WESTPOINT CAPITAL PERFORMANCE MORTGAGE INVESTMENT CORPORATION CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS

2 December 14, 2012 Independent Auditor s Report To the Shareholders of Westpoint Capital Performance Mortgage Investment Corporation We have audited the accompanying consolidated financial statements of Westpoint Capital Performance Mortgage Investment Corporation and its subsidiary, which comprise the consolidated statements of net assets and investment portfolio as at and the consolidated statements of operations, changes in net assets and cash flows for the initial period from July 19, 2011 to, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. PricewaterhouseCoopers LLP TD Tower, Avenue NW, Suite 1501, Edmonton, Alberta, Canada T5J 3N5 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Westpoint Capital Performance Mortgage Investment Corporation and its subsidiary as at June 30, 2012 and the results of their operations, their cash flows and the changes in their net assets for the initial period from July 19, 2011 to in accordance with Canadian generally accepted accounting principles. Chartered Accountants

4 Consolidated Statement of Net Assets As at Assets Cash and cash equivalents $ 3,193,340 Restricted cash 157,547 Interest and fees receivable 16,962 Subscription proceeds receivable 30,000 Due from affiliates, Note 7 71,040 Mortgage investments, Note 3 6,916,730 10,385,619 Liabilities Preferred share dividends payable 142,662 Accounts payable and accrued liabilities 97,922 Due to affiliate, Note 7 5,065 Commitments and contingencies, Note ,649 Net Assets Representing Shareholders' Equity Class A preferred shares, Note 5 10,139,870 Class B common voting shares, Note $ 10,139,970 Shares Outstanding, Notes 5 and 6 Class A shares 10,655,761 Class B shares 100 Net Assets per Share Class A shares $ 0.95 Class B shares $ 1.00 Approved by the Board of Directors: _/s/ Munir Virani Director See accompanying notes to the consolidated financial statements

5 Consolidated Statement of Operations For the initial period from July 19, 2011 to Revenue Interest $ 175,837 Lending fees 140,275 Other revenue 13, ,917 Expenses Legal fees 31,227 Audit and accounting fees 26,025 Mortgage brokerage and administration to the General Partner, Note 7 5,116 Insurance and other 1,408 Interest and bank charges 1,120 Increase in net assets before income taxes 265,021 Income taxes, Note 9 - Increase in net assets from operations $ 265,021 Increase in net assets from operations: Class A preferred shares $ 265,021 Class B common shares $ - Increase in net assets from operations per share: Class A preferred shares $ 0.08 Class B common shares $ - See accompanying notes to the consolidated financial statements

6 Consolidated Statement of Changes In Net Assets For the initial period from July 19, 2011 to Class A Class B Shares Shares Total Net Assets, beginning of period $ - $ - $ - Increase in net assets from operations 265, ,021 Share capital transactions Net proceeds from issuance of shares 10,102, ,102,965 Reinvested distributions Redemption of shares ,102, ,102,965 Dividends to shareholders 228, ,016 Net Assets, end of period $ 10,139,870 $ 100 $ 10,139,970 See accompanying notes to the consolidated financial statements

7 Consolidated Statement of Cash Flows For the initial period from July 19, 2011 to Operating Activities Increase in net assets from operations $ 265,021 Net change in non-cash working capital balances: Interest and fees receivable (16,962) Mortgage discount 227,500 Due from and to affiliates, net (65,975) Accounts payable and other liabilities 15,002 Cash and cash equivalents provided by operating activities 424,586 Financing Activities Issuance of preferred shares 10,655,761 Subscription proceeds receivable (30,000) Redemption of preferred shares - Capital raising commissions (469,976) Issuance of common shares 100 Preferred share dividends paid (85,354) Cash and cash equivalents provided by financing activities 10,070,531 Investing Activities Mortgages advanced (7,295,730) Mortgages repaid 151,500 Restricted cash (157,547) Cash and cash equivalents used for investing activities (7,301,777) Increase in cash and cash equivalents during the period 3,193,340 Cash and cash equivalents, beginning of period - Cash and cash equivalents, end of period $ 3,193,340 Cash and cash equivalends are comprised of: Bank balances $ 1,693,324 Short-term investments 1,500,016 $ 3,193,340 See accompanying notes to the consolidated financial statements

8 Statement of Investment Portfolio As at Amortized Fair Carrying % Cost Value Value Mortgage investments 68% $ 6,916,730 $ 6,916,730 $ 6,916,730 Cash and Other Net Assets 32% 3,223,240 Net Assets $ 10,139,970 Distribution of Mortgages Interest Principal Unamortized Fair Value Number Rates Amount Discount Adjustments Fair Value First Mortgage % $ 4,482,965 $ (131,221) $ - $ 4,351,744 Second Mortgage % 2,598,265 (95,416) - 2,502,849 Third Mortgage 1 15% 63,000 (863) - 62,137 Mortgage investments 30 $ 7,144,230 $ (227,500) $ - $ 6,916,730 See accompanying notes to the consolidated financial statements

9 Notes to the Consolidated Financial Statements 1. Nature of Business Westpoint Capital Performance Mortgage Investment Corporation (the Company or WCPMIC) was incorporated under the Business Corporations Act of Alberta on July 19, The Company operates as a Mortgage Investment Corporation (MIC) and primarily funds mortgages secured by real property in Canada. A MIC is a special investment corporation defined under Section of the Income Tax Act (Canada). A MIC does not pay corporate income taxes when all taxable income is distributed to the shareholders as dividends during a taxation year and within 90 days of its year end. Dividend payments made to taxable Canadian shareholders are subject to Canadian tax as interest income. The Company must continually meet various criteria to maintain its eligibility as a MIC. 2. Summary of Significant Accounting Policies The preparation of consolidated financial statements in conformity with Canadian Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the consolidated balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (a) Basis of Presentation These consolidated financial statements have been prepared in accordance with Part V of the CICA Handbook. The Company previously issued its interim consolidated financial statements as at September 30, 2011 and for the period then ended in accordance with International Financial Reporting Standards (IFRS). However, the Company subsequently adopted Accounting Guideline 18, Investment Companies, and certain requirements of National Instrument , Investment Fund Continuous Disclosure, in response to updates of the regulatory guidance that governs certain operations of the Company. As a result, mortgage investments are recorded at fair value, with any changes in the fair value recorded in the consolidated statement of operations. The consolidated financial statements include the assets, liabilities and results of operations of the Company and its subsidiary after the elimination of intercompany transactions and balances. The Company s subsidiary is Westpoint Capital Performance Limited Partnership (the Limited Partnership). The Company holds 9,999 units of the 10,000 units issued by this partnership and therefore holds a majority of the votes necessary to control the strategic activities of the partnership. The other limited partnership unit is held by Westpoint Capital Performance GP Ltd. (the General Partner). (b) Cash and Cash Equivalents and Restricted Cash The Company considers deposits in banks, certificates of deposit and short-term investments with original maturities of three months or less as cash and cash equivalents. Cash subject to restrictions that prevent its use for general operations is included in restricted cash. Cash and cash equivalents are financial assets classified as held for trading and recorded at fair value. (c) Revenue Recognition Interest income is accounted for an accrual basis using the effective interest method. Commitment fees and loan administration fees are recognized over the term of each mortgage based on the effective interest rate method. A provision is recorded for interest and fees receivable that are assessed as impaired and uncollectible. Interest and fees receivable are considered impaired when there is reasonable doubt as to collectability. This provision, if any, is presented as a reduction of the related receivable and revenue.

10 Notes to the Consolidated Financial Statements 2. Summary of Significant Accounting Policies (continued) (d) Mortgage Investments Mortgage investments are recorded at fair value. Any unrealized change in the fair value of a mortgage or loan investment is recorded in the consolidated statement of operations as an unrealized fair value adjustment. A realized change in the fair value of a mortgage or loan as a result of a disposition or repayment is recorded as a realized fair value adjustment. (e) Financial Liabilities Financial liabilities are classified as other liabilities. Other liabilities are initially recorded at fair value and subsequently measured at cost or amortized cost. (f) Transaction Costs Other than for mortgage investments, transaction costs directly attributable to the acquisition or issue of a financial asset or financial liability are included in the amortized cost of the related asset or liability using the effective interest rate method. For mortgage investments, any related costs are recorded as an expense in the consolidated statement of operations, as these investments are recorded at fair value. (g) Capital Raising Commissions Capital raising commissions can be incurred and payable to third parties who raise capital in the form of the Company s preferred shares. Capital raising commissions to third parties are capitalized and form part of the related preferred share account. These commissions contain provisions to pay the third party immediately, and in certain circumstances residual commissions are paid annually over the term of the related capital invested. (h) Income Taxes The Company follows the asset and liability method of accounting for income taxes, if any. Under the asset and liability method, future tax assets and liabilities represent the amount of tax applicable to temporary differences between the carrying amounts of the assets and the liabilities and their values for tax purposes. Future tax assets and liabilities, if any, are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the years that include the date of enactment or substantive enactment. The Company does not pay income taxes as long as dividends to shareholders meet or exceed the amount of the Company's income that would otherwise be taxable. (i) Increase in Net Assets from Operationgs per Share and Net Assets per Share The increase in net assets from operations per share is calculated as the increase in net assets from operations attributable to each class of shares divided by the monthly weighted average number of shares outstanding during the year. The weighed avergage number of preferred shares outstanding for the period was 3,140,108. The net assets per share are calculated as the net assets outstanding divided by the total number of shares outstanding at the end of the year.

11 Notes to the Consolidated Financial Statements 2. Summary of Significant Accounting Policies (continued) (j) Future Accounting Changes 3. Mortgage investments Publicly accountable enterprises were required to adopt IFRS for years beginning on or after January 1, In December 2011, the Accounting Standards Board (AcSB) announced amendments which provided investment companies with the option to defer adoption of IFRS until fiscal years beginning on or after January 1, As a result of the amendments, the Company will adopt IFRS for its fiscal year ending June 30, The Company will establish an implementation plan to prepare for this conversion. As disclosed in the Statement of Investment Portfolio, there are 30 mortgages held which are a combination of first, second and third mortgages secured by residential and commercial property. All mortgages are due within one year. As part of the assessment of fair value, management of the Company reviews each mortgage or loan for fair value adjustments due to impairment or other market factors. At, management does not believe any impairment or other fair value adjustments exist on any mortgage investments. As such, no adjustment to the fair value of mortgage investments has been recorded. 4. Capital Management The Company s primary capital management objectives are to ensure that sufficient capital is available to fund its dividend and redemption obligations to investors, and to ensure that it has sufficient liquidity to fund lending opportunities. These objectives are achieved by a combination of holding interest and fees received in cash, funding mortgages with maturities shorter than the related capital and developing a pool of mortgages with staggered maturities. The Company may generate liquidity through the issuance of preferred shares and common shares or may liquidate certain mortgages. Should the Company have excess capital on hand it may retract preferred shares issued or may seek to purchase mortgages from other lenders. The Company s senior management team is responsible for approving the Company s capital management objectives and policies and for overseeing the effective management of capital. The Company defines capital as net assets, including preferred and common shares. The Company is not subject to external imposed capital requirements.

12 Notes to the Consolidated Financial Statements 5. Preferred Shares Authorized The Company is authorized to issue an unlimited number of Class A preferred non-voting shares. The preferred shares have no stated maturity date and are redeemable, subject to the sole discretion of the Board of Directors, by the holder at any time, and are also redeemable by the Company at any time. As a result the preferred shares are presented in Net Assets. Class A preferred shares are entitled, subject to declaration by the Board of Directors, to a monthly priority cumulative dividend distribution of $ per share, equivalent to a return of 11% per annum. Class A shares are issued and redeemed at $1 per principal preferred share. The preferred shares are subject to an early redemption penalty if the holder redeems on or prior to the sixth anniversary date of the subscription. The early redemption penalties are applied as follows: 1. Redemption on or before the second anniversary: Penalty equal to 75% of the value of the dividends received by or payable to the holder; 2. Redemption between the second and forth anniversary: Penalty equal to 50% of the value of the dividend received by or payable to the holder. 3. Redemption between the fourth and sixth anniversary: Penalty equal to 25% of the value of the dividends received by or payable to the holder. Issued and Outstanding Class A preferred shares Shares Amount Class A preferred shares, beginning of period - $ - Issued 10,655,761 10,655,761 Redeemed - - Class A preferred shares, end of period 10,655,761 $ 10,655,761 Deferred capital raising commissions 515, Share Capital Authorized The Company is authorized to issue an unlimited number of Class B common voting shares. $ 10,139,870 Issued and outstanding Class B common shares Shares Amount Class B shares, beginning of period - $ - Issued Redeemed - - Class B shares, end of period 100 $ 100

13 7. Related Party Transactions Notes to the Consolidated Financial Statements The Company conducts transactions with affiliated entities in the course of its regular business activities. Transactions between the Company and these related entities are recorded at the exchange amount. The Company is affiliated to Westpoint Capital Corporation as the common shareholders have assigned their right to elect the directors of the Company to Westpoint Capital Corporation. The Company is affiliated to Westpoint Capital High Yield Mortgage Corporation (WCHYMIC), Westpoint Capital High Yield GP Ltd. and Westpoint Capital Performance GP Ltd. as they are companies under common control. Related party transactions and balances are as follows (except as disclosed elsewhere in these consolidated financial statements): a) Due from affiliates Westpoint Capital Corporation 71,030 WCHYMIC 10 $ 71,040 Amounts due from Westpoint Capital Corporation are held in a trust account by that entity. b) Due to affiliate Westpoint Capital Performance GP Ltd. $ 5,065 Amounts owing from and to affiliates are non-interest bearing and have no fixed terms of repayment. c) Mortgage brokerage and administration Westpoint Capital Performance GP Ltd. $ 5,116 The General Partner provides mortgage brokerage and administration services and capital raising services to the Company. Under the terms of the agreement with the General Partner, the General Partner is entitled to a fee equal to the residual profits earned by the Company, once all of the dividends and expenses of the Company have been paid. d) Mortgage investments In June 2012, WCHYMIC assumed a mortgage that the Company participated in. Mortgage investments include a $710,625 mortgage at 11% owing from WCHYMIC and maturing November 2012.

14 Notes to the Consolidated Financial Statements 8. Financial Instruments Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company is exposed to credit risk on the interest and fees receivable from its borrowers, as well as on mortgage investments. In order to reduce its credit risk, the Company's credit committee analyses the ability of the borrower to repay its mortgage through the borrower's exit strategy, as well as evaluates the value of the collateral provided to secure the mortgage. Collateral security consists of real property for which the mortgage was provided, and may also include other real property, and other property such as motor vehicles and recreational vehicles. The Company may also require interest reserves to be held back from the amounts funded to borrowers in certain circumstances. In addition, credit risk is mitigated by lending policies which ensure that the mortgage does not exceeded 89.9% of the estimated value of the security provided at origination, based on appraised value. There were no interest and fees receivable or mortgage investments with past due balances as at. Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company does not have any financial instruments which contain variable interest rates. Mortgage investments are denominated at fixed interest rates and are typically expected to be repaid within one year or less. The preferred shares issued also bear a dividend entitlement for a fixed rate of return. The Company is exposed to interest rate risk to the extent that the Company is unable to source mortgages and loans at rates sufficient to meet the dividend entitlement to the preferred shareholders. This risk is mitigated by the ability of the Company to redeem the preferred shares at any time prior to the stated maturity of those shares. In addition, the Company is exposed to the risk of rising interest rates which would render the fixed interest rates of the preferred shares less attractive and may impact the Company s ability to retain the preferred share capital upon maturity. Liquidity Risk Liquidity risk is the risk of the Company being unable to honour all cash flow obligations as they become due. The Company monitors its liquidity to ensure that there is sufficient cash flow to meet its obligations. The two primary sources of liquidity risk arise from the Company, and its related subsidiaries as the case may be, having sufficient cash: a) to meet the redemption requirements of preferred shares; and b) to fund and manage its mortgages in a manner to enable it to pay dividend entitlements to its investors. This risk is managed by aligning the timing of obligations, such as redemptions, and payments for the cost of funds, with new subscriptions and cash flows from interest and lending fees and mortgage maturities. All financial liabilities at are short-term in nature. Comprehensive Income The Company's financial instruments do not contain any elements which give rise to other comprehensive income.

15 Notes to the Consolidated Financial Statements 8. Financial Instruments (continued) Fair Value Disclosures Mortgage investments In accordance with Canadian GAAP, the Company must classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making its fair value measurements. The following hierarchy has been used in determining and disclosing fair value of financial instruments: Level 1 quoted prices in active markets for the same instrument (i.e., without modification or repackaging); Level 2 quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based on observable market data; and Level 3 valuation techniques for which any significant input is not based on observable market data. Mortgage investments are classified as Level 3 investments. Fair value is the amount of consideration that would be agreed upon in an arm s-length transaction between knowledgeable, willing parties under no compulsion to act. As there is no quoted price in an active market for these mortgage investments, management makes its determination of fair value based on its assessment of the current lending market for mortgage investments of same or similar terms. Typically, these mortgage investments approximate their carrying values given the mortgage investments consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. When collection of the principal amount of a mortgage or loan is no longer reasonably assured, the fair value of the mortgage or loan is reduced to the estimated net realizable value of the underlying security. As fair value estimates and valuation recoveries are made at a specific point in time and are subject to measurement uncertainty, actual results may differ from these estimates. The following table summarizes the changes in fair value measurement in Level 3 mortgage investments: Amount Balance, beginning of period $ - Net advances and repayments 6,916,730 Realized fair value gains (losses) - Unrealized fair value gains (losses) - Balance, end of period $ 6,916,730 Other financial assets and liabilities The Company s other financial instruments consist of cash and cash equivalents (Level 1), restricted cash (Level 1), interest and fees receivable, preferred share dividends payable, accounts payable and accrued liabilities and amounts due from and to affiliates. As at, there are no significant differences between the carrying amounts of these items and their estimated fair values.

16 9. Income Taxes Notes to the Consolidated Financial Statements The Company will distribute all of the dividends, accrued at year-end, on or prior to September 28, 2012, which falls within the 90 day requirement for deductibility of those dividends. Accordingly, the Company s taxable income is $nil and no income taxes are payable for the year ended. 10. Commitments and Contingencies At, the Company had commitments outstanding to fund an additional $1,742,086 on draw mortgages which were not fully funded at year-end. In the ordinary course of business, the Company may initiate legal action against certain borrowers as part of its enforcement activities. The outcome of the legal action may have a material effect on the Company's profit or loss and financial condition.