Annual Report to Shareholders. March 15, 2012

Transcription

1 Annual Report to Shareholders March 15, 2012

2 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying financial statements of Diversified Private Equity Corp. and all the information in this report are the responsibility of management and have been approved by the Board of Directors of Diversified Private Equity Corp. (the Board ). The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial statements are not precise since they include certain amounts based on estimates and judgements. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Management has prepared the financial information presented in this annual report and has ensured that it is consistent with the financial statements. The financial statements have been audited by PricewaterhouseCoopers LLP on behalf of the shareholders, and their report is set out on the next page. The Board has oversight responsibility for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out these responsibilities through its Audit Committee (the Committee ). The Committee is appointed by the Board. The Committee meets periodically with management and the external auditors to discuss internal controls, the financial reporting process, various auditing and financial reporting issues, and to review the annual report, the financial statements and the external auditor s report. The Committee reports its findings semi-annually to the Board for consideration when approving the financial statements for issuance to the shareholders. The Committee also considers, for review by the Board, the engagement or re-appointment of the external auditors. PricewaterhouseCoopers LLP has full and free access to the Committee. Brian D. McChesney President and Chief Executive Officer Stephen D. Pearce Chief Financial Officer and Secretary Toronto, Canada May 24, 2012

3 Independent Auditor s Report To the Shareholders of Diversified Private Equity Corp. (the Company ) We have audited the accompanying financial statements of the Company, which comprise the statements of net assets as at March 15, 2012 and 2011, the statements of investments as at March 15, 2011, and the statements of investment operations and deficit, cash flows and changes in net assets for the years ended March 15, 2012 and 2011, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at March 15, 2012 and March 15, 2011 and the results of its operations, its cash flows and the changes in its net assets for the years then ended in accordance with Canadian generally accepted accounting principles. Emphasis of matter or other matter Without qualifying our opinion, we draw attention to Note 1 to the financial statements which discloses that the Company is a limited life company and effective March 15, 2012, the Company s operations were terminated. Toronto, Canada May 24, 2012 PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants

4 STATEMENTS OF NET ASSETS As at March Assets Investments, at fair value (note 3) $ - $ 4,656,093 Cash (note 7) 81, ,844 Prepaid expenses - 14,100 81,796 4,773,037 Liabilities Accrued liabilities (note 7) 81,696 64,095 Unrealized loss on Forward Agreement - 405,754 81, ,849 $ 100 $ 4,303,188 Shareholders Equity Share capital (notes 1 and 4 ) $ 100 $ 7,981,025 Deficit (9,992,641) (9,528,706) Contributed surplus 9,992,641 5,850,869 $ 100 $ 4,303,188 Number of Class A Shares outstanding (note 4) Net assets per Share - 853,575 $ - $ 5.04 See accompanying notes to financial statements. On behalf of the Board: Brian D. McChesney President and Chief Executive Officer Thomas Pippy Chairman of the Board

5 STATEMENTS OF INVESTMENT OPERATIONS AND DEFICIT For the years ended March Revenue Interest $ - $ 10 Expenses Directors' fees 42,670 32,668 Insurance premiums 33,973 19,972 Audit fees 27,142 27,529 Legal fees 18,990 7,619 Filing fees 14,681 14,289 Administrative fees (note 7) 11,110 12,655 Transfer agent fees 9,978 10,437 Listing fees 9,145 9,105 Independent Review Committee fees 10,500 7,500 Printing and mailing charges 4,065 4,697 Other (note 6) 16,314 8, , ,168 Net investment loss for the year (198,568) (155,158) Net realized loss on settlement of the Forward Agreement (812,821) (238,948) Forward Agreement fees (23,722) (27,752) Net realized gain (loss) on disposition of Canadian Securities Portfolio (107,889) 81,272 Realized and unrealized gain (loss) on Forward Agreement 405,754 (181,231) Realized and unrealized gains on Canadian Securities Portfolio 273,311 1,055,887 Results of investment operations for the year $ (463,935) $ 534,070 Deficit, beginning of year $ (9,528,706) $ (10,062,776) Results of investment operations for the year (463,935) 534,070 Deficit, end of year $ (9,992,641) $ (9,528,706) Results of investment operations per Share* $ (0.55) $ 0.56 * Based upon the weighted average number of Shares outstanding during the year. See accompanying notes to financial statements.

6 STATEMENTS OF CASH FLOWS For the years ended March Operating activities Results of investment operations for the year $ (463,935) $ 534,070 Add (deduct): Net realized loss on settlement of the Forward Agreement 812, ,948 Net realized (gain) loss on disposition of Canadian Securities Portfolio 107,889 (81,272) Realized and unrealized (gain) loss on Forward Agreement (405,754) 181,231 Realized and unrealized gains on Canadian Securities Portfolio (273,311) (1,055,887) Changes in non-cash working capital Increase in accrued liabilities 17,601 13,881 Decrease (increase) in prepaid expenses 14,100 (1,540) Net cash flow used in operating activities (190,589) (170,569) Investing activities Purchase of Canadian Securities Portfolio (1,250,770) (2,170,588) Proceeds on disposition of Canadian Securities Portfolio 1,250,777 2,170,645 Proceeds on settlement of the Forward Agreement 4,008, ,509 Net cash flow provided by investing activities 4,008, ,566 Financing activities Proceeds paid on Shares redeemed or retracted (3,796,994) (552,511) Shares purchased for cancellation (42,159) (22,572) Net cash flow used in financing activities (3,839,153) (575,083) Net increase (decrease) in cash Cash, beginning of year Cash, end of year (21,048) 41, ,844 60,930 $ 81,796 $ 102,844 See accompanying notes to financial statements.

7 STATEMENTS OF CHANGES IN NET ASSETS For the years ended March Capital transactions Redemption or retraction of Class A Shares $ (3,796,994) $ (552,511) Shares purchased for cancellation (42,159) (22,572) (3,839,153) (575,083) Investment transactions Cost of Canadian Securities Portfolio, beginning of year (4,929,404) (5,874,646) Purchase of Canadian Securities Portfolio (1,250,770) (2,170,588) Cost of Canadian Securities Portfolio, end of year - 4,929,404 Cost of Canadian Securities Portfolio disposed of (6,180,174) (3,115,830) Proceeds on disposition of Canadian Securities Portfolio 1,250,777 2,170,645 Proceeds on settlement of the Forward Agreement 4,008, ,509 Net realized loss on disposition of Canadian Securities Portfolio before fees (920,710) (157,676) Forward Agreement fees (note 3) (23,722) (27,752) Realized and unrealized gain (loss) on Forward Agreement 405,754 (181,231) Realized and unrealized gains on Canadian Securities Portfolio 273,311 1,055,887 Net realized and unrealized gain (loss) on investments (including the Forward Agreement) (265,367) 689,228 Income transactions Net investment loss (198,568) (155,158) Decrease in net assets during the year Net assets, beginning of year Net assets, end of year (4,303,088) (41,013) 4,303,188 4,344,201 $ 100 $ 4,303,188 See accompanying notes to financial statements.

8 STATEMENT OF INVESTMENTS As at March 15, 2011 Cost Fair Value Investments Canadian Securities Portfolio (note 3) $ 4,929,404 $ 4,656, Value of Forward Agreement (note 3) (405,754) (9.5) Total value of investments (including the Forward Agreement) $ 4,250, As a result of the Forward Agreement described in Note 3, the total value of investments (including Forward Agreement) are represented by the net asset value of the Portfolio as at March 15, 2011, as listed below: % of Number of Shares Private Equity Funds Average Cost Fair Value Asset 13,509 American Capital Strategies, Ltd. $ 466,686 $ 116, ,154 AP Alternative Assets, L.P. 432, , ,902 Apollo Investment Corp. 446, , ,125 Ares Capital Corp. 867, , ,164 Capital Southwest Corp. 373, , ,886 Electra Private Equity plc 432, , ,983 Eurazeo 429, , ,402 GIMV N.V. 400, , ,509 Gladstone Capital Corp. 443, , ,173 Intermediate Capital Group PLC 432,841 48, ,004 3i Group plc 423,944 62, ,282 Kohlberg Kravis Roberts & Co. 423, , ,406 MCG Capital Corporation 433, , ,195 MVC Capital Inc. 376, , ,598 Onex Corporation 362, , ,938 RATOS AB 409, , ,915 RHJ International 423, , ,582 SVG Capital plc 423,655 76, ,427 Technology Investment Capital Corp. 450, , Value of Portfolio $ 8,452,221 $ 4,248, Cash 2, Net Asset Value of Portfolio $ 4,250, See accompanying notes to financial statements.

9 NOTES TO FINANCIAL STATEMENTS March 15, 2012 and CORPORATE ACTIVITIES AND WIND-UP Diversified Private Equity Corp. (the Company ), incorporated under the laws of Alberta on November 24, 2006, is a mutual fund corporation created to provide holders of the Company s Class A shares (the Shareholders ) with tax efficient exposure to the total return of an initially equally-weighted portfolio (the Portfolio ) of securities (the Portfolio Securities ) that consisted of nine firms specializing in private equity investments that are publicly traded in North America and ten firms specializing in private equity investments that are publicly traded in Europe. The Company is a limited life entity that completed its term and pursuant to its prospectus dated February 28, 2007, redeemed all of its outstanding Class A Shares (the Shares ) on March 15, 2012 (the Redemption ). The Shares were delisted from The Toronto Stock Exchange (the TSX ) at the close of trading on March 15, As a result of the Company s Redemption on March 15, 2012 (special annual retraction on March 15, 2011), 843,675 ( ,370) Shares were redeemed for cash in the amount of $3.8 million (2011 $0.6 million). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The preparation of financial statements requires management to make estimates and assumptions that may impact the reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ from these estimates. The significant accounting policies followed in the preparation of these financial statements are summarized below: Investments The Company s investment in the Canadian Securities Portfolio was presented at fair value. The fair value was computed using the closing bid price (see note 3 below) on the principal exchange on which the investments are listed. Investment transactions were recorded on a trade date basis. Realized gains (losses) from investment transactions were recorded on an average cost basis. Cash is presented at fair value. Forward Agreement The value of the Forward Agreement (note 3) is the gain or loss that would be realized if the positions in the Forward Agreement were to be closed out in accordance with its terms, in which case the value is based on the current market value of the underlying securities in the Portfolio and the Canadian Securities Portfolio using the bid prices on the principal exchange on which they are listed. The value takes into account amounts equal to other assets including cash, prepaids, and distributions received, less liabilities attributed to the Forward Agreement on such date. The unrealized appreciation (depreciation) in the Forward Agreement (which is the difference between the fair value of the Portfolio and the fair value of the Canadian Securities Portfolio), is included in the change in unrealized gain (loss) on Forward Agreement in the Statement of Investment Operations and Deficit. Transaction costs have been expensed and are included as a separate line item in the Statement of Investment Operations and Deficit. Transaction costs of $23,722 (2011 $27,752) have been expensed reflecting Forward Agreement fees incurred during the year.

10 Revenue Recognition Interest income was recorded on an accrual basis. Other Assets and Liabilities Other assets and liabilities are recorded at cost, which approximates their fair value. Foreign Exchange All monetary items denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date. Contributed Surplus Contributed surplus represents the credits arising from the redemption of Shares at less than the amount recorded as share capital. Financial Instrument Risks As the Company had liquidated its portfolio to Canadian dollars prior to year end as part of its wind up, it is no longer exposed to any significant financial instrument risks. The cash balance is held with Scotia Capital Inc. and its parent company, The Bank of Nova Scotia, which has a credit rating of AA as rated by DBRS. 3. FORWARD AGREEMENT AND CANADIAN SECURITIES PORTFOLIO The Forward Agreement was fully settled on March 15, Pursuant to the terms of the Forward Agreement, Bank of Montreal (the Counterparty ) paid the Company on the Redemption Date, in return for the Canadian Securities Portfolio, an amount equal to 100% of the redemption proceeds of all the corresponding shares of the Portfolio, net of any amount then owing by the Company to the Counterparty. The Company partially settled the Forward Agreement prior to the Redemption Date in order to fund retractions, redemptions and repurchases of Shares and to pay expenses and other liabilities of the Company. Under the Forward Agreement, the Company paid the Counterparty a fee, calculated weekly and payable quarterly in arrears, of 0.60% per annum of the notional amount of the Forward Agreement, being substantially the value of the Portfolio Securities upon which the payment obligation of the Counterparty under the Forward Agreement was based. The total fees paid to the Bank of Montreal relating to the Forward Agreement for the year ended March 15, 2012 were $23,722 (2011 $27,752). The Company had legal title to the Canadian Securities Portfolio. As explained above, the Company s interest in the net assets of the Portfolio was only through the Forward Agreement. The Canadian Securities Portfolio held at March 15, 2011 was as follows: Shares Average Cost Fair Value 105,592 Canfor Corporation $ 1,400,150 $ 1,372,696 23,725 Celtic Exploration Ltd. 425, ,145 49,255 Crew Energy Inc. 993, , ,521 Lundin Mining Corporation 1,358,666 1,200,746 16,059 MEG Energy Corp. 750, ,692 Total Canadian Securities Portfolio $ 4,929,404 $ 4,656,093

11 4. SHARE CAPITAL Authorized, Issued and Outstanding The Company s authorized share capital consists of an unlimited number of the Shares and 100 Class J shares. A summary of the Company s issued and outstanding share capital is as follows: Number of Number of Class A Class J Class J Class A Issue Total Share Shares Shares Shares Shares Costs (net of issue costs) Outstanding on March 15, , $ 100 $ 9,643,450 (626,824) $ 9,016,726 Shares repurchased during fiscal year 2011 (5,400) (54,000) 3,510 (50,490) Retraction during fiscal year 2011 (105,370) (1,053,700) 68,489 (985,211) Outstanding on March 15, , ,535,750 (554,825) 7,981,025 Shares repurchased during fiscal year 2012 (9,900) (99,000) 6,435 (92,565) Redemptions during fiscal year 2012 (843,675) (8,436,750) 548,390 (7,888,360) Outstanding on March 15, $ 100 $ - $ - $ 100 The Shares rank prior to the Class J Shares with respect to the payment of dividends, distributions upon a redemption, retraction or return of capital and distributions upon a dissolution, liquidation or winding-up of the Company. As at March 15, 2012, the Company had contributed surplus in the amount of $9,992,641 (2011 $5,850,869) where $4,141,772, $460,618, $890,578, $2,482,179 and $2,017,494 represents the amount of contributed surplus arising from shares being redeemed, repurchased and retracted, net of issue costs, at prices below the issue price for 2012, 2011, 2010, 2009 and 2008, respectively. Class A Shares Holders of the Shares were entitled to receive dividends on the Shares if, as and when declared and paid by the Company s Board of Directors. Shareholders were not expected to be paid any dividends by the Company. However, if the Company realized capital gains on the sale of the Canadian Portfolio Securities, and would be liable to pay tax thereon, the Company could have declared a capital gains dividend on the Shares. All Shares outstanding on March 15, 2012 were redeemed by the Company at a price per share equal to $4.50. Holders of the Shares were not entitled to vote at any meetings of the Company other than meetings of the holders of the Shares, except as provided by law, or any of the Canadian Portfolio Securities that comprise the Canadian Securities Portfolio held by the Company. Normal Course Issuer Bid The Company could have repurchased Shares in the market for cancellation if Scotia Managed Companies Administration Inc., ( SMCAI ) in its capacity as administrator to the Company, determined that such purchases were accretive to Shareholders and provided that any necessary approval had been obtained. Under the normal course issuer bid for the annual period ended February 15, 2012, the Company could have purchased up to 84,960 Shares, representing 10% of the 849,675 Shares in the public float as at June 10, For the year ended March 15, 2012, 9,900 (2011 5,400) Shares were repurchased under this program at an average price of $4.26 ( $4.18) per Share for a total repurchase amount of $42,159 (March 15, 2011 $22,572).

12 Class J Shares The Class J Shares are retractable at any time. For retractions occurring at a time when any Shares are outstanding, the retraction price will be $1.00 per share; for other retractions, the retraction price will be based on the Net Asset Value of the Company. The Class J Shares are redeemable at any time for $1.00 per share. Holders of Class J Shares are entitled to one vote per share. Holders of Class J Shares are entitled to receive dividends if, as and when declared from time to time by the Company s Board of Directors. However, holders of Class J Shares are not entitled to receive any dividends at any time when there are any Shares outstanding. Diversified Private Equity Holdings Corp. owns the 100 issued and outstanding Class J Shares of the Company. 5. INCOME TAXES The Company qualified as a mutual fund corporation under the Income Tax Act (Canada) (the Act ) and was subject to tax in each taxation year under Part I of the Act on the amount of its net realized capital gains. The Company is entitled to refunds in accordance with the provisions of the Act of substantially all tax paid with respect to net taxable capital gains upon payment of sufficient capital gains dividends or in respect of sufficient redemptions of shares. Also the Company is subject to tax of 331/3% under Part IV of the Act on taxable dividends received in the year. This tax is fully refundable upon payment of sufficient dividends. Given the investment and distribution policies of the Company and taking into account expenses and issue costs, the Company does not anticipate that it will be subject to any material non-refundable Canadian income tax. 6. OTHER EXPENSES Other expenses include costs incurred for bank charges and miscellaneous expenses. 7. RELATED PARTY INFORMATION The Company engaged SMCAI, a wholly owned subsidiary of Scotia Capital Inc. ( SCI ), to administer all of the ongoing operations of the Company. In consideration for the services provided by SMCAI as administrator, including portfolio and cash management, accounting and tax administration, the Company paid SMCAI a quarterly administration fee in an amount equal to 1 4 of 0.25% of the net assets of the Company plus applicable taxes. The Administration Agreement expired on the redemption of all of the Shares on March 15, The total administrative fees paid to SMCAI for the year ended March 15, 2012 were $11,110 (2011 $12,655 of which $6,038 was paid to SCI and $6,617 was paid to SMCAI). At March 15, 2012, the Company had accrued liabilities of $35,362 (2011 $37,711) payable to SMCAI. The Company had cash on deposit with SCI and its parent company, The Bank of Nova Scotia, of $81,042 (2011 $35,924).

13 CORPORATE INFORMATION PRINCIPAL OFFICE Scotia Plaza, 26th Floor 40 King Street West Station A, P.O. Box 4085 Toronto, Ontario M5W 2X6 Telephone: (416) Facsimile: (416) Web site: DIRECTORS AND OFFICERS Douglas L. Derry, FCA* Director and Chairman of the Audit Committee Brian D. McChesney Director, President and Chief Executive Officer Thomas Pippy, CA* Director and Chairman of the Board REGISTRAR & TRANSFER AGENT Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario M5J 2Y1 LEGAL COUNSEL Stikeman Elliott LLP Toronto, Ontario AUDITOR PricewaterhouseCoopers LLP Toronto, Ontario STOCK EXCHANGE LISTING The Toronto Stock Exchange SYMBOLS Class A Shares PEQ Stephen D. Pearce, CA Director, Chief Financial Officer and Secretary Louise A. Morwick* Director * Audit Committee Member INDEPENDENT REVIEW COMMITTEE Louise A. Morwick (Chair) Douglas L. Derry Thomas Pippy

14 DIVERSIFIED PRIVATE EQUITY CORP. 40 KING STREET WEST, SCOTIA PLAZA, 26TH FLOOR TORONTO, ONTARIO M5W 2X6