quotes, a valuation adjustment based on certain assumptions may be required to determine the fair value. For financial instruments in illiquid investments, the Company estimates the fair value based on valuation models using relevant assumptions based on observable market data or independently sourced market information and internal data, as may be available and which also includes risk adjustments that market participants would make for non-performance and marketability risk. Equity securities that do not have a quoted market price are carried at cost.
Trading Financial Assets and Liabilities
Trading financial assets and liabilities are securities that are purchased for resale and are generally held for short periods of time. The Company’s trading portfolio is primarily related to trading operations in DundeeWealth’s brokerage subsidiary. The Company’s trading portfolio also includes certain other investments in guaranteed investment certificates and discounted notes issued by a Canadian Schedule I Chartered Bank. Trading securities are measured at fair value at the balance sheet date. Both realized and unrealized gains and losses from changes in fair value are recorded in net earnings.
Designation as Fair Value Financial Assets and Liabilities
Upon initial recognition, the Company may elect to designate financial assets and liabilities at fair value and subsequently account for them in the same manner as trading financial assets and liabilities. During 2009, DundeeWealth elected to designate the FRNs it received as part of the implementation of the restructuring plan for holders of certain ABCP as fair value financial assets. Realized and unrealized gains and losses from these securities are recorded in net earnings as fair value adjustments.
Available-for-Sale Financial Assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as AFS, or that are not classified as loans and receivables, HTM, trading, or designated as fair value financial assets. Investments in financial assets that are subject to significant influence may not be designated as AFS. AFS securities are generally carried at their fair values. Changes in the unrealized fair values of AFS securities are reported as OCI in the consolidated statement of comprehensive income and are included in accumulated other comprehensive income (“AOCI”) until the financial asset is disposed of or becomes impaired, at which time the unrealized gain or loss is recognized in net earnings.
Dividends, interest and realized gains and losses on the sale of AFS financial assets are included in investment income. Realized gains and losses are calculated using the average cost method.
The Company assesses its AFS securities at each balance sheet date for potential impairment. As part of this assessment, it considers objective evidence that may indicate impairment. Write-downs for impairments in value are included in the consolidated statement of operations when there is objective evidence that the financial instrument is impaired and the decline in fair value is other-than-temporary. The Company considers various factors in the determination of whether objective evidence exists that a financial instrument is impaired, including significant financial difficulty of an issuer, a breach in the terms and conditions of the security such as a default on interest or principal payments on debt securities, the granting of a concession to the issuer that would not otherwise be considered, the disappearance of an active market for the underlying security where one formerly existed or a significant or prolonged decline in the market value of an equity-based investment.
Loans and Receivables
Loans and receivables include accounts receivable and client accounts receivable. Loans and receivables are accounted for at amortized cost.
Held-to-Maturity Financial Assets
Financial assets designated as HTM are comprised of non-derivative financial assets with fixed or determinable payments and a fixed maturity, other than those designated as loans and receivables, where the Company has the intent and ability to hold the financial asset to maturity. HTM financial assets are recorded at amortized cost. The Company has not presently designated any financial assets as HTM.
Financial Liabilities
Financial liabilities include all liabilities, other than derivatives and trading financial liabilities relating to securities sold short, or liabilities that have been designated at fair value on original recognition. Financial liabilities are recorded at amortized cost using the effective interest method.
Derivatives
Derivatives are carried at fair value and are generally reported as assets in circumstances when they have a positive fair value and liabilities when they have a negative fair value. However, derivatives may be embedded in other financial and non-financial instruments. Embedded derivatives are valued as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host contract, the terms of the embedded derivative are the same as those of a freestanding derivative and the combined contract is not held for trading or designated at fair value. Otherwise, embedded derivatives are classified as part of the host instrument and measured at fair value with changes therei n recognized in the consolidated statement of operations.
Hedge Accounting
The Company may acquire derivative instruments for risk management purposes, and when such financial instruments meet the criteria specified in the relevant accounting guidance, the Company may apply fair value hedge accounting or cash flow hedge accounting, as appropriate, to the risks being hedged. Fair value hedges are used to hedge changes in the fair value of assets, liabilities or firm commitments and changes in the fair value of the derivative instruments are recorded in net earnings. Cash flow hedges are used to hedge the variability of cash flows related to variable rate assets, liabilities or forecasted transactions and the effective portion of the changes in the fair value of the derivative instruments are recorded in OC I until the hedged items are recognized in net earnings.
When a hedge of an anticipated transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the Company removes the associated gains and losses that were recognized in OCI and includes them in the initial carrying value of the asset acquired or liability incurred.
The ineffective portion of the derivative instruments used in cash flow hedges is immediately recognized in net earnings.
For a derivative to qualify for hedge accounting, the hedge relationship must be designated and formally documented at its inception and tested on an ongoing basis. Documentation must include a description of the risk management objective and strategy of the specific asset, liability or cash flow being hedged and describe the test for the ongoing assessment of the effectiveness of the hedge.
Equity Accounted Investments
Investments in companies that are subject to significant influence by the Company are accounted for using the equity method whereby the Company recognizes its proportionate share of earnings or losses and of other comprehensive income of the investee in its own earnings or other comprehensive income, as applicable. An interest in excess of 20% of the underlying voting shares of an investee would generally indicate that the Company has significant influence over that investee. However, in certain circumstances, the Company may exert significant influence through representation on the investee’s board of directors or by other day-to-day participation in operations, although it may own less than 20%.
An equity accounted investment may be written down if its carrying value exceeds its estimated fair value and, in the opinion of management, such a decrease is other-than-temporary in nature. A significant or prolonged decline in the fair value of an investment below its carrying value may be evidence of an other-than-temporary loss in value of an equity investment. Any impairment in equity accounted investments is recorded in earnings in the period in which the impairment is identified.
Deferred Sales Commissions Deferred sales commissions consist of sales commissions paid by DundeeWealth to financial advisors on the sale of investment management products sold on a deferred sales charge basis to investors. DundeeWealth is then entitled to receive from the investor, a fee on redemption of these products if these products are redeemed within a certain period.
Deferred sales commissions are capitalized and recorded at cost. The asset is amortized on a straight-line basis over a five year period, which represents the estimated period during which commissions are generally recovered from management fee revenues. The carrying value of deferred sales commissions is tested for impairment at least annually and is written down to the extent that the carrying value exceeds the expected future revenue on an undiscounted basis.
Real Estate, Capital and Other Assets
Real Estate Assets
Land under development and housing and condominiums are stated at the lower of cost and net realizable value. Net realizable value is calculated by estimating the future cash flows from such properties and discounting these cash flows at a risk-adjusted rate appropriate for a particular project. Land held for development is stated at cost less impairment charges.
Capitalized costs on land under and held for development and on housing and condominiums include all expenditures incurred in connection with the acquisition, all related development costs, interest on project-specific and general debt, and property taxes, less miscellaneous revenue earned during the construction period. General and administrative overhead and selling and marketing costs are expensed as incurred. The cost of sale of land under development is allocated to each lot based on the projected total estimated cost to develop the entire subdivision, pro-rated based on street frontage for each lot. The cost of sale of houses and condominiums is based on the total costs incurred up to the date of occupancy, as well as a provision for costs to complete.
Revenue properties are stated at historic cost less accumulated depreciation and impairment charges, if any. The net book value of revenue properties under development includes interest on project-specific and general debt, property taxes, carrying charges and applicable general and administrative expenses incurred in the project development and construction periods, and initial leasing costs, less revenue earned prior to the project being declared operational. The Company uses the straight-line method of depreciation for revenue properties, initial leasing costs and major expansions and renovations. The estimated useful life of the properties is between 30 and 40 years.
Certain real estate assets, including revenue properties and land held for development, are tested for recoverability whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Examples of such events or changes in circumstances include, but are not limited to, a significant decrease in the market value; a significant adverse change in the extent or manner in which the asset is being used or its physical condition; a significant adverse change in legal factors or in the business climate that could affect its value; an accumulation of costs significantly in excess of the amount originally expected for its acquisition or construction; a current-period o perating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing operating or cash flow losses associated with its use; or a current expectation that it will be more likely than not that the asset will be sold or substantially disposed of before the end of its previously estimated useful life.
Capital and Other Assets
Capital assets are recorded at cost, net of accumulated amortization, and are amortized on a straight-line or declining-balance basis. Annual amortization rates adopted by the Company range from 10% to 40%. Leasehold improvements are amortized on a straight-line basis over the period of the lease.
Other assets include deposits made to regulatory authorities, including contingency trust funds, deferred trademark costs and intellectual property acquired in business combinations that are amortized on a straight-line basis over various terms ranging from five to 15 years.
The Company evaluates the carrying value of capital and other assets whenever changes in circumstances indicate that the carrying value of the asset may not be recoverable. Recoverability is measured by comparing the carrying value of the asset to future undiscounted cash flows expected to be generated from operations and projected disposition. The cash flow projections take into account the estimated cash flows for the life of each asset, specific business plans and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market area. If the analysis indicates that the carrying value is not recoverable from future cash flows, the asset is written down to the estimate d fair value and an impairment loss is recognized immediately in net earnings.
The Company also reviews the amortization method and estimates of the useful life of its capital and other assets on a regular basis to determine whether events and circumstances warrant a revision. On sale or retirement, the capital and specific asset and its related accumulated amortization are removed from the consolidated financial statements and any related gain or loss is reflected in net earnings.
Oil and Gas Exploration and Evaluation Expenditures
Oil and gas exploration and evaluation activities are conducted through the Company’s investment in Eurogas. Eurogas follows the full-cost method of accounting for exploration and evaluation expenditures whereby all costs related to the exploration of oil and natural gas reserves, including asset retirement costs, are accumulated in separate geographic cost centres. Costs include lease acquisitions, geological and geophysical expenditures, carrying costs of non-productive properties, equipment costs and that portion of general and administrative expenses directly attributable to exploration and evaluation activities. Proceeds received by Eurogas for the disposal of properties or in farmout arrangements are normally deducted from the full-cost pool without recognition of a gain or loss. When such a disposal would alter the depreciation rate of the pool by more than 20%, a gain or loss would be recognized.
Eurogas recognizes the estimated liability associated with future site reclamation costs in its financial statements as a charge against the carrying value of oil and gas expenditures. Costs are estimated in consultation with Eurogas’ joint venture partners and are based on current costs and technology. The obligation is initially measured at fair value and subsequently adjusted for the accretion of any discount and any changes to the underlying estimated cash flows. Eurogas reviews the obligation regularly such that revisions to the estimated timing of cash flows, discount rates and costs will result in an increase or decrease to the estimated liability.
The Company evaluates the carrying value of its oil and natural gas properties at least annually, or when events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the carrying value of the oil and natural gas properties is assessed not to be recoverable, an impairment loss is recognized. The recovery of recorded costs is contingent upon the existence of economically recoverable reserves and future profitable production.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid on acquisitions over the fair value assigned to identifiable net assets, including identifiable intangible assets. Goodwill is not amortized but assessed for impairment annually and more frequently if events or changes in circumstances indicate that there may be an impairment. Goodwill impairment testing is a two step process. Goodwill is first allocated to reporting units. If the fair value of the reporting unit exceeds its carrying value including goodwill, no further testing is performed. If the fair value of the reporting unit is less than its carrying value, the second step is performed to compare the carrying value of the goodwill to it s fair value to quantify the amount of impairment, if any. The fair value used in these goodwill impairment assessments is generally based on an income approach where estimated future cash flows are discounted to arrive at a single present value amount. The Company also utilizes a market approach in its goodwill impairment assessments to provide a secondary fair value by comparing this single point estimate with comparable company and transaction multiples.
The most sensitive assumptions in these approaches include the estimate of cash flows and the determination of the weighted average cost of capital, which is used as the discount rate to determine present value. In assessing market data, judgment is required in determining whether recent transactions are comparable to the Company’s reporting unit in nature, scope and size.
Intangible assets with an indefinite life include investment management contracts. These intangible assets are not amortized but assessed for impairment annually and more frequently if events or changes in circumstances indicate that there may be an impairment. Indefinite life intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment loss is recognized when the carrying value of the asset exceeds its fair value. In estimating the fair value of indefinite life intangible assets, the Company uses valuation techniques based on projected discounted cash flows to be derived from these assets. Similar to the impairment assessments for goodwill, the most sensitive assumptions in this approach include the estimate of cash flows and the determination of the weighted average cost of capital, which is used as the discount rate to determine present value. In order to determine cash flows, the Company estimates growth rates in assets under management (“AUM”) and assets under administration (“AUA”), as a result of both net sales activity and performance related activity.
Intangible assets with a finite life include institutional management contracts, funds under administration and client relationships. These assets are amortized on a straight-line basis over their estimated useful life of ten years, 15 years and five years, respectively. An intangible asset with a finite life is tested for impairment when an event or change in circumstances indicates that the carrying value may not be recoverable. In estimating the fair value of an intangible asset with a finite life, the Company uses valuation techniques based on cash flow projections.
Any impairment in goodwill or other intangible asset is recorded in earnings in the period in which the impairment is identified.
Preference Shares
The Company classifies its Preference shares, series 1 (note 16) as financial liabilities for reporting purposes given that these shares may be converted into a variable number of the Company’s Class A subordinate voting shares (“Subordinate Shares”), or may be redeemed at or after a particular date for a fixed or determinable amount.
The Series 1 preference shares issued by DundeeWealth have attributes that are similar to those of the Company’s Preference shares, series 1 and include a provision for the conversion of the Series 1 preference shares to common shares of DundeeWealth, or to a redemption at or after a particular date for a fixed or determinable amount. Accordingly, the Series 1 preference shares of DundeeWealth are also considered financial liabilities for reporting purposes.
Issue costs related to the issuance of the Company’s Preference shares, series 1 and the Series 1 preference shares of DundeeWealth are netted against the associated liability, and recorded at amortized cost using the effective interest method. The amortization of issue costs are recorded as interest expense in the consolidated statements of operations.
The Company’s Preference shares, series 2 (note 16) are rate reset preferred shares and are therefore not subject to provisions for settlement using a variable number of equity instruments of the Company, or provisions for mandatory redemption requirements. Accordingly, the Company classifies its Preference shares, series 2 as equity instruments.
Revenue Recognition
Wealth Management
Management fees are calculated as a percentage of the net asset value of the respective mutual fund or other discretionary portfolio being managed and are recognized on an accrual basis over the period during which the related service is rendered. These fees are disclosed net of management fee rebates. DundeeWealth may also earn performance fees from certain of these managed assets when their market appreciation exceeds established benchmarks. Performance fees are not recognized in earnings until the amounts are established with certainty.
Redemption fees paid by unitholders of mutual funds purchased on a deferred sales charge basis, the sales commissions of which have been financed by DundeeWealth, are recognized as revenue on the settlement date of the redemption of the applicable mutual fund units.
Securities transactions and related commission revenues are recorded in the consolidated financial statements on a trade-date basis. Interest earned from or paid to client accounts and from trading securities owned or sold short is recognized on a net accrual basis as earned and has been included in financial services revenue.
Securities owned and securities sold short are classified as part of the trading portfolio. Both realized and unrealized gains and losses from trading securities owned and securities sold short are included in the determination of net earnings.
Investment income includes interest and dividend income which is recognized as earned, as well as realized investment gains and losses in respect of the Company’s AFS securities or other assets.
Real Estate Asset Management Revenues
Real estate asset management activities include a broad range of asset management services. Asset management revenues earned through DREAM include both asset management and incentive fees. Generally, asset management fees are calculated as a percentage of the capital managed. These fees are recognized on an accrual basis over the period during which the related service is rendered. Incentive fees are earned when the investment performance of the capital managed exceeds established benchmarks. These fees are not recognized in earnings until the amounts may be established with certainty and are no longer dependent on future events.
DREAM may also earn advisory fees in respect of real estate acquisitions. These fees are generally calculated as a percentage of the purchase price of the assets acquired and are recognized in earnings in a manner commensurate with the recognition of the purchase of such underlying asset by the managed account.
Real Estate
Revenue from the sale of developed sites and land sold to third parties is recognized at the time the agreement of purchase and sale is executed, at which point the earnings process is virtually complete, the usual risks and rewards of ownership are transferred to the buyer and the Company does not have a substantial continuing involvement with the property. Revenue is recognized provided that the agreement of purchase and sale is unconditional, at least 15% of the sale proceeds have been received and the collectability of the remaining proceeds is reasonably assured.
Revenue from housing projects is recognized when ownership has been transferred to the purchaser and the collectability of the proceeds of sale is assured. Ownership transfer occurs when the usual risks and rewards of ownership are transferred to the buyer and the Company does not have a substantial continuing involvement with the property.
Revenue from condominium projects is recognized by the percentage-of-completion method upon the sale of individual units when the following criteria have been satisfied: construction is beyond a preliminary stage, the purchaser is unable to demand a refund, sufficient units have been sold to secure that the condominiums will not revert to a rental property, sales prices are collectable and proceeds and costs can be estimated. Proceeds are accounted for as deposits until all of the criteria are met.
Revenue from real estate revenue properties includes base rents and recoveries of operating expenses including property taxes, percentage participation rents, lease cancellation fees, parking income and other incidental income. The Company’s real estate segment uses the straight-line method of rental revenue recognition on revenue properties whereby any contractual rent increase over the term of a lease is recognized in earnings evenly over the lease term.
All other real estate revenue is recognized when earned with the exception of annual season passes to ski resort properties which are deferred and amortized on a straight-line basis over the ski season.
Dilution Gains
Consolidation of subsidiaries and the application of the equity method of accounting may result in a dilution gain or loss if the Company’s interest in its subsidiary or equity accounted investee is reduced, either by a disposition or by the issuance of shares by the subsidiary or equity accounted investee to an external party. Dilution gains and losses in respect of consolidated subsidiaries are separately reported in the statement of operations. Dilution gains and losses in respect of equity accounted investments are included in the Company’s share of earnings of equity accounted investees.
Stock Based Compensation
The Company and its subsidiaries may issue stock based compensation to directors, financial advisors and employees under the terms of its share incentive plan and the share incentive plans of its subsidiaries. These plans may include the issuance of stock options and stock based awards.
The Company uses the fair value based method to account for stock based compensation granted to directors, financial advisors and employees. The value of stock based compensation, as at the date of grant, including awards under the Company’s share incentive plan or the share incentive plans of its subsidiaries, is recognized over the applicable vesting period as compensation expense, generally with a corresponding increase in contributed surplus. When stock options are exercised, the proceeds received, together with the amount in contributed surplus, are added to common share capital. No expense is recognized for stock options granted before January 1, 2003. At the time these options are exercised, the a mount received is recorded as common share capital. The Company does not factor in an estimated forfeiture rate for stock based compensation arrangements, but instead, adjusts for actual forfeitures as a change in estimate as they occur.
The Company’s contributions under its employee share purchase plan, and the employee and advisor share purchase plans of its subsidiaries, are expensed as incurred.
DundeeWealth has established a share loan plan for employees to purchase common shares of DundeeWealth. Compensatory amounts in respect of DundeeWealth’s share loan plan are amortized on a straight-line basis over a three-year vesting period.
Income Taxes
The Company uses the asset and liability method to provide for income taxes on all transactions recorded in the consolidated financial statements. The asset and liability method requires that income taxes reflect the expected future income tax consequences of temporary differences between the carrying amounts of assets and liabilities and their income tax bases. Future income tax assets and liabilities are determined for each temporary difference and for unused losses, as applicable, at income tax rates expected to be in effect when the asset is realized or the liability is settled. The effect on future income tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes t he substantive enactment date. A valuation allowance is established, if necessary, to reduce any future income tax asset to an amount that is more likely than not to be realized.
Contingent Losses
The Company records losses when it is likely that a future event will confirm that an asset has been impaired or a liability incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated.
Earnings per Share
Basic earnings per share is computed by dividing the net earnings for the year, adjusted for cumulative dividends on preference shares classified as equity, by the weighted average number of Subordinate Shares and Class B common shares ("Class B Shares") outstanding during the year.
Diluted earnings per share is calculated to reflect the dilutive effect of exercising outstanding share incentive arrangements by applying the treasury stock method and by reflecting the dilutive effect of convertible preference shares, as may be appropriate.
Assets Under Management
AUM represent the period-end market value of client assets managed on a discretionary basis and in respect of which the Company and its subsidiaries earn management fees and in certain cases, performance fees. AUM are not reflected on the consolidated balance sheets.
| 2. | CHANGES IN ACCOUNTING POLICIES |
Asset Recognition including Goodwill and Intangible Assets
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 t o 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.
Financial Instruments – Disclosures
Beginning with fiscal 2009, the Company adopted the amendments to CICA Handbook Section 3862, “Financial Instruments – Disclosures”. The amendments introduce a three-level fair value disclosure hierarchy that distinguishes fair value measurements by the significance of the inputs used. In addition, the amendments require enhanced disclosures regarding the nature and extent of liquidity risk arising from financial instruments to which an entity is exposed. Comparative information is not required in the year of adoption. The impact of these amendments is disclosed in note 24 to these consolidated financial statements.
Impairment of Financial Assets
In August 2009, the CICA Accounting Standards Board (“AcSB”) amended CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurement”, to achieve consistency with international standards on impairment of debt securities. The amendments changed the definition of a loan such that debt securities not quoted in an active market could be classified as a loan and measured at amortized cost. Impairment for debt securities classified as loans will be assessed and recorded using the incurred credit loss model of CICA Handbook Section 3025, “Impaired Loans”. De bt securities that are classified as AFS securities continue to be written down to their fair value through earnings when the impairment is considered other-than-temporary. The impairment loss may be reversed in future periods if the fair value subsequently increases and the increase can be objectively related to an event occurring after the impairment loss was recognized. The Company adopted these amendments beginning with fiscal 2009. There were no significant impacts resulting from these amendments.
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
In January 2009, the CICA issued an Emerging Issues Committee (“EIC”) Abstract on “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”, EIC-173. This Abstract discusses the conclusion reached by the EIC that an entity’s own credit risk and the credit risk of the counterparty should be taken into account when determining the fair value of financial assets and financial liabilities, including derivative instruments. The recommendations on the accounting treatment discussed in this Abstract should be applied retroactively without restatement to prior periods. The Company has adopted these recommendations effectiv e for fiscal periods beginning January 1, 2009. There was no significant impact resulting from these amendments.
| 3. | BUSINESS COMBINATIONS, DISPOSITIONS AND REORGANIZATIONS |
Transactions Completed During 2009
Wealth Management Transactions
Step Acquisition in DundeeWealth Inc.
During 2009, the Company purchased 450,000 common shares of DundeeWealth in a series of transactions for aggregate cash consideration of $4,227,000. The purchase price was allocated to the fair value of net assets acquired. The amount allocated to investment management contracts has been included in “Goodwill and other intangible assets” on the consolidated balance sheets of the Company. Investment management contracts have an indefinite life and are therefore not subject to amortization.
| Net assets acquired | | | |
| Investment management contracts | | $ | 3,006 | |
| Other net assets | | | 1,679 | |
| Future income tax liabilities | | | (458 | ) |
| | | $ | 4,227 | |
| Aggregate purchase price | | | | |
| Cash | | $ | 4,227 | |
| | | $ | 4,227 | |
Dilutions of Interest in DundeeWealth Inc.
From time to time, DundeeWealth may issue common shares from its treasury to settle share incentive awards to employees and financial advisors, or otherwise. Unless the Company participates in the issuance of common shares from treasury on a pro-rata basis, such issuances will result in a dilution of the Company’s interest in DundeeWealth. During 2009, the issuance of common shares from treasury by DundeeWealth resulted in the Company recognizing a dilution gain of $2,576,000.
Real Estate Transactions
Dilution of Interest in Dundee Realty Corporation
On July 31, 2009, the non-controlling shareholder of Dundee Realty exercised an option to acquire an additional 1.4% interest in Dundee Realty for aggregate cash consideration of $1,783,000. The Company recognized a dilution loss of $1,303,000 as a result of this transaction.
Deconsolidation of Variable Interest Entity
As part of Dundee Realty’s co-ownership in the Distillery Historic District, Dundee Realty had previously provided the funds necessary for the other co-owners to invest in the co-ownership structure. The co-ownership structure was determined to be a VIE for which the Company was considered the primary beneficiary and accordingly, 100% of the accounts of the VIE were consolidated with those of the Company, with the other co-owners share reflected as non-controlling interest.
During 2009, amounts advanced to the other co-owners were repaid to Dundee Realty and therefore, the co-ownership is no longer considered a VIE. Accordingly, during 2009, the Company deconsolidated 50% of the co-ownership.
| Deconsolidation of Variable Interest Entity | | | |
| Capital, real estate and other assets | | $ | (26,045 | ) |
| Working capital, net | | | 3,400 | |
| Corporate debt | | | 20,023 | |
| Non-controlling interest | | | 2,622 | |
Resources Transactions
Step Acquisition in Eurogas Corporation
On December 18, 2009, the Company purchased 1,500,000 common shares of Eurogas for aggregate cash consideration of $983,000. The purchase price was allocated to the fair value of net assets acquired. The amount allocated to the oil and gas property – Tunisia has been included in “Real estate, capital and other assets” on the consolidated balance sheets of the Company.
| Net assets acquired | | | |
| Oil and gas property - Tunisia | | $ | 259 | |
| Other net assets | | | 724 | |
| | | $ | 983 | |
| Aggregate purchase price | | | | |
| Cash | | $ | 983 | |
Dilution of Interest in Eurogas Corporation
During 2009, the Company recognized a dilution loss of $29,000 from changes in Eurogas’ equity, including the issuance of common shares pursuant to its share incentive arrangements.
Transactions Completed During 2008
Wealth Management
Acquisition of Aurion Capital Management Inc. (“Aurion”)
In July 2008, DundeeWealth entered into a share purchase agreement to acquire 60% of Aurion, a Canadian institutional money manager. The aggregate purchase price was $26,078,000 and included cash of $6,450,000, 1,417,582 common shares of DundeeWealth with a value of $19,350,000, and transaction costs of $278,000.
The remaining 40% of Aurion is held by the key employees of Aurion and is subject to the terms of a shareholders’ agreement.
Approximately 35% of the cash and common shares of DundeeWealth issued as consideration for the purchase was placed into escrow, to be released on the third anniversary date of the acquisition, contingent on the retention of certain key employees and AUM of Aurion.
Acquisition of DundeeWealth US, LP (“DWUS”)(formerly BHR Fund Advisors, L.P.)
In July 2008, DundeeWealth entered into a partnership interest purchase agreement to acquire 89% of DWUS, a U.S. based mutual fund manager and distribution platform, for aggregate cash consideration of US$2,217,000 and transaction costs of $203,000. The purchase price was subject to further contingent consideration, which required DWUS to meet certain conditions prior to June 30, 2009. As these conditions were not met, no further consideration was paid.
Allocation of the Purchase Price of Aurion and DWUS
The purchase price, net of contingent consideration, was assigned to the assets and liabilities acquired based on their estimated fair values. When the outcome of the contingency is resolved, contingent consideration recognized, if any, will be allocated to goodwill and other intangible assets. Institutional management contracts acquired were included in “Goodwill and other intangible assets” on the consolidated balance sheets of the Company and are being amortized over their estimated life of ten years.
| | | Aurion | | | DWUS | | | Total | |
| Net assets acquired | | | | | | | | | |
| Institutional management contracts | | $ | 16,417 | | | $ | - | | | $ | 16,417 | |
| Other net assets (liabilities) | | | 510 | | | | (172 | ) | | | 338 | |
| Future income tax liabilities | | | (4,937 | ) | | | - | | | | (4,937 | ) |
| | | $ | 11,990 | | | $ | (172 | ) | | $ | 11,818 | |
| Aggregate purchase price | | | | | | | | | | | | |
| Cash | | $ | 6,450 | | | $ | 2,258 | | | $ | 8,708 | |
| Common shares | | | 19,350 | | | | - | | | | 19,350 | |
| Transaction costs | | | 278 | | | | 203 | | | | 481 | |
| Less: Contingent consideration | | | (9,030 | ) | | | - | | | | (9,030 | ) |
| | | $ | 17,048 | | | $ | 2,461 | | | $ | 19,509 | |
| Excess of the purchase price over net assets acquired | | | | | | | | | | | | |
| assigned to goodwill | | $ | 5,058 | | | $ | 2,633 | | | $ | 7,691 | |
Disposition of Quebec-based Mutual Fund Dealer and Insurance Distribution Operations
On December 31, 2008, DundeeWealth disposed of its mutual fund dealer and its insurance network of financial advisors registered in the province of Quebec to Industrial Alliance Insurance and Financial Services Inc. (“Industrial”), for cash consideration of $12,734,000. The disposition resulted in a loss of $17,679,000.
| Assets disposed of: | | | |
| Cash | | $ | 1,182 | |
| Goodwill and other intangible assets | | | 28,874 | |
| Other assets | | | 357 | |
| | | | 30,413 | |
| Proceeds of disposition | | | 12,734 | |
| Loss on sale | | $ | (17,679 | ) |
Step Acquisition in DundeeWealth Inc.
During 2008, the Company purchased 5,450,571 common shares of DundeeWealth for cash of $71,497,000 and DundeeWealth paid cash of $22,805,000 to purchase and cancel 2,057,600 common shares pursuant to its normal course issuer bid. Combined, these transactions increased the Company’s interest in DundeeWealth. This increase was accounted for as a step acquisition in DundeeWealth, with the aggregate purchase price allocated to the fair value of the assets acquired.
| Net assets acquired | | | |
| Investment management contracts | | $ | 77,619 | |
| Other net assets | | | 23,262 | |
| Future income tax liabilities | | | (22,012 | ) |
| | | $ | 78,869 | |
| Aggregate purchase price | | | | |
| Cash | | $ | 71,497 | |
| Cash attributed to non-controlling interest | | | 7,372 | |
| | | $ | 78,869 | |
Dilution of Interest in DundeeWealth Inc.
During 2008, the issuance of common shares from treasury by DundeeWealth resulted in the Company recognizing a dilution gain of $6,297,000.
Real Estate
Dilution of Interest in Dundee Realty Corporation
In June 2008, the non-controlling shareholder of Dundee Realty exercised an option to acquire an additional 1.5% interest in Dundee Realty for $1,783,000. During 2008, the Company recognized a dilution loss of $435,000 in respect of its investment in Dundee Realty.
Resources
Partial Disposition of Eurogas Corporation’s Interest in Escal UGS S.L. (“Escal”)
In December 2007, Eurogas entered into agreements with ACS Servicios Comunicaciones y Energia, S.L. (“ACS”) (the “ACS Transaction”), a Spanish construction group, pursuant to which ACS increased its ownership in Escal from 5% to 66.67%. Correspondingly, Castor UGS Limited Partnership (“CLP”), of which Eurogas is a 73.7% owner, reduced its ownership in Escal from approximately 95% to 33.33%. The terms of the ACS Transaction were subject to the granting of a development concession by the Spanish authorities in respect of CLP’s natural gas storage project which was received on May 16, 2008. In accordance with Canadian GAAP, the results and balances of Escal were subsequently deconso lidated and Eurogas’ interest in Escal was accounted for on an equity basis. During 2008, the Company recorded a dilution loss of $4,990,000 in respect of this transaction.
The ACS Transaction also provided for the repayment to CLP of certain amounts previously invested in the natural gas storage project. Amounts due from Escal immediately following the ACS Transaction were approximately $43,347,000 (€27,894,000). During 2008, CLP received payments against the loan of approximately $41,055,000 (€25,683,000). During 2009, CLP received further payments of $2,311,000 (€1,435,000). At December 31, 2009, the loan amount due from Escal had a principal amount of $660,302 (€440,202) and was included in “Accounts receivable.”
Step Acquisition in Eurogas
On April 24, 2008, Eurogas completed a rights offering pursuant to which it raised $29,386,000, net of issue costs of $823,000. The Company’s participation in the rights offering was $19,306,000 and increased the Company’s ownership in Eurogas. This increase in ownership was accounted for as a step acquisition, with the aggregate purchase price allocated to the fair value of the net assets acquired.
| Net assets acquired | | | |
| Oil and gas property - Tunisia | | $ | 2,204 | |
| Other net assets | | | 17,102 | |
| | | $ | 19,306 | |
| Aggregate purchase price | | | | |
| Cash | | $ | 19,306 | |
Dilution of Interest in Eurogas
During 2008, the issuance of common shares from treasury by Eurogas, other than in respect of its rights offering, resulted in the Company recognizing a dilution loss of $294,000.
Reorganization of Eurogas
On August 5, 2008, Eurogas exchanged the common shares it held in Eurogas International Inc. (“EII”), its then wholly owned subsidiary, for preferred shares and new common shares of EII. The new common shares were then immediately distributed to all of Eurogas’ common shareholders as a dividend-in-kind. Each common shareholder of Eurogas received one new common share of EII for every five Eurogas shares held. As a result of this transaction, the Company received a 53% interest in EII and the Company therefore continues to consolidate the assets and liabilities and the results of operations of EII.
| 4. | CLIENT ACCOUNTS RECEIVABLE |
| | | | | | | | | | | | | |
| | | | | | | | | | 2009 | | | | 2008 | |
| Client accounts | | | $ | 301,329 | | | $ | 232,563 | |
| Brokers' and dealers' balances | | | | 30,744 | | | | 55,056 | |
| Securities borrowed | | | | 69,707 | | | | 101,663 | |
| | | | | | | | | $ | 401,780 | | | $ | 389,282 | |
DundeeWealth is holding collateral with a market value of $69,708,000 (2008 – $101,537,000) against amounts receivable pursuant to borrowing arrangements.
| | | | | | | | | | | | | | |
| | | | | | | 2009 | | | | | | | 2008 | |
| | | Trading Securities | | | Securities | | | Trading Securities | | | Securities | |
| | | Owned | | | Sold Short | | | Owned | | | Sold Short | |
| Bonds | | $ | 139,377 | | | $ | 22,718 | | | $ | 142,333 | | | $ | 39,925 | |
| Equities and convertible debentures | | | 53,444 | | | | 409 | | | | 19,549 | | | | 4,026 | |
| Floating rate notes from restructuring of ABCP | | | 5,570 | | | | - | | | | - | | | | - | |
| | | $ | 198,391 | | | $ | 23,127 | | | $ | 161,882 | | | $ | 43,951 | |
Bonds include $74,459,000 (2008 - $75,549,000) in guaranteed investment certificates held by the resources segment. These amounts have been deposited with a Canadian Schedule I Chartered Bank. Bond maturities range from 2010 to 2109 (2008 – from 2009 to 2052) and have annual interest yields ranging from 0% to 11.5% (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 ABCP on January 21, 2009 (note 24), DundeeWealth received certain FRNs, which were designated as fair value financial assets and included with other trading securities. On December 29, 2009, DundeeWealth announced that certain of these FRNs had been sold for cash proceeds of $139,511,000. Market appreciation in the fair value of DundeeWealth’s investments in ABCP aggregated $23,626,000 during 2009, including market appreciation earned on FRNs prior to their disposal. This amount has been included in net earnings as a “fair value adjustment”.
| 6. | AVAILABLE-FOR-SALE SECURITIES |
| | | | | | | | | | | | | | |
| | | | | | | 2009 | | | | | | | 2008 | |
| | | Cost | | | Fair Value | | | Cost | | | Fair Value | |
| Asset-backed commercial paper | | $ | - | | | $ | - | | | $ | 169,478 | | | $ | 169,478 | |
| Mutual funds managed by a subsidiary | | | 92,319 | | | | 101,236 | | | | 91,719 | | | | 68,194 | |
| Collateralized loan obligations | | | 7,071 | | | | 39,308 | | | | 16,645 | | | | 16,645 | |
| Other portfolio investments | | | 87,803 | | | | 116,950 | | | | 56,779 | | | | 40,413 | |
| | | $ | 187,193 | | | $ | 257,494 | | | $ | 334,621 | | | $ | 294,730 | |
The Company continues to recognize changes in fair values of AFS securities, other than changes that are determined to be other-than-temporary impairments in fair value, in OCI.
Between December 31, 2008 and June 30, 2009, the value of DundeeWealth’s portfolio of collateralized loan obligations (“CLOs”) had depreciated by $9,501,000. At June 30, 2009, the Company determined that this depreciation was an other-than-temporary impairment in the investment and accordingly, the Company recognized the depreciation in net earnings as a “fair value adjustment”. Since June 30, 2009, and primarily as a result of changes in the credit markets generally, the value of these assets increased by $32,237,000. The fair value appreciation was recorded in OCI.
In the prior year, the Company recognized other-than-temporary impairments of $113,827,000 related to its ABCP investments, $99,961,000 related to its CLO investments and $57,310,000 related to other portfolio investments.
| 7. | EQUITY ACCOUNTED INVESTMENTS |
| | | | | | | | | | | | |
| | | | | | | 2009 | | | | | | | 2008 | |
| | | | | | Carrying | | | | | | Carrying | |
| | | Ownership | | | Value | | | Ownership | | | Value | |
| Breakwater Resources Ltd. | | | 25 | % | | $ | 18,662 | | | | 25 | % | | $ | 13,560 | |
| Dundee Precious Metals Inc. | | | 20 | % | | | 45,109 | | | | 20 | % | | | 37,952 | |
| Dundee Real Estate Investment Trust | | | 18 | % | | | 84,156 | | | | 21 | % | | | 96,337 | |
| Escal UGS S.L.(note 3) | | | 33 | % | | | 5,714 | | | | 33 | % | | | 5,975 | |
| Odyssey Resources Limited | | | 31 | % | | | 1,417 | | | | 43 | % | | | 2,842 | |
| Other | | | | | | | 3,905 | | | | | | | | 3,673 | |
| | | | | | | $ | 158,963 | | | | | | | $ | 160,339 | |
The aggregate fair value of the Company’s equity accounted investments as at December 31, 2009 was $255,582,000 (2008 – $106,027,000).
Transactions In Equity Accounted Investments
Breakwater Resources Ltd. (“Breakwater”)
During 2008, the Company acquired 5,000,000 shares of Breakwater in the open market at an aggregate cost of $2,915,000.
In April 2009, Breakwater completed a public offering pursuant to which the Company acquired an aggregate of 57,960,000 units of Breakwater at a price of $0.10 per unit. Each unit was comprised of one common share of Breakwater and one-half of one common share purchase warrant. Each warrant entitles the holder to purchase one common share at an exercise price of $0.12 per common share. As the Company purchased its pro-rata share of the offering, the Company’s 25% interest in Breakwater did not change.
Dundee Precious Metals Inc. (“Dundee Precious”)
During the fourth quarter of 2008, the Company acquired 6,800,000 shares and 3,400,000 warrants of Dundee Precious at a cost of $15,300,000. Each full warrant entitles the holder to acquire a common share of Dundee Precious at $3.25 per share for a period of seven years from the date of issue.
The Company did not acquire any further interest in Dundee Precious during 2009. Subsequent to December 31, 2009, Dundee Precious announced a public offering, on a bought deal basis, for up to 20,000,000 common shares of Dundee Precious at a price of $3.30 per share. The offering was completed on March 15, 2010. The Company purchased an aggregate of 8,881,200 common shares of Dundee Precious pursuant to the offering at a cost to the Company of $29,308,000. As a result of the acquisition, the Company’s interest in Dundee Precious was increased from 20% to 24%.
Dundee Real Estate Investment Trust
The Company's investment in 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 Dundee REIT units pursuant to the exchange feature of its outstanding exchangeable debentures (note 13).
During 2008, the Company acquired 460,000 Dundee REIT Units Series B at a cost of $3,841,000. In addition, during 2008, the Company delivered 12,669 Dundee REIT Units Series A to settle $377,000 of par value exchangeable debentures. The Company recognized an associated gain on disposition of the Dundee REIT Units Series A of $50,000, which has been included in net earnings as “investment income” (note 19). There were no exchanges pursuant to the exchangeable debentures during 2009.
During the third quarter of 2009, the Company received 140,448 Dundee REIT Units Series A relating to an historic transaction pursuant to which the Company was entitled to Dundee REIT Units Series A which had remained unclaimed since 2003. Following receipt of the Dundee REIT Units Series A and the associated unclaimed distributions in respect thereof, the Company and its affiliates held an aggregate 21% interest in Dundee REIT.
In September 2009, Dundee REIT completed a public offering of 3,852,500 units at a price of $18.35 per unit. The Company did not participate in the offering, resulting in a dilution of the Company’s interest to 18%. Subsequent to December 31, 2009, Dundee REIT completed additional public offerings in each of January and March 2010. The Company did not participate in the offerings and accordingly, the Company’s interest in Dundee REIT will be further diluted to 14%.
Odyssey Resources Limited (“Odyssey”)
In the third quarter of 2008, the Company acquired 10,000,000 shares of Odyssey for $2,500,000, increasing its ownership interest to 43%. As a result, effective August 8, 2008, Odyssey was transferred from AFS securities to equity accounted investments, and the Company began to account for this investment on an equity basis.
In June and December 2009, Odyssey completed non-brokered private placements of 4,800,000 and 4,750,000 flow-through shares, respectively at a price of $0.25 and $0.20 per share, respectively. The issuances resulted in a dilution of the Company’s interest in Odyssey to 31%.
Effect of Dilution of Interest on Share of Earnings of Equity Accounted Investees
During 2009, dilution of the Company’s interest, generally from issuance of treasury shares by equity accounted investees, resulted in the Company recognizing dilution losses of $3,793,000 (2008 – dilution gains of $1,546,000).
Impairment in Fair Value of Equity Accounted Investees
The Company assesses its equity accounted investments for impairment by reviewing any equity accounted investments where fair values are significantly below original cost, and where such amounts are subject to an ongoing decline that has been consistent over a prolonged period. As a result of this impairment assessment, during the fourth quarter of 2008, the Company recorded a total fair value adjustment amount of $114,194,000 against the carrying value of its equity-accounted investments. At December 31, 2009, the fair values of equity accounted investees exceeded their cost.
| 8. | DEFERRED SALES COMMISSIONS |
| | | | |
| | | 2009 | | | 2008 | |
| Deferred sales commissions, beginning of year | | $ | 234,027 | | | $ | 207,005 | |
| Commissions funded during the year | | | 91,643 | | | | 108,890 | |
| Amortization during the year | | | (88,689 | ) | | | (81,868 | ) |
| Deferred sales commissions, end of year | | $ | 236,981 | | | $ | 234,027 | |
| 9. | REAL ESTATE, CAPITAL AND OTHER ASSETS |
| | | | | | | | | | | |
| | | | | | | | | 2009 | | | 2008 | |
| | | | | | Accumulated | | | Net Book | | | Net Book | |
| | | Cost | | | Amortization | | | Value | | | Value | |
| Real estate assets | | $ | 456,567 | | | $ | (15,696 | ) | | $ | 440,871 | | | $ | 446,226 | |
| Capital and other assets | | | 145,158 | | | | (84,614 | ) | | | 60,544 | | | | 61,741 | |
| Oil and gas properties | | | 22,695 | | | | (623 | ) | | | 22,072 | | | | 18,289 | |
| | | | 624,420 | | | | (100,933 | ) | | | 523,487 | | | | 526,256 | |
Real Estate Assets by Type | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2009 | | | | 2008 | |
| Land under development | | | | | | | | | | $ | 135,235 | | | $ | 125,298 | |
| Land held for development | | | | | | | | | | | 167,628 | | | | 160,048 | |
| Housing and condominiums | | | | | | | | | | | 75,502 | | | | 96,929 | |
| Revenue properties | | | | | | | | | | | 62,506 | | | | 63,951 | |
| | | | | | | | | | | | 440,871 | | | | 446,226 | |
Oil and Gas Properties by Geographic Area | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2009 | | | | 2008 | |
| Tunisia | | | | | | | | | | $ | 20,851 | | | $ | 17,825 | |
| Other | | | | | | | | | | | 1,221 | | | | 464 | |
| | | | | | | | | | | | 22,072 | | | | 18,289 | |
| 10. | GOODWILL AND OTHER INTANGIBLE ASSETS |
| | | | | | | | | | | | | | | | |
| | | | | | | | 2009 | | | | | | | | | 2008 | |
| | | | | Accumulated | | | Net Book | | | | | | Accumulated | | | Net Book | |
| | Cost | | | Amortization | | | Value | | | Cost | | | Amortization | | | Value | |
| Goodwill | $ | 373,926 | | | $ | - | | | | 373,926 | | | $ | 375,967 | | | $ | - | | | $ | 375,967 | |
| Indefinite life intangible assets | | | | | | | | | | | | | | | | | | | | | | | |
| Investment management contracts | | 338,078 | | | | - | | | | 338,078 | | | | 336,548 | | | | - | | | | 336,548 | |
| Intangible assets with a finite life | | | | | | | | | | | | | | | | | | | | | | | |
| Institutional management contracts | | 16,417 | | | | 2,463 | | | | 13,954 | | | | 16,417 | | | | 821 | | | | 15,596 | |
| Funds under administration | | 15,795 | | | | 7,281 | | | | 8,514 | | | | 15,795 | | | | 6,335 | | | | 9,460 | |
| Customer relationships | | 6,651 | | | | 4,768 | | | | 1,883 | | | | 6,651 | | | | 3,438 | | | | 3,213 | |
| | $ | 750,867 | | | $ | 14,512 | | | $ | 736,355 | | | $ | 751,378 | | | $ | 10,594 | | | $ | 740,784 | |
Goodwill and investment management contracts are not amortized but are tested for impairment at least annually. The Company completed impairment testing related to these assets and determined that at December 31, 2009 and 2008, no impairment existed.
From time to time, DundeeWealth’s brokerage subsidiary may utilize call loan arrangements to facilitate the securities settlement process for both client and principal securities transactions or to fund margin lending. At December 31, 2009, DundeeWealth’s subsidiary had drawn $4,821,000 (2008 - $nil) against available call loan facilities of $81,050,000 (2008 - $93,300,000). Call loan facilities have been established with Canadian Schedule I Chartered Banks.
During 2009, the interest rate on these facilities ranged from 1.20% to 2.75% (2008 – 2.75% to 5.00%) on Canadian dollar denominated borrowings and from 1.25% to 2.75% (2008 - $2.60 to 5.25%) on borrowings denominated in United States dollars.
| 12. | CLIENT DEPOSITS AND RELATED LIABILITIES |
| | | 2009 | | 2008 | |
| Client accounts | | $ | 388,780 | | | $ | 356,898 | |
| Brokers' and dealers' balances | | | 59,489 | | | | 35,061 | |
| Securities loaned | | | 24,310 | | | | 7,629 | |
| International banking client accounts | | | 4,241 | | | | 9,059 | |
| | | $ | 476,820 | | | $ | 408,647 | |
DundeeWealth has provided securities with a fair value of $24,586,000 (2008 – $7,610,000) against amounts outstanding pursuant to domestic securities lending arrangements.
At December 31, 2009 and 2008, the fair value of corporate debt approximated its carrying value.
| | | | | | |
| | | 2009 | | | 2008 | |
| Corporate | | | | | | |
| $ 200 million revolving term credit facility due November 9, 2010 | | $ | - | | | $ | 81,960 | |
| $ 9.5 million, 5.85% exchangeable unsecured subordinated debentures due June 30, 2015 | | | 9,227 | | | | 9,168 | |
| Subsidiaries | | | | | | | | |
| $ 200 million 5.10% Series 1 Notes, DundeeWealth, due September 25, 2014 | | | 197,949 | | | | - | |
| $ 500 million revolving term credit facility, DundeeWealth | | | - | | | | 169,606 | |
| $ 150 million revolving term credit facility, Dundee Realty, due November 30, 2011 | | | 75,408 | | | | 85,408 | |
| Other real estate debt | | | 105,433 | | | | 183,365 | |
| | | $ | 388,017 | | | $ | 529,507 | |
$200,000,000 – Revolving Term Credit Facility, Corporate
On November 10, 2009, the Company amended its revolving term credit facility with a Canadian Schedule I Chartered Bank, increasing the borrowing amount available from $150 million to $200 million and extending the maturity date to November 9, 2010. Borrowings under the amended facility bear interest, at the Company’s option, at a rate per annum equal to either the bank’s prime lending rate for loans plus 1.75% (2008 – 0.25%) or, for bankers’ acceptances, at the bank’s then prevailing bankers’ acceptance rate plus 2.75% (2008 – 1.25%). Unused amounts available under the facility are subject to a standby fee of 0.95% (2008 – 0.375%). At December 31, 2009, the Company had not drawn against the revolving term credit facility (2008 - $81,960,000).
The amended facility is subject to certain covenants, including maintenance of minimum levels of specific assets, restrictions on the existence of secured indebtedness, restrictions on the redemption, purchase or repayment of the exchangeable debentures (below) and restrictions on the prepayment and payment of interest on the exchangeable debentures. In certain limited circumstances, the Company may be required to secure amounts borrowed pursuant to the amended facility through a pledge of certain investments.
During the year ended December 31, 2009, interest expense relating to the Company’s revolving term credit facility was $2,953,000 (2008 - $1,911,000).
On February 23, 2010, the terms of the Company’s revolving term credit facility were amended to reduce the interest rate per annum on prime lending arrangements from prime plus 1.75% to prime plus 1.25% and to reduce the interest rate per annum on bankers’ acceptances from the prevailing bankers’ acceptance rate plus 2.75% to the prevailing bankers’ acceptance rate plus 2.25%. The amendment also provides for a reduction in the standby fee rate from 0.95% to 0.7875%.
$9,545,000, 5.85% Exchangeable Unsecured Subordinated Debentures
On June 22, 2005, the Company issued 100,000 exchangeable unsecured subordinated debentures with a par value of $1,000 for aggregate proceeds of $100,000,000. The exchangeable debentures mature on June 30, 2015 and bear interest at 5.85% per annum, payable semi-annually on June 30 and December 31 of each year. Each Exchangeable Debenture may be exchanged, at the option of the holder for 33.6134 units of Dundee REIT, representing a conversion price of $29.75 per Dundee REIT unit.
The Company has placed units of DPLP into escrow in order to satisfy the exchange feature, each unit of which is convertible into a Dundee REIT unit on a one-for-one basis. The Company is entitled to all voting rights and related privileges and is entitled to all distributions and rights of reinvestment of such distributions associated with the units held in escrow.
The carrying value of the exchangeable debentures is adjusted in the consolidated financial statements to reflect the fair value of the exchange feature, provided that such adjustment does not result in a carrying value that is below the principal value of the exchangeable debentures outstanding. The fair value of the exchange feature is determined using a valuation model that recognizes both the debt and exchange feature of the debentures and is based on the premise that each of these components have different default risks. Changes in the fair value of the exchange feature will be recorded in consolidated net earnings. Based on this valuation model, the Company determined that the value of the exchange feature at Decem ber 31, 2009 was $nil. In 2008, the Company recognized a gain of $1,314,000 related to the exchange feature.
There were no surrenders of exchangeable debentures for exchange during 2009. During 2008, $377,000 par value of exchangeable debentures was surrendered for exchange in accordance with the terms of the exchange feature.
Issuance of $200,000,000 5.10% Series 1 Notes, DundeeWealth
On September 25, 2009, DundeeWealth completed an offering pursuant to which it issued $200 million principal amount of Series 1 Notes, which mature on September 25, 2014 (the “Notes”). The Notes bear interest at 5.10% per annum, payable semi-annually on March 25 and September 25 of each year, beginning on March 25, 2010. Proceeds from the issuance of the Notes, net of a discount and issue costs, were $197,838,000.
The Notes are unsecured obligations of DundeeWealth and rank equally with all other unsecured and unsubordinated indebtedness and obligations of DundeeWealth. Certain subsidiaries of DundeeWealth have fully and unconditionally guaranteed on a joint and several basis, the payment of principal and interest on the Notes.
The Notes are redeemable, at DundeeWealth’s option, at the greater of the Canada Yield Price and par, together with any accrued and unpaid interest. The Canada Yield Price is defined as the price of the Notes, calculated so as to provide a holder of the Notes with a yield from the date of redemption to the maturity date of the Notes equal to the Government of Canada yield on non-callable bonds with similar maturity dates, plus 0.62%. The Company determined that the value of the option to redeem the Notes was $nil at December 31, 2009.
$500,000,000 – Revolving Term Credit Facility, DundeeWealth
On September 25, 2009, and following receipt of proceeds pursuant to the Notes issued, DundeeWealth repaid all amounts outstanding pursuant to its previously available $500,000,000 revolving term credit facility. The facility was subsequently cancelled. At December 31, 2008, DundeeWealth had drawn $169,606,000 pursuant to this arrangement. Interest expense on the facility during the year ended December 31, 2009, and prior to repayment of the facility, was $3,656,000 (2008 - $5,585,000).
$150,000,000 Revolving Term Credit Facility, Dundee Realty
On October 16, 2009, Dundee Realty amended its $150,000,000 revolving term credit facility with a Canadian Schedule I Chartered Bank, extending the maturity date to November 30, 2011. The amended facility bears interest, at Dundee Realty’s option, at a rate per annum equal to either the bank’s prime lending rate plus 3.00% (2008 - 0.625%) or at the bank’s then prevailing bankers’ acceptance rate plus 4.25% (2008 - 2.125%). The facility is secured by a general security agreement and a first charge against various assets in western Canada. At December 31, 2009, Dundee Realty had drawn $101,263,000 (2008 - $121,146,000) against this facility, including $25,855,000 (2008 - $35,738,000) in the form of letters of credit. Interest expense relating to this revolving term credit facility during the year ended December 31, 2009, was $2,866,000 (2008 – $3,985,000).
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 under development, housing and condominiums under development, or land held for development. Term debt is secured by charges on specific capital equipment. At December 31, 2009, the weighted average interest rate on fixed rate debt at Dundee Realty, aggregating $50,140,000 (2008 - $59,003,000) was 7.55% (2008 – 6.26%). The remaining real estate debt, including in respect of its demand revolving term credit facilities, is subject to variable interest rates, with a weig hted average rate during 2009 of 4.80% (2008 – 4.29%). Fixed rate debt matures between 2010 and 2030. Variable rate debt, including demand revolving term credit facilities, matures between 2010 and 2018.
During 2009, Dundee Realty capitalized interest of $5,366,000 (2008 - $9,279,000), including interest incurred on its revolving term credit facility and on other real estate debt, to the carrying value of real estate assets.
| 14. | SERIES 1 PREFERENCE SHARES OF DUNDEEWEALTH |
In 2007, DundeeWealth issued 6,225,000 4.75% cumulative redeemable first preference shares, series 1 (“Series 1 preference shares, DundeeWealth”) at a price of $25.00 per share. These shares entitle the holder to a fixed preferential cumulative dividend at the rate of 4.75% per annum, payable quarterly.
These shares may be redeemed at the option of DundeeWealth at any time, at a price per share which declines over time in accordance with the terms of the Series 1 preference shares, DundeeWealth, from $26.75 per share if such share is redeemed prior to March 13, 2010 to $25.00 per share if such share is redeemed after March 13, 2016 (the “DW Redemption Price Schedule”).
On redemption, DundeeWealth may convert the Series 1 preference shares, DundeeWealth to its common shares subject to regulatory approval. If such election is made, the Series 1 preference shares, DundeeWealth will be converted on the basis of one Series 1 preference share, DundeeWealth for that number of common shares that is equal to the redemption price at the time of the conversion determined in accordance with the DW Redemption Price Schedule divided by the current market price of DundeeWealth’s common shares, determined in accordance with a formula. DundeeWealth does not intend to make such an election if these shares are redeemed.
Any redemption or conversion of the Series 1 preference shares, DundeeWealth prior to March 13, 2012 is limited to circumstances where such shares are entitled to vote separately, as a class or series, by law.
DundeeWealth may, at any time, purchase the Series 1 preference shares, DundeeWealth for cancellation in the open market, by private placement or otherwise. Series 1 preference shares, DundeeWealth are retractable by the holder at any time after March 13, 2017 for cash of $25.00 per share.
DundeeWealth determined that the redemption feature available to it pursuant to the terms of the Series 1 preference shares, DundeeWealth is an embedded derivative with a fair value on the date of issue of $1,805,000.
| 15. | NON-CONTROLLING INTEREST |
| | | | | | |
| | | 2009 | | | 2008 | |
| Non-controlling interest in: | | | | | | |
| DundeeWealth Inc. | | $ | 566,391 | | | $ | 516,003 | |
| Dundee Realty Corporation | | | 55,275 | | | | 50,435 | |
| Eurogas Corporation | | | 46,205 | | | | 48,704 | |
| | | $ | 667,871 | | | $ | 615,142 | |
Share Loans Receivable in DundeeWealth
DundeeWealth has a share loan plan pursuant to which key employees were provided with a loan from DundeeWealth to purchase common shares of DundeeWealth from treasury or in the market. The shares issued pursuant to these arrangements are pledged as collateral against the loans. At December 31, 2009, the aggregate loan amount was $24,261,000 (2008 - $29,814,000).
The share loan plan features a one-time bonus equal to one third of the aggregate loan amount, which is payable by DundeeWealth in 2010, at the conclusion of a three year vesting period, conditional on the retention of the key employee. During 2009, DundeeWealth recognized compensation expense of $2,068,000 (2008 - $3,065,000) in respect of these share loans.
During 2009, DundeeWealth amended the repayment terms of the share loan plan such that not less than one sixth of the loan principal value will be repaid at vesting of the loan arrangements in 2010, with the balance to be repaid in four equal installments in years seven through ten of the outstanding term of the loan. Previously, not less than 50% of the loan principal was to be repaid after five years. The discounted value of the share loan receivable in DundeeWealth has been included in “non-controlling interest”.
Authorized
The Company is authorized to issue an unlimited number of first preference shares, issuable in series, an unlimited number of second preference shares, issuable in series, and an unlimited number of third preference shares, issuable in series.
First Preference Shares ─ Each series of first preference shares ranks on a parity with the first preference shares of every other series and will be entitled to preference on the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of the Company over the Subordinate Shares, Class B Shares, second preference shares and third preference shares.
Second Preference Shares ─ Each series of second preference shares ranks junior and subordinate to the first preference shares, on a parity with second preference shares of every other series and will be entitled to preference over the Subordinate Shares, Class B Shares and third preference shares. The Company currently has no second preference shares outstanding.
Third Preference Shares ─ Each series of third preference shares ranks junior and subordinate to the first preference shares and the second preference shares, on a parity with the third preference shares of every other series and will be entitled to preference over the Subordinate Shares and Class B Shares. The Company currently has no third preference shares outstanding.
Issued and Outstanding Preference Shares, First Series, Series 1 (“Preference shares, series 1”)
| | | Number | | | Par | | | Issue | | | | | | Net Book | |
| | | of Shares | | | Value | | | Costs | | | Premium | | | Value | |
| Balance as at December 31, 2007 | | | 6,000,000 | | | $ | 150,000 | | | $ | (4,030 | ) | | $ | 1,050 | | | $ | 147,020 | |
| Amortization during the year | | | - | | | | - | | | | 474 | | | | (123 | ) | | | 351 | |
| Balance as at December 31, 2008 | | | 6,000,000 | | | | 150,000 | | | | (3,556 | ) | | | 927 | | | | 147,371 | |
| Amortization during the year | | | - | | | | - | | | | 474 | | | | (123 | ) | | | 351 | |
| Balance as at December 31, 2009 | | | 6,000,000 | | | $ | 150,000 | | | $ | (3,082 | ) | | $ | 804 | | | $ | 147,722 | |
In 2006, the Company issued 6,000,000 5.00% cumulative redeemable first preference shares, series 1 at a price of $25.00 per share. The Preference shares, series 1 rank on a parity with the Preference shares, series 2 and series 3 (see below) and in priority to the Subordinate Shares and the Class B Shares of the Company as to the payment of dividends and the distribution of assets on dissolution, liquidation or winding-up of the Company. The Preference shares, series 1 entitle the holder to a fixed preferential cumulative dividend at the rate of 5.00% per annum, payable quarterly. The Preference shares, series 1 are generally non-voting, except in limited circumstances.
The Preference shares, series 1 may be redeemed, at the option of the Company, at any time at a price per share which declines over time in accordance with the terms of the Preference shares, series 1 from $26.50 per share if redeemed prior to June 30, 2010 to $25.00 per share if redeemed after June 30, 2015 (the “DC Redemption Price Schedule”).
The Company may elect to convert the Preference shares, series 1 to Subordinate Shares of the Company at any time, subject to regulatory approval. The Preference shares, series 1 will be converted on the basis of one Preference share, series 1 for that number of Subordinate Shares that is equal to the redemption price at the time of the conversion determined in accordance with the DC Redemption Price Schedule divided by the current market price of the Subordinate Shares, determined in accordance with a formula. The Company does not currently intend to convert the Preference shares, series 1.
Any redemption or conversion of the Preference shares, series 1 by the Company, prior to June 30, 2011 is limited to circumstances where the Preference shares, series 1 are entitled to vote separately, as a class or series, by law.
The Company may, at any time, purchase the Preference shares, series 1 for cancellation in the open market, by private placement or otherwise.
The Preference shares, series 1 are retractable by the holder at any time after June 30, 2016 for cash of $25.00 per share.
The Company determined that the redemption feature available to the Company pursuant to the terms of the Preference shares, series 1 is an embedded derivative with a fair value on the date of issue of $1,236,000.
| First Preference Shares, Series 2 (“Preference shares, series 2”) | | | | | | |
| | | Number of | | | | |
| | | Shares | | | Amount | |
| Issuance of Preference shares, series 2, September 15, 2009 | | | 4,600,000 | | | $ | 115,000 | |
| Issuance of Preference shares, series 2, September 21, 2009 | | | 600,000 | | | | 15,000 | |
| Issue costs, net of taxes of $1,179 | | | - | | | | (2,915 | ) |
| Balance at December 31, 2009 | | | 5,200,000 | | | $ | 127,085 | |
In September 2009, the Company issued 5,200,000 cumulative 5 year rate reset Preference shares, series 2 at a price of $25.00 per share for net proceeds of $125,906,000, after issue costs of $4,094,000.
The Preference shares, series 2 rank on a parity with the Preference shares, series 1 and Preference shares, series 3 (see below), and rank in priority to the Subordinate Shares and the Class B Shares of the Company as to the payment of dividends and the distribution of assets on dissolution, liquidation or winding-up of the Company. The Preference shares, series 2 entitle the holder to a fixed preferential cumulative dividend at the rate of 6.75% per annum, payable quarterly for the initial period from and including September 15, 2009 to, but excluding September 30, 2014. Thereafter, the dividend rate will reset every five years to equal the then Canadian dollar denominated non-callable Government of Canada bond yield with a term to maturity of five years plus 4.10%. The Preference shares, series 2 are generally non-voting, except in limited circumstances.
Holders of Preference shares, series 2 have the option to convert the shares into Cumulative Floating Rate First Preference Shares, Series 3 (“Preference shares, series 3”), subject to certain conditions, on September 30, 2014 and on September 30 every fifth year thereafter (“Series 3 conversion date”). The conversion is on the basis of one Preference share, series 3 for each Preference share, series 2.
The Preference shares, series 2 may be redeemed, at the option of the Company, on September 30, 2014 and on September 30 every fifth year thereafter at a price of $25.00 per share. Prior to September 30, 2014, the Company has the right to redeem the Preference shares, series 2 in limited circumstances.
First Preference Shares, Series 3 (“Preference shares, series 3”)
The Preference shares, series 3 rank on a parity with the Preference shares, series 1 and Preference shares, series 2, and rank in priority to the Subordinate Shares and the Class B Shares of the Company as to the payment of dividends and the distribution of assets on dissolution, liquidation or winding-up of the Company. Holders of Preference shares, series 3, if and when issued, will be entitled to receive quarterly floating rate, cumulative preferential cash dividends based on the applicable three month Government of Canada T-Bill rate plus 4.10%. The Preference shares, Series 3 are generally non-voting, except in limited circumstances.
Holders of Preference shares, series 3 will have the option, on September 30, 2019 and on each September 30 every fifth year thereafter, to convert their Preference shares, series 3 into Preference shares, series 2. The conversion is on the basis of one Preference share, series 2 for each Preference share, series 3.
On September 30, 2019 and on September 30 every fifth year thereafter, the Company has the option to redeem the Preference shares, series 3 by payment of an amount in cash of $25.00 per share together with accrued and unpaid dividends to, but excluding, the redemption date.
On any date after September 30, 2014 that is not a Series 3 conversion date, the Company has the option to redeem the Preference shares, series 3 by payment of an amount in cash of $25.50 per share together with accrued and unpaid dividends to, but excluding, the redemption date.
Authorized
The Company is authorized to issue an unlimited number of Subordinate Shares and an unlimited number of Class B Shares.
Holders of Subordinate Shares and Class B Shares are entitled to one vote and 100 votes, respectively, for each such share held. The Subordinate Shares and Class B Shares participate equally, share for share, as to dividends. The Class B Shares are convertible into Subordinate Shares on a one-for-one basis at any time. In the event of an offer to purchase the Class B Shares by a third party, and in certain circumstances, each Subordinate Share will be convertible, at the option of the holder, into one Class B Share for purposes of accepting an offer.
