Clairvest Group Inc. (TSX:CVG) today reported results for the quarter ended
December 31, 2009. (All figures are in Canadian dollars unless otherwise
stated).
Clairvest's book value increased to $290.4 million or $18.20 per share for the
quarter, compared with $18.06 per share at September 30, 2009. The increase in
book value per share was attributable to net income for the quarter of $2.3
million, or $0.14 per share. Net income per share was $0.41 for the first three
quarters of the fiscal year. Net loss for the quarter ended December 31, 2008
was $0.6 million or $0.04 per share, and net income for the nine months ended
December 31, 2008 was $22.3 million or $1.40 per share.
During the quarter, Clairvest continued marketing for its new private equity
vehicle, Clairvest Equity Partners IV Limited Partnership ("CEP IV").
Commitments received since the second quarter of fiscal 2010 amounted to $97
million at January 31, 2010, bringing total commitments to 74% of the $400
million target. The initial $200 million closing of CEP IV occurred in the
second quarter of fiscal 2010, half of which came from Clairvest. Commitments to
CEP IV are limited by a cap of $500 million, and Clairvest has the right to
increase its commitment to $125 million prior to the end of the fundraising
period.
"We are happy with the confidence demonstrated by new and returning investors in
CEP IV, who share our optimism about the opportunities arising from the current
environment," said Ken Rotman, Co-Chief Executive Officer and Managing Director
of Clairvest Group Inc. "Throughout our 22-year history, our team has
demonstrated its ability to take advantage of diverse economic conditions and we
look forward to partnering with new companies, for the benefit of our
shareholders and investors in CEP IV."
As previously announced, subsequent to quarter end, the State of New York
selected Aqueduct Entertainment Group LLC ("AEG") to negotiate an agreement to
operate a new casino at the Aqueduct Racetrack in Queens, New York (the
"Aqueduct Project"). The AEG consortium includes Clairvest, Navegante Group
Inc., GreenStar Services Corporation, Levine Builders and Turner Construction.
Coming to an agreement with the New York State over the Aqueduct Project remains
subject to a number of conditions and regulatory approvals.
Subject to the approval of the Toronto Stock Exchange, Clairvest's Board of
Directors has approved a new normal course issuer bid to purchase up to 797,678
common shares on the Toronto Stock Exchange during the 12-month period
commencing March 6, 2010.
About Clairvest
Clairvest Group Inc. is a Canadian merchant bank that invests its own capital,
and that of third parties through the Clairvest Equity Partners limited
partnerships, in businesses that have the potential to generate superior
returns. In addition to providing financing, Clairvest contributes strategic
expertise and execution ability to support the growth and development of its
investee partners. Clairvest realizes value through investment returns and the
eventual disposition of its investments.
Forward-looking Statements
This news release contains forward-looking statements with respect to Clairvest
Group Inc., its subsidiaries and their investments. These statements are based
on current expectations and are subject to known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Clairvest, its subsidiaries and their investments to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include
general and economic business conditions, regulatory risks, the possibility that
Clairvest may not be successful in obtaining any additional capital commitments
for CEP IV and the possibility of conditions not being met and documentation not
being concluded in the Aqueduct Project. Clairvest is under no obligation to
update any forward-looking statements contained herein should material facts
change due to new information, future events or otherwise.
www.clairvest.com
CLAIRVEST GROUP INC. February 12, 2010
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED DECEMBER 31, 2009
The Management's Discussion and Analysis ("MD&A") analyzes significant changes
in the unaudited consolidated financial statements of Clairvest Group Inc.
("Clairvest"). It should be read in conjunction with the accompanying unaudited
consolidated financial statements and notes of Clairvest for the quarter ended
December 31, 2009 and the attached news release.
All amounts are in Canadian dollars unless otherwise indicated.
CRITICAL ACCOUNTING ESTIMATES
Clairvest prepares its financial statements in accordance with Canadian
generally accepted accounting principles ("GAAP"). In accordance with Accounting
Guideline 18, "Investment Companies" ("AcG-18"), the Company designates its
temporary investments and corporate investments as held-for-trading and carries
them at fair value. Clairvest has also designated its receivables and payables
as held-for-trading in accordance with Canadian Institute of Chartered
Accountants Handbook ("CICA Handbook") Section 3855. Accordingly, each of
Clairvest's financial assets and liabilities is fair valued on each consolidated
balance sheet date.
When a financial asset or liability is initially recognized, its fair value is
generally the value of consideration paid or received. Subsequent to initial
recognition, the fair value of an investment quoted on an active market is
generally the bid price on the principal exchange the investment is traded on.
Investments that are escrowed or otherwise restricted on sale or transfer are
recorded at fair values which take into account the escrow terms or other
restrictions. In determining the fair value for such investments, the Company
considers the nature and length of the restriction, business risk of the
investee company, its stage of development, market potential, relative trading
volume and price volatility, liquidity and collateral of the security and the
size of Clairvest's ownership block as well as any other factors that may be
relevant to the ongoing and realizable value of the investments. The amounts at
which Clairvest's publicly-traded investments could be disposed of may differ
from this fair value and the differences could be material. Differences could
arise as the value at which significant ownership positions are sold is often
different than the quoted market price due to a variety of factors such as
premiums paid for large blocks or discounts due to illiquidity. Estimated costs
of disposition are not included in the fair value determination.
In the absence of an active market, the fair values are determined by management
using the appropriate valuation methodologies after considering the history and
nature of the business; operating results and financial conditions; the general
economic, industry and market conditions; capital market and transaction market
conditions; contractual rights relating to the investment; public market
comparables; private market transactions multiples and, where applicable, other
pertinent considerations. The process of valuing investments for which no active
market exists is inevitably based on inherent uncertainties and the resulting
values may differ from values that would have been used had an active market
existed. The amounts at which Clairvest's privately-held investments could be
disposed of may differ from the fair value assigned and the differences could be
material. Estimated costs of disposition are not included in the fair value
determination.
In determining the fair value of public company warrants, for which the
underlying security is traded on a recognized securities exchange, and if there
are sufficient and reliable observable market inputs, including exercise price
and term of the warrants, market interest rate, and current market price,
expected dividends and volatility of the underlying security, a valuation
technique is used. If market inputs are insufficient or unreliable, the warrants
are valued at intrinsic value, which is equal to the higher of the closing bid
price of the underlying security less the exercise price of the warrant, or nil.
For private company warrants, the underlying security for which is not traded on
a recognized securities exchange, the fair value is determined consistently with
other investments which do not have an active market as described above.
A change to an estimate with respect to Clairvest's corporate investments would
impact the carrying value of corporate investments and net unrealized gains
(losses) on corporate investments.
The process of determining future income tax assets and liabilities requires
management to exercise judgment while considering the anticipated timing of
disposal of corporate investments, and proceeds thereon, tax planning
strategies, changes in tax laws and rates, and loss carry-forwards. Future
income tax assets are only recognized to the extent that in the opinion of
management, it is more likely than not that the future income tax asset will be
realized. A change to an accounting estimate with respect to future income taxes
would impact future tax asset or liability and income tax expense.
OPERATING RESULTS
Net income for the third quarter of fiscal 2010 was $2.3 million compared with
net loss of $0.6 million for the third quarter of fiscal 2009. The net income
for the third quarter of fiscal 2010 is comprised primarily of $5.9 million of
net corporate investment gains, net of $3.4 million of net operating losses and
$0.2 million of income tax expense. This compares with $2.6 million of net
corporate investment losses, $1.8 million of net operating income and $0.2
million of income tax recoveries for the third quarter of fiscal 2009.
The net corporate investment gains of $5.9 million for the third quarter of
fiscal 2010 comprised primarily of unrealized gains on KUBRA Data Transfer
Limited ("Kubra"), Landauer Metropolitan Inc. ("Landauer") and Van-Rob Inc.
("Van-Rob").
Distributions and interest income for the quarter were $2.3 million, compared
with $2.8 million for the same quarter last year. Distributions and interest
income for the third quarter of fiscal 2010 included income earned on cash, cash
equivalents and temporary investments of $0.6 million. Distributions and
interest income for the third quarter of fiscal 2009 included income earned on
cash, cash equivalents and temporary investments of $1.1 million.
Clairvest earned $0.3 million in net management fees during the quarter for its
services in the administration of Clairvest Equity Partners Limited Partnership
("CEP") portfolio and $0.2 million in advisory and other fees from its corporate
investments. The CEP management fees are reduced to the extent of 75% of fees
earned by Clairvest from joint Clairvest/CEP corporate investments.
Administration and other expenses for the quarter were $6.3 million, compared
with $2.3 million for the same quarter last year. Included in administrative and
other expenses for the third quarter of fiscal 2010 were management bonuses
totaling $3.4 million and $0.2 million of stock-based compensation expense as a
result of an increase in the trading price of Clairvest's common shares.
Included in administrative and other expenses for the third quarter of fiscal
2009 were management bonuses totaling $0.5 million and $0.8 million of
stock-based compensation recovery as a result of a decrease in the trading price
of Clairvest's common shares.
Finance and foreign exchange expense recovery of $0.1 million for the third
quarter of fiscal 2010 represented foreign exchange gains of $0.2 million net of
$0.1 million in interest expense and bank charges. The foreign exchange gains
were driven by gains realized on U.S. dollar foreign exchange forward contracts
entered into in anticipation of future investment gains. Finance and foreign
exchange expense of $0.2 million for the third quarter of fiscal 2009 comprised
of $0.1 million in foreign exchange expenses and $0.1 million in interest and
bank charges.
SUMMARY OF QUARTERLY RESULTS
----------------------------
Net income
Quarterly results Gross Net Net income (loss) per
($000's except per revenue income (loss) per common share
share information) $ (loss) $ common share $ fully diluted(i) $
----------------------------------------------------------------------------
December 31, 2009 8,747 2,268 0.14 0.14
September 30, 2009 5,520 3,692 0.23 0.23
June 30, 2009 6,003 662 0.04 0.04
March 31, 2009 8,643 3,822 0.24 0.23
----------------------------------------------------------------------------
December 31, 2008 1,658 (606) (0.04) (0.04)
September 30, 2008 5,406 2,558 0.16 0.16
June 30, 2008 29,873 20,314 1.27 1.23
March 31, 2008 8,469 5,216 0.33 0.32
(i) The sum of reported quarterly net income (loss) per common share may not
equal to the full year reported net income (loss) per common share due
to rounding and on the fully diluted, the anti-dilutive effect of any
quarters where the Company reported a net loss.
Significant variations arise in the quarterly results due to unrealized gains
(losses) on corporate investments, which result from Clairvest re-valuing its
corporate investments on a quarterly basis, and stock-based compensation due to
the movement in the trading price of Clairvest's common shares. Corporate
investments are re-valued when conditions warrant an adjustment to the fair
value of the corporate investment.
FINANCIAL POSITION AND LIQUIDITY
Clairvest has sufficient capital to support its current and anticipated new
investments. In addition to cash, cash equivalents and temporary investments of
$163.1 million at December 31, 2009, Clairvest has a $20.0 million credit
facility with a Canadian chartered bank, all of which was available at December
31, 2009. Cash equivalents consist of deposits in savings accounts, term
deposits and fixed income mutual funds which have maturities less than 90 days
from date of acquisition. Temporary investments consist of corporate bonds and
guaranteed investment certificates rated not below A- and preferred shares rated
not below P-2 which have maturities greater than 90 days from the date of
acquisition. The maturity dates of these temporary investments range from June
2010 through to December 2012.
During the fourth quarter of fiscal 2009, Clairvest filed a normal course issuer
bid enabling it to purchase up to 797,678 common shares during the 12-month
period ending March 5, 2010. No shares were purchased under the bid during the
quarter. Subsequent to quarter end, Clairvest's Board of Directors approved a
new normal course issuer bid to purchase up to 797,678 common shares on the
Toronto Stock Exchange during the 12-month period commencing March 6, 2010. The
new normal course issuer bid is subject to the approval of the Toronto Stock
Exchange. As at December 31, 2009, Clairvest had repurchased a total of
5,709,578 common and non-voting shares over the last six years.
15,953,566 common shares were outstanding at December 31, 2009.
Clairvest has corporate investments with a carrying value of $112.1 million.
Changes in the carrying value of Clairvest's corporate investments during the
third quarter of fiscal 2010 are primarily a result of follow-on investments
made, net unrealized gains on corporate investments and foreign exchange
valuation on foreign-denominated investments. Clairvest enters into foreign
exchange forward contracts to manage the risks arising from fluctuations in
exchange rates on its foreign denominated investments. Clairvest's corporate
investments increased $8.3 million during the third quarter of fiscal 2010.
Significant events relating to Clairvest's corporate investments, other than
with respect to net unrealized gains and foreign exchange valuations, are
described below.
Casino New Brunswick
During the third quarter of fiscal 2010, Clairvest funded an additional $3.0
million to Casino New Brunswick in the form of debentures, which are
non-interest bearing until Casino New Brunswick opens and bear interest at a
rate of 8% per annum thereafter. At December 31, 2009, the total amount funded
was $8.2 million.
Casino Marina del Sol
During the third quarter of fiscal 2010, Casino Marina del Sol ("Casino del
Sol") repaid in full a $0.7 million loan advanced by Clairvest during fiscal
2009. The loan was non-interest bearing and repayable on demand.
Wellington Financial Fund II
During the third quarter of fiscal 2010, Wellington Financial Fund II
("Wellington Fund II") distributed $0.8 million to Clairvest, thereby returning
all funds invested and reducing the fair value of Clairvest's investment in
Wellington Fund II to $0.2 million.
TRANSACTIONS WITH RELATED PARTIES
A wholly-owned subsidiary of Clairvest ("GP I") has entered into a Management
Agreement with the General Partner of CEP, appointing GP I as the Manager of
CEP. The General Partner is another wholly-owned subsidiary of Clairvest. The
Management Agreement provides that a management fee be paid to GP I as
compensation for its services in the administration of the portfolio of CEP. The
fee was calculated annually as 2% of committed capital until the fifth
anniversary of the last closing of CEP (August 21, 2006), and thereafter at 2%
of contributed capital less distributions on account of capital and any
write-downs of capital invested. The management fee is reduced to the extent of
75% of fees earned by Clairvest or GP I from corporate investments of CEP.
During the third quarter of fiscal 2010, GP I earned net management fees of $0.3
million as compensation for its services in the administration of the portfolio
of CEP. As per the Management Agreement, fees of $0.1 million from corporate
investments of CEP were netted against the management fees.
The General Partner of CEP is entitled to participate in distributions made by
CEP equal to 20% of net gains of CEP. These distributions to the General Partner
will be determined based on the overall performance of CEP and no such
distributions are permitted until CEP's limited partners have received amounts
equal to the sum of their contributed capital and a return equal to 6% per annum
compounded annually. The distributions received by the General Partner of CEP
will be allocated 50% to each of its limited partners, one of which is another
wholly-owned subsidiary of Clairvest ("Clairvest Subsidiary"), and the other of
which is another limited partnership (the "Participation Partnership"). The
limited partners of the Participation Partnership are principals and employees
of Clairvest and GP I (the "Participation Investors"). The Participation
Investors have purchased, at fair market value, units of the Participation
Partnership. From time to time, additional units in the Participation
Partnership may be purchased by the Participation Investors. At December 31,
2009, CEP had made distributions to the General Partner totaling $9.7 million,
50% of which, or $4.9 million, was allocated to Clairvest Subsidiary. If CEP
were to sell its corporate investments at their current fair values, the General
Partner would receive up to a further $15.7 million of distributions, 50% of
which, or $7.8 million, would be payable to Clairvest Subsidiary.
Clairvest is also the parent company of the two General Partners of Clairvest
Equity Partners III Limited Partnership ("CEP III") (GP I and "GP II"). GP I is
entitled to priority distribution from CEP III. The priority distribution is
calculated monthly as 0.1667% of commitment capital until the earlier of the
fifth anniversary of the month in which CEP III made its first investment
(August 2006) and the date on which CEP III is closed to new investments, and
thereafter 0.1667% of contributed capital net of distributions on account of
capital and any write-downs of capital invested. The priority distribution is
reduced to the extent of 75% of any fees earned by GP I from corporate
investments of CEP III. During the third quarter of fiscal 2010, CEP III
declared to GP I net priority distributions of $1.1 million. As per the Limited
Partnership Agreement, fees of $0.1 million from corporate investments of CEP
III were netted against the priority distributions. GP I is also entitled to
distributions made by CEP III equal to 2% of net gains of CEP III determined as
described below. To date, CEP III has not made any distributions to GP I other
than priority distributions.
GP II, a limited partnership, the General Partner of which is a wholly-owned
subsidiary of Clairvest, is entitled to participate in distributions made by CEP
III equal to 18% of net gains of CEP III. These distributions to GP II, and GP I
as noted above, will be determined based on the overall performance of CEP III.
No such distributions are permitted until CEP III's limited partners have
received amounts equal to the sum of their contributed capital and a return
equal to 8% per annum compounded annually. To date, CEP III has not made any
distributions to GP II. If CEP III were to sell its corporate investments at
their current fair values, GP I and GP II would not receive any distributions
other than the priority distributions described above. Any distributions
received by GP II will be allocated to each of its two limited partners, one of
which is Clairvest Subsidiary which will receive 44.4% of such distributions,
and the other of which is another limited partnership (the "Participation III
Partnership") which will receive 55.6% of such distributions. The limited
partners of the Participation III Partnership are principals and employees of
Clairvest and GP I (the "Participation III Investors"). The Participation III
Investors purchased, at fair market value, units of the Participation III
Partnership. From time to time, additional units in the Participation III
Partnership may be purchased by Participation III Investors.
GP II is also entitled to a carried interest in respect of CEP III Co-Investment
Limited Partnership ("CEP III Co-Invest") of 10% to June 23, 2008 and 8.25%
thereafter. CEP III Co-Invest was established in 2006 as the investment vehicle
through which Clairvest would co-invest alongside CEP III. Distributions
received by GP II from CEP III Co-Invest will be allocated 100% to the
Participation III Partnership.
Clairvest is also the parent company of the two General Partners of Clairvest
Equity Partners IV Limited Partnership ("CEP IV") (GP I and "GP III"). GP I is
entitled to priority distribution from CEP IV. The priority distribution is
calculated monthly as follows: i) from the month in which CEP IV makes its first
investment to the last day on which CEP III calculates its priority
distributions based on committed capital ("CEP III Termination Date"), 0.1667%
of capital allocated to specifically identifiable investments net of any
write-downs of capital invested; ii) from the CEP III Termination Date to the
fifth anniversary of the month of the earlier of the CEP III Termination Date
and the date of final closing of CEP IV, 0.1667% of committed capital; and iii)
thereafter 0.1667% of contributed capital net of distributions on account of
capital and any write-downs of capital invested. The priority distribution is
reduced to the extent of 63.8% of any fees earned by GP I from corporate
investments of CEP IV. GP I is also entitled to distributions made by CEP IV
equal to 2% of gains of CEP IV determined as described below. To date, CEP IV
has not made any distributions to GP I.
GP III, a limited partnership, the General Partner of which is a wholly-owned
subsidiary of Clairvest, is entitled to participate in distributions made by CEP
IV equal to 18% of net gains of CEP IV. These distributions to GP III, and GP I
as noted above, will be determined based on the overall performance of CEP IV.
No such distributions are permitted until CEP IV's limited partners have
received amounts equal to the sum of their contributed capital and a return
equal to 8% per annum compounded annually. To date, CEP IV has not made any
distributions to GP III. Any distributions received by GP III will be allocated
to each of its two limited partners, one of which is Clairvest Subsidiary which
will receive 44.4% of such distributions, and the other of which is another
limited partnership (the "Participation IV Partnership") which will receive
55.6% of such distributions. The limited partners of the Participation IV
Partnership are principals and employees of Clairvest and GP I (the
"Participation IV Investors"). The Participation IV Investors purchased, at fair
market value, units of the Participation IV Partnership. From time to time,
additional units in the Participation IV Partnership may be purchased by
Participation IV Investors.
GP III is also entitled to a carried interest in respect of CEP IV Co-Investment
Limited Partnership ("CEP IV Co-Invest") of 8.25%. CEP IV Co-Invest was
established in 2009 as the investment vehicle through which Clairvest would
co-invest alongside CEP IV. Distributions received by GP III from CEP IV
Co-Invest will be allocated 100% to the Participation IV Partnership.
At December 31, 2009, Clairvest had loans receivable from certain officers of
Clairvest and GP I (the "Officers") totaling $0.9 million. The loans are
interest bearing, have full recourse to the individual and are collateralized by
the common shares of Clairvest purchased by the Officers with a market value of
$0.9 million. At December 31, 2009, Clairvest also had loans receivable from
certain officers of a company affiliated with Clairvest totaling $0.7 million.
The loans are interest bearing and have full recourse to the individual.
Included in accounts receivable and other assets are receivables of $3.1 million
from Clairvest's investee companies, $0.6 million from CEP, $0.1 million from
CEP III and $2.8 million from CEP IV. Also included in accounts receivable and
other assets is a refundable deposit of $8.8 million paid to the State of Kansas
with respect to a gaming license application in Wichita, Kansas. Included in
accounts payable and accrued liabilities is $0.1 million owing to Clairvest's
investee companies.
Loans totaling $9.0 million, bearing interest at the prime rate, made by the
Company to CEP III during the third quarter of fiscal 2010 were repaid in full
during the quarter. Interest of $20,000 was earned from loans to CEP during the
third quarter of fiscal 2010.
During the third quarter of fiscal 2010, Clairvest earned $0.6 million in
distributions and interest income, and $0.2 million in fee income from its
investee companies.
OFF-BALANCE SHEET ARRANGEMENTS
Clairvest has committed to co-invest alongside CEP in all investments undertaken
by CEP. Clairvest's total co-investment commitment is $54.7 million, $3.5
million of which remains unfunded at December 31, 2009. Clairvest may only sell
all or a portion of a corporate investment that is a joint investment with CEP
if the manager of CEP, GP I, concurrently sells a proportionate number of
securities of that corporate investment held by CEP.
Clairvest has also committed to co-invest alongside CEP III in all investments
undertaken by CEP III. Clairvest's total co-investment commitment is $75.0
million, $25.4 million of which remains unfunded at December 31, 2009. Clairvest
may only sell all or a portion of a corporate investment that is a joint
investment with CEP III if the manager of CEP III, GP I, concurrently sells a
proportionate number of securities of that corporate investment held by CEP III.
Clairvest has also committed to co-invest alongside CEP IV in all investments
undertaken by CEP IV. Clairvest's total co-investment commitment is $100.0
million, all of which remains unfunded at December 31, 2009. Clairvest may only
sell all or a portion of a corporate investment that is a joint investment with
CEP IV if the manager of CEP IV, GP I, concurrently sells a proportionate number
of securities of that corporate investment held by CEP IV.
Clairvest has committed $25.0 million to Wellington Financial Fund III
("Wellington Fund III"), $12.5 million of which has been funded to December 31,
2009. At December 31, 2009, Clairvest has earned profit distributions totaling
$2.0 million through its ownership interest in the general partners of
Wellington Fund II and Wellington Fund III (the "Wellington Funds"). Clairvest
has guaranteed, up to the amounts received from the respective general partners,
the clawback provisions (the "Clawback") entered into by the general partners in
the event the limited partners of the Wellington Funds do not meet their return
threshold as specified in the respective Limited Partnership Agreement. At
December 31, 2009, there were no accruals made with respect to the Clawback.
Clairvest has guaranteed up to $3.0 million of CEP's obligations to a Schedule 1
Canadian chartered bank under CEP's foreign exchange forward contracts with the
bank.
Clairvest and CEP III entered into a US$13.0 million credit facility agreement
with a Schedule 1 Canadian chartered Bank to allow Clairvest and CEP III to
enter into foreign exchange contracts. Clairvest and CEP III are jointly and
severally liable on this credit facility.
Under Clairvest's Management Incentive Bonus Program (the "Program"), a bonus of
10% of after-tax cash income and realizations on certain Clairvest's corporate
investments would be paid to management annually as applicable. Amounts are
accrued under this Program to the extent that the cash income and investment
realizations have occurred and the bonus has become payable. At December 31,
2009, $0.8 million has been accrued under the Program. If Clairvest were to sell
its corporate investments at their current fair values, an additional bonus of
$1.4 million would be owing to management under this Program. As no such
realizations have occurred and the terms of the bonus plan with respect to these
corporate investments have not yet been fulfilled, the additional $1.4 million
has not been accrued at December 31, 2009. The Program does not apply to the
income generated by Clairvest through CEP III Co-Invest and CEP IV Co-Invest.
Clairvest enters into foreign exchange forward contracts to manage the risks
arising from fluctuations in exchange rates on its foreign denominated
investments. At December 31, 2009, Clairvest had entered into forward contracts
to sell US$53.6 million at an average rate of Canadian $1.1245 per U.S. dollar
through to August 2010. The fair value of these US dollar contracts at December
31, 2009 is a gain of $3.9 million. These contracts have been recognized on the
consolidated balance sheet as derivative instruments. US$2.6 million of these
forward contracts were entered into in anticipation of future growth in value of
the Company's U.S. denominated investments. The fair value of these contracts at
December 31, 2009 is a gain of $3,000.
Clairvest has also entered into forward contracts to sell Chilean Unidad de
Fomento (CLF) 0.7 million at an average rate of Canadian $41.8449 per CLF
through to January 2010. The fair value of these CLF contracts at December 31,
2009 is a loss of $0.9 million. These contracts have been recognized on the
consolidated balance sheet as derivative instruments.
During fiscal 2006, Clairvest and a wholly-owned subsidiary sold their interests
in Signature Security Group Holdings Pty Limited ("Signature") and a related
company as part of a sale of 100% of Signature and the related company. As part
of the transaction, the subsidiary has indemnified the purchaser for various
potential claims which will reduce over time.
Clairvest, together with CEP, has guaranteed to fund any operating deficiencies
of the Tsuu T'ina charitable casino for a specified period of time. The amount
of the guarantee is allocated 75% to CEP, to the extent that the amounts paid
thereunder are within the limits of the CEP Limited Partnership Agreement, with
the remainder being allocated to Clairvest. Any amounts paid under the guarantee
will result in additional debentures being granted to Clairvest and CEP,
allocated on the same basis as the participation between Clairvest and CEP in
the guarantee funding. As at December 31, 2009, no amounts subject to this
guarantee have been funded.
Clairvest, together with CEP III, has guaranteed to fund 50% of any operating
deficiencies upon the opening of Casino del Sol for a specified period of time.
Amounts paid under the guarantee will be allocated 75% to CEP III to the extent
that the amounts paid thereunder are within the limits of the CEP III Limited
Partnership Agreement, with the remainder being allocated to Clairvest. Any
amounts paid under the guarantee will result in additional equity being granted
to Clairvest and CEP III, allocated on the same basis as the participation
between Clairvest and CEP III in the guarantee funding. As at December 31, 2009,
no amounts subject to this guarantee have been funded.
Clairvest, together with CEP III, has guaranteed to fund any cost overruns
during the construction of Casino New Brunswick, as well as any operating
deficiencies upon the opening of the casino for a specified period of time. The
amount of the guarantee is allocated 75% to CEP III, to the extent that the
amounts paid thereunder are within the limits of the CEP III Limited Partnership
Agreement, with the remainder being allocated to Clairvest. Any amounts paid
under the guarantee will result in additional debentures being granted to
Clairvest and CEP III, allocated on the same basis as the participation between
Clairvest and CEP III in the guarantee funding. As at December 31, 2009, no
amounts subject to this guarantee have been funded.
As part of the holding structure of Casino del Sol, Clairvest, together with CEP
III, borrowed $32.1 million through an acquisition entity from an unrelated
financial institution, while another acquisition entity deposited $32.1 million
with the financial institution as security for the loan. Clairvest intends to
settle the loan, the deposit and related interest accruals simultaneously upon
the divestiture of the investment in Casino del Sol, and as a result, the
deposit and the loan, and the interest revenue and expense have been presented
on a net basis. Clairvest's ownership of both acquisition vehicles was 23.8% at
December 31, 2009, with CEP III owning 71.5% and the remainder owned by
unrelated third party investors.
As part of the holding structure of Latin Gaming Osorno S.A. ("Casino Osorno"),
Clairvest borrowed $14.8 million through an acquisition entity from an unrelated
financial institution, while another acquisition entity deposited $14.8 million
with the financial institution as security for the loan. Clairvest intends to
settle the loan, the deposit and related interest accruals simultaneously upon
the divestiture of the investment in Casino Osorno, and as a result, the deposit
and the loan, and the interest revenue and expense have been presented on a net
basis. Clairvest's ownership of both acquisition vehicles was 100% at December
31, 2009.
As part of the holding structure of Latin Gaming Chile S.A. ("Latin Gaming"),
Clairvest borrowed $8.3 million through an acquisition entity from an unrelated
financial institution, while another acquisition entity deposited $8.3 million
with the financial institution as security for the loan. Clairvest intends to
settle the loan, the deposit and related interest accruals simultaneously upon
the divestiture of the investment in Latin Gaming, and as a result, the deposit
and the loan, and the interest revenue and expense have been presented on a net
basis. Clairvest's ownership of both acquisition vehicles was 100% at December
31, 2009.
In connection with its normal business operations, Clairvest is from time to
time named as a defendant in actions for damages and costs allegedly sustained
by plaintiffs. While it is not possible to estimate the outcome of the various
proceedings at this time, Clairvest does not believe that it will incur any
material losses in connection with such actions.
CURRENT ENVIRONMENT
With economic conditions beginning to improve in the third quarter of fiscal
2010, Clairvest is in a strong capital position to benefit from advantageous
enterprise valuations and attract new limited partners as a result of its
historical performance.
Subsequent to quarter end, the State of New York selected Aqueduct Entertainment
Group LLC ("AEG") to negotiate an agreement to operate a new casino at the
Aqueduct Racetrack in Queens, New York (the "Aqueduct Project"). The AEG
consortium includes Clairvest, Navegante Group Inc., GreenStar Services
Corporation, Levine Builders and Turner Construction. Coming to an agreement
with the New York State over the Aqueduct Project remains subject to a number of
conditions and regulatory approvals.
RISK MANAGEMENT
The private equity investment business involves accepting risk for potential
return, and is therefore affected by a number of economic factors, including
changing economic environments, capital markets and interest rates. Clairvest
continually reviews and adjusts its investment strategy and its capital resource
allocation policies considering, amongst other factors, market conditions.
Clairvest's current liquidity position allows the Company to support its
investee companies and acquisitions as appropriate. The Company maintains a
conservative liquidity position that exceeds all liabilities payable on demand.
The Company invests its cash equivalents and temporary investments in liquid
assets such that they are available to cover any potential funding commitments
and guarantees. In addition, the Company maintains a credit facility with a
Schedule 1 Canadian chartered bank.
As of December 31, 2009, Clairvest's corporate investment portfolio is
diversified across 12 companies in 7 industries and 3 countries. Concentration
risk by industry and by country is disclosed in note 13 to the interim financial
statements. Certain industries, particularly the automotive related industry,
the oil field service industry and the financial services industry, may
experience a significant negative impact to their profitability and liquidity
positions given the current economic environment. The Company has considered
these economic events and indicators in the valuation of its corporate
investments.
A number of investee companies may also be subject to foreign exchange risk. A
significant change in foreign exchange rates can have an impact to the
profitability of these entities and in turn the Company's fair value of these
corporate investments. Certain of the Company's corporate investments are also
held in the form of subordinated debentures. Significant fluctuations in market
interest rates can have a significant impact in the fair value of these
investments.
Clairvest also actively reviews its hedging strategy to ensure the values of all
foreign denominated investments are protected against currency fluctuations. The
Company manages counterparty credit risk on derivative financial instruments by
only contracting with counterparties which are Schedule 1 Canadian chartered
banks.
Clairvest is also subject to credit risk on its accounts receivables, a
significant portion of which is with its investee companies. The Company manages
this risk through its oversight responsibilities with existing investee
companies and by reviewing the financial condition of investee companies
regularly.
Clairvest considers the capital it manages to be the amounts it has in cash,
cash equivalents, temporary investments and corporate investments. Clairvest
also manages the third-party capital invested in CEP, CEP III and CEP IV. At
December 31, 2009, Clairvest had cash, cash equivalents and temporary
investments of $163.1 million, in addition to $112.1 million of corporate
investments. Clairvest also had access to $261.9 million of uncalled committed
third-party capital for acquisitions through CEP, CEP III and CEP IV at December
31, 2009. Clairvest's objectives in managing capital are disclosed in note 14 to
the interim financial statements.
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
During the third quarter of fiscal 2010, Clairvest continued to evaluate the
impact of adopting International Financial Reporting Standards ("IFRS") and is
in the process of finalizing its IFRS policies. The Company continues to monitor
ongoing changes to IFRS and adjusts its transition and implementation plans
accordingly. The Company has established formal communications with the Audit
Committee to ensure timely decisions are made on key issues and risks. However,
at December 31, 2009, the Company has not yet determined the full impact of IFRS
on Clairvest's consolidated financial statements.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
In accordance with National Instrument 52-109, "Certification of Disclosure in
Issuers' Annual and Interim Filings", issued by the Canadian Securities
Administrators ("CSA"), management has evaluated the effectiveness of
Clairvest's disclosure controls and procedures as of December 31, 2009.
Management has concluded that the disclosure controls and procedures are
effective as of December 31, 2009 based on this evaluation.
National Instrument 52-109 also requires certification from the Chief Executive
Officers and Chief Financial Officer to certify their responsibilities for
establishing and maintaining internal controls with regards to the reliability
of financial reporting and the preparation of financial statements in accordance
with Canadian generally accepted accounting principles. Management has evaluated
Clairvest's design effectiveness of internal controls over financial reporting
for the quarter ended December 31, 2009. Management has concluded that the
design effectiveness of internal controls over financial reporting are effective
as of December 31, 2009 based on this evaluation. No changes were made to
internal controls over financial reporting during the quarter ended December 31,
2009 that have materially affected, or are reasonably likely to materially
affect, internal controls over financial reporting.
A number of the matters discussed in this MD&A deal with potential future
circumstances and developments and may constitute "forward-looking" statements.
These forward-looking statements can generally be identified as such because of
the context of the statements and often include words such as the Company
"believes", "anticipates", "expects", "plans", "estimates" or words of a similar
nature.
The forward-looking statements are based on current expectations and are subject
to known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The impact of any one risk factor on
a particular forward-looking statement is not determinable with certainty as
such factors are interdependent upon other factors, and management's course of
action would depend upon its assessment of the future considering all
information then available.
All subsequent forward-looking statements, whether written or oral, attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The Company assumes no obligation to
update forward-looking statements should circumstances or management's estimates
or opinions change.
CLAIRVEST GROUP INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31 March 31
$000's 2009 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
Cash and cash equivalents (Notes 4,
10 and 13) $ 68,968 $ 112,272
Temporary investments (Notes 4 and 13) 94,132 72,140
Accounts receivable and other assets (Note 8i) 18,701 8,463
Income taxes receivable 7,716 189
Loans receivable (Notes 8j) 182 8,549
Derivative instruments (Notes 11 and 13) 3,941 -
Future tax asset 2,102 3,526
Corporate investments (Notes 6 and 13) 112,111 102,865
-----------------------------
$ 307,853 $ 308,004
-----------------------------
-----------------------------
Liabilities
Accounts payable and accrued liabilities
(Notes 8i, 9 and 12g) $ 6,730 $ 7,932
Income taxes payable 1,118 2,025
Derivative instruments (Notes 11 and 13) 880 5,523
Future tax liability 4,678 4,049
Stock-based compensation (Note 9) 4,037 3,092
-----------------------------
17,443 22,621
-----------------------------
Contingencies, commitments and guarantees
(Note 12)
Shareholders' Equity
Share capital (Note 7) 82,823 82,823
Retained earnings 207,587 202,560
-----------------------------
290,410 285,383
-----------------------------
$ 307,853 $ 308,004
-----------------------------
-----------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the quarters ended December 31
(unaudited)
Quarter ended Nine months ended
December December
$000's (except per share information) 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net corporate investment gains (losses)
Net realized gains (losses) on
corporate investments (Note 5) $ (42) $ - $ 153 $ 25,335
Net unrealized gains (losses) on
corporate investments 5,962 (2,599) 6,727 (216)
-------------------------------------
5,920 (2,599) 6,880 25,119
-------------------------------------
Other income
Distributions and interest income
(Note 8) 2,317 2,810 11,853 8,689
Dividend income (Note 8k) 47 914 147 1,547
Management fees (Note 8a) 258 274 770 893
Advisory and other fees (Note 8k) 205 259 620 675
-------------------------------------
2,827 4,257 13,390 11,804
-------------------------------------
Expenses
Administration and other expenses
(Note 9) (6,329) (2,299) (14,462) (10,202)
Finance and foreign exchange
(expenses) gains 66 (157) 918 (541)
-------------------------------------
(6,263) (2,456) (13,544) (10,743)
-------------------------------------
Income (loss) before income taxes 2,484 (798) 6,726 26,180
Income tax (expense) recovery (216) 192 (104) (3,914)
-------------------------------------
Net income (loss) $ 2,268 $ (606) $ 6,622 $ 22,266
-------------------------------------
Basic net income (loss) per share $ 0.14 $(0.04) $ 0.41 $ 1.40
-------------------------------------
Fully diluted net income (loss)
per share $ 0.14 $(0.04) $ 0.41 $ 1.36
-------------------------------------
-------------------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the quarters ended December 31
(unaudited)
Quarter ended Nine months ended
December 31 December 31
$000's 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings, beginning
of period $ 205,319 $ 199,344 $ 202,560 $ 188,066
Net income (loss) 2,268 (606) 6,622 22,266
----------------------------------------------
207,587 198,738 209,182 210,332
Dividends declared - - (1,595) (11,594)
----------------------------------------------
Retained earnings, end
of period $ 207,587 $ 198,738 $ 209,587 $ 198,738
----------------------------------------------
----------------------------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the quarters ended December 31
(unaudited)
Quarter ended Nine months ended
December 31 December 31
$000's 2009 2008 2009 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Net income (loss) $ 2,268 $ (606) $ 6,622 $ 22,266
Add (deduct) items not
involving a current cash
outlay
Amortization of fixed assets 84 75 236 223
Stock-based compensation
expense (recovery) 239 (844) 945 (914)
Future income tax expense 1,266 315 2,053 910
Net realized losses (gains)
on investments 42 - (153) (25,335)
Net unrealized losses
(gains) on investments (5,962) 2,599 (6,727) 216
Non-cash items relating
to foreign exchange forward
contracts 653 4,544 (9,386) 4,213
Non-cash items relating to
corporate investments (1,111) (5,594) 7,369 (5,701)
---------------------------------------------
(2,521) 489 959 (4,122)
Net change in non-cash
working capital balances
related to operations
(Note 10) 1,240 (2,131) (20,110) (14,239)
---------------------------------------------
Cash used in operating
activities (1,281) (1,642) (19,151) (18,361)
---------------------------------------------
Investing activities
Acquisition of corporate
investments (2,977) (3,722) (16,032) (29,714)
Proceeds on corporate
investments 928 - 5,492 28,125
Return of capital from
corporate investments 805 - 805 60
Proceeds on realization
(cost) of foreign
exchange forward contracts 426 (1,431) 801 (2,184)
Net proceeds on sale
(purchase) of temporary
investments (19,861) (17,263) (21,992) (5,048)
Loans advanced (Notes 8j) (9,091) (2,884) (39,519) (10,859)
Receipt of loans advanced
(Notes 8j) 9,009 1,835 47,887 25,450
---------------------------------------------
Cash provided by (used in)
investing activities (20,761) (23,465) (22,558) 5,830
---------------------------------------------
Financing activities
Issuance of share capital - 64 - 64
Cash dividends paid - - (1,595) (11,594)
Receipt of loans - 1,083 - 3,249
---------------------------------------------
Cash provided by (used in)
financing activities - 1,147 (1,595) (8,281)
---------------------------------------------
Net decrease in cash and
cash equivalents (22,042) (23,960) (43,304) (20,812)
Cash and cash equivalents,
beginning of period 91,010 60,468 112,272 57,320
---------------------------------------------
Cash and cash equivalents,
end of period (Note 10) $ 68,968 $ 36,508 $ 68,968 $ 36,508
---------------------------------------------
---------------------------------------------
Supplemental cash flow
information
Income taxes paid $ 72 $ 1,161 $ 6,491 $ 7,119
Interest paid $ 335 $ 6 $ 1,426 $ 258
---------------------------------------------
---------------------------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 (Tabular Dollar Amounts in Thousands)
(unaudited)
1. NATURE OF ACTIVITIES AND BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Clairvest Group Inc.
("Clairvest" or the "Company") are based upon accounting principles consistent
with those used and described in the annual audited consolidated financial
statements. The disclosures contained in these unaudited interim consolidated
financial statements do not include all requirements of generally accepted
accounting principles for annual financial statements. As a result, the
unaudited interim consolidated financial statements should be read in
conjunction with the annual audited consolidated financial statements for the
year ended March 31, 2009.
In accordance with National Instrument 51-102 released by the Canadian
Securities Administrators, the Company discloses that its auditors have not
reviewed the unaudited interim consolidated financial statements for the quarter
ended December 31, 2009.
In accordance with Accounting Guideline 18 ("AcG-18"), the Company designated
its temporary investments and its corporate investments as held-for-trading and
carries them at fair value. Clairvest has also designated its receivables and
payables as held-for-trading in accordance with the Canadian Institute of
Chartered Accountants Handbook ("CICA Handbook") Section 3855. Accordingly, each
of Clairvest's financial assets and liabilities is fair valued on each
consolidated balance sheet date.
When a financial asset or liability is initially recognized, its fair value is
generally the value of consideration paid or received. Subsequent to initial
recognition, the fair value of an investment quoted on an active market is
generally the bid price on the principal exchange the investment is traded on.
Investments that are escrowed or otherwise restricted on sale or transfer are
recorded at fair values which take into account the escrow terms or other
restrictions. In determining the fair value for such investments, the Company
considers the nature and length of the restriction, business risk of the
investee company, its stage of development, market potential, relative trading
volume and price volatility, liquidity and collateral of the security and the
size of Clairvest's ownership block as well as any other factors that may be
relevant to the ongoing and realizable value of the investments. The amounts at
which Clairvest's publicly-traded investments could be disposed of may differ
from this fair value and the differences could be material. Differences could
arise as the value at which significant ownership positions are sold is often
different than the quoted market price due to a variety of factors such as
premiums paid for large blocks or discounts due to illiquidity. Estimated costs
of disposition are not included in the fair value determination.
In the absence of an active market, the fair values are determined by management
using the appropriate valuation methodologies after considering the history and
nature of the business; operating results and financial conditions; the general
economic, industry and market conditions; capital market and transaction market
conditions; contractual rights relating to the investment; public market
comparables; private market transactions multiples and, where applicable, other
pertinent considerations. The process of valuing investments for which no active
market exists is inevitably based on inherent uncertainties and the resulting
values may differ from values that would have been used had an active market
existed. The amounts at which Clairvest's privately-held investments could be
disposed of may differ from the fair value assigned and the differences could be
material. Estimated costs of disposition are not included in the fair value
determination.
In determining the fair value of public company warrants, for which the
underlying security is traded on a recognized securities exchange, and if there
are sufficient and reliable observable market inputs, including exercise price
and term of the warrants, market interest rate, and current market price,
expected dividends and volatility of the underlying security, a valuation
technique is used. If market inputs are insufficient or unreliable, the warrants
are valued at intrinsic value, which is equal to the higher of the closing bid
price of the underlying security, less the exercise price of the warrant, or
nil. For private company warrants, the underlying security for which is not
traded on a recognized securities exchange, the fair value is determined
consistently with other investments which do not have an active market as
described above.
2. ADOPTION OF NEW ACCOUNTING POLICIES
Effective fiscal 2010, the Company adopted the Emerging Issues Committee
Abstract 173 ("EIC-173"), "Credit Risk and the Fair Value of Financial Assets
and Financial Liabilities". EIC-173 requires the Company's own credit risk and
the credit risk of the counterparty to be taken into account in determining the
fair value of financial assets and financial liabilities, including derivative
instruments. The adoption of EIC 173 did not have a significant impact on the
consolidated financial statements.
In February 2008, the Canadian Accounting Standards Board confirmed that the use
of International Financial Reporting Standards ("IFRS") will be required for
Canadian publicly accountable enterprises for years beginning on or after
January 1, 2011. As a result, Clairvest must adopt IFRS commencing April 1,
2011. Clairvest is currently evaluating the impact of adopting IFRS.
3. BANKING FACILITY
Clairvest has a $20.0 million line of credit available, bearing interest at
prime plus 0.5%. The line of credit available at December 31, 2009 is $20.0
million (March 2009 - $20.0 million) and is based on debt covenants within the
banking arrangement. No amounts were drawn during the quarter.
4. CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash equivalents consist of deposits in savings accounts, term deposits and
fixed income mutual funds which have maturities less than 90 days from the date
of acquisition.
Temporary investments have maturities greater than 90 days from the date of
acquisition and through to December 2012. Temporary investments consist of
corporate bonds, guaranteed investment certificates and preferred shares. The
yield on these investments ranges between 1.4% and 4.9% (March 2009 - between
2.7% and 5.6%) with a weighted average rate of pre-tax return of 3.1% (March
2009 - 3.7%).
December 31, 2009 March 31, 2009
--------------------------------------------------------
--------------------------------------------------------
Due in 1 year Due after
or less 1 year Total Total
--------------------------------------------------------
Corporate bonds $ 13,321 $ 34,904 $ 48,225 $ 51,585
Guaranteed
investment
certificates 5,008 37,272 42,280 -
Preferred shares - 3,627 3,627 5,507
Term deposits - - - 15,048
--------------------------------------------------------
Total $ 18,329 $ 75,803 $ 94,132 $ 72,140
--------------------------------------------------------
--------------------------------------------------------
5. NET CORPORATE INVESTMENT GAINS (LOSSES)
Net realized gains (losses) on corporate investments for the quarters and
nine months ended December 31 comprised of the following:
Quarter ended Nine months ended
December 31 December 31
$000's 2009 2008 2009 2008
-------------------------------------------
-------------------------------------------
Net realized gains (losses)
on investments $ 199 $ - $ (3,538) $ 27,332
Previously recognized net
unrealized (gains) losses (241) - 3,691 (1,997)
-------------------------------------------
$ (42) $ - $ 153 $ 25,335
-------------------------------------------
6. CORPORATE INVESTMENTS
December 31, 2009 March 31, 2009
-----------------------------------------------------------------
-----------------------------------------------------------------
Fair value Cost Difference Fair value Cost Difference
-----------------------------------------------------------------
Casino
Marina
del Sol $ 10,287 $ 9,911 $ 376 $ 11,571 $ 10,624 $ 947
Casino
New
Brunswick 8,171 8,171 - 2,342 2,342 -
Kubra
Data
Transfer
Limited 6,493 2,150 4,343 5,962 2,150 3,812
Landauer
Metropolitan
Inc. 7,762 4,238 3,524 5,015 3,636 1,379
Latin
Gaming
Chile S.A. 12,866 12,443 423 11,461 9,132 2,329
Latin Gaming
Osorno S.A. 17,969 16,618 1,351 18,830 16,618 2,212
Light Tower
Rentals Inc. 6,139 5,884 255 7,368 5,884 1,484
Lyophilization
Services of
New England
Inc. 5,056 6,454 (1,398) 6,068 6,454 (386)
N-Brook
Mortgage LP 2,625 5,037 (2,412) 3,115 5,037 (1,922)
PEER 1
Network
Enterprises
Inc. 5,289 6,291 (1,002) - - -
Tsuu T'ina
Gaming
Limited
Partnership 7,992 5,625 2,367 7,603 5,625 1,978
Van-Rob Inc. 6,186 5,000 1,186 3,750 5,000 (1,250)
Wellington
Financial
Fund II 230 - 230 986 726 260
Wellington
Financial
Fund III 13,950 12,476 1,474 13,110 12,476 634
-----------------------------------------------------------------
111,015 100,298 10,716 97,181 85,704 11,477
-----------------------------------------------------------------
Other
investments 1,096 238 858 5,684 4,772 912
-----------------------------------------------------------------
$ 112,111 $ 100,536 $ 11,574 $ 102,865 $ 90,476 $ 12,389
-----------------------------------------------------------------
The cost and fair value of corporate investments do not reflect foreign exchange
gains or losses on the foreign exchange forward contracts entered into as hedges
against these investments. Details of significant events are described below.
During the third quarter of fiscal 2010, Clairvest funded an additional $3.0
million to Casino New Brunswick in the form of debentures, which are
non-interest bearing until Casino New Brunswick opens and bear interest at a
rate of 8% per annum thereafter. At December 31, 2009, the total amount funded
was $8.2 million.
During the third quarter of fiscal 2010, Casino Marina del Sol ("Casino del
Sol") repaid in full a $0.7 million loan advanced by Clairvest during fiscal
2009. The loan was non-interest bearing and repayable on demand.
During the third quarter of fiscal 2010, Wellington Financial Fund II
("Wellington Fund II") distributed $0.8 million to Clairvest, thereby returning
all funds invested and reducing the fair value of Clairvest's investment in
Wellington Fund II to $0.2 million.
7. SHARE CAPITAL
During the fourth quarter of fiscal 2009, the Company filed a normal course
issuer bid enabling it to make purchases of up to 797,678 common shares in the
12-month period ending March 5, 2010. The Company has made no purchases under
this issuer bid. Subsequent to quarter end, Clairvest's Board of Directors
approved a new normal course issuer bid to purchase up to 797,678 common shares
on the Toronto Stock Exchange during the 12-month period commencing March 6,
2010. The new normal course issuer bid is subject to the approval of the Toronto
Stock Exchange. In total 2,544,424 common shares at a cost of $21.9 million have
been purchased under previous normal course issuer bids as of December 31, 2009.
An additional 934,200 common and 2,230,954 non-voting shares have been purchased
for cancellation from a financial institution outside of the normal course
issuer bid.
15,953,566 common shares were outstanding at December 31, 2009.
8. RELATED PARTY TRANSACTIONS
(a) A wholly-owned subsidiary of Clairvest ("GP I") has entered into a
Management Agreement with the General Partner of Clairvest Equity Partners
Limited Partnership ("CEP"), appointing GP I as the Manager of CEP. The General
Partner is another wholly-owned subsidiary of Clairvest. The Management
Agreement provides that a management fee be paid to GP I as compensation for its
services in the administration of the portfolio of CEP. The fee was calculated
annually as 2% of committed capital until the fifth anniversary of the last
closing of CEP (August 21, 2006), and thereafter at 2% of contributed capital
less distributions on account of capital and any write-downs of capital
invested. The management fee is reduced to the extent of 75% of fees earned by
Clairvest or GP I from corporate investments of CEP. During the third quarter of
fiscal 2010, GP I earned net management fees of $0.3 million (2009 - $0.3
million) as compensation for its services in the administration of the portfolio
of CEP. As per the Management Agreement, fees of $0.1 million (2009 - $0.1
million) from corporate investments of CEP were netted against the management
fees.
(b) The General Partner of CEP is entitled to participate in distributions made
by CEP equal to 20% of net gains of CEP. These distributions to the General
Partner will be determined based on the overall performance of CEP and no such
distributions are permitted until CEP's limited partners have received amounts
equal to the sum of their contributed capital and a return equal to 6% per annum
compounded annually. The distributions received by the General Partner of CEP
will be allocated 50% to each of its limited partners, one of which is another
wholly-owned subsidiary of Clairvest ("Clairvest Subsidiary"), and the other of
which is another limited partnership (the "Participation Partnership"). The
limited partners of the Participation Partnership are principals and employees
of Clairvest and GP I (the "Participation Investors"). The Participation
Investors have purchased, at fair market value, units of the Participation
Partnership. From time to time, additional units in the Participation
Partnership may be purchased by the Participation Investors. At December 31,
2009, CEP had made distributions to the General Partner totaling $9.7 million,
50% of which, or $4.9 million, was allocated to Clairvest Subsidiary. If CEP
were to sell its corporate investments at their current fair values, the General
Partner would receive up to a further $15.7 million of distributions, 50% of
which, or $7.8 million, would be payable to Clairvest Subsidiary.
(c) Clairvest is also the parent company of the two General Partners of
Clairvest Equity Partners III Limited Partnership ("CEP III") (GP I and "GP
II"). GP I is entitled to priority distribution from CEP III. The priority
distribution is calculated monthly as 0.1667% of committed capital until the
earlier of the fifth anniversary of the month in which CEP III made its first
investment (August 2006) and the date on which CEP III is closed to new
investments, and thereafter 0.1667% of contributed capital net of any
distribution on account of capital and write-downs of capital invested. The
priority distribution is reduced to the extent of 75% of fees earned by GP I
from corporate investments of CEP III. During the third quarter of fiscal 2010,
CEP III declared to GP I net priority distributions of $1.1 million (2009 - $1.0
million). As per the Limited Partnership Agreement, fees of $0.1 million (2009 -
$0.1 million) from corporate investments of CEP III were netted against the
priority distributions. GP I is also entitled to distributions made by CEP III
equal to 2% of gains of CEP III determined as described in note 8(d) below. To
date, CEP III has not made any distributions to GP I other than priority
distributions.
(d) GP II, a limited partnership, the general partner of which is a wholly-owned
subsidiary of Clairvest, is entitled to participate in distributions made by CEP
III equal to 18% of net gains of CEP III. These distributions to GP II, and GP I
as noted in note 8(c) above, will be determined based on the overall performance
of CEP III. No such distributions are permitted until CEP III's limited partners
have received amounts equal to the sum of their contributed capital and a return
equal to 8% per annum compounded annually. To date, CEP III has not made any
distributions to GP II. If CEP III were to sell its corporate investments at
their current fair values, GP I and GP II would not receive any distributions
other than the priority distributions described in note 8(c) above. Any
distributions received by GP II will be allocated to each of its two limited
partners, one of which is Clairvest Subsidiary which will receive 44.4% of such
distributions, and the other of which is another limited partnership (the
"Participation III Partnership") which will receive 55.6% of such distributions.
The limited partners of the Participation III Partnership are principals and
employees of Clairvest and GP I (the "Participation III Investors"). The
Participation III Investors have purchased, at fair market value, units of the
Participation III Partnership. From time to time, additional units in the
Participation III Partnership may be purchased by Participation III Investors.
(e) GP II is also entitled to a carried interest in respect of CEP III
Co-Investment Limited Partnership ("CEP III Co-Invest") of 10% to June 23, 2008
and 8.25% thereafter. CEP III Co-Invest was established in 2006 as the
investment vehicle through which Clairvest would co-invest alongside CEP III.
Distributions received by GP II from CEP III Co-Invest will be allocated 100% to
the Participation III Partnership.
(f) Clairvest is also the parent company of the two General Partners of
Clairvest Equity Partners IV Limited Partnership ("CEP IV") (GP I and "GP III").
GP I is entitled to priority distribution from CEP IV. The priority distribution
is calculated monthly as follows: i) from the month in which CEP IV makes its
first investment to the last day on which CEP III calculates its priority
distributions based on committed capital ("CEP III Termination Date"), 0.1667%
of capital allocated to specifically identifiable investments net of any
write-downs of capital invested; ii) from the CEP III Termination Date to the
fifth anniversary of the month of the earlier of the CEP III Termination Date
and the date of final closing of CEP IV, 0.1667% of committed capital; and iii)
thereafter 0.1667% of contributed capital net of distributions on account of
capital and any write-downs of capital invested. The priority distribution is
reduced to the extent of 63.8% of fees earned by GP I from corporate investments
of CEP IV. GP I is also entitled to distributions made by CEP IV equal to 2% of
gains of CEP IV determined as described in note 8(g) below. To date, CEP IV has
not made any distributions to GP I.
(g) GP III, a limited partnership, the general partner of which is a
wholly-owned subsidiary of Clairvest, is entitled to participate in
distributions made by CEP IV equal to 18% of net gains of CEP IV. These
distributions to GP III, and GP I as noted in note 8(f) above, will be
determined based on the overall performance of CEP IV. No such distributions are
permitted until CEP IV's limited partners have received amounts equal to the sum
of their contributed capital and a return equal to 8% per annum compounded
annually. To date, CEP IV has not made any distributions to GP III. Any
distributions received by GP III will be allocated to each of its two limited
partners, one of which is Clairvest Subsidiary which will receive 44.4% of such
distributions, and the other of which is another limited partnership (the
"Participation IV Partnership") which will receive 55.6% of such distributions.
The limited partners of the Participation IV Partnership are principals and
employees of Clairvest and GP I (the "Participation IV Investors"). The
Participation IV Investors have purchased, at fair market value, units of the
Participation IV Partnership. From time to time, additional units in the
Participation IV Partnership may be purchased by Participation IV Investors.
(h) GP III is also entitled to a carried interest in respect of CEP IV
Co-Investment Limited Partnership ("CEP IV Co-Invest") of 8.25%. CEP IV
Co-Invest was established in 2009 as the investment vehicle through which
Clairvest would co-invest alongside CEP IV. Distributions received by GP III
from CEP IV Co-Invest will be allocated 100% to the Participation IV
Partnership.
(i) Included in accounts receivable and other assets are share purchase loans
made to certain officers of the Company and GP I totaling $0.9 million (March
2009 $0.7 million). The share purchase loans bear interest fixed at the prime
rate on the date of drawdown less 1%, interest is paid annually, and the loans
have full recourse and are collateralized by the common shares of the Company
purchased by the officers with a market value of $0.9 million (March 2009 - $0.5
million). Also included in accounts receivable and other assets are other loans
made to certain officers of a company affiliated with Clairvest totaling $0.7
million (March 2009 $0.6 million). The loans to officers of a company affiliated
with Clairvest bear interest at rates commensurate with prime, and interest is
paid quarterly. Loans are repayable upon departure of the officer. Interest of
$12,000 was earned on the loans during the quarter. Also included in accounts
receivable and other assets are receivables of $3.1 million (March 2009 - $2.2
million) from Clairvest's investee companies, from CEP totaling $0.6 million
(March 2009 - 1.8 million), from CEP III totaling $0.1 million (March 2009 -
$1.2 million) and from CEP IV totaling $2.8 million (March 2009 - nil). Also,
included in accounts receivable and other assets is a refundable deposit of $8.8
million paid to the State of Kansas with respect to a gaming license application
in Wichita, Kansas. Included in accounts payable and accrued liabilities is $0.1
million (March 2009 - $0.5 million) owing to Clairvest's investee companies.
(j) Loans totaling $9.0 million, bearing interest at the prime rate, made by the
Company to CEP III during the third quarter of fiscal 2010 were repaid in full
during the quarter. Interest of $20,000 was earned from loans to CEP III during
the third quarter of fiscal 2010.
(k) During the third quarter of fiscal 2010, Clairvest earned $0.6 million (2009
- $0.6 million) in distributions and interest income, $0.2 million in fee income
(2009 - $0.3 million) and nil in dividends (2009 - $0.9 million) from its
investee companies.
9. STOCK-BASED COMPENSATION AND OTHER COMPENSATION PLANS
No options were issued or exercised during the third quarter of fiscal 2010. At
December 31, 2009, a total of 1,082,000 options were outstanding under
Clairvest's stock option plan.
As a result of a cash settlement feature in Clairvest's stock option plan,
Clairvest recognizes compensation expense based upon the intrinsic value of the
outstanding stock options at the balance sheet date, and the proportion of their
vesting periods that have elapsed. For the quarter ended December 31, 2009,
Clairvest recognized a stock-based compensation expense of $0.2 million.
As at December 31, 2009, $4.0 million (March 2009 - 3.1 million) has been
accrued under the Company's stock option plan.
As at December 31, 2009, a total of 152,371 (March 2009 123,636) Deferred Share
Units were held by directors of the Company, the accrual in respect of which was
$1.9 million (March 2009 - $1.4 million) and has been included in accounts
payable and accrued liabilities. For the quarter ended December 31, 2009,
Clairvest recognized an expense of $0.1 million with respect to Deferred Share
Units.
As at December 31, 2009, 120,000 (March 2009 - 105,000) Appreciation Deferred
Share Units were held by directors of the Company, the accrual in respect of
which is $10,000 (March 2009 - nil) and has been included in accounts payable
and accrued liabilities. For the quarter ended December 31, 2009, Clairvest
recognized an expense of $3,000 with respect to Appreciation Deferred Share
Units.
As at December 31, 2009, a total of 541,000 (March 2009 432,000) Book Value
Appreciation Rights Units were held by employees of Clairvest, GP I and a
company affiliated with Clairvest, the accrual in respect of which was $2.0
million (March 2009 - $1.5 million) and has been included in accounts payable
and accrued liabilities. For the quarter ended December 31, 2009, Clairvest
recognized an expense of $0.1 million with respect to Book Value Appreciation
Rights Units.
10. CONSOLIDATED STATEMENTS OF CASH FLOWS
Net change in non-cash working capital balances related to operations at
December 31 is detailed as follows:
2009 2008
-------------------------------
-------------------------------
Accounts receivable and other assets $ 2,007 $ (1,206)
Income taxes receivable (969) (417)
Accounts payable and accrued liabilities 203 377
Income taxes payable (1) (885)
-------------------------------
$ 1,240 $ (2,131)
-------------------------------
-------------------------------
Cash and cash equivalents at the balance sheet dates comprised of the
following:
December 31 March 31
2009 2009
-------------------------------
-------------------------------
Cash $ 2,650 $ 61,134
Cash equivalents 66,318 51,138
-------------------------------
$ 68,968 $ 112,272
-------------------------------
11. DERIVATIVE INSTRUMENTS
As at December 31, 2009, the Company had entered into foreign exchange forward
contracts as hedges against its foreign investments as follows:
Forward contracts to sell US$53.6 million (March 2009 - US$36.1 million) at an
average rate of Canadian $1.1245 per U.S. dollar (March 2009 - average rate of
$1.1722) through to August 2010. The fair value of these contracts at December
31, 2009 is a gain of $3.9 million (March 2009 - $3.2 million loss) and has been
recognized on the consolidated balance sheet as derivative instruments. US$2.6
million (March 2009 - US$7.1 million) of these forward contracts were entered
into in anticipation of future growth in the value of Clairvest's U.S.
denominated investments, as described in Note 13.
Forward contracts to sell Chilean Unidad de Fomento ("CLF") 0.7 million (March
2009 - CLF0.7 million) at an average rate of Canadian $41.8449 per CLF (March
2009 - average rate of $41.8148) through to January 2010. The fair value of
these contracts at December 31, 2009 is a loss of $0.9 million (March 2009 -
$2.3 million) and has been recognized on the consolidated balance sheet as
derivative instruments.
12. CONTINGENCIES, COMMITMENTS AND GUARANTEES
(a) Clairvest has committed to co-invest alongside CEP in all investments
undertaken by CEP. Clairvest's total co-investment commitment is $54.7 million,
$3.5 million (March 2009 - $4.0 million) of which remains unfunded at December
31, 2009. Clairvest may only sell all or a portion of a corporate investment
that is a joint investment with CEP if the manager of CEP, GP I, concurrently
sells a proportionate number of securities of that corporate investment held by
CEP.
(b) Clairvest has also committed to co-invest alongside CEP III in all
investments undertaken by CEP III. Clairvest's total co-investment commitment is
$75.0 million, $25.4 million (March 2009 - $39.8 million) of which remains
unfunded at December 31, 2009. Clairvest may only sell all or a portion of a
corporate investment that is a joint investment with CEP III if the manager of
CEP III, GP I, concurrently sells a proportionate number of securities of that
corporate investment held by CEP III.
(c) Clairvest has also committed to co-invest alongside CEP IV in all
investments undertaken by CEP IV. Clairvest's total co-investment commitment is
$100.0 million, all of which remains unfunded at December 31, 2009. Clairvest
may only sell all or a portion of a corporate investment that is a joint
investment with CEP IV if the manager of CEP IV, GP I, concurrently sells a
proportionate number of securities of that corporate investment held by CEP IV.
(d) Clairvest has also committed $25.0 million to Wellington Financial Fund III
("Wellington Fund III"), $12.5 million (March 2009 - $12.5 million) of which has
been funded at December 31, 2009. At December 31, 2009, Clairvest has received
profit distributions totaling $2.0 million (March 2009 - $2.0 million) through
its ownership interest in the general partner of Wellington Fund II and
Wellington Fund III (the "Wellington Funds"). Clairvest has guaranteed, up to
the amounts received from the respective general partners, the clawback
provisions (the "Clawback") entered into by the general partners in the event
the limited partners of the Wellington Funds do not meet their return threshold
as specified in the respective Limited Partnership Agreement. At December 31,
2009, there were no accruals made with respect to the Clawback (March 2009 -
$0.4 million).
(e) Clairvest has guaranteed up to $3.0 million of CEP's obligations to a
Schedule 1 Canadian chartered bank under CEP's foreign exchange forward
contracts with the bank.
(f) Clairvest and CEP III entered into a US$13.0 million credit facility
agreement with a Schedule 1 Canadian chartered bank to allow Clairvest and CEP
III to enter into foreign exchange contracts. Clairvest and CEP III are jointly
and severally liable on this credit facility.
(g) Under Clairvest's Incentive Bonus Program (the "Program"), a bonus of 10% of
after-tax cash income and realizations on certain Clairvest's corporate
investments would be paid to management annually as applicable. Amounts are
accrued under this Program to the extent that the cash income and investment
realizations have occurred and the bonus has become payable. At December 31,
2009, $0.8 million (March 2009 $2.8 million) has been accrued under the Program.
If Clairvest were to sell its corporate investments at their current fair
values, an additional bonus of $1.4 million would be owing to management under
this Program. As no such realizations have occurred and the terms of the bonus
plan with respect to these corporate investments have not yet been fulfilled,
the additional $1.4 million has not been accrued at December 31, 2009. The
Program does not apply to the income generated by Clairvest through CEP III
Co-Invest and CEP IV Co-Invest.
(h) During fiscal 2006, Clairvest and a wholly-owned subsidiary sold their
interests in Signature Security Group Holdings Pty Limited ("Signature") and a
related company as part of a sale of 100% of Signature and the related company.
As part of the transaction, the wholly-owned subsidiary has indemnified the
purchaser for various potential claims which will reduce over time.
(i) Clairvest, together with CEP, has guaranteed to fund any operating
deficiencies of the Tsuu T'ina charitable casino for a specified period of time.
The amount of the guarantee is allocated 75% to CEP, to the extent that the
amounts paid thereunder are within the limits of the CEP Limited Partnership
Agreement, with the remainder being allocated to Clairvest. Any amounts paid
under the guarantee will result in additional debentures being granted to
Clairvest and CEP, allocated on the same basis as the participation between
Clairvest and CEP in the guarantee funding. As at December 31, 2009, no amounts
subject to this guarantee have been funded.
(j) Clairvest, together with CEP III, has guaranteed to fund 50% of any
operating deficiencies upon the opening of Casino del Sol for a specified period
of time. Amounts paid under the guarantee will be allocated 75% to CEP III, to
the extent that the amounts paid thereunder are within the limits of the CEP III
Limited Partnership Agreement, with the remainder being allocated to Clairvest.
Any amounts paid under the guarantee will result in additional equity being
granted to Clairvest and CEP III, allocated on the same basis as the
participation between Clairvest and CEP III in the guarantee funding. As at
December 31, 2009, no amounts subject to this guarantee have been funded.
(k) Clairvest, together with CEP III, has guaranteed to fund any cost overruns
during the construction of Casino New Brunswick, as well as any operating
deficiencies upon the opening of the casino for a specified period of time. The
amount of the guarantee is allocated 75% to CEP III, to the extent that the
amounts paid thereunder are within the limits of the CEP III Limited Partnership
Agreement, with the remainder being allocated to Clairvest. Any amounts paid
under the guarantee will result in additional debentures being granted to
Clairvest and CEP III, allocated on the same basis as the participation between
Clairvest and CEP III in the guarantee funding. As at December 31, 2009, no
amounts subject to this guarantee have been funded.
(l) As part of the holding structure of Casino del Sol, Clairvest, together with
CEP III, borrowed $32.1 million through an acquisition entity from an unrelated
financial institution, while another acquisition entity deposited $32.1 million
with the financial institution as security for the loan. Clairvest intends to
settle the loan, the deposit and related interest accruals simultaneously upon
the divestiture of the investment in Casino del Sol, and as a result, the
deposit and the loan, and the interest revenue and expense have been presented
on a net basis. Clairvest's ownership of both acquisition vehicles was 23.8% at
December 31, 2009, with CEP III owning 71.5% and the remainder owned by
unrelated third party investors.
(m) As part of the holding structure of Latin Gaming Osorno S.A. ("Casino
Osorno"), Clairvest borrowed $14.8 through an acquisition entity from an
unrelated financial institution, while another acquisition entity deposited
$14.8 million with the financial institution as security for the loan. Clairvest
intends to settle the loan, the deposit and related interest accruals
simultaneously upon the divestiture of the investment in Casino Osorno, and as a
result, the deposit and the loan, and the interest revenue and expense have been
presented on a net basis. Clairvest's ownership of both acquisition vehicles was
100% at December 31, 2009.
(n) As part of the holding structure of Latin Gaming Chile S.A. ("Latin
Gaming"), Clairvest borrowed $8.3 million through an acquisition entity from an
unrelated financial institution, while another acquisition entity deposited $8.3
million with the financial institution as security for the loan. Clairvest
intends to settle the loan, the deposit and related interest accruals
simultaneously upon the divestiture of the investment in Latin Gaming, and as a
result, the deposit and the loan, and the interest revenue and expense have been
presented on a net basis. Clairvest's ownership of both acquisition vehicles was
100% at December 31, 2009.
(o) In connection with its normal business operations, the Company is from time
to time named as a defendant in actions for damages and costs allegedly
sustained by plaintiffs. While it is not possible to estimate the outcome of the
various proceedings at this time, the Company does not believe that it will
incur any material loss in connection with such actions.
13. RISK MANAGEMENT
The private equity investment business involves accepting risk for potential
return, and is therefore affected by a number of economic factors, including
changing economic environments, capital markets and interest rates. As a result,
the Company faces various risk factors, inherent in its normal business
activities. These risk factors and how the Company manages these risk factors
are described below.
Credit risk
Credit risk is the risk of a financial loss occurring as a result of default of
a counterparty on its obligations to the Company. For the quarter ended December
31, 2009, there were no material income effects on changes of credit risk on
financial assets. The carrying values of financial assets subject to credit
exposure at December 31, 2009 and March 31, 2009, net of any allowances for
losses, were as follows:
December 31 March 31
2009 2009
-------------------------------
-------------------------------
Cash and cash equivalents $ 68,968 $ 112,272
Temporary investments 94,132 72,140
Accounts receivable and other assets 16,906 6,719
Loans receivable 182 8,549
Derivative instruments 3,941 -
Corporate investments 112,111 102,865
-------------------------------
$ 296,240 $ 302,545
-------------------------------
-------------------------------
The Company manages credit risk on corporate investments through thoughtful
planning, strict investment criteria, significant due diligence of investment
opportunities and oversight responsibilities with existing investee companies
and by conducting activities in accordance with investment policies that are
approved by the Board of Directors. Management's application of these policies
is regularly monitored by the Board of Directors. Management and the Board of
Directors review the financial condition of investee companies regularly.
The Company is also subject to credit risk on its accounts receivables, a
significant portion of which is with its investee companies. The Company manages
this risk through its oversight responsibilities with existing investee
companies and by reviewing the financial condition of investee companies
regularly.
The Company manages counterparty credit risk on derivative financial instruments
by only contracting with counterparties which are Schedule 1 Canadian chartered
banks.
The Company manages credit risk on cash, cash equivalents and temporary
investments by conducting activities in accordance with the fixed income
securities policy that is approved by the Audit Committee. The Company also
manages credit risk by contracting with counterparties which are Schedule 1
Canadian chartered banks or through investment firms where Clairvest's funds are
segregated and held in trust for Clairvest's benefit. Management's application
of these policies is regularly monitored by the Audit Committee. Management and
the Audit Committee review credit quality of cash equivalents and temporary
investments regularly. The credit rating on the Company's cash, cash equivalents
and temporary investments were as follows:
December 31 March 31
2009 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash and term deposits 15,392 61,216
Guaranteed income contracts and savings accounts
AA 70,318 15,048
AA- 11,755 -
Bonds and treasury bills
AA 16,774 8,194
AA- 20,639 19,291
A+ 1,845 8,100
A 2,040 10,999
A- 6,919 5,001
Preferred shares
P-1 low 2,074 1,982
P-2 - 421
P-2 low 1,553 -
P-3 high - 2,004
P-3 - 801
P-4 - 299
Other fixed income investments
R1-High 52 841
Other non-rated securities(i) 13,739 50,215
----------------------------------------------------------------------------
Total cash, cash equivalents and temporary
investments 163,100 184,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Included in other non-rated securities at December 31, 2009 are
holdings in fixed income mutual funds where the lowest rating of its
underlying holdings is R1-Low.
Market risk
Market risk includes exposure to fluctuations in the market value of the
Company's investments, currency rates and interest rates.
As at December 31, 2009, approximately 4.8% of the fair value of the Company's
corporate investments was in publicly-traded companies. If market prices were
higher or lower by 5% as at December 31, 2009, the potential effect would be an
increase or decrease of $0.3 million to the carrying value of corporate
investments and net unrealized gains (losses) on corporate investments on a
pre-tax basis for the quarter ended December 31, 2009.
Included in corporate investments are investments for which the fair values have
been estimated based on assumptions that may not be supported by observable
market prices. The most significant unobservable input is the multiple of
earnings before interest, income tax, depreciation and amortization (EBITDA)
used for each individual investment. In determining the appropriate multiple,
Clairvest considers i) public company multiples for companies in the same or
similar businesses; ii) where information is known and believed to be reliable,
multiples at which recent transactions in the industry occurred; and iii)
multiples at which Clairvest invested in the company, or for follow-on
investments or financings. The resulting multiple is adjusted, if necessary, to
take into account differences between the investee company and those the Company
selected for comparisons and factors include public versus private company,
company size, same versus similar business, as well as with respect to the
sustainability of the company's EBITDA and current economic environment.
Investments which are valued using the EBITDA multiple approach include KUBRA
Data Transfer Ltd., Landauer Metropolitan Inc., Light Tower Rentals Inc.,
Lyophilization Services of New England Inc. and Van-Rob Inc. If the Company had
used an EBITDA multiple for each investment that was higher or lower by 0.5
times, the potential effect would be an increase or decrease of $5.7 million to
the carrying value of corporate investments and net unrealized gains (losses) on
corporate investments, on a pretax basis for the quarter ended December 31,
2009.
The Company's corporate investment portfolio is diversified across 12 companies
in 7 industries and 3 countries as of December 31, 2009. Concentration risk by
industry and by country is as follows:
December 31, 2009 March 31, 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
United Fair United Fair
Canada States Chile value Canada States Chile value
----------------------------------------------------------------------------
Automotive
related 6,186 - - 6,186 3,750 - - 3,750
Business
services 990 6,493 - 7,483 5,062 5,962 - 11,024
Financial
services 16,805 - - 16,805 17,211 - - 17,211
Gaming 16,163 - 41,122 57,285 9,945 - 41,862 51,807
Health and
medical
related - 12,818 - 12,818 - 11,083 - 11,083
Information
technology - 5,289 - 5,289 - - - 0
Oil field
service - 6,139 - 6,139 - 7,368 - 7,368
Other 106 - - 106 90 532 - 622
----------------------------------------------------------------------------
Total 40,250 30,739 41,122 112,111 36,058 24,945 41,862 102,865
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Certain industries, particularly the automotive related industry, the oil field
service industry and the financial services industry, may experience significant
negative impact to their profitability and liquidity positions given the current
economic environment. The Company has considered these economic events and
indicators in the valuation of its corporate investments.
The company held $3.6 million in preferred shares of corporations in its
temporary investments portfolio at December 31, 2009. Fluctuations between par
value and market price did not exceed 8% during the period the shares were held.
A sensitivity analysis on market risk is therefore not disclosed due to the
Company's minimal exposure to market risk.
The Company has implemented a hedging strategy because it has, directly and
indirectly, several investments outside of Canada, currently in the United
States and in Chile. In order to limit its exposure to changes in the value of
foreign denominated currencies relative to the Canadian dollar, at December 31,
2009, Clairvest hedged 100% of the carrying value of its foreign investments. In
addition, the Company has entered into foreign exchange contracts in
anticipation of future growth in the value of its U.S. denominated investments.
These contracts have notional values totaling US$2.6 million and a fair value of
a gain of $3,000 at December 31, 2009. The Company manages counter party credit
risk on derivative financial instruments by only contracting with counterparties
which are Schedule 1 Canadian chartered banks.
A number of investee companies are subject to foreign exchange risk. A
significant change in foreign exchange rates can have a significant impact to
the profitability of these entities and in turn the Company's fair value of
these corporate investments. The Company manages this risk through oversight
responsibilities with existing investee companies and by reviewing the financial
condition of investee companies regularly.
Certain of the Company's corporate investments are also held in the form of
subordinated debentures. Significant fluctuations in market interest rates can
also have a significant impact on the fair value of these investments.
Fluctuations in market interest rates affect the Company's income derived from
cash, cash equivalents, and temporary investments. For financial instruments
which yield a floating interest income, the interest received is directly
impacted by the prevailing market interest rate. The fair value of financial
instruments which yield a fixed interest income would change when there is a
change in the prevailing market interest rate. The Company manages interest rate
risk on cash, cash equivalents and temporary investments by conducting
activities in accordance with the fixed income securities policy that is
approved by the Audit Committee. Management's application of these policies is
regularly monitored by the Audit Committee.
If interest rates were higher or lower by 0.25% per annum, the potential effect
would be an increase or decrease of $0.3 million to distributions and interest
income on a pre-tax basis for the quarter ended December 31, 2009.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they come due. See Note 12 which describes the
Company's contingencies, commitments and guarantees.
The Company maintains a conservative liquidity position that exceeds all
liabilities payable on demand. The Company invests its cash equivalents and
temporary investments in liquid assets such that they are available to cover any
potential funding commitments and guarantees. In addition, The Company maintains
a credit facility with a Schedule 1 Canadian chartered bank.
14. CAPITAL DISCLOSURES
Clairvest considers the capital it manages to be the amounts it has in cash,
cash equivalents, temporary investments and corporate investments. Clairvest
also manages the third-party capital invested in CEP, CEP III and CEP IV. At
December 31, 2009, Clairvest had cash, cash equivalents and temporary
investments of $163.1 million (March 2009 - $184.4 million), in addition to
$112.1 million (March 2009 - $102.9 million) of corporate investments. Clairvest
also had access to $261.9 million (March 2009 - $131.2 million) of uncalled
committed third-party capital for acquisitions through CEP, CEP III and CEP IV
at December 31, 2009.
Clairvest's objectives in managing capital are to:
- Preserve a financially strong company with substantial liquidity such that
funds are available to pursue new acquisitions and growth opportunities as well
as to support its operations and the growth of its existing corporate
investments;
- Achieve an appropriate risk adjusted return on capital;
- Build the long-term value of its corporate investments; and
- Have appropriate levels of committed third-party capital available to invest
along with Clairvest's capital. The management of third-party capital also
provides management fees and/or priority distributions to Clairvest and the
ability to enhance Clairvest's returns by earning a carried interest.
15. SUBSEQUENT EVENTS
Subsequent to quarter end, the State of New York selected Aqueduct Entertainment
Group LLC ("AEG") to negotiate an agreement to operate a new casino at the
Aqueduct Racetrack in Queens, New York (the "Aqueduct Project"). The AEG
consortium includes Clairvest, Navegante Group Inc., GreenStar Services
Corporation, Levine Builders and Turner Construction. Coming to an agreement
with the New York State over the Aqueduct Project remains subject to a number of
conditions and regulatory approvals.
16. COMPARATIVE FINANCIAL STATEMENTS
The comparative financial statements have been reclassified from statements
previously presented to conform to the presentation of the 2010 financial
statements.
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