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| Name | Symbol | Market | Type |
|---|---|---|---|
| iShares 1 to 5 Year Laddered Government Bond Index ETF | TSX:CLF | Toronto | Exchange Traded Fund |
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| 0.01 | 0.06% | 17.17 | 17.16 | 17.17 | 17.17 | 17.15 | 17.16 | 3,869 | 20:25:32 |
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Clairvest Group Inc. (TSX:CVG) today reported results for the quarter ended June
30, 2010. (All figures are in Canadian dollars unless otherwise stated).
Clairvest's book value was at $291.6 million or $18.28 per share, at June 30,
2010, compared with $18.32 per share at March 31, 2010. The decrease in book
value per share was attributable to the annual dividend of $1.6 million, or
$0.10 per share, net of net income for the quarter of $0.9 million, or $0.06 per
share.
As previously announced, Clairvest, Clairvest Equity Partners IV Limited
Partnership ("CEP IV") and CEP IV co-investors, through various acquisition
entities, invested a combined US$72.0 million for an ultimate 40.0% ownership in
Midwest Gaming Holdings, LLC ("Midwest Gaming") to build a casino and amenities
in Des Plaines, Illinois. In addition to this investment, Clairvest, CEP IV and
CEP IV co-investors advanced an additional US$15.8 million loan to Midwest
Gaming to bridge the raising of equity from minority investors as required by
the Illinois legislature. The loan will be repaid as minority investors are
approved by the Illinois Gaming Board with final repayments expected prior to
August 2011. The project is expected to open by late summer 2011, and will be
funded by US$295.0 million of total debt and US$180.0 million of equity. The
initial phase of the project will include 1,150 slot machines, 30 gaming tables
and food and beverage amenities in a 147,000 square foot facility and a 1,500
space parking garage. The project is located approximately 1 mile from O'Hare
International Airport and 16 miles southwest of downtown Chicago, the third
largest city by population in the United States. Clairvest's portion of the
combined investments was US$11.7 million (C$11.7 million) for an ultimate 6.0%
ownership in Midwest Gaming.
Also during the quarter, Clairvest advanced a further US$2.0 million (C$2.1
million) to Latin Gaming Chile S.A. to support Casino Sol Calama in Calama,
Chile. The loan was provided as bridging capital and is repayable on the earlier
of the closing of an equity investment in this casino or September 22, 2010.
Casino Marina del Sol ("Casino del Sol"), a joint investment by Clairvest and
Clairvest Equity Partners III Limited Partnership, which was impacted by the
Chilean earthquake in February 2010, reopened for business in late June 2010
ahead of schedule. Casino del Sol is performing at above pre-earthquake levels
and is completing its insurance claims.
Also as previously announced, Clairvest closed on a new 10-year, $75 million,
committed credit facility. The credit facility is unsecured and bears interest
at the rate of 11.0% per annum on drawn amounts and 1.0% per annum on undrawn
amounts. The credit facility is not expected to be drawn during the current
fiscal year and enhances Clairvest's available liquidity.
Subsequent to quarter end, CEP IV closed an additional $37 million in capital
commitments, bringing total committed capital to 87% of the $400 million CEP IV
fund pool target.
"With the additional capital commitments for CEP IV and the closing of a new
credit facility, Clairvest and the CEP funds now have close to $400 million in
combined dry powder, ready to be invested in companies that match our rigorous
investment criteria", said Ken Rotman, Co-Chief Executive Officer and Managing
Director of Clairvest Group Inc. "More than ever, we are confident that our
team, backed by an experienced board of directors, has the expertise and
discipline to achieve a superior outcome for our portfolio companies, our
shareholders and our limited partners."
Subsequent to quarter end, Clairvest paid an annual dividend of $0.10 per share.
The dividend was paid on July 26, 2010 to common shareholders of record as of
July 9, 2010. This is an eligible dividend for Canadian income tax purposes.
About Clairvest
Clairvest Group Inc. is a private equity management firm which 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 and the possibility
that the opening of the casino being built by Midwest Gaming is delayed.
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. August 10, 2010
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED JUNE 30, 2010
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
June 30, 2010 and the attached news release.
The financial positions and operating results of Clairvest Equity Partners
Limited Partnership ("CEP"), Clairvest Equity Partners III Limited Partnership
("CEP III") and Clairvest Equity Partners IV Limited Partnership ("CEP IV")
(together, the "CEP Funds") are not included in Clairvest's financial position
and operating results.
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 ("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. Acquisition costs
relating to corporate investments are not included as part of the cost of the
investment. 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 carryforwards. 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 future income tax expense.
OPERATING RESULTS
Net income for the first quarter of fiscal 2011 was $0.9 million compared with
net income of $0.7 million for the first quarter of fiscal 2010. The net income
for the first quarter of fiscal 2011 is comprised of $1.1 million of net
corporate investment gains, $0.3 million of net operating income, net of $0.5
million of income tax expense. This compares with $0.9 million of net corporate
investment losses, $1.4 million of net operating income and $0.2 million of
income tax recoveries for the first quarter of fiscal 2010.
The net corporate investment gains of $1.1 million for the first quarter of
fiscal 2011 comprised entirely of net unrealized gains on corporate investments.
The net corporate investment losses of $0.9 million for the first quarter of
fiscal 2010 comprised of $0.2 million of net realized gains on corporate
investments and $1.1 million of net unrealized losses on corporate investments.
Distributions and interest income for the quarter was $2.8 million, compared
with $6.4 million for the same quarter last year. Distributions and interest
income for the first quarter of fiscal 2011 included yield on cash, cash
equivalents and temporary investments of $0.8 million, net priority
distributions of $1.2 million from the CEP funds, general partner distributions
of $0.3 million from CEP and $0.2 million in income distributions from
Wellington Financial Fund II and Wellington Financial Fund III (the "Wellington
Funds"). Distributions and interest income for the first quarter of fiscal 2010
included yield on cash, cash equivalents and temporary investments of $1.5
million, net priority distributions of $1.1 million from the CEP funds and
general partner distributions of $3.4 million from CEP.
Clairvest earned $0.3 million in net management fees during the quarter for its
services in the administration of CEP's portfolio and $0.2 million in advisory
and other fees from its corporate investments, compared with $0.3 million and
$0.2 million, respectively, for the same quarter last year.
The CEP management fees and CEP III and CEP IV priority distributions are
reduced to the extent of the pro-rata portion of fees earned by Clairvest from
joint corporate investments of Clairvest and the CEP Funds.
Administration and other expenses for the quarter were $2.9 million, compared
with $5.9 million for the same quarter last year. Included in administration and
other expenses for the first quarter of fiscal 2011 were $0.8 million of
share-based compensation expense compared with $2.6 million for the same quarter
last year.
Finance and foreign exchange expense of $0.2 million for the first quarter of
fiscal 2011 included interest expense of $0.2 million. Finance and foreign
exchange expense recovery of $0.3 million for the first quarter of fiscal 2010
included foreign exchange gain of $0.4 million net of $0.1 million in interest
expense and bank charges.
SUMMARY OF QUARTERLY RESULTS
Quarterly Net income
results ($000's (loss) per
except per Net income common share
share Net income (loss) per fully
information) Gross revenue $ (loss) $ common share $ diluted(i)$
----------------------------------------------------------------------------
June 30, 2010 4,501 891 0.06 0.05
March 31, 2010 4,476 1,875 0.12 0.11
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
(i) The sum of quarterly net income (loss) per common share may not equal to
the full year net income (loss) per common share due to rounding and the
anti-dilutive effect on any quarters where the Company reported a net loss.
Significant variations arise in the quarterly results due to realized gains
(losses) on corporate investments, unrealized gains (losses) on corporate
investments, which are re-valued on a quarterly basis when conditions warrant an
adjustment to the fair value of the corporate investment, and stock-based
compensation due to the movement in the trading price of Clairvest's common
shares.
FINANCIAL POSITION AND LIQUIDITY
With $147.6 million in cash, cash equivalents and temporary investments
("treasury funds") and $95.0 million of available credit, Clairvest has
sufficient capital to support its current and anticipated investments.
At June 30, 2010, the Company's treasury funds were held in cash and term
deposits, or in corporate bonds, guaranteed investment certificates and
investment savings accounts rated not below A-, preferred shares rated not below
P-2, and other fixed income investments rated not below R1-high (see Notes 4 and
13 to the financial statements for a detailed discussion of the Company's
treasury funds).
Clairvest has a $20.0 million credit facility with a Canadian chartered bank.
The credit facility is unsecured and bears interest at the bank prime rate plus
0.5% per annum. The amount available under the credit facility at June 30, 2010
is $20.0 million and is based on debt covenants within the banking arrangement.
During the first quarter of fiscal 2011, Clairvest closed on a new 10-year,
$75.0 million, committed credit facility with a financial institution, bringing
total available credit to $95.0 million. The new credit facility is unsecured
and bears interest at the rate of 11.0% per annum on drawn amounts and 1.0% per
annum on undrawn amounts. No amounts were drawn during the quarter.
During the fourth quarter of fiscal 2010, 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, 2011. No shares were purchased under the bid during the
quarter and to August 10, 2010. As at August 10, 2010, Clairvest had repurchased
a total of 5,709,578 common and non-voting shares over the last seven years.
At June 30, 2010, Clairvest had 15,953,566 common shares issued and outstanding.
At June 30, 2010, Clairvest had 1,047,000 stock options outstanding, 913,000 of
which were exercisable at June 30, 2010. Each option is exercisable for one
common share.
At June 30, 2010, Clairvest had corporate investments with a carrying value of
$139.2 million. Changes in the carrying value of Clairvest's corporate
investments during the first quarter of fiscal 2011 are primarily a result of
new and follow-on investments made, unrealized valuation changes on corporate
investments and foreign exchange revaluation 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 $20.3 million during
the first quarter of fiscal 2011. Significant events relating to Clairvest's
corporate investments, other than with respect to net unrealized gains and
foreign exchange revaluations, are described below.
Casino Marina del Sol ("Casino del Sol")
Casino del Sol, which was impacted by the Chilean earthquake in February 2010,
reopened for business in late June 2010 ahead of schedule. Casino del Sol is
performing at above pre-earthquake levels and is completing its insurance
claims.
Latin Gaming Chile S.A. ("Latin Gaming Chile")
During the first quarter of fiscal 2011, a wholly-owned acquisition entity of
Clairvest advanced a further US$2.0 million (C$2.1 million) to Latin Gaming
Chile to support Casino Sol Calama in Calama, Chile. The loan is non-interest
bearing and is repayable on the earlier of the closing of an equity investment
in this casino or September 22, 2010.
Light Tower Rentals Inc. ("Light Tower Rentals")
During the first quarter of fiscal 2011, Clairvest invested a further US$0.2
million (C$0.2 million) to acquire 217,914 common shares of LTR Equipment Inc.,
a company affiliated with Light Tower Rentals which supplies certain equipment
to Light Tower Rentals.
Midwest Gaming Holdings LLC ("Midwest Gaming")
During the first quarter of fiscal 2011, Clairvest invested US$9.3 million
(C$9.3 million) to acquire 9,269,882 units of Midwest Gaming Holdings LLC
("Midwest Gaming") to build a casino and amenities in Des Plaines, Illinois. In
addition to this investment, Clairvest advanced an additional US$2.4 million
(C$2.4 million) loan to Midwest Gaming to bridge the raising of equity from
minority investors as required by the Illinois legislature. The loan will be
repaid as minority investors are approved by the Illinois Gaming Board with
final repayments expected prior to August 2011. The project is expected to open
by late summer 2011. The initial phase of the project will include 1,150 slot
machines, 30 gaming tables and food and beverage amenities in a 147,000 square
foot facility and a 1,500 space parking garage. The project is located 1 mile
from O'Hare International Airport and 16 miles southwest of downtown Chicago,
the third largest city by population in the United States.
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 August 21, 2006,
the fifth anniversary of the last closing of CEP, 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 first
quarter of fiscal 2011, 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
are allocated 50% to each of its limited partners, one of which is another
wholly owned subsidiary of Clairvest, 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. During the first quarter of fiscal 2011, CEP declared
and paid $0.7 million of distributions to the General Partner, 50% of which,
$0.3 million, belongs to Clairvest. At June 30, 2010, CEP had declared and paid
distributions to the General Partner totaling $10.4 million, 50% of which, or
$5.2 million, was allocated to Clairvest. If CEP were to sell its corporate
investments at their current fair values, the General Partner would receive up
to a further $15.5 million of distributions, 50% of which, or $7.7 million,
would be payable to Clairvest.
Clairvest is also the parent company of the two General Partners of CEP III (GP
I and "GP II"). GP I is entitled to a priority distribution from CEP III. The
priority distribution is calculated monthly as 0.1667% of commitment capital
until August 2011, being the earlier of the fifth anniversary of the month in
which CEP III made its first investment, 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 any fees earned by GP I
from corporate investments of CEP III. During the first quarter of fiscal 2011,
CEP III declared to GP I net priority distributions of $1.0 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.
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 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. The General Partner of the Participation III
Partnership, a wholly owned subsidiary of Clairvest, is entitled to participate
in additional distributions equal to the exit value on the first $1.1 million
contributed by the Participation III Investors into the Participation III
Partnership, the amount of which was invested in Kubra Data Transfer Ltd.
("Kubra"), plus the first $0.2 million received by the Participation III
Partnership as described above.
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 fiscal 2007 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 CEP IV (GP I
and "GP III"). GP I is entitled to a priority distribution from CEP IV. The
priority distribution is calculated monthly as follows: i) from April 2010,
being 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 67.9% of any
fees earned by GP I from corporate investments of CEP IV. During the first
quarter of fiscal 2010, CEP IV declared to GP I net priority distributions of
$0.1 million. GP I is also entitled to distributions made by CEP IV equal to 2%
of gains of CEP IV determined as described below.
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 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. The General Partner of the Participation IV Partnership, a wholly
owned subsidiary of Clairvest, is entitled to participate in additional
distributions equal to the exit value on the first $1.6 million contributed by
the Participation IV Investors into the Participation IV Partnership, the amount
of which was invested in Midwest Gaming, plus the first $0.4 million received by
the Participation IV Partnership as described above.
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 fiscal 2010 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 June 30, 2010, 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
$1.0 million. At June 30, 2010, Clairvest also had loans receivable from certain
officers of a company affiliated with Clairvest totaling $0.5 million. The loans
are interest bearing and have full recourse to the individual. Interest of
$12,000 was earned during the first quarter of fiscal 2011.
Included in accounts receivable and other assets are receivables of $3.1 million
from Clairvest's investee companies, $0.7 million from CEP, $0.1 million from
CEP III and $3.4 million from CEP IV.
Loans totaling $0.6 million made by the Company to CEP during the fourth quarter
of fiscal 2010 were repaid in full during the first quarter of fiscal 2011.
Loans totaling $1.1 million, bearing interest at the prime rate, made by the
Company to CEP III during the first quarter of fiscal 2011 remain outstanding at
June 30, 2011 and were repaid in full subsequent to quarter end.
Loans totaling $28.6 million, bearing interest at the prime rate, made by the
Company to CEP IV during the first quarter of fiscal 2011, were repaid in full
during the quarter. Interest of $8,000 was earned from loans to CEP IV during
the first quarter of fiscal 2011.
During the first quarter of fiscal 2011, Clairvest earned $0.5 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 June 30, 2010. 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, $15.2 million of which remains unfunded at June 30, 2010. 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, $86.5 million of which remains unfunded at June 30, 2010. 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, $12.5
million of which remains unfunded to June 30, 2010.
At June 30, 2010, Clairvest has received profit distributions totaling $3.1
million through its ownership interest in the General Partners of 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 Agreements. At June 30, 2010, 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 had 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 were jointly
and severally liable on this credit facility. The joint and several agreement
was extinguished during the quarter and Clairvest entered into a standalone
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 June 30, 2010,
no amounts have been accrued under the Program. If Clairvest were to sell its
corporate investments at their current fair values, an additional bonus of $1.6
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 $1.6 million has not been accrued
at June 30, 2010. 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 June 30, 2010, Clairvest had entered into foreign exchange
forward contracts to sell US$97.9 million at an average rate of Canadian $1.0197
per U.S. dollar through to March 2011 and foreign exchange forward contracts to
sell Chilean Unidad de Fomento ("CLF") 0.7 million at an average rate of
Canadian $44.0993 per CLF through to January 2011. US$0.7 million and US$28.0
million of the U.S. dollar foreign exchange forward contracts were entered into
on behalf of CEP III and CEP IV, respectively. Any amounts paid or received as a
result of settlement of these forward contracts will be reimbursed by or paid to
CEP III and CEP IV respectively and therefore the fair value of these forward
contracts have not been recognized on Clairvest's consolidated balance sheet.
The fair value of the U.S. dollar forward contracts at June 30, 2010, excluding
those entered into on behalf of CEP III and CEP IV, is a loss of $2.6 million
and the fair value of the CLF forward contracts at June 30, 2010 is a gain of
$2.0 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 and no claims have been made to
June 30, 2010.
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 June 30, 2010, 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 June 30, 2010, $2.7
million of the cost overruns guarantee has been funded, $2.0 million of which
was allocated to CEP III, and no amounts subject to the operating deficiencies
guarantee have been funded.
Clairvest, together with CEP IV and other investors of Midwest Gaming, have
entered into a US$20 million joint and several guarantee to fund cost overruns
during the construction of a casino in Des Plains, Illinois. Any amounts paid
under the guarantee will result in additional units being granted to Clairvest,
CEP IV and the other investors of Midwest Gaming, allocated on the same basis as
the participation between Clairvest, CEP IV and the other investors of Midwest
Gaming in the guarantee funding. As at June 30, 2010, 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 $32.1million
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 entities was 23.8% at
June 30, 2010, with CEP III owning 71.5% and the remainder owned by unrelated
third party investors.
As part of the holding structure of Latin Gaming Chile, Clairvest borrowed $8.4
million through an acquisition entity from an unrelated financial institution,
while another acquisition entity deposited $8.4 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 Chile, 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 entities was 100% at June 30, 2010.
As part of the holding structure of Latin Gaming Osorno S.A. ("Casino Osorno"),
Clairvest borrowed $15.2 million through an acquisition entity from an unrelated
financial institution, while another acquisition entity deposited $15.2 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 entities was 100% at June 30,
2010.
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
Economic conditions continued to improve slowly during the first quarter of
fiscal 2011. With cash and cash equivalents on hand and the enhanced liquidity
created by the new 10 year credit facility, Clairvest is in a strong position to
support the growth of its investee companies as appropriate, to take advantage
of the current economic environment, and to continue its active pursuit of new
investment opportunities to enhance shareholder value.
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 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 the CEP Funds. At June 30,
2010, Clairvest had cash, cash equivalents and temporary investments of $147.6
million, in addition to $139.2 million of corporate investments. Clairvest also
had access to $95.0 million through its credit facilities and $258.2 million of
uncalled committed third-party capital for acquisitions through the CEP Funds at
June 30, 2010. Clairvest's objectives in managing capital are disclosed in Note
14 to the consolidated financial statements.
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 $20.0 million credit
facility with a Schedule 1 Canadian chartered bank and a $75.0 million credit
facility with a financial institution.
As of June 30, 2010, Clairvest's corporate investment portfolio is diversified
across 14 companies in 9 industries and 3 countries. Concentration risk by
industry and by country is disclosed in Note 13 to the consolidated financial
statements. The Company has considered current 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 is also subject to credit risk on its loans receivables, the majority
of which is with the CEP Funds. The Company manages this risk through its
fiduciary duty as Manager of the CEP Funds and by maintaining sufficient
uncalled capital for the CEP Funds to settle obligations as they come due.
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 June 30, 2010. Management
has concluded that the disclosure controls and procedures are effective as of
June 30, 2010 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 ("GAAP"). Management has
evaluated Clairvest's design effectiveness of internal controls over financial
reporting for the quarter ended June 30, 2010. Management has concluded that the
design effectiveness of internal controls over financial reporting are effective
as of June 30, 2010 based on this evaluation. No changes were made to internal
controls over financial reporting during the quarter ended June 30, 2010 that
have materially affected, or are reasonably likely to materially affect,
internal controls over financial reporting.
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
During fiscal 2008, the Canadian Accounting Standards Board ("AcSB") confirmed
the use of International Financial Reporting Standards ("IFRS") for all Canadian
publicly accountable enterprises for years beginning on or after January 1,
2011. During the quarter ended June 30, 2011, the AcSB released an exposure
draft which would allow Canadian companies that currently follow AcG-18 to
continue to use existing Canadian GAAP until fiscal years beginning on or after
January 1, 2012. Under the exposure draft, Clairvest will be required to adopt
IFRS beginning in the first quarter of fiscal 2013 which begins on April 1,
2012. The AcSB expects to finalize this amendment by September 2010.
Based on recent publications made by the International Accounting Standards
Board ("IASB") and the recent exposure draft by the AcSB, the Company is
optimistic that fair value accounting will continue to be the method for which
the Company accounts for its investee companies. Given the IASB does not expect
to release its standard on consolidation for investee companies until the second
quarter of calendar year 2011, the Company will likely delay its IFRS adoption
as permitted by the AcSB as outlined in the aforementioned exposure draft.
Despite this, the Company continues to work towards issuing IFRS-based financial
results for the first quarter ended June 30, 2011 with comparative data also on
an IFRS basis. The Company continues to monitor ongoing changes to IFRS and will
adjust its transition and implementation plans accordingly. Formal
communications with the Audit Committee have been established to ensure timely
decisions are made on key issues and risks.
The Company will continue to evaluate the impact to its financial reporting
process and its financial statements if IFRS requires the Company to consolidate
certain of its investee companies, which would be expected to have a significant
impact to the Company's financial reporting process and financial statements.
Other significant items which may have a significant impact to the Company's
financial reporting and financial statements include the accounting for
share-based compensation, for contingent liabilities and for income taxes. The
Company is in the process of quantifying the impacts to the opening balance
sheet for the period for which the Company is required to report under IFRS. The
Company continues to monitor new developments to IFRS which may result in
additional significant accounting differences.
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)
June 30 March 31
$000's 2010 2010
----------------------------------------------------------------------------
Assets
Cash and cash equivalents (Notes 4, 10 and
13) $ 30,748 $ 43,684
Temporary investments (Notes 4 and 13) 116,822 108,544
Accounts receivable and other assets (Note
8i) 12,553 20,146
Income taxes recoverable 6,791 7,399
Loans receivable (Notes 8j, 8k and 8l) 1,165 698
Future tax asset 717 108
Derivative instruments (Note 11) 1,955 5,900
Corporate investments (Notes 6 and 13) 139,163 118,881
------------------------------
$ 309,914 $ 305,360
------------------------------
------------------------------
Liabilities
Accounts payable and accrued liabilities
(Note 9) $ 8,679 $ 7,417
Dividends payable 1,595 -
Derivative instruments (Note 11) 2,648 -
Future tax liability 1,411 1,455
Stock-based compensation (Note 9) 4,000 4,203
------------------------------
18,333 13,075
------------------------------
Contingencies, commitments and guarantees
(Notes 11 and 12)
Shareholders' Equity
Share capital (Notes 7 and 9) 82,823 82,823
Retained earnings 208,758 209,462
------------------------------
291,581 292,285
------------------------------
$ 309,914 $ 305,360
------------------------------
------------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the quarters ended June 30
(unaudited)
$000's (except per share information) 2010 2009
----------------------------------------------------------------------------
Net corporate investment gains (losses)
Net realized gains on corporate investments
(Note 5) $ - $ 195
Net unrealized gains (losses) on corporate
investments 1,113 (1,102)
------------------------------
1,113 (907)
------------------------------
Other income
Distributions and interest income (Note 8) 2,848 6,378
Dividend income 47 69
Management fees (Note 8a) 258 255
Advisory and other fees (Note 8m) 235 208
------------------------------
3,388 6,910
------------------------------
Expenses
Administration and other expenses (Note 9) (2,918) (5,893)
Finance and foreign exchange (expense)
recovery (Note 13) (224) 332
------------------------------
(3,142) (5,561)
------------------------------
Income before income taxes 1,359 442
Income tax (expense) recovery (468) 220
------------------------------
Net income $ 891 $ 662
------------------------------
Basic net income per share $ 0.06 $ 0.04
------------------------------
Fully diluted net income per share $ 0.05 $ 0.04
------------------------------
------------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the quarters ended June 30
(unaudited)
$000's 2010 2009
----------------------------------------------------------------------------
Retained earnings, beginning of period $ 209,462 $ 202,560
Net income 891 662
------------------------------
210,353 203,222
Dividends declared (1,595) (1,595)
------------------------------
Retained earnings, end of period $ 208,758 $ 201,627
------------------------------
------------------------------
(see accompanying notes to interim consolidated financial statements)
CLAIRVEST GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the quarters ended June 30
(unaudited)
$000's 2010 2009
----------------------------------------------------------------------------
Operating activities
Net income for the period $ 891 $ 662
Add (deduct) items not involving a current
cash outlay
Amortization of fixed assets 88 75
Stock-based compensation expense (recovery) (203) 1,416
Future income tax expense (recovery) (53) 166
Net realized gains on investments - (195)
Net unrealized losses (gains) on investments (1,113) 1,102
Non-cash items relating to foreign exchange
forward contracts 3,597 (2,961)
Non-cash items relating to corporate
investments (6,006) 2,600
------------------------------
(2,799) 2,865
Net change in non-cash working capital
balances related to operations (Note 10) 8,775 (9,594)
------------------------------
Cash provided by (used in) operating
activities 5,976 (6,729)
------------------------------
Investing activities
Acquisition of corporate investments (13,185) (1,893)
Proceeds on sale of corporate investments 22 4,394
Proceeds on (cost of) realized foreign
exchange forward contracts 2,996 (948)
Net acquisition of temporary investments (8,278) (217)
Loans advanced (Notes 8k and 8l) (29,659) (5,852)
Receipt of loans advanced (Note 8j and 8l) 29,192 5,761
------------------------------
Cash provided by (used in) investing
activities (18,912) 1,245
------------------------------
Net decrease in cash and cash equivalents (12,936) (5,484)
Cash and cash equivalents, beginning of period 43,684 112,272
------------------------------
Cash and cash equivalents, end of period (Note
10) $ 30,748 $ 106,788
------------------------------
------------------------------
Supplemental cash flow information
Income taxes paid $ 20 $ 5,741
Interest paid, on gross basis (Note 12(m),
12(n) and 12(o)) $ 308 $ 880
------------------------------
------------------------------
(see accompanying notes to consolidated financial statements)
CLAIRVEST GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010 (Tabular Dollar Amounts in Thousands)
(unaudited)
1. NATURE OF ACTIVITIES AND BASIS OF PRESENTATION
The unaudited 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 consolidated financial
statements do not include all requirements of generally accepted accounting
principles for annual financial statements. As a result, the unaudited
consolidated financial statements should be read in conjunction with the annual
audited consolidated financial statements for the year ended March 31, 2010.
The financial positions and operating results of Clairvest Equity Partners
Limited Partnership ("CEP"), Clairvest Equity Partners III Limited Partnership
("CEP III") and Clairvest Equity Partners IV Limited Partnership ("CEP IV")
(together, the "CEP Funds") are not included in Clairvest's consolidated
financial statements.
The comparative figures indicated in the notes to the consolidated financial
statements are as of June 30, 2009 unless otherwise indicated.
In accordance with National Instrument 51-102 released by the Canadian
Securities Administrators, the Company discloses that its auditors have not
reviewed the unaudited consolidated financial statements for the quarter ended
June 30, 2010.
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 ("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. Acquisition costs
relating to corporate investments are not included as part of the cost of the
investment. 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. FUTURE ACCOUNTING POLICIES
In February 2008, the Canadian Accounting Standards Board ("AcSB") 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. During the first quarter of fiscal 2011, the AcSB
released an exposure draft which would allow Canadian companies currently follow
AcG-18 to continue to use existing Canadian Generally Accepted Accounting
Principles until fiscal years beginning on or after January 1, 2012. Under the
exposure draft, Clairvest will be required to adopt IFRS beginning in the first
quarter of fiscal 2013 which begins on April 1, 2012.
Clairvest is currently evaluating the impact of adopting IFRS and the potential
delay in adoption as a result of the AcSB exposure draft.
3. CREDIT FACILITIES
Clairvest has a $20.0 million credit facility available with a Canadian
chartered bank, bearing interest at prime plus 0.5%. The amount under the credit
facility available at June 30, 2010 is $20.0 million (March 2010 - $20.0
million) and is based on debt covenants within the banking arrangement. No
amounts were drawn during the quarter.
During the first quarter of fiscal 2011, the Company closed on a new 10-year,
$75.0 million, committed credit facility with a financial institution. The
credit facility may be increased to $100.0 million on or before September 30,
2010 upon mutual consent. The credit facility bears interest at 11% per annum on
drawn amounts and at 1% per annum on undrawn amounts. No amounts were drawn
during the first quarter of fiscal 2011.
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 March 2013. Temporary investments consist of
guaranteed investment certificates, corporate bonds and preferred shares. The
yield on these investments ranges between 1.3% and 4.9% per annum (March 2010 -
between 0.7% and 4.9%) with a weighted average rate of pre-tax return of 2.9%
per annum (March 2010 - 2.7%).
March 31,
June 30, 2010 2010
------------------------------------------------------------
------------------------------------------------------------
Due in 1 year Due after 1
or less year Total Total
------------------------------------------------------------
Guaranteed
investment
certificates $ 26,935 $ 20,230 $ 47,165 $ 42,049
Corporate bonds 35,620 30,576 66,196 63,020
Preferred shares - 3,461 3,461 3,475
------------------------------------------------------------
Total $ 62,555 $ 54,267 $ 116,822 $ 108,544
------------------------------------------------------------
------------------------------------------------------------
5. NET REALIZED GAINS ON CORPORATE INVESTMENTS
Net realized gains on corporate investments for the quarters ended June 30
comprised of the following:
$000's 2010 2009
------------------------------
------------------------------
Net realized losses during the period $ - $ (3,901)
Previously recognized net unrealized losses - 4,096
------------------------------
$ - $ 195
------------------------------
------------------------------
6. CORPORATE INVESTMENTS
June 30, 2010 March 31, 2010
--------------------------------------------------------------
--------------------------------------------------------------
Fair Fair
value Cost Difference value Cost Difference
--------------------------------------------------------------
Casino Marina
del Sol $ 9,793 $ 9,911 $ (118) $ 9,699 $ 9,911 $ (212)
Casino New
Brunswick 8,687 8,687 - 8,687 8,687 -
Hudson Valley
Waste
Holding, Inc. 9,382 9,221 161 8,952 9,221 (269)
Kubra Data
Transfer
Limited 6,437 2,150 4,287 6,573 2,150 4,423
Landauer
Metropolitan
Inc. 8,051 4,407 3,644 7,693 4,429 3,264
Latin Gaming
Chile S.A. 15,162 14,518 644 12,435 12,443 (8)
Latin Gaming
Osorno S.A. 17,107 16,618 489 16,942 16,618 324
Light Tower
Rentals Inc. 6,813 6,461 352 6,280 6,233 47
Lyophilization
Services of
New England
Inc. 5,121 6,454 (1,333) 4,887 6,454 (1,567)
Midwest Gaming
Holdings LLC 14,028 11,708 2,320 - - -
N-Brook
Mortgage LP 2,625 5,037 (2,412) 2,625 5,037 (2,412)
PEER 1 Network
Enterprises
Inc. 5,803 6,291 (488) 5,494 6,291 (797)
Tsuu T'ina
Gaming
Limited
Partnership 9,099 5,625 3,474 8,631 5,625 3,006
Van-Rob Inc. 5,605 5,000 605 4,853 5,000 (147)
Wellington
Financial
Fund II 207 1 206 211 1 210
Wellington
Financial
Fund III 13,989 12,476 1,513 13,733 12,476 1,257
--------------------------------------------------------------
137,909 124,565 13,344 117,695 110,576 7,119
Other
investments 1,254 295 959 1,186 295 891
--------------------------------------------------------------
$139,163 $124,860 $ 14,303 $118,881 $110,871 $ 8,010
--------------------------------------------------------------
--------------------------------------------------------------
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 first quarter of fiscal 2011, Casino Marina del Sol ("Casino del
Sol"), which was impacted by the Chilean earthquake in February 2010, reopened
for business ahead of schedule. Casino del Sol is performing at above
pre-earthquake levels and is completing its insurance claims.
During the first quarter of fiscal 2011, a wholly-owned acquisition entity of
Clairvest advanced a further UC$2.0 million (C$2.1 million) to Latin Gaming
Chile S.A. ("Latin Gaming Chile") to support Casino Sol Calama in Calama, Chile.
The loan is non-interest bearing and is repayable on the earlier of the closing
of an equity investment in this casino or September 22, 2010.
During the first quarter of fiscal 2011, Clairvest invested a further $0.2
million to acquire 217,914 common shares of LTR Equipment Inc. ("LTR
Equipment"), a company affiliated with Light Tower Rentals Inc. ("Light Tower
Rentals") which supplies certain equipment to Light Tower Rentals. Clairvest's
ownership interest in LTR Equipment is 11.0%.
During the first quarter of fiscal 2011, Clairvest invested US$9.3 million
(C$9.3 million) to acquire 9,269,882 units of Midwest Gaming Holdings LLC
("Midwest Gaming") to build a casino and amenities in Des Plaines, Illinois. In
addition to this investment, Clairvest advanced an additional US$2.4 million
(C$2.4 million) loan to Midwest Gaming to bridge the raising of equity from
minority investors as required by the Illinois legislature. Clairvest's
ownership interest in Midwest Gaming is 6.0%.
7. SHARE CAPITAL
During the fourth quarter of fiscal 2010, 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, 2011. The Company has made no purchases under
this issuer bid. 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 June 30,
2010. 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 June 30, 2010.
8. RELATED PARTY TRANSACTIONS
a. 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 August 21, 2006, the fifth anniversary
of the last closing of CEP, 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 first quarter of fiscal 2011, GP I earned net management fees of
$0.3 million (2010 - $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 (2010 - $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 Clairvest, 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. During the first quarter of fiscal 2011, CEP declared and
paid $0.7 million of distributions to the General Partner, 50% of which,
or $0.3 million, belongs to Clairvest. At June 30, 2010, CEP had
declared and paid distributions to the General Partner totaling $10.4
million, 50% of which, or $5.2 million, was allocated to Clairvest. If
CEP were to sell its corporate investments at their current fair values,
the General Partner would receive up to a further $15.5 million (March
2010 - $15.3 million) of distributions, 50% of which, or $7.7 million
(March 2010 - $7.6 million), would be payable to Clairvest.
c. Clairvest is also the parent company of the two General Partners of CEP
III (GP I and "GP II"). GP I is entitled to a priority distribution from
CEP III. The priority distribution is calculated monthly as 0.1667% of
committed capital until August 2011, being the earlier of the fifth
anniversary of the month in which CEP III made its first investment, 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 first quarter of fiscal 2011, CEP III
declared to GP I net priority distributions of $1.0 million (2010 - $1.0
million). As per the Limited Partnership Agreement, fees of $0.1 million
(2010 - $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 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. The General Partner of the Participation
III Partnership, a wholly owned subsidiary of Clairvest, is entitled to
participate in additional distributions equal to the exit value on the
first $1.1 million contributed by the Participation III Investors into
the Participation III Partnership, the amount of which was invested in
Kubra Data Transfer Ltd. ("Kubra"), plus the first $0.2 million received
by the Participation III Partnership as described above.
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 fiscal
2007 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 CEP
IV (GP I and "GP III"). GP I is entitled to a priority distribution from
CEP IV. The priority distribution is calculated monthly as follows: i)
from April 2010, being 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 67.9% of fees earned by GP I from corporate investments of CEP IV.
During the first quarter of fiscal 2010, CEP IV declared to GP I
priority distributions of $0.1 million. 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 other than priority distributions.
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 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. The General Partner of the Participation IV Partnership, a
wholly owned subsidiary of Clairvest, is entitled to participate in
additional distributions equal to the exit value on the first $1.6
million contributed by the Participation IV Investors into the
Participation IV Partnership, the amount of which was invested in
Midwest Gaming, plus the first $0.4 million received by the
Participation IV Partnership as described above.
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 fiscal 2010 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 2010 - $1.0 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 $1.0 million (March 2010 - $1.0
million). Also included in accounts receivable and other assets are
other loans made to certain officers of a company affiliated with
Clairvest totaling $0.5 million (March 2010 - $0.5 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 2010 - $3.0
million) from Clairvest's investee companies, from CEP totaling $0.7
million (March 2010 - 0.7 million), from CEP III totaling $0.1 million
(March 2010 - $0.1 million) and from CEP IV totaling $3.4 million (March
2010 - $4.6 million).
j. Loans totaling $0.6 million made by the Company to CEP during the fourth
quarter of fiscal 2010 were repaid in full during the first quarter of
fiscal 2011.
k. Loans totaling $1.1 million, bearing interest at the prime rate, made by
the Company to CEP III during the first quarter of fiscal 2011 remain
outstanding at June 30, 2010 and were repaid in full subsequent to
quarter end.
l. Loans totaling $28.6 million, bearing interest at the prime rate, made
by the Company to CEP IV during the first quarter of fiscal 2011, were
repaid in full during the quarter. Interest of $8,000 was earned from
loans to CEP IV during the first quarter of fiscal 2011.
m. During the first quarter of fiscal 2011, Clairvest earned $0.5 million
(2010 - $0.4 million) in distributions and interest income and $0.2
million (2010 - $0.2 million) in fee income from its investee companies.
9. STOCK-BASED COMPENSATION AND OTHER COMPENSATION PLANS
During the first quarter of fiscal 2011, 35,000 options were exercised, all of
which were exercised under the cash settlement plan and had no impact to share
capital. No options were issued during the first quarter of fiscal 2011. At June
30, 2010, a total of 1,047,000 (March 2010 - 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 June 30, 2010,
Clairvest recognized a stock-based compensation expense of $0.1 million. As at
June 30, 2010, $4.0 million (March 2010 - $4.2 million) has been accrued under
the Company's stock option plan.
As at June 30, 2010, a total of 171,201 (March 2010 - 155,135) Deferred Share
Units were held by directors of the Company, the accrual in respect of which was
$2.3 million (March 2010 - $2.0 million) and has been included in accounts
payable and accrued liabilities. For the quarter ended June 30, 2010, Clairvest
recognized an expense of $0.3 million with respect to Deferred Share Units.
As at June 30, 2010, 120,000 (March 2010 - 120,000) Appreciation Deferred Share
Units were held by directors of the Company, the accrual in respect of which is
$21,000 (March 2010 - $19,000) and has been included in accounts payable and
accrued liabilities. For the quarter ended June 30, 2010, Clairvest recognized
an expense of $2,000 with respect to Appreciation Deferred Share Units.
As at June 30, 2010, a total of 839,612 (March 2010 - 541,000) 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 $2.6
million (March 2010 - $2.3 million) and has been included in accounts payable
and accrued liabilities. For the quarter ended June 30, 2010, Clairvest
recognized an expense of $0.3 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 for the
quarters ended June 30 are detailed as follows:
2010 2009
------------------------------
------------------------------
Accounts receivable and other assets $ 7,505 $ (5,349)
Income taxes receivable 608 (5,436)
Accounts payable and accrued liabilities 662 1,776
Income taxes payable - (585)
------------------------------
$ 8,775 $ (9,594)
------------------------------
------------------------------
Cash and cash equivalents at the balance sheet dates comprised of the following:
June 30 2010 March 31 2010
---------------------------------
---------------------------------
Cash $ 1,851 $ 3,843
Cash equivalents 28,897 39,841
---------------------------------
$ 30,748 $ 43,684
---------------------------------
---------------------------------
11. DERIVATIVE INSTRUMENTS
As at June 30, 2010, the Company had entered into foreign exchange forward
contracts as hedges against its foreign investments as follows:
Foreign exchange forward contracts to sell US$97.9 million (March 2010 - US$62.8
million) at an average rate of Canadian $1.0197 per U.S. dollar (March 2010 -
$1.0745) through to March 2011. US$0.7 million and US$28.0 million (March 2010 -
nil) of the U.S. dollar foreign exchange forward contracts were entered into on
behalf of CEP III and CEP IV, respectively. Any amounts paid or received as a
result of settlement of these forward contracts will be reimbursed by or paid to
CEP III and CEP IV respectively and therefore the fair value on these forward
contracts have not been recognized on Clairvest's consolidated balance sheet.
The fair value of the forward contracts at June 30, 2010, excluding those
entered into on behalf of CEP III and CEP IV, is a loss of $2.6 million (March
2010 - gain of $3.7 million) and has been recognized on the consolidated balance
sheet as derivative instruments.
Foreign exchange forward contracts to sell Chilean Unidad de Fomento ("CLF") 0.7
million (March 2010 - CLF0.7 million) at an average rate of Canadian $44.0993
per CLF (March 2010 - $44.0993) through to January 2011. The fair value of these
contracts at June 30, 2010 is a gain of $2.0 million (March 2010 - $2.2 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 2010 - $3.5 million) of which remains
unfunded at June 30, 2010. 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, $15.2 million (March 2010 - $15.2 million)
of which remains unfunded at June 30, 2010. 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, $86.5 million (March 2010 - $100.0
million) of which remains unfunded at June 30, 2010. 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 2010 - $12.5 million)
of which remains unfunded at June 30, 2010.
e. At June 30, 2010, Clairvest has received profit distributions totaling
$1.6 million (March 2010 - $1.6 million) through its ownership interest
in the General Partner of Wellington Financial Fund II ("Wellington Fund
II") and $1.5 million (March 2010 - $1.5 million) through its ownership
interest in the General Partner of Wellington Fund III. 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 Wellington Fund II
and Wellington Fund III do not meet their return threshold as specified
in the respective Limited Partnership Agreements. At June 30, 2010,
there were no accruals (March 2010 - nil) made with respect to the
Clawback.
f. 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.
g. Clairvest and CEP III had 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 were jointly and severally liable on this credit facility. The joint
and several agreement was extinguished during the quarter and Clairvest
entered into a standalone facility.
h. 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 June 30, 2010, no amounts (2010 - $0.8 million)
have been accrued under the Program. If Clairvest were to sell its
corporate investments at their current fair values, an additional bonus
of $1.6 million (March 2010 - $1.4 million) would be owing to management
under this Program. As no such realizations have occurred and the terms
of the Program with respect to these corporate investments have not yet
been fulfilled, the $1.6 million (March 2010 - $1.4 million) has not
been accrued at June 30, 2010. The Program does not apply to the income
generated by Clairvest through CEP III Co-Invest and CEP IV Co-Invest.
i. 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 and no claims have been made to June 30, 2010.
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 June 30, 2010, 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 June 30, 2010, $2.7 million of
the cost overruns subject to the operating deficiencies guarantee have
been funded, $2.0 million of which was allocated to CEP III, and no
amounts subject to the operating deficiencies guarantee have been
funded.
l. Clairvest, together with CEP IV and other investors of Midwest Gaming,
have entered into a US$20 million joint and several guarantee to fund
any cost overruns during the construction of a casino in Des Plains,
Illinois. Any amounts paid under the guarantee will result in additional
units being granted to Clairvest, CEP IV and the other investors of
Midwest Gaming, allocated on the same basis as the participation between
Clairvest, CEP IV and the other investors of Midwest Gaming in the
guarantee funding. As at June 30, 2010, no amounts subject to this
guarantee have been funded.
m. 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 entities was 23.8% at June 30,
2010, with CEP III owning 71.5% and the remainder owned by unrelated
third party investors.
n. As part of the holding structure of Latin Gaming Chile, Clairvest
borrowed $8.4 million through an acquisition entity from an unrelated
financial institution, while another acquisition entity deposited $8.4
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 Chile, 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 entities was 100% at June 30,
2010.
o. As part of the holding structure of Latin Gaming Osorno S.A. ("Casino
Osorno"), Clairvest borrowed $15.2 through an acquisition entity from an
unrelated financial institution, while another acquisition entity
deposited $15.2 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 entities was 100% at June 30,
2010.
p. 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 June 30,
2010, there were no material income effects on changes of credit risk on
financial assets and financial liabilities. The carrying values of financial
assets and financial liabilities subject to credit exposure at June 30, 2010 and
March 31, 2010, net of any allowances for losses, were as follows:
June 30 2010 March 31 2010
----------------------------------
----------------------------------
Financial Assets
Cash and cash equivalents $ 30,748 $ 43,684
Temporary investments 116,822 108,544
Accounts receivable 9,501 18,445
Loans receivable 1,165 698
Derivative instruments 1,955 5,900
Corporate investments 139,163 118,881
----------------------------------
$ 299,354 $ 296,152
----------------------------------
Financial Liabilities
Accounts payable $ 11 $ 23
Derivative Instruments $ 2,648 -
----------------------------------
$ 2,659 $ 23
----------------------------------
----------------------------------
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 and its CEP funds.
The Company manages this risk through its oversight responsibilities with
existing investee companies, by reviewing the financial condition of investee
companies regularly, and through its fiduciary duty as Manager of the CEP funds
and by maintaining sufficient uncalled capital for the CEP Funds to settle
obligations as the come due.
The Company is also subject to credit risk on its loans receivables, the
majority of which is typically with its CEP funds (see Note 14). The Company
manages this risk through its fiduciary duty as Manager of the CEP Funds and by
maintaining sufficient uncalled capital for the CEP Funds to settle obligations
as the come due.
The Company manages counterparty credit risk on derivative financial instruments
by only contracting with counterparties which are Schedule 1 Canadian chartered
banks. At June 30, 2010, the Company's CLF derivative instruments have an
accrued gain and a fair value of $2.0 million. The Company believes the
counterparty risk with respect to its derivative instruments is nominal.
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 ratings, based on the Dominion Bond Rating
Services ("DBRS") rating scale, for the Company's cash, cash equivalents and
temporary investments were as follows:
June 30 2010 March 31 2010
--------------------------------
--------------------------------
Cash and term deposits 3,658 30,572
Guaranteed investment certificates and
savings accounts
AAA 3,005 -
AA+ 5,041 5,025
AA 56,603 37,942
AA- 9,555 6,980
Corporate bonds
AA 23,646 21,543
AA- 16,357 25,466
A+ 12,221 7,025
A 2,004 2,001
A- 11,969 6,976
BBB - 5,166
Preferred shares
P-1 low 1,948 1,954
P-2 low 1,513 1,521
Other fixed income investments
R1-High 50 49
Other non-rated securities - 8
--------------------------------
Total cash, cash equivalents and temporary
investments 147,570 152,228
--------------------------------
--------------------------------
Market risk
Market risk includes exposure to fluctuations in the market value of the
Company's investments, currency rates and interest rates. The following table
presents the financial instruments measured at fair value classified by the fair
value hierarchy set out in CICA Handbook Section 3862:
March 31,
June 30, 2010 2010
--------------------------------------------------------------
--------------------------------------------------------------
Assets / Assets /
liabilities liabilities
at fair at fair
Fair value measurements using value value
------------------------------------
Level 1 Level 2 Level 3
--------------------------------------------------------------
Financial
assets
Cash $ 1,851 $ - $ - $ 1,851 $ 3,843
Cash
equivalents
Investment
savings
accounts 27,040 - - 27,040 7,898
Term deposits 1,807 - - 1,807 26,728
Corporate
bonds - - - - 5,166
Fixed income
mutual funds 50 - - 50 49
--------------------------------------------------------------
28,897 - - 28,897 39,841
--------------------------------------------------------------
Temporary
investments
Guaranteed
investment
certificates - 47,165 - 47,165 42,049
Corporate
bonds 66,196 - - 66,196 63,020
Preferred
shares 3,461 - - 3,461 3,475
--------------------------------------------------------------
69,657 47,165 - 116,822 108,544
--------------------------------------------------------------
Accounts
receivable - - 9,501 9,501 18,445
Loans
receivable - - 1,165 1,165 698
Derivative
instruments - 1,955 - 1,955 5,900
Corporate
investments 5,893 - 133,270 139,163 118,881
--------------------------------------------------------------
$ 106,298 $ 49,120 $ 143,936 $ 299,354 $ 296,152
--------------------------------------------------------------
--------------------------------------------------------------
Financial
liabilities
Accounts
payable $ - $ - $ 11 $ 11 $ 23
Derivative
instruments - 2,648 - 2,648 -
--------------------------------------------------------------
$ - $ 2,648 $ 11 $ 2,659 $ 23
--------------------------------------------------------------
--------------------------------------------------------------
The following table presents the changes in fair value measurements for
instruments included in Level 3 of the fair value hierarchy set out in CICA
Handbook Section 3862:
-----------------------------------------------------
Total realized /
unrealized gains
(losses) and
foreign exchange Purchases of
revaluations assets /
Fair value included in issuances of
April 1, 2010 earnings liabilities
-----------------------------------------------------
-----------------------------------------------------
Financial assets
Accounts receivable $ 18,445 $ - $ 5,373
Loans receivable 698 - 29,659
Corporate investments 113,317 6,790 13,185
-----------------------------------------------------
$ 132,460 $ 6,790 $ 48,217
-----------------------------------------------------
-----------------------------------------------------
Financial liabilities
Accounts payable $ 23 $ - $ 28
-----------------------------------------------------
$ 23 $ - $ 28
-----------------------------------------------------
-----------------------------------------------------
-------------------------------------------------------
Unrealized gains
(losses) and
foreign exchange
revaluations
included in
earnings for
assets and
Sales of liabilities for
assets / the quarter ended
settlements June 30, 2010 for
of Fair value June positions still
liabilities 30, 2010 held
-------------------------------------------------------
-------------------------------------------------------
Financial assets
Accounts receivable $ (14,317) $ 9,501 $ -
Loans receivable (29,192) 1,165 -
Corporate investments (22) 133,270 6,790
-------------------------------------------------------
$ (43,531) $ 143,936 $ 6,790
-------------------------------------------------------
-------------------------------------------------------
Financial liabilities
Accounts payable $ (40) $ 11 $ -
-------------------------------------------------------
$ (40) $ 11 $ -
-------------------------------------------------------
-------------------------------------------------------
As at June 30, 2010, approximately 4.2% 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 June 30, 2010, the potential effect would be an
increase or decrease of $0.6 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 June 30, 2010.
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 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 earnings and current economic environment.
Investments which are valued using the earnings multiple approach include Hudson
Valley Waste Holding, Inc., Kubra, Landauer Metropolitan Inc., Light Tower
Rentals, Lyophilization Services of New England Inc. and Van-Rob Inc. If the
Company had used an earnings multiple for each investment that was higher or
lower by 0.5 times, the potential effect would be an increase of $3.9 million or
decrease of $6.2 million to the carrying value of corporate investments and net
unrealized gains or losses on corporate investments, on a pre-tax basis for the
quarter ended June 30, 2010. Earnings multiples used are based on public company
valuations as well as private market multiples for comparable companies.
The Company's corporate investment portfolio is diversified across 14 companies
in 9 industries and 3 countries as of June 30, 2010. Concentration risk by
industry and by country is as follows:
June 30, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
United
Canada States Chile Fair value
----------------------------------------------------------------------------
Automotive related $ 5,605 $ - $ - $ 5,605
Business services 1,083 6,437 - 7,520
Contract manufacturing - 5,121 - 5,121
Financial services 16,821 - - 16,821
Gaming 17,786 14,028 42,062 73,876
Health and medical
related - 8,051 - 8,051
Information technology - 5,803 - 5,803
Oil field service - 6,813 - 6,813
Waste management - 9,382 - 9,382
Other 171 - - 171
----------------------------------------------------------------------------
Total $ 41,466 $ 55,635 $ 42,062 $ 139,163
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
United
Canada States Chile Fair value
----------------------------------------------------------------------------
Automotive related $ 4,853 $ - $ - $ 4,853
Business services 1,035 6,573 - 7,608
Contract manufacturing - 4,887 - 4,887
Financial services 16,569 - - 16,569
Gaming 17,318 - 39,076 56,394
Health and medical
related - 7,693 - 7,693
Information technology - 5,494 - 5,494
Oil field service - 6,280 - 6,280
Waste management - 8,952 - 8,952
Other 151 - - 151
----------------------------------------------------------------------------
Total $ 39,926 $ 39,879 $ 39,076 $ 118,881
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has considered current economic events and indicators in the
valuation of its corporate investments.
The company held $3.5 million in preferred shares of corporations in its
temporary investments portfolio at June 30, 2010. Fluctuations between par value
and market price did not exceed 4% 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 June 30,
2010, Clairvest hedged 100% of the fair value of its foreign investments.
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 1% 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 June 30, 2010.
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 and closed on a new
credit facility with a financial institution during the quarter.
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 committed or invested in the CEP Funds. At
June 30, 2010, Clairvest had cash, cash equivalents and temporary investments of
$147.6 million (March 2010 - $152.2 million), in addition to $139.2 million
(March 2010 - $118.9 million) of corporate investments. Clairvest also had
access to $95.0 million (March 2010 - $20.0 million) through its credit
facilities and $258.2 million (March 2010 - $267.9 million) of uncalled
committed third-party capital for acquisitions through the CEP Funds at June 30,
2010.
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.
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