Unaudited Condensed Consolidated Interim Financial Statements Element Financial Corporation As at and for the three months ended
CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION [unaudited, in thousands of Canadian dollars] As at As at March 31, December 31, 2013 2012 $ $ ASSETS Cash 68,442 9,997 Restricted funds [note 4] 53,092 51,279 Finance receivables [note 3] 1,468,639 1,294,591 Accounts receivable and other assets 50,493 33,055 Notes receivable 6,740 7,125 Current tax receivable 944 Property, equipment and leasehold improvements 6,970 6,485 Intangible assets 24,384 24,825 Deferred tax assets 18,018 16,152 Goodwill [note 8] 68,631 65,383 1,766,353 1,508,892 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued liabilities 106,727 68,197 Current income taxes payable 1,860 Derivative financial instruments [note 7] 1,134 645 Secured borrowings [note 4] 1,033,181 989,128 Deferred tax liabilities 29,398 25,637 Total liabilities 1,170,440 1,085,467 Shareholders' equity Share capital [note 5] 599,429 330,578 Special warrants [note 5] 101,975 Contributed surplus 6,675 5,712 Accumulated deficit (9,656) (14,341) Accumulated other comprehensive loss (535) (499) Total shareholders' equity 595,913 423,425 1,766,353 1,508,892 See accompanying notes On behalf of the Board: Director Director
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS [unaudited, in thousands of Canadian dollars] Three-month Three-month period ended period ended March 31, March 31, 2013 2012 $ $ REVENUE Interest income - finance receivables 27,297 5,539 Interest expense 8,469 1,364 18,828 4,175 Provision for credit losses [note 3] 1,571 291 17,257 3,884 Amortization of lease origination costs 1,223 616 Amortization of deferred financing costs 574 199 15,460 3,069 Syndication fees 98 26 Fees and other income 6,801 457 Other interest income 317 470 Gain on foreign exchange 119 (52) 7,335 901 22,795 3,970 OPERATING EXPENSES Salaries and benefits 7,162 1,868 General and administrative expenses 3,590 1,198 10,752 3,066 Income before share-based compensation and business acquisition costs 12,043 904 Share-based compensation [note 5] 1,452 920 Income (loss) before business acquisition costs and taxes 10,591 (16) Amortization of intangible assets from acquisition 339 Integration costs [note 8] 3,000 Income (loss) before income taxes 7,252 (16) Provision for income tax 2,567 245 Net income (loss) for the period 4,685 (261) Basic and diluted loss per share [note 6] $0.04 $0.00 See accompanying notes
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS) [unaudited, in thousands of Canadian dollars] Three-month Three-month period ended period ended March 31, March 31, 2013 2012 $ $ Net income (loss) for the period 4,685 (261) OTHER COMPREHENSIVE INCOME (LOSS) Cash flow and foreign exchange hedges [note 7] (2,693) Net unrealized foreign exchange gain on investment in foreign operations 425 Net unrealized foreign exchange gain 1,879 (389) Deferred tax benefit (353) Total other comprehensive loss (36) Comprehensive income (loss) for the period 4,649 (261) See accompanying notes
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY [unaudited, in thousands of Canadian dollars] Accumulated Share capital Special Warrants Contributed surplus Accumulated Deficit other comprehensive loss Total Shareholders' equity $ $ $ $ $ $ Balance, December 31, 2011 243,637 2,625 (7,921) 238,341 Net loss for the period (6,420) (499) (6,919) Options exercised [note 5] 220 220 Shares issued [note 5] 86,721 86,721 Warrants issued [note 5] 101,975 101,975 Employee stock options 3,107 3,107 Non-employee stock options (20) (20) Balance, December 31, 2012 330,578 101,975 5,712 (14,341) (499) 423,425 Net income (loss) for the period 4,685 (36) 4,649 Warrants exercised [note 5] 2,739 (489) 2,250 Shares issued [note 5] 164,137 164,137 Special Warrants exercised [note 5] 101,975 (101,975) Employee stock options 1,452 1,452 Balance 599,429 6,675 (9,656) (535) 595,913 See accompanying notes
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS [unaudited, in thousands of Canadian dollars] Three-month Three-month period ended period ended March 31, March 31, 2013 2012 $ $ OPERATING ACTIVITIES Net income (loss) for the period 4,685 (261) Items not affecting cash Employee stock options [note 5] 1,452 920 Amortization of property, equipment and leasehold improvements 369 107 Amortization of intangible assets 112 Amortization of intangible assets from acquisition 339 Amortization of deferred lease costs 794 568 Amortization of deferred financing costs 574 199 Provision for credit losses 1,571 291 9,896 1,824 Changes in non-cash operating working capital items Accounts receivable and other assets (6,677) (6,691) Accounts payable and accrued liabilities 31,996 11,477 Current income taxes payable (2,804) Deferred tax assets (4,690) 245 Deferred tax liabilities 3,761 Derivative financial instruments 453 Cash provided by operating activities 31,935 6,855 INVESTING ACTIVITIES Business acquisition [note 8] (17,603) Increase in restricted funds 4,750 4,162 Investment in finance receivables (296,251) (156,606) Repayments of finance receivables 199,645 28,676 Purchase of capital assets (603) (93) Purchase of intangible assets (10) Increase in notes receivables 385 1,201 Increase in deferred financing costs (575) (37) Cash used in investing activities (110,262) (122,697) FINANCING ACTIVITIES Issue of share capital, net [note 5] 166,387 14 Repayment of secured borrowings, net [note 4] (33,851) (867) Proceeds from syndication financings 4,236 Cash provided by financing activities 136,772 (853) Net (decrease) increase in cash during the period 58,445 (116,695) Cash, beginning of period 9,997 151,086 Cash, end of period 68,442 34,391 See accompanying notes
1. CORPORATE INFORMATION Element Financial Corporation [the "Company"] is an independent financial services company that originates, sells and manages equipment financings. The Company is organized into three marketing groups. Element Finance, in conjunction with manufacturers and distributors, delivers financing and leasing solutions to end-user customers in the transportation and construction, commercial and industrial, healthcare equipment and the golf cart businesses. Element Capital provides large ticket equipment leases and other secured financing for energy related assets, corporate airplanes and helicopters, rail and road transportation and large scale construction equipment. Element Fleet Management provides vehicle fleet leasing and management solutions and related service programs including service cards, remarketing, maintenance management and accident services. The Company was incorporated under the Business Corporations Act of Ontario (Canada) on May 11, 2007 and commenced operations on that date. The registered office of the Company is 161 Bay Street, Suite 4600, Toronto, Ontario. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These condensed consolidated interim financial statements are prepared in accordance with International Accounting Standards 34, Interim Financial Reporting as issued by the International Accounting Standards Board. These statements have been prepared in comformity with accounting policies disclosed in the consolidated financial statements for the year ended December 31, 2012. During the quarter the Company adopted IFRS 10, Consolidated Financial Statements [ IFRS 10 ], IFRS 12, Disclosure of Interest in Other Entities [ IFRS 12 ], and IFRS 13, Fair Value Measurement [ IFRS 13 ], these accounting policies are described below. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements of the Company as at December 31, 2012 which includes information necessary or useful to understanding the Company s business and financial statement presentation. 1
The results reported in these condensed consolidated interim financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. These condensed consolidated interim financial statements were authorized for issuance by the Board of Directors of the Company on May 13, 2013. Basis of consolidation These consolidated financial statements include the accounts of Element Financial Corporation and its wholly-owned subsidiaries. Transactions and balances among entities have been eliminated upon consolidation. Adoption of accounting policies IFRS 10, Consolidated Financial Statements, is effective for fiscal years beginning on or after January 1, 2013, and replaced IAS 27 Consolidated and Separate Financial Statements. Under IFRS 10, consolidated financial statements include all controlled entities under a single control model. The Company adopted IFRS 10 retrospectively on January 1, 2013. The adoption of IFRS 10 had no impact on the financial statements of the Company. IFRS 12, Disclosure of Interests in Other Entities, is effective for fiscal years beginning on or after January 1, 2013, and establishes disclosure requirements for interests in other entities such as joint arrangements, associates, special purpose entities and off-balance sheet entities. The standard introduces additional disclosure requirements that address the nature of, and risks associated with, an entity s interests in other entities. The additional disclosure requirements of IFRS 12 are not applicable to the interim condensed consolidated financial statements, unless significant events and transactions require that they be provided. IFRS 13, Fair Value Measurement, is effective for fiscal years beginning on or after January 1, 2013, and establishes the definition of fair value and sets out a single IFRS framework for measuring fair value and the required disclosures. The Company adopted IFRS 13 on a prospective basis on January 1, 2013. The adoption of IFRS 13 did not have a significant impact on the financial statements of the Company. 2
3. FINANCE RECEIVABLES The following table presents finance receivables by division, based on obligor location: December 31, 2012 Canada USA EU Total Canada USA EU Total $ $ $ $ $ $ $ $ Element Finance 682,293 302,090 984,383 541,698 285,352 827,050 Element Capital 145,118 23,562 22,971 191,651 113,676 22,997 136,673 Element Fleet Management 508,810 508,810 516,302 516,302 1,336,221 325,652 22,971 1,684,844 1,171,676 285,352 22,997 1,480,025 Unearned income (158,078) (44,175) (7,013) (209,266) (136,815) (36,029) (7,178) (180,022) 1,178,143 281,477 15,958 1,475,578 1,034,861 249,323 15,819 1,300,003 Net realizable value of impaired receivables 393 1,306 1,699 489 2,422 2,911 Unamortized deferred costs and fees 8,910 197 9,107 6,814 (1,287) 5,527 Security deposits and others (6,010) (1,725) (7,735) (4,074) (373) (4,447) Allowance for credit losses (6,725) (3,285) (10,010) (4,411) (4,992) (9,403) 1,174,711 277,970 15,958 1,468,639 1,033,679 245,093 15,819 1,294,591 3
The following tables present portfolio delinquency status by contract balance excluding impaired receivables: Delinquency Status - 31-60 days past due 61-90 days past due Greater than 90 days Total past due Current Total finance receivables $ $ $ $ $ $ Element Finance 2,677 890 212 3,779 845,434 849,213 Element Capital 158,037 158,037 Element Fleet Management 468,328 468,328 2,677 890 212 3,779 1,471,799 1,475,578 Delinquency Status - December 31, 2012 Element Finance 1,973 942 506 3,421 709,451 712,872 Element Capital 112,601 112,601 Element Fleet Management 180 20 44 244 474,286 474,530 2,153 962 550 3,665 1,296,338 1,300,003 Selected characteristics of the finance receivables December 31, 2012 Leases Loans Leases Loans % % % % Weighted average fixed interest rate 8.00 7.32 8.10 7.48 Weighted average floating interest rate 5.65 5.61 5.63 4.45 Portion of fixed interest rate component 83.22 93.30 80.64 92.49 4
Allowance for credit losses An analysis of the Company's allowance for credit losses is as follows: Three-month period ended Year ended December 31, 2012 $ $ Allowance for credit losses, beginning of period 9,403 2,795 Business acquisition 226 6,898 Provision for credit losses during the period 1,571 1,957 Charge-offs, net of recoveries (1,299) (2,134) Impact of foreign exchange rate 109 (113) Allowance for credit losses, end of period 10,010 9,403 Allowance as a percentage of finance receivables 0.68% 0.72% Finance receivables in arrears [90 days and over] 212 550 Arrears as a percentage of finance receivables 0.26% 0.28% Impaired receivables, at estimated net realizable value 1,699 2,911 5
4. SECURED BORROWINGS ON FINANCE RECEIVABLES Secured borrowings outstanding Pledged finance receivables December 31, 2012 December 31, 2012 $ $ $ $ [a] Secured borrowings from Canadian life insurance companies. 346,922 309,609 329,984 289,970 The weighted average effective interest rate, including variable fees 3.64% 3.67% [b] Non-revolving secured borrowings from non-related trusts/bank securitization conduits. 78,295 36,884 88,398 73,294 The weighted average effective interest rate, including variable fees 3.81% 2.64% [c] Revolving floating rate secured borrowings, which bears interest at spread over 30 day CDOR or prime on CAD balances and spread over 30 day Libor on USD balances. 609,440 579,981 693,324 657,387 [d] Revolving fixed rate secured borrowings. 4,770 5,164 The weighted average effective interest rate, including variable fees 3.37% 1,039,427 926,474 1,116,870 1,020,651 [e] General borrowings from Canadian Schedule 1 banks, secured by the totality of the Company's assets, which bear interest at spread over prime on CAD balances and spread over 30 day Libor on USD balances. 68,899 1,039,427 995,373 Deferred financing costs (6,246) (6,245) 1,033,181 989,128 The Company is in compliance with all covenants at and December 31, 2012. 6
[a] The Company has access to committed lines of funding of $360,748 from three Canadian life insurance companies [December 31, 2012 - $360,748]. On January 18, 2013, the Company assumed $1,374 of secured borrowing from one Canadian life insurance company through the acquisition of Nexcap [note 8]. These lenders receive either a security interest and/or legal ownership in direct financing leases. In addition, the Company must maintain certain cash reserves as credit enhancements. These borrowings are advanced to the Company on a tranche-by-tranche basis, with each tranche collateralized by a specific group of underlying finance receivables. The terms of repayment are designed to match the payment terms of the underlying finance receivables. Interest rates are fixed at the time of each advance and are based on Government of Canada Bond yields with maturities comparable to the term of the underlying leases plus a premium ranging from 2.25% to 2.45% [December 31, 2012 2.25% to 2.45%]. The average effective interest rates on secured borrowings outstanding at range from 3.6 % to 4.2% [December 31, 2012-3.6 % to 4.2%]. As at, the Company had access to $167,137 [December 31, 2012 - $223,850] of the available financing under its secured borrowing facilities with the life insurance companies. [b] Non-revolving secured borrowings with non-related trusts/bank securitization conduits, consist of the following secured borrowing agreements: i) Secured borrowing agreement to fund selected eligible pools of financial assets obtained from the purchase of most of the assets of Alter Moneta Corporation. This facility was repaid on March 7, 2013 [December 31, 2012 $11,111]. ii) Secured borrowing agreement to fund an eligible pool of finance assets obtained from the purchase of CoActiv Capital Partners Canada Inc. The facility bears interest at a weighted average fixed interest rate of 1.22% plus variable fees. As at, $21,502 is outstanding on this facility [December 31, 2012 - $25,773]. iii) Various secured borrowing agreements assumed on the acquisition of Nexcap [note 8] on January 18, 2013. As at, these facilities have a weighted average fixed interest rate of 4.22% and $56,793 is outstanding on these facilities [December 31, 2012 $nil]. These secured borrowings are collateralized by specific groups of financial assets, through a legal transfer of the financial assets or a security interest in financial assets, and are repayable on the basis of the amounts collected from the related securitized finance receivables. As at, the Company had access to $17,311 [December 31, 2012 - $24,227] of the available financing under its secured borrowing facilities with the non-related trusts/banking securitization conduits. 7
[c] Revolving floating rate secured borrowings consist of the following: i) Secured borrowing agreement with an unrelated trust for $435,000 to fund eligible pools of finance assets from Element Fleet. The facility bears interest at the 30 day CDOR plus 1.5%, and has an outstanding balance of $407,866 as at [December 31, 2012 - $402,640]. ii) Secured borrowing agreement with an unrelated banking securitization conduit for US $250,000, to fund eligible pools of finance assets from Element Finance in the US. This facility bears interest at 30 day Libor plus 1.5%, and has an outstanding balance of $186,792 [December 31, 2012 - $177,341]. iii) Secured borrowing agreement with a Canadian pension plan for $20,000 assumed on the acquisition of Nexcap [note 8] on January 18, 2013. This facility bears interest at prime plus 2.5%, and has an outstanding balance of $14,782 as at [December 31, 2012 $nil]. These secured borrowings are collateralized by a specific group of financial assets, through a security interest in the financial assets, and are repayable on the basis of the amounts collected from the related securitized finance receivables. These facilities are revolving facilities and amounts repaid can be reborrowed. [d] Revolving fixed rate secured borrowings consist of the following: i) Secured borrowing facility with an unrelated trust for $50.0 million assumed on the acquisition of Nexcap [note 8]. Interest rates are fixed at the time of each advance and are based on Government of Canada Bond yields with maturities comparable to the term of the underlying leases plus a premium of 2.20%, and $4,475 is outstanding on this facility as at [December 31, 2012 $nil]. ii) Secured borrowing facility with an unrelated asset manager assumed on the acquisition of Nexcap [note 8]. Interest rates are fixed at the time of each advance and are dependent on specific customer credit rating. As at, $295 was outstanding on this facility [December 31, 2012 $nil]. These secured borrowings are collateralized by a specific group of financial assets, through a security interest in the financial assets, and are repayable on the basis of the amounts collected from the related securitized finance receivables. These facilities are revolving facilities and amounts repaid can be reborrowed. In addition to collateralized financial assets, restricted funds are reserved for the repayment of the secured borrowings. Restricted funds include cash reserves of $42,333 as at [December 31, 2012 - $36,209] and cash accumulated in the collection account of $10,759 as at [December 31, 2012 - $15,070]. 8
[e] General borrowings from Canadian Schedule 1 banks consist of the following facilities: i) The Company has access to a $125,000 [December 31, 2012 - $125,000] senior revolving facility. As at, no amounts were outstanding on this facility [December 31, 2012 - $49,000 and US $20,000]. The facility bears interest at the prime rate plus 0.75% per annum and Libor rate plus 1.75%, respectively. The facility is payable monthly, and is secured by a general security agreement. ii) On January 18, 2013, a warehouse line of $9,000 assumed as part of the Nexcap acquisition [note 8]. As at, no amounts were outstanding on this facility [December 31, 2012 - $nil]. The facility bears interest at the prime rate plus 1.75% per annum. The facility is payable monthly, and is secured by a general security agreement on the Nexcap subsidiary. 5. SHARE CAPITAL Common shares The Company is currently authorized to issue [i] an unlimited number of common shares without nominal or par value and [ii] an unlimited number of preferred shares, issuable in series. Common shares Shares Amount # $ Balance, December 31, 2011 66,379,553 243,637 Exercise of options 66,546 220 Tax benefit of share issue costs incurred in prior year 5,778 Issuance of shares, net of costs 16,595,900 80,943 Balance, December 31, 2012 83,041,999 330,578 Exercise of options Exercise of warrants 562,500 2,739 Conversion of special warrants 19,500,000 101,975 Issuance of shares, net of costs 22,310,000 164,137 Balance 125,414,499 599,429 9
On November 23, 2012, the Company issued, on a private placement basis, 19,500,000 Special Warrants at a price of $5.65 per Special Warrants for gross proceeds of $110,175. The issuance included pre-tax transaction costs of $11,183 [or after-tax transaction costs of $8,200], inclusive of $2,080 in management compensation. The Special Warrants were automatically exercised on February 6, 2013 upon receipt by the OSC of the qualifying prospectus. On March 12, 2013, the Company issued, through a public offering, 22,310,000 common shares at a price of $7.75 per common share for gross proceeds of $172,902. The issuance included pre-tax transaction costs of $11,944 [or after-tax transaction costs of $8,765], inclusive of $3,000 in management compensation. Warrants On April 5, 2011, and as part of the issuance of 18,750,000 units, the Company granted, as additional compensation, an aggregate of 562,500 broker warrants to the agents. During the quarter ended, 562,500 broker warrants were exercised for total cash proceeds of $2,250 [December 31, 2012 562,500 broker warrants were outstanding]. Employee stock options The changes in the number of employee stock options during the period were as follows: Weighted Number of average options exercise price # $ Outstanding, December 31, 2011 3,783,940 3.98 Granted 1,741,843 5.86 Cancelled (149,874) 4.47 Exercised (27,021) 3.41 Outstanding, December 31, 2012 5,348,888 4.62 Granted 3,341,430 8.06 Cancelled Exercised Outstanding, 8,690,318 5.94 10
The cost of the options granted during the period was determined using the Black-Scholes option valuation model with inputs to the model as follows: Unit Three-month period ended March 31, 2013 Year ended December 31, 2012 Weighted average share price $ 8.06 5.86 Average term to exercise Years 7.0 7.0 Share price volatility [1] % 35 35 Weighted average expected annual dividend yield % 0 0 Risk-free interest rate % 1.40 1.49 [1] Share price volatility was determined based on the historical share price of common shares issued by the Company in recent periods and the historical volatility of similar entities for which share price information was available. 6. EARNINGS PER SHARE Basic and diluted loss per share is as follows: Three-month period ended March 31, 2013 Three-month period ended March 31, 2012 Net income (loss) for the period - basic and diluted $4,685 $(261) Basic and diluted earnings (loss) per share Weighted average number of common shares [number] 107,711,263 66,379,947 Basic earnings (loss) per share $0.04 $(0.00) Weighted average number of diluted common shares [number] 109,924,327 66,379,947 Diluted earnings (loss) per share $0.04 $(0.00) 11
Instruments outstanding at that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they were anti-dilutive for the period presented, include 3,341,430 stock options [March 31, 2012 4,537,437 stock options and 562,500 broker warrants]. 7. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, and consistent with its risk management program, the Company enters into interest rate derivatives to manage interest rate risk, and foreign exchange forward agreements to manage foreign currency exposure. The Company has applied hedge accounting to all derivative financial instruments to which it is a counterparty as at. Cash flow hedging relationships In conjunction with the acquisition of TLSI, the on-going operation of the Element Fleet Management business, and the related $435 million secured borrowing agreement [note 4], the Company has entered into interest rate swap transactions whereby the Company pays a fixed rate of interest based on the amount of Element Fleet Management's fixed rate finance receivables and receives a floating rate of interest based on the Canadian bankers' acceptance rate. Similarly, in conjunction with the acquisition of CoActiv, the on-going operations of Element Finance business in the US, and the related US $250 million secured borrowing agreement [note 4], the Company has entered into swap transactions whereby the Company pays a fixed rate of interest based on the amount of Element Finance operations in the US's fixed rate finance receivables and receives a floating rate of interest based on the US Libor rate. 12
In conjunction with the acquisition of Nexcap Finance Corporation [note 8] on January 18, 2013, the Company assumed interest rate swaps whereby the Company pays a fixed rate of interest based on a portion of secured borrowings [note 4]and receives a floating rate of interest based on the Canadian bankers acceptance rate. These swap transactions are designed to provide the Company with a fixed rate of return on its finance receivables, net of interest paid on secured borrowing agreements. To mitigate the foreign exchange risk on finance receivables denominated in US dollars, the Company uses foreign exchange interest rate swap forward agreements and foreign exchange flat forward agreements. Hedges of net investment in foreign operations The Company uses foreign exchange forward agreements to hedge its net investment in US subsidiaries. Gains or losses on the foreign exchange forward agreements are transferred to equity to offset any gains or losses on the translation of the net investment in subsidiaries. The following table presents the fair value changes related to derivatives used the cash flow net investment hedges included in the Company's results: Three month period ended Three month period ended March 31, 2012 Fair value changes recorded in other comprehensive income (loss) (2,693) 13
The following table summarizes the notional principal and fair value of the derivative financial instruments outstanding as at and December 31, 2012: March 31, December 31, 2013 2012 $ $ Notional principal Interest rate swaps 378,446 411,500 FX forward agreements 141,636 115,227 Derivative assets 520,082 526,727 Fair values Interest rate swaps (889) (516) FX forward agreements (1,194) (408) Derivative liabilities (2,083) (924) As at, the Company has applied $(949) of the fair value of foreign currency forward agreements to the carrying amount of the related hedged finance receivable [December 31, 2012 $(279)]. The fair values of derivatives are determined by the derivative counterparty using the related interest rate swap curves and/or foreign exchange forward values. Derivatives are classified as level 2 financial instruments, whereby fair value is determined using valuation techniques and observable inputs. 8. BUSINESS ACQUISITIONS On January 18, 2013, the Company acquired all of the outstanding shares of Nexcap Finance Corporation, a Canadian leasing company that offers equipment leasing and structured financing solutions to customers in a wide range of industries. The Company completed the transaction for net cash consideration of $17,603 and the assumption of $77,905 of debt financing. 14
The excess purchase consideration over the net fair value of financial and other tangible and intangible assets acquired of $3,248 has been allocated to goodwill. None of the goodwill is expected to be deductible for income tax purposes. The fair value of the assets acquired and liabilities assumed may be subject to adjustments pending the completion of final valuations and post-closing adjustments. The Company accrued integration costs of $3,000 during the threemonths ended. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date, as well as the consideration for the acquisition. January 18, 2013 $ Assets acquired Finance receivables 84,043 Accounts receivable and other assets 10,317 Capital assets 251 Inventories 444 Restricted cash 6,562 Goodwill 3,248 104,865 Liabilities assumed Accounts payable and accrued liabilities 6,533 Secured borrowings 77,905 Deferred income taxes 2,824 87,262 17,603 Source of financing Cash 19,745 Less cash acquired (2,142) 17,603 15
9. CAPITAL DISCLOSURES The Company's objectives when managing capital are to ensure sufficient liquidity to support its financial objectives and strategic plans, to ensure its financial covenants are met and to maximize shareholder value. The Company's capitalization is as follows: Three month period ended Year ended December 31, 2012 [in 000's for stated values, except per unit amounts] $ $ Secured borrowings 1,033,181 989,128 Accounts payable and accrued liabilities 106,727 68,197 Other 1,139,908 1,057,325 Shareholders' equity Share capital and special warrants 599,429 432,553 Contributed surplus 6,675 5,712 Accumulated deficit (9,656) (14,341) Accumulated other comprehensive income (535) (499) Total shareholders' equity 595,913 423,425 1,735,821 1,480,750 Financial leverage 1.73 2.34 The Company considers financial leverage as a key indicator of the strength of the Company's consolidated balance sheet. Under the terms of the Company's secured borrowing facilities, the most restrictive financial leverage cannot exceed 6.0 to 1 at the end of any calendar period. The most restrictive ratio permitted by the arrangements with the life insurance companies is 12.5 to 1. As at, the financial leverage was 1.73 to 1 [December 31, 2012-2.34 to 1]. 16
10. COMPARATIVE FIGURES To conform to the presentation adopted in the current period, certain amounts in the prior period have been reclassified. 17