Financial Statements
Contents Page Auditors' Report 1 Statement of Revenues and Expenses 2 Statement of Changes in Net Assets 3 Balance Sheet 4 Statement of Cash Flows 5 6-13
Grant Thornton LLP Chartered Accountants Management Consultants Auditors' Report To the Members of Investment Dealers Association of Canada We have audited the balance sheet of Investment Dealers Association of Canada as at March 31, 2005 and the statements of revenues and expenses, changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the Association s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Association as at and the results of its operations and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Toronto, Canada May 13, 2005 Grant Thornton LLP Chartered Accountants Royal Bank Plaza 19th Floor, South Tower 200 Bay Street, Box 55 Toronto, Ontario M5J 2P9 T (416) 366-0100 F (416) 360-4949 E Toronto@GrantThornton.ca W www.grantthornton.ca Canadian Member of Grant Thornton International 1
Statement of Revenues and Expenses Year Ended March 31 2005 2004 Operating Fund Revenues Members annual fees $ 30,373 $ 29,109 Less Special reduction 1,000 - Net members annual fees 29,373 29,109 Underwriting levies 8,121 7,627 Registration fees 2,133 2,465 Interest on investments 391 467 Other income 245 258 40,263 39,926 Expenses Industry Relations & Representation 5,718 5,529 Member Regulation 34,394 31,878 40,112 37,407 151 2,519 Discretionary Fund (Note 7) 34,446 341 Excess of revenues over expenses $ 34,597 $ 2,860 See accompanying notes to the financial statements. 2
Statement of Changes in Net Assets Year Ended Internally Restricted Investment in Net Net Operating Discretionary Property and Assets Assets Fund Fund Equipment 2005 2004 Balance, beginning of year $ 9,783 $ 4,453 $ 2,306 $ 16,542 $ 13,683 Excess of revenues over expenses 151 34,446-34,597 2,859 Depreciation and amortization 1,124 2 (1,126) - - Purchase of property and equipment (1,480) - 1,480 - - Balance, end of year $ 9,578 $ 38,901 $ 2,660 $ 51,139 $ 16,542 See accompanying notes to the financial statements. 3
Balance Sheet March 31 2005 2004 Assets Current Cash and cash equivalents $ 53,397 $ 23,014 Receivables 1,606 2,386 Prepaids and other 1,120 229 Current portion of loans receivable 30 23 56,153 25,652 Loans receivable, less current portion (Note 3) 20 13 Property and equipment (Note 4) 2,660 2,306 Investment (Note 5) 1 1 $ 58,834 $ 27,972 Liabilities Current Payables and accruals $ 5,586 $ 5,796 Deferred revenue 80 268 Current portion of deferred rental credit 194 174 5,860 6,238 Deferred rental credit 213 292 Employee future benefits (Note 6) 1,622 4,900 7,695 11,430 Net Assets Investment in Property and Equipment 2,660 2,306 Internally Restricted Discretionary Fund (Note 7) 38,901 4,453 Operating Fund 9,578 9,783 51,139 16,542 $ 58,834 $ 27,972 Commitments and Contingencies (Note 8) On behalf of the Board Brian J. Porter, Chair Joseph J. Oliver, President - See accompanying notes to the financial statements. 4
Statement of Cash Flows Year Ended March 31 2005 2004 Increase (decrease) in cash and cash equivalents Operating activities Excess of revenues over expenses $ 34,597 $ 2,860 Depreciation and amortization 1,126 1,085 Amortization of deferred rental credit, net of additions (59) (175) Loss from sale of property and equipment - 2 Employee future benefits, net of payments (3,278) 790 32,386 4,562 Increase (decrease) in non-cash working capital Receivables 780 (193) Prepaids (891) 16 Payables and accruals (210) 278 Deferred revenue (188) (14) 31,877 4,649 Investing activities Purchase of property and equipment (1,480) (809) Proceeds from sale of property and equipment - 4 Repayment of loans receivable (net) (14) 21 (1,494) (784) Net increase in cash and cash equivalents 30,383 3,865 Cash and cash equivalents, beginning of year 23,014 19,149 Cash and cash equivalents, end of year $ 53,397 $ 23,014 See accompanying notes to the financial statements. 5
1. Nature of operations The Investment Dealers Association of Canada (the Association ) is an unincorporated association existing through its constitution and by contract. The Association is exempt from income taxes under Section 149(1) (l) of the Income Tax Act (Canada). The Association is the national self-regulatory organization and representative of the securities industry. The Association s members play an essential role in the Canadian economy by raising capital for governments and businesses and by helping individuals and institutions invest with confidence in open and fair capital markets. The Association regulates the activities of investment dealers in terms of both their capital adequacy and conduct of business. The Association s mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets. The Association has invested in Market Regulation Services Inc. ( RS Inc. ). RS Inc. was incorporated under the Canada Business Corporations Act. As a not-for-profit organization, RS Inc. is exempt from income taxes under Section 149(1) (l) of the Income Tax Act (Canada). The company is jointly owned by the TSX Inc. ( TSX ) and the Association. RS Inc. monitors all securities trading on marketplaces that retain RS Inc. to act as their regulation services provider for compliance with the Universal Market Integrity Rules and marketplace specific rules. The Association, in trust for the beneficial interest of its members, holds a 10% interest in common shares of FundSERV Inc., an organization created as a depository and clearing house for the investment fund industry. The Association, in trust for the beneficial interest of its members, holds a 15.2% interest in the common shares of the Canadian Depository for Securities Limited ( CDS ), an organization created as a depository and clearing house for the securities industry. The Association is a sponsor of the Canadian Securities Institute ( CSI ). CSI owns the shares of CSI Global Education Inc. a provider of financial education to Canadian financial professionals. In the event of a windup of CSI, the Association would receive a proportionate share of the net assets at that time for the beneficial interest of its members. 2. Summary of significant accounting policies The Association follows accounting principles appropriate for not-for-profit organizations, in accordance with Canadian generally accepted accounting principles, including the application of disclosures required for investments in related entities not otherwise consolidated or equity accounted. 6
2. Summary of significant accounting policies (continued) Net assets The financial statements have been prepared in a manner which segregates net asset balances as follows: (a) (b) (c) Investment in Property and Equipment represents the Association s net investment in property and equipment which is comprised of the unamortized balance of its capital assets purchased with unrestricted funds. Internally Restricted Discretionary Fund. The Association s Discretionary Fund (the Fund ) allows the Association to make payments for the following purposes; (i) to fulfill its obligations to the Canadian Investor Protection Fund; (ii) to meet the financial obligations of an insolvent member; (iii) to provide financial support to the Canadian Depository for Securities Limited; (iv) to cover expenses related to the Association's disciplinary panels; and (v) for making payments for special non-recurring projects that benefit the public and/or generally benefit Canadian Capital Markets, as determined by the Board of Directors or the Executive Committee. Operating Fund comprises the remaining excess of revenues over expenses from operations that are available for general operating requirements. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks net of bank overdrafts and short term investments with maturities of three months or less. Investment in related entities Investments in related entities are not consolidated or accounted on the equity basis due to no control or significant influence and are recorded at cost. 7
2. Summary of significant accounting policies (continued) Revenue recognition Annual fees are assessed upon the member firms and are recorded as income on a fiscal year basis. Underwriting levies are recognized when the underwriting transaction closes. Registration fees and other payments are recorded as income on a fiscal year basis. Fines levied as a result of disciplinary decisions, late filing fees, and a portion of the initiation fees from new members are recorded in the Discretionary Fund in the period they are received. Property and equipment Capital assets are recorded at cost. Depreciation and amortization of office furniture and equipment over their useful lives are computed by the straight-line method at 10% per annum, except for computer equipment, which is at 33 1/3% per annum and photocopier equipment, which is amortized at 20% per annum. Leasehold improvements are amortized over the term of the respective leases. Deferred rental credit and tenant inducements The values of the rent-free periods and tenant inducements received by the Association under the office leases are being amortized over the term of the leases. Employee future benefits The Association accrues its obligations under employee benefit plans and the related costs, net of plan assets, as follows: The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro rated on service and management s best estimate of expected plan investment performance for funded plans, salary escalation, retirement ages of employees and expected health care costs. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value which is equivalent to the fair market value at March 31. Past service costs for plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. The excess of net actuarial gain (loss) over 10% of the greater of the benefit obligation and fair value of plan assets is amortized over the average remaining service period of active employees. 8
3. Loans receivable Loans receivables from employees of the Association are for the purchase of home computers. Repayment terms and maturity dates were negotiated with the Association at the time of making the loans. The loans are non interest bearing and are due on or before January 14, 2008. 4. Property and equipment 2005 2004 Accumulated Net Net Cost Depreciation Book Value Book Value Operating Fund: Office furniture and equipment $ 2,544 $ 1,776 $ 768 $ 871 Leasehold improvements 2,260 1,708 552 631 Computer equipment 6,216 4,892 1,324 804 11,020 8,376 2,644 2,306 Discretionary Fund: Business continuity - computer equipment 18 2 16 - $ 11,038 $ 8,378 $ 2,660 $ 2,306 5. Investments, at cost 2005 2004 Market Regulation Services Inc. ( RS Inc., 50% owned) $ 1 $ 1 6. Employee future benefits The Association has established a contributory defined benefit pension plan providing pension, other retirement and post-employment benefits for all employees with at least twelve months of continuous service. The plan provides pension benefits that are based on 2% of the highest three year average earnings times the number of years of continuous participation. The Association has also established a Supplementary Executive Retirement Plan (SERP). During the year the Association registered the SERP under the rules of the Income Tax Act as a Retirement Compensation Arrangement and commenced funding the plan. The measurement date of the plan assets and accrued benefit obligation is December 31 of each year. The most recent actuarial valuation of the pension plans for funding purposes was as of April 1, 2004, and the next required valuation will be as of April 1, 2007. 9
6. Employee future benefits (continued) The Association s net benefit expense as at is as follows: Pension benefit plan Other benefits plan SERP 2005 2004 2005 2004 2005 2004 Net expense $ (1,110) $ (865) $ (530) $ (466) $ (738) $ (615) Information about the Association s defined benefit plans as at December 31 is a follows: Pension benefit plan Other benefits plan SERP 2005 2004 2005 2004 2005 2004 Accrued benefit obligation Balance at end of year $ (11,276) $ (8,773) $ (2,837) $ (2,126) $ (5,020) $ (3,978) Plan assets Fair value at end of year $ 8,776 $ 6,952 $ - $ - $ 4,067 $ - Funded status Plan deficit $ (2,500) $ (1,821) $ (2,837) $ (2,126) $ (953) $ (3,978) Unamortized transitional (asset)/obligation (1,956) (2,079) 434 473 314 432 Unamortized past service costs - - 59 64 167 - Unamortized net actuarial (gain)/loss 3,127 2,590 843 574 971 679 Accrued benefit liability, December 31, 2004 (1,329) (1,310) (1,501) (1,015) 499 (2,867) Employer contributions - after measurement date 654 266 - - 55 26 Accrued benefit liability, $ (675) $ (1,044) $ (1,501) $ (1,015) $ 554 $ (2,841) Plan assets by asset category are as follows: Pension benefit plan Other benefits plan SERP 2005 2004 2005 2004 2005 2004 Equities securities 61.80% 61.20% - % - % 31.50% - % Bonds 35.70% 35.90% - % - % 18.10% - % Deposit with CRA - % - % - % - % 49.20% - % Short-term investments 2.50% 2.90% - % - % 1.20% - % 100.00% 100.00% - % - % 100.00% - % 10
6. Employee future benefits (continued) The significant actuarial assumptions adopted in measuring the Association s accrued benefit obligations are as follows (weighted-average assumptions as of December 31): Pension benefit plan Other benefits plan SERP 2005 2004 2005 2004 2005 2004 Discount rate 6.00% 6.25% 6.25% 6.50% 6.00% 6.25% Expected long-term rate of return on plan assets 7.00% 6.25% - - 7.00% - Rate of compensation increase 5.00% 5.00% 4.50% 4.50% 4.00% 4.00% For measurement purposes, inflation of medical expenses was assumed to be 10% decreasing gradually over 5 years to 5%. Inflation of dental costs was assumed to remain constant at 2%. Other information about the Association s benefit plans is as follows: Pension benefit plan Other benefits plan SERP 2005 2004 2005 2004 2005 2004 Employer contributions $ 1,478 $ 1,010 $ 45 $ 42 $ 4,133 $ 104 Employee contributions $ 269 $ 240 $ - $ - $ - $ - Benefits paid $ 199 $ 199 $ 45 $ 42 $ 104 $ 104 11
7. Discretionary Fund 2005 2004 Revenues Market timing fines $ 41,217 $ - Market timing fines interest 234 - New membership fees 48 98 Investigation fines 782 609 Late filing fines 364 329 Continuing education fines 9 57 42,654 1,093 Expenses Market timing fines disgorgement 7,214 - Disciplinary hearings 765 301 Cancellation fees 138 - Continuing education fine refund 39-8,156 301 Excess of revenues over expenses before special projects 34,498 792 Special projects National Registration Database expenses 22 212 recoveries (213) - Canadian Capital Markets Association 236 239 Business continuity amortization 2 - Other expenses 5-52 451 Excess of revenues over expenses $ 34,446 $ 341 8. Commitments and contingencies As at, the basic minimum aggregate annual rental payments, excluding GST and occupancy costs, net of expected recoveries from other parties under long term leases with varying expiry dates to January 10, 2010, for the Association's premises are as shown below. 2006 $ 1,387 2007 1,141 2008 518 2009 279 2010 53 $ 3,378 12
8. Commitments and contingencies The Association is contingently liable for the future rents of its co-tenants, the Canadian Securities Institute, Mutual Fund Dealers Association and Megatrade Corporation Services Inc., in the amount of approximately $990 at. The Association has also entered into agreements to lease office equipment for various periods until 2010. Minimum rent payable for equipment for each of the next five years is as follows: 2006 $ 137 2007 111 2008 31 2009 10 2010 10 $ 299 The Association has also provided a $100 million guarantee on the Canadian Investor Protection Fund ( CIPF ) bank lines of credit. At, the CIPF has not drawn on these lines of credit. The Association has committed to fund its proportionate share of the annual operations of the Canadian Capital Markets Association through the Discretionary Fund. At, the Association has advanced funds of $247 above its annual commitments. This amount is included in prepaid expenses. 9. Financial instruments The carrying values of the Association s financial instruments, which consist of cash and cash equivalents, receivables, loans receivable and payables, approximate their fair value due to their relatively short periods to maturity. The Association does not have significant concentration of credit risk to members. The Association does not have significant exposure to interest rate risk. 10. Comparative figures Certain of the comparative figures have been restated to conform to current year financial statement presentation. 13