B R A S C A N 2002 Annual Report > > > A S I N G U L A R F O C U S O N E N H A N C I N G S H A R E H O L D E R V A L U E > > > BNN Focussed on Performance With a singular focus on enhancing shareholder value, Brascan operates in three business sectors – real estate, power generation and financial services. Today, Brascan’s $23 billion portfolio of high quality assets includes 55 commercial properties and 37 hydroelectric power plants. Our two key performance targets are annual growth in cash flow per share of 15% and a long-term goal of 20% cash return on equity. Our strategy of investing in high quality assets delivered strong results in 2002, with an increase in cash flow per share exceeding 15% for the sixth successive year. We invite you to read on to learn more about our strategy for continued growth and enhanced shareholder returns. > > > A P O R T F O L I O O F Q U A L I T Y A S S E T S G E N E R A T I N G S U S T A I N A B L E C A S H F L O W A N D Our results reflect our ability to remain focussed on our performance objectives and strategic priorities. Increasing Cash Flow per Share Performance Objectives Strategic Priorities 2003 2002 2001 2000 1999 $4.25E $3.74 $3.20 $2.55 $2.00 Cash Return on Equity (ROE) 2003 2002 2001 2000 1999 17%E 16% 13% 11% 9% 15% Cash Flow Growth > 20% Cash ROE > >> Increase and strengthen cash flows >> Actively manage assets to improve quality and increase return on capital >> Enhance return on equity with disciplined capital management >> Expand operating businesses with add-on acquisitions >> Pursue major initiatives when assets inefficiently priced MILLIONS, EXCEPT PER SHARE AMOUNTS Per fully diluted common share Cash flow from operations Cash return on book equity Market trading price – TSX / NYSE Trailing cash flow multiple on closing share price Net income Prior to resource investments and gains Including resource investments and gains Dividends paid Total Assets Revenues Operating income Cash flow from operations Free cash flow Net income Prior to resource investments and gains Including resource investments and gains 2002 Cdn$ 2001 Cdn$ 2000 Cdn$ 2002 US$ 2001 US$ 2000 US$ $ $ 3.74 16% 31.75 8.5x 1.93 0.33 1.00 3.20 13% 28.75 9.0x 1.74 1.52 1.00 $ 2.55 11% 21.95 8.6x $ 2.38 16% 20.50 8.5x $ 2.06 13% 18.06 9.0x $ 1.65 11% 14.56 8.6x 1.12 3.41 0.99 1.23 0.21 0.64 1.12 0.98 0.65 0.72 2.20 0.64 $ 22,788 $ 21,929 $ 21,467 $ 14,423 $ 13,792 $ 13,501 4,810 1,906 736 910 414 130 4,716 1,802 601 787 349 311 4,237 1,600 495 645 240 648 3,064 1,214 469 580 264 83 3,042 1,163 388 508 225 201 2,733 1,032 319 416 155 418 Fully diluted number of common shares outstanding 183.9 176.4 175.5 183.9 176.4 175.5 Note: 2001 and 2000 results reflect the consolidation of Brookfield Properties Corporation A C T I V E C A P I T A L M A N A G E M E N T C O N T I N U E T O D E L I V E R R E C O R D P E R F O R M A N C E > > > We are actively managing our capital to enhance shareholder returns. Increasing Free Cash Flow for Reinvestment Balanced Sources of Financing Report Contents % OF UNDERLYING VALUE 2003E 2002 2001 2000 $990 M $910 M $787 M $645 M Equity from Shareholders 50% Non-Recourse Debt 38% Corporate and Other Debt 12% 02 2002 Achievements 03 Report to Shareholders 14 Review of Operations 20 Financial Report 21 Management’s Discussion and Analysis 60 Consolidated Financial Statements 86 Management Team 87 Directors 88 Five-Year Financial Review Financial Performance > Delivered record cash flow from operations of $736 million or $3.74 per share. > Improved cash return on equity to 16%. > Increased underlying value of the company to $47.75 per share. > Achieved net income of $130 million despite a significant restructuring charge in our resource investments. Active Capital Management > Raised $2 billion through 8 debt and preferred equity issues to strengthen our balance sheet and fuel growth. > Generated $450 million from the sale of interests in mature commercial properties. > Repurchased over 7 million common shares and expanded our normal course issuer bid to permit the acquisition of up to 10% of our issued shares. Growth Initiatives > Invested $650 million in 16 hydroelectric generating facilities, strengthening our competitive position in the northeast energy markets. > Invested $775 million to privatize our financial operations, furthering our objective of owning 100% of our operating businesses. > Acquired a 51% interest in the Three World Financial Center office property in New York. Record Year of Achievements 2002 was an active year in which we achieved a number of important initiatives to increase our cash flow,strengthen our balance sheet and broaden our base for continued growth. Report to Shareholders > > > 2 0 0 2 W A S A S I G N I F I C A N T Y E A R O F A C H I E V E M E N T S A N D C H A L L E N G E S > > > In our drive to create shareholder value,we encountered both challenges and opportunities during 2002. Creating Shareholder Value Our principal operating businesses – real estate, power generation and financial services – fared well during 2002, each generating record cash flows. Furthermore, the strength of our balance sheet enabled us to expand our business base and broaden the foundation for future cash flow growth and higher shareholder values. While there are different ways to increase shareholder value, building sustainable cash flows is what we have chosen to concentrate on. We have, focussed much of our reporting to you on our operating cash flows and on the free cash flow available for reinvestment. therefore, In this report we will also try to convey our business strategies and recent achievements, so that you can make your own assessment on how we are doing and where we are heading. To start with, and particularly for those of you who are just getting to know us, summarized below are the five main building blocks upon which our business strategies are based: >> Delivering Sustainable Cash Flows – supported by long-term revenue contracts, locked in place for a number of years. >> Building Competitive Advantages – to give us an edge in our efforts to increase our return on capital invested. >> Disciplined Return on Capital – which drives our daily decisions and sets the parameters for our long-term strategic plans. >> Maintaining a Solid Financial Position – based on investment grade ratings and access to diverse sources of capital in order to expand our businesses when opportunities arise. These five building blocks are an integral part of our business model. The objectives are to safeguard your capital; and twofold: second, to generate superior returns measured over the longer term. first, Delivering on Our Commitments >> Focussing on Quality Assets – purchased on a value basis to generate increasing cash flows, which in turn lead to higher values over time. Last year, we shared with you our vision for refocussing the company in three main areas, each of which is capable of gener- ating sustainable and growing cash flows. 2 0 0 2 N A C S A R B 03 > > > O U R I N C R E A S I N G F O C U S O N A S S E T M A N A G E M E N T A C R O S S T H E C O M P A N Y E N H A N C E D At the same time, we established two first, long-term performance objectives: achievement of 15% annual growth in cash flow from operations; and second, more active management of our capital to increase the cash return on shareholders’ equity. In 2002, we exceeded our cash flow objective with 17% growth in cash flow per share. This helped us to increase the cash return on shareholders’ equity to 16% and take another meaningful step towards our long-term goal of 20%. Equally important, we are confident of achieving further growth in the current year, benefiting from the contractual revenue streams embedded in our businesses and the recent additions to our operating base. Longer term performance will, however, depend to some extent on the economic environment and also on how effectively we execute our strategic plans. investment in 2002 was our One source of significant disappoint- ment in Noranda. Profound structural changes in the world’s magnesium markets led Noranda to record a large non-cash restructuring charge during the fourth quarter of 2002. By taking painful but decisive action, Noranda can now focus on increasing the returns from its other assets. Noranda’s writedown did not affect Brascan’s cash flows; however, it did impact our net income and represents a real loss of value. Fortunately, Noranda represents a much smaller portion of our assets than it did a few years ago, and putting this behind us will enable us to broaden our options for this investment as commodity prices recover. 2002 Performance While we think of our shareholders as owning a piece of each of our assets for the long term, we do recognize that some shareholders rely on, and are measured by, short-term stock market performance. In this regard, we took some comfort from the fact that our common share price has more than held its own in difficult financial markets. But we know full well you cannot take historical or relative performance to the bank and that it is essential each day for us to lay and nurture the seeds for continued growth. We are therefore pleased to report that considerable value was added during the year to the underlying value of the company and our Building Shareholder Value With nearly $1 billion of free cash flow and over $2 billion of current liquidity, we are actively pursuing growth opportunities which complement existing operations,meet our return targets and enhance long-term shareholder value. Acquisitions – Quality assets which produce Markets sustainable cash flows with the potential to appreciate in value – Expansion in existing markets or penetration of new markets where a strong presence can be built Development – Focussed on completion of existing development projects 04 S H A R E H O L D E R V A L U E A N D S T R E N G T H E N E D O U R C O M P E T I T I V E P O S I T I O N > > > future prospects despite the performance of our investment in Noranda. Initiatives completed during 2002 increased the underlying value of your shares to approximately $47.75. Taking into account the $1.00 annual dividend you received, the incremental value created totalled $5.85 per share, an increase of 14% from last year. The analysis we regularly undertake to track growth in the underlying value of your shares is presented in the Management’s Discussion and Analysis section of this annual report. Additional information is also available in the supplemen- tary financial package on our web site. We encourage you to review this information and to make your own assessment of the company’s underlying value. Focussing on Quality Assets Our focus on high quality assets is one of the reasons that we have been able to deliver strong financial results in a difficult business environment. It has always been our practice to focus on achieving long-term sustainable growth rather than seeking short-term gains. We therefore endeavour to own quality assets with secure income streams that can be maintained during difficult times, and as a result are more likely to generate higher returns over the longer term. Our strong operating cash flows in 2002 largely reflect the quality of our businesses. In recent years, we worked proactively to put long- term escalating revenue contracts in place in our real estate and power generating operations with the objective of earning sustainable cash flows throughout the business cycle. We have found that quality assets, which generate increasing cash flows, also tend to rise in value, especially those that require little sustaining capital. With assets such as these, the cash flow generated is also free for selective investment in additional quality assets to expand the base of our operations. With our high quality asset base as a founda- tion and a company-wide commitment to achieve higher returns on capital, we believe we are well positioned to deliver on our commitment to you to maintain our growth, even in these more difficult times. Underlying Value of Brascan($ per share) Our commitment to build long–term shareholder value has steadily increased the underlying value of Brascan. 2002 2001 2000 $47.75 $42.90 $39.33 2 0 0 2 N A C S A R B 05 > > > O P E R A T I N G I N S E V E R A L B U S I N E S S S E C T O R S , W E H A V E A C O M P E T I T I V E A D V A N T A G E , Delivering Sustainable Cash Flows In 2002, we generated a record $3.74 per share in cash flow from operations, a 17% increase over the $3.20 per share earned in 2001 and the sixth consecutive year we have been able to report meaningful growth. Of the $3.74 of cash generated for each of your shares, $1.00, as you know, was paid to you as a dividend. We utilized $1.24 to repurchase common shares of the company, which alone added approximately $0.54 of incremental underlying value to each of your shares. The balance of $1.50 was utilized within our businesses to strengthen and expand our operations. In total, our share of the operating cash flow increased generated from our businesses by 22% to $736 million, while the free cash flow, which includes cash retained for other stake- holders, totalled $910 million – both record achievements. The improved quality of our cash flows, although not as measurable, is of critical importance to our success. Strong performance in difficult markets is made possible by the long-term revenue contracts which produce stable and increasing cash flows. Proactively managing the terms of our com- mercial real estate leases continues to add value and certainty to our cash flows. In 2002, we entered into new rental agreements covering over three million square feet of space with high quality tenants. This represented 10% of our portfolio, nearly triple the amount of space that was scheduled to rollover in 2002. locked-in In addition, we long-term contracts for a number of our power plants, including a 20-year escalating contract for 100% of the power that will be produced by a new generating plant under construction in British Columbia. We also continued to build our asset management business, striving to increase fee revenues and the overall sustainability of cash flows from these operations. Our cash flows will also benefit from assets currently under construction when they come on stream. Many of these assets will start contributing to our cash flows in 2003 or 2004 and include the following projects: a 1.2 million square foot Strong Development Pipeline Brascan currently has $2 billion of assets under construction or development,many of which will begin contributing to our bottom line in 2003 and 2004. Power Generating Plants 8% Commercial Property Developments 51% Residential Property Developments 33% 06 Other 8% A L L O C A T I N G C A P I T A L O N A V A L U E B A S I S I N T O Q U A L I T Y A S S E T S > > > office tower in Midtown Manhattan, pre-leased for 30 years and targeted for completion in the fall of 2003; five hydroelectric power generating plants now under construction; and a number of properties we are developing into master- planned residential communities in California, Virginia, Colorado and Alberta. With a solid foundation of contract-based sustainable cash flows and developments under way in each of our operations, we believe we are well positioned to meet our growth targets in the years ahead. Building Competitive Advantages We strengthened our operating model in 2002 by acquiring 100% of our financial businesses. This was a natural next step for us, after privatizing our power generating operations in 2001. It enabled us to integrate key aspects of our financial operations with our other businesses and increase our return on the capital invested. What this means from an operational perspective is that we are better able to share the expertise of our financial services team across our other operations in order to sharpen our decision making in acquisitions, dispositions and financing of assets. It has also enabled us to make available, more effectively, our extensive industry-specific knowledge and operating strengths to our now wholly-owned financial businesses. The integration of our operations should ensure that our capital commitments start off with a competitive advantage. We have actively narrowed the areas of business to which we commit capital, but broadened our exposure to those where we have a competitive advantage. We believe that the benefits we gain from this approach will lead to higher returns over time. One example of our businesses working together to achieve higher returns is the recent formation of the Brascan Real Estate Finance Fund. As a result of our strong position in the North American real estate market, we identi- fied an opportunity to establish a real estate financing fund providing mezzanine financing to commercial property owners. Managed by an experienced New York-based team, the fund was launched in 2002 with an initial investment of US$200 million. We took a major step forward in strengthening our business model by privatizing and then integrating our financial services operations with our real estate and power generation operations. > > Creating competitive advantages in capital markets and asset management based on operational and industry expertise Strengthening decision making in acquisitions,dispositions and financing of assets 2 0 0 2 N A C S A R B 07 > > > I N A C H A L L E N G I N G E C O N O M I C E N V I R O N M E N T, B R A S C A N ’ S F O C U S O N S U S T A I N A B L E Another example of our competitive advan- tages in action is our restructuring of a gold mine in British Columbia. We recapitalized the mine several years ago based on a $250 per ounce gold price and today we are earning very positive returns with significant cost reductions and higher gold prices. Our ability to withdraw and reallocate capital among businesses is another strat- egy that gives us a competitive advantage and differentiates us from many single sector companies. By leveraging our competitive advantages we will endeavour to acquire, on a value basis, quality operating assets when they are out of favour, such as real estate in the early to mid-1990s and power generating assets today. Disciplined Return on Capital While we will continue to focus on increasing our cash flow from operations as a key ingredient to the creation of value, we do recognize that increasing cash flow is only part of the long-term value creation equation. The effective allocation of resources among our operations is critical to the achievement of superior risk adjusted returns on the capital invested in the business. In doing so, we aim to invest capital in assets when they trade below net asset value, and sell assets when they trade above their net asset value. During 2002, we extracted capital from our real estate operations and invested capital to earn higher returns in our power generating operations. In total, we generated $450 million through the sale of half interests in two commercial office towers to institutional investors seeking solid returns with limited capital risk. We invested $650 million in the acquisition of 16 hydroelectric power plants in Ontario, New Hampshire and Maine. In addition, we acquired an additional half interest in our Lake Superior Power natural gas-fired cogeneration facility in northern Ontario. These acquisitions almost doubled our generating capacity and solidified our position in our selected markets. Achieving superior returns is partly depend- ent on the continued reduction in our cost of capital. We plan to achieve this by maintaining high investment grade credit ratings which Sustainable Cash Flows Our high quality cash flow streams are derived from long-term contracts,many of them in our real estate and power generating operations – averaging 10 years and 17 years,respectively. Commercial Property Occupancy % of Power Sold Under Contract 96% 86% 08 C A S H F L O W S D E L I V E R E D A 14 % I N C R E A S E I N V A L U E > > > provide us with access to a wide range of low- cost financing options. In 2002, we reduced our overall cost of capital by 20 basis points to 9.6%, adding approximately $40 million or $0.20 per share annually to the future bottom line of the company. This was accomplished in part through the issuance of low-cost preferred equity and the use of income trusts and other investment funds favourably leveraged by institutional investors. We also continuously review whether or not to use a portion of the equity you have invested in the business to repurchase common shares and hence increase your ownership interest in each of our operations. We have believed for some time that our common shares represent an attractive place to invest surplus capital, and consequently we have repurchased shares consistently over the past three years. In 2002, we repurchased over 7 million common shares for cancellation. These re- purchases went part of the way to offsetting the dilution arising from the issuance of 11 million common shares to privatize our financial operations during the year. Although we would have preferred not to have issued these shares, we believed it was the only way to complete this strategic initiative. We continue to believe that the case for repurchasing our shares is compelling. At the same time, we know we must maintain a balance between capturing immediate value through share repurchases and utilizing capital to create long-term strategic value in our operations. With these factors in mind, we will continue repurchasing shares for value while remaining cognizant of the need to maintain a strong capital base, financial ratios which exceed debt rating targets, and sufficient free capital in order to pursue attractive investment opportunities as they arise. Maintaining a Solid Financial Position Two years ago, we set out to enhance our liquidity in anticipation of unsettled capital markets and the opportunities that a more challenging business and financial environment might present. In 2002,our common shares represented a compelling investment of capital.We repurchased 7 million common shares for cancellation,bringing the total shares purchased over the last three years to over 17 million shares. Total 2002 $225 M $458 M 2001 $101 M 2000 $132 M 2 0 0 2 N A C S A R B 09 > > > B R A S C A N I S I N A F O R T U N A T E P O S I T I O N T O T A K E A D V A N T A G E O F G R O W T H Our solid financial position enabled us to make a number of key acquisitions and still conclude 2002 in the strongest financial position in the company’s history, including investment grade credit ratings from three recognized North American rating agencies. Today, we have access to over $2 billion of capital for investment and our operations are expected to generate free cash flow of close to $1 billion in the current year. As we enter 2003 we are in the fortunate position of being able to finance additional growth opportunities for each of our businesses, should opportunities present themselves. We have had a relatively high dividend pay- out policy for the past five years. There are a number of reasons for this. In the mid-1990s, when there were fewer investment opportunities to expand our businesses, we decided to pay out a larger portion of our free cash flows. Recently, we have been retaining more of our cash flow in order to strengthen our financial ratios and lower our overall cost of capital. Longer term, we will look at our dividend payouts on a relative and absolute basis and weigh the views of our share- holders, some of whom would like to see lower dividends and some higher. We are also paying close attention to new dividend taxation regula- tions being introduced in the U.S. Growth Opportunities During the past year, we continued to favour organic growth to expand our operations rather than making major acquisitions. At the same time, we withdrew capital from limited growth mature assets which had prospects and invested capital in other more strategic assets with higher return prospects. Our objective is to seek balanced, profitable growth, and not growth for its own sake. We have previously assured you that we will only pursue business expansions, acquisitions or development opportunities that meet our return objectives and build long-term value for shareholders. In this regard, we are exploring further opportunities in the U.S. power generation industry to acquire assets on a deep value basis in relation to their replacement cost. We believe we have a unique, once in a multi-decade opportunity to add quality assets to our power Financial Strength Brascan is in a strong financial position,with solid investment grade ratings from all three North American rating agencies. > > > > 10 Annual free cash flow of approximately $1 billion Over $2 billion of cash,financial assets and undrawn credit facilities currently available for investment Cost of capital improved by 20 basis points in 2002,adding $40 million to annual cash flow from operations Low levels of corporate debt O P P O R T U N I T I E S W I T H O V E R $ 2 B I L L I O N O F C A P I T A L A V A I L A B L E F O R I N V E S T M E N T > > > operating base. This is a result of the turmoil in this industry caused by short-term over-supply and the financial difficulties faced by many industry participants. Our preference is to acquire long-life hydro generating facilities with extensive water storage reservoirs. We will also invest in thermal generating facilities, but only when these can be acquired with a knowledgeable partner at significant discounts to their replace- ment costs. The opportunities to acquire high quality real estate at this point in the business cycle are fewer. We did, however, purchase a half interest this year in the American Express Tower at the World Financial Center, the only tower in this premier office complex in which we did not already have an ownership interest. We are confident that we can use our strong market presence in Manhattan to re-lease and refinance the property to create exceptional long-term value for shareholders. Alternative asset management initiatives represent the strongest area of growth in our financial operations. The launch of the Tricap Restructuring Fund in 2001 and the Brascan Real Estate Finance Fund this year are targeted at meeting the needs of institutional investors seeking alternatives to the equity markets. Our real estate services and reinsurance operations also made strong progress during 2002 in implementing their business plans. Our finite risk reinsurance business, conducted through Imagine Reinsurance, has established itself as a partner of choice for many U.S. and European insurers. With our focus on the three areas in which we have solid expertise and distinct competitive advantages, we believe that broadening our range of activities within these areas is the least risky method to implement our growth strategy. We are often asked if we would consider moving into sectors that are outside of our core expertise. While the simple answer is “No”, there may well be exceptions. Although we may invest relatively small amounts of capital in unrelated businesses through our financial operations, or through restructuring or refinancing opportunities, you will not see us acquiring or building totally unrelated businesses, or businesses that do not Our operating expertise provides us with a competitive advantage in building our alternative asset management initiatives – by attracting institutional partners and leveraging our combined investments to enhance returns. MILLIONS Assets Under Management Imagine Reinsurance $ 1,400 Tricap Restructuring Fund Brascan Real Estate Finance Fund Brascan Opportunity Fund 416 300 50 2 0 0 2 N A C S A R B 11 > > > O U R S T R O N G I N V E S T M E N T D Y N A M I C S P R O V I D E A S O L I D F O U N D A T I O N F O R fit the sustainable cash flow model that is at the heart of our business strategy. Looking ahead, you can expect that the investments we make will be consistent with our strategy of building long-term share- holder value through the ownership of high quality assets which generate sustainable cash flows. These criteria will guide us as we deploy our capital resources in order to increase returns. Strengthening Corporate Governance We embrace sound and effective corpo- rate governance as a priority for building and managing our businesses. With the recent attention given to corporate governance, we took the opportunity to review our current policies and practices, benchmark- ing them against companies acknowledged as leaders. As a result, we made several governance changes during the year to ensure that we remain abreast or ahead of evolving governance practices in both the U.S. and Canada. We re-aligned our audit and compensation committees to ensure that they are comprised totally of independent directors. We commenced expensing management options and introduced minimum hold periods for options exercised as well as share ownership requirements for senior executives. Management also certified our financial statements ahead of any regulatory requirement to do so. The roles of the board Chair and Chief Executive within the company have been separated and, for a number of years, our board has met independently from management under the leadership of a Lead Director. We aim to continually review and improve our corporate governance practices, which are outlined in our Management Information Circular and which can also be accessed on our web site. In Closing You should expect our actions in the years ahead to reflect our determination to long-term shareholder value by build owning quality assets which generate sus- tainable cash flows. Leading Governance Initiatives We are committed to accountability to our shareholders through strong corporate governance practices. > > > > 12 Options expensed in first quarter of 2002 Share ownership requirements introduced for senior executives Financial statements certified by CEO and CFO Board of Directors includes majority of independent directors and an independent Lead Director O U R C O N T I N U E D G R O W T H A N D E N H A N C E D S H A R E H O L D E R V A L U E > > > While none of us can know for sure what the future will bring or whether each of our financial targets will always be met, we are confident that we have the financial resources and the com- mitment of our colleagues to continue building shareholder value. As part-owners of high quality assets, please feel free to stop by and visit our operations and meet our people. The Winter Garden within the World Financial Center in downtown New York recently re-opened, better than ever; the Marché at BCE Place in Toronto is a wonderful place for lunch; and Bankers Hall in Calgary has some great shops. While our power generating plants are in more remote areas, we would also encourage you to visit them if you are in the vicinity. And, when you decide to buy a new home, please consider Royal LePage if you live in Canada. We thank our many customers, business partners and lenders for the support they have provided over the past year. We espe- cially thank Jack Curtin, who is retiring as a director this year, for his guidance and support which have been much appreciated by his board colleagues and management. Lastly, we pay tribute to Allen Lambert, one of our great mentors and partners who passed away this year after a remarkable life as a business leader, an active commu- nity contributor and former Chairman of the Toronto-Dominion Bank. The Allen Lambert Galleria in BCE Place is one of the lasting tributes to Allen’s role in changing the face of downtown Toronto. As a board member for over 20 years, he was an inspiration to all of us and is deeply missed at our weekly management and quarterly board meetings. On behalf of all of my partners and our board, thank you for your continued interest and support. J. Bruce Flatt President and CEO February 12, 2003 Looking ahead,we remain firmly focussed on our five strategic priorities to achieve our performance objectives and maximize shareholder value. > > > > > Increase and strengthen cash flows Actively manage assets to enhance quality and increase return on capital Improve return on equity with disciplined capital management Expand operating businesses with add-on acquisitions Pursue major initiatives when assets are inefficiently priced 2 0 0 2 N A C S A R B 13 > > > O N E O F T H E S T R O N G E S T, L O W E S T R I S K L E A S E P R O F I L E S I N N O R T H A M E R I C A > > > Commercial Properties Operating Profile Operating Cash Flow by Region Strategic Advantages >> 55 premier office properties >> 48 million square feet >> Focussed in financial centres with supply constraints >> Average property size of 1.4 million square feet >> Technologically advanced property infrastructure New York 56% Toronto 11% Boston 5% Denver 6% Calgary 6% Other 16% 14 Underlying Value = $13.2 billion >> Strong leasing profile with one of the lowest annual rollover rates in North America – 4% until 2005 >> Below market leases with embedded contractual increases >> Stable,high credit quality tenant base >> Nine million square feet of development opportunities Above: The reconstructed Winter Garden in the World Financial Center,New York City 300 Madison Avenue New York Bankers Hall Calgary 53 State Street Boston Winter Garden Manhattan Brookfield Homes Orange County,California We own one of the highest quality property portfolios in North America,distinguished by the size,quality and prime locations of our properties. Located primarily in the downtown business districts of major North American cities, our portfolio of 55 commercial properties features primarily large, Class A office towers that average approximately 1.4 million square feet of leasable area and represents 48 million square feet in total. Strategic Focus Our strategy is to acquire quality office properties at below replacement value in supply constrained finan- cial centres, aggressively manage these properties to enhance their value and establish partnerships with high quality institutional investors seeking mature properties. This strategy surfaces value for our shareholders while maintaining our strong position in selected markets. In addition, the quality of our buildings enables us to attract and retain the best tenants and generate a high quality stream of cash flow to deliver strong financial results through the current difficult economic environment. Today, we have one of the strongest, lowest risk lease profiles, with the lowest turnover of leases of any major North American office property company. In 2002, our portfolio generated $1.1 billion in cash flow representing an 11% cash return on assets. Foundation for Growth As one of North America’s leading office property landlords, we are in a strong position with attractive inter- nal and external growth prospects. Contractually embedded rental rate increases and proactive re-leasing of space continue to drive internal growth. As market conditions improve, we have access to nine million square feet of low risk, build-to-suit space for development. And with our strong financial capacity we can take advantage of acquisition opportunities as they arise in our existing markets and other supply constrained markets such as Washington, D.C. and San Francisco. With a strong financial position and a strategic focus on high quality office properties in supply constrained markets, we are confident in our ability to continue delivering growing and secure streams of cash flow from this business. Long-Term Lease Profile – Expiries Currently Available 2003 2004 2010 & Beyond 62% 4% 3% 3% 2005 8% 9% 3% 5% 3% 2006 2007 2008 2009 Financial Performance Underlying Value Book Value MILLIONS 2002 2002 2001 2000 Total assets $13,150 $ 9,429 $ 9,580 $ 9,838 Cash flow from operations 1,076 1,087 Cash return on assets 11% 11% 960 10% 2 0 0 2 N A C S A R B 15 > > > L O N G - L I F E A S S E T S A N D S T R E N G T H T H R O U G H G E O G R A P H I C D I V E R S I T Y > > > Power Generation Operating Profile Operating Cash Flow by Region Strategic Advantages >> 37 hydroelectric power generating plants; one cogeneration facility >> Over 1,600 megawatts of installed capacity >> 14 river systems in North America >> 86% of power under long-term contract Ontario Hydroelectric 50% 16 Underlying Value = $3.5 billion Northeast U.S. Hydroelectric 9% Other Hydroelectric 10% Cogeneration 5% Quebec Hydroelectric 26% >> One of the lowest cost producers of electricity in North America >> Long-life asset base with diversified watersheds >> Key interconnections and transmission facilities in the northeast >> Acquisition opportunities focussed in U.S.markets >> Expertise to take advantage of U.S.power market opportunities Above: Aubrey Falls,Mississagi River in northern Ontario,acquired in 2002 Gartshore Montreal River,Ontario Rapide-des-Cèdres Dam Lièvre River,Quebec Mackay Montreal River,Ontario Riverside Dam New Hampshire Scott Falls Michipicoten River,Ontario We are one of North America’s lowest cost producers of electricity with a history of almost 100 years of profitable hydroelectric operations. Our power generating operations are comprised of 37 hydroelectric generating facilities and one natural gas- fired cogeneration plant. Located on 14 river systems, primarily in northeast North America, these power assets are distinguished by the diversity of watersheds and water storage reservoirs, which reduce the impact of hydrology variations. Strategic Focus We are focussed on building long-term sustainable cash flows by investing in high quality hydroelectric power generating assets at attractive values. During 2002, we increased our generating capacity by 65% through the acquisition of 16 hydroelectric stations in Ontario, Maine and New Hampshire. We operate with a three-part strategy for fueling growth and shareholder returns in our power operations. First, we continually strive to enhance and optimize our existing power operations, through a comprehensive capital investment program to increase the reliability and value of our facilities and improve our on-peak generating capabilities. Second, we are focussed on expanding power generation through the acquisition of hydro- electric or other low cost generation assets and the selective development of new hydroelectric facilities. Lastly, we are strengthening the sustainability of our cash flows through the use of long-term fixed-price contracts to minimize the impact of price fluctuations. Solid Foundation for Growth With a strong base of operational expertise and growing and competitive positions in several key North American markets, our opportunities for continued growth are positive. In particular, we believe the disruption in the power markets throughout the U.S. has provided a window of opportunity for us to acquire generating assets below net asset value from industry participants in financial difficulty. Revenue Profile – Long Term Contracts Financial Performance Long-Term Bilateral & Fixed-Price Contracts Underlying Value Book Value 74% MILLIONS 2002 2002 2001 2000 Total assets $ 3,480 $ 2,338 $ 1,600 $ 1,442 Cash flow from operations Cash return on assets 240 12% 142 10% 123 9% 14% Wholesale Power 12% Transmission & Distribution Regulated Income 2 0 0 2 N A C S A R B 17 > > > C O M P E T I T I V E A D V A N T A G E S T H R O U G H F I N A N C I A L A N D O P E R A T I N G E X P E R T I S E > > > Financial Services Operating Profile Cash Flow Profile Strategic Advantages >> Currently $2 billion of invested assets together with a further $4 billion under management >> Asset management services and investment funds for institutional clients >> Investment on low risk basis >> Specialized industry focus, including real estate,power generation and resources >> Capital markets and business services for a broad range of clients Underlying Value = $2.6 billion 18 Dividend Income 15% Interest Income 47% Capital Gains 16% Commissions and Fees, Net 22% >> Operational expertise and track record in select industry sectors is being utilized to develop and manage leading funds and financial products >> Strong partnerships with institutions seeking alternative-type investments >> Access to significant capital Financial Transaction Services Imagine Reinsurance Brascan Opportunity Fund Tricap Restructuring Fund Property-Related Services by Royal LePage Brascan has established a unique and growing position in the financial services sector with a specialized focus on the management of alternative asset classes. With over $2 billion invested and a further $4 billion under management, we are leveraging our financial expertise and operational know-how in our core businesses to build an asset management business that delivers growing streams of cash flow and enhanced shareholder value. Strategic Focus As an active asset manager, our primary focus is on alternative-type investments, such as direct ownership of infrastructure assets and bridge and mezzanine lending in industry sectors where we have a competitive advantage by virtue of our operating expertise, including real estate, power generation and resources. This class of investment has grown dramatically over the past decade as pension funds and other institutional investors seek to earn higher, stable returns and diversify their portfolio risk. We structure and manage specialized investment funds such as income trusts, capital market funds and preferred share issues for clients and utilizing our own capital. In addition, we provide a growing portfolio of business services to government, institutional and corporate clients. These include a broad array of property-related services under our Royal LePage brand, as well as specialized financial transaction and information processing services which enable us to leverage our industry expertise, our partnerships and customer base across the company. Foundation for Growth With operational expertise and strong management in each of our core industry sectors and a long history as a direct investor in these and other industries, we believe we are uniquely positioned to build on our expertise and track record to solidify our position as an asset manager of choice, and in the process enhance value for shareholders. We will continue to seek opportunities to increase the level of assets under management and our return on assets. Operating Cash Flow by Segment Financial Performance Merchant Banking 17% Capital Markets 35% 26% Corporate Loans 12% 10% Client Services Asset Management Underlying Value Book Value MILLIONS 2002 2002 2001 2000 Total assets $ 2,562 $ 2,099 $ 1,597 $ 1,460 Cash flow from operations Cash return on assets 268 15% 256 17% 222 14% 2 0 0 2 N A C S A R B 19 > > > A C T I V E A N D D I S C I P L I N E D C A P I T A L M A N A G E M E N T F U E L L I N G S T R O N G P E R F O R M A N C E > > > Financial Report Underlying Value > 80% of Brascan’s underlying cash flows are generated by our real estate, power generating and financial operations.Brascan’s assets have a total underlying value of $29 billion,which represents $47.75 per share. Commercial Properties – United States 34% Power Generation 12% Residential Properties 5% Resource Investments 6% Other 13% Commercial Properties – Canada & Other 12% Assets Under Development 9% Financial Operations 9% 20 Management’s Discussion and Analysis of Financial Results Brascan’s business strategy is to own, manage and build businesses which generate sustainable free cash flows. Our current operations are largely in the real estate, power generating and financial sectors. Our goal is to build long-term shareholder value by investing in high quality assets at attractive values, by actively working to increase returns on capital invested in these assets, and by continuously pursuing new opportunities for future growth. We own and operate our businesses directly as well as through partially owned companies and joint venture partnerships. While we would prefer to own 100% of our operating businesses, and we aim to ultimately do so, there are circumstances when it is beneficial to operate through partially owned companies and partnerships. In recent years we have increased the ownership level of both our power generating and financial services businesses to 100% and increased the ownership of our real estate property business above 50% on a fully diluted basis. Accordingly, we have presented the results of these operations in this section on a fully consolidated basis for each of the past three years to provide fully comparable results. Headquartered in Toronto, Canada with offices in New York, Brascan is an international company with most of its revenues denominated in US dollars. The company’s common shares are listed on the New York, Toronto and Brussels stock exchanges. Financial results have historically been reported in Canadian dollars, although we plan to adopt the US dollar as our reporting currency in early 2003. This discussion and analysis contains cash flow and valuation information based on estimates which we believe are appropriate. The nature and form of the information presented is also intended to enable shareholders, investors and analysts to conduct their own assessment of the company’s performance and underlying value, utilizing their own valuation metrics. Financial Profile Brascan’s consolidated assets totalled $22.8 billion as at December 31, 2002 on a book value basis, compared with $21.9 billion at the end of the preceding year. The underlying value of these assets at the end of 2002, based on the methodology and assumptions contained in this analysis, totalled $28.8 billion. For reporting purposes, Brascan segre- gates its assets into operating assets, financial and working capital balances, and investments in the resource sector. Operating assets represent the assets employed in our real estate, power generating and financial businesses, together with assets under development in each of those sectors. These assets represent 81% of our total assets on an underlying value basis and generated approximately 87% of our operating cash flows during 2002. Our operating businesses generate sustainable, low risk, growing streams of cash flow. Relatively low sustaining capital investment is required to maintain these operations, and the values of the assets held by these businesses typically appreciate as the associated cash flow streams grow, rather than depreciate over time as is common with many operating assets. As a result, we believe that the majority of the company’s operating assets are most appropriately valued on a discounted cash flow basis or a cash flow multiple basis. Commercial property assets are principally premier quality office properties located in major North American cities; power generating plants are predominantly hydroelectric power generating facilities located on North American river systems; financial services assets represent investment and other assets owned as part of our financial services business, which is focussed primarily on asset management, client services, capital market activities and merchant banking; and residential property assets represent building lots and houses under construction in master-planned communities. “Our focus on increasing operating cash flows and underlying shareholder value continued to deliver results,despite a weaker economy.” Bruce Flatt CASH RETURN ON EQUITY PERCENTAGE 20% 16% 13% 11% 2000 2001 2002 Goal 2 0 0 2 N A C S A R B 21 Assets under development include properties under development in our commercial and residential property operations as well as our power generating business. Although these assets currently generate minimal cash flow, we expect that they will generate superior levels of cash flow as they are completed. They represent an important component of our strategy to continuously upgrade the quality of our businesses and enhance cash flows from operations. Our two resource investments, Noranda Inc. (“Noranda”) and Nexfor Inc. (“Nexfor”), contributed $100 million of dividend income and, when valued based on their December 31, 2002 stock market prices, represent 6% of the underlying value of our total assets. Given that prices for many of the products produced by these two companies are at cyclical lows, we believe that their values will increase as demand for their products recovers. We finance our operations through diversified sources of capital. Attractive low-risk financial leverage for common shares is achieved through the use of property specific mortgages that have no recourse to Brascan and the issuance of low-rate permanent non-participating securities such as preferred shares. Basis of Presentation “Our goal is to be a leader in reporting financial results.We are working to ensure all our stakeholders know where we are heading and how we are doing.” Our annual report this year contains two sets of financial statements: audited consolidated financial statements prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and pro forma consolidated financial statements. The GAAP financial statements are presented together with the report of the independent external auditor beginning on page 60. These financial statements include the results of Brookfield Properties Corporation (“Brookfield Properties”) on a consolidated basis from December 31, 2001 onward and as an equity accounted investment prior to that date, whereas the pro forma financial statements consolidate the results of Brookfield Properties during 2002, 2001 and 2000. We believe the pro forma presentation is relevant to readers because it provides financial information on a fully comparable basis. Brian Lawson The financial information throughout much of this section is presented on a basis that reflects our real estate operations on a fully consolidated basis for each of the past three years. Accordingly, much of the information is drawn from the pro forma financial statements. It is important to note, however, that the basis of presentation for each set of financial statements is the same with respect to the consolidated balance sheet as at December 31, 2002 and December 31, 2001 and the operating results for the year ended December 31, 2002. The 2001 and 2000 operating results differ in that the pro forma statements include Brookfield Properties on a consolidated basis, whereas the audited financial statements do not. Net income and net income per share are the same in both sets of financial statements. It is also important to note that we place considerable emphasis on cash flow from operations on an aggregate and per share basis. This is because, while cash flow is a non-GAAP measure, it is the key performance measure that we use in evaluating our operations and is an important factor in valuing our businesses and their underlying assets. We do, nonetheless, provide a specific discussion of net income and the two measures are reconciled within both sets of financial statements and within the related discussion beginning on page 49. ASSET VALUE CDN$ BILLIONS 28.8 27.0 21.9 22.8 Performance Measurements 2001 2002 Book Underlying Value As discussed above and in our message to shareholders, we are focussed principally on cash flow as a perform- ance measurement. We have chosen this as a measure because it is tangible, reflects the value of our assets, and is utilized by analysts as a key measure in each of our operating sectors. We also measure performance in terms of the underlying value per share. Each year we evaluate the value added to the business through our various initiatives, and strive to increase the underlying value each year. 22 Finally, while we recognize the value of debt in providing leverage to common share returns, we are committed to maintaining a strong financial position with a prudent amount of leverage. The following table summarizes our key performance measurements: Operating Measures Operating cash flow per share Growth Return on equity Balance Sheet Measures Underlying value per share Growth, including dividends Debt to capitalization Objective 2002 2001 2000 15% 20% 17% 16% 25% 13% 28% 11% 12% 14% 12% 10% Excluding property specific mortgages Corporate borrowings 30% to 40% 20% to 30% 31% 20% 30% 17% 31% 19% Underlying Values and Cash Flows The following is a summarized statement of underlying values, book values and operating cash flows from our operations for the past three years: YEARS ENDED DECEMBER 31 (MILLIONS) Assets Operating assets Underlying Return on Assets1 2002 Value % 2002 Book Value 2002 2001 Operating Cash Flow 2001 2002 2000 Commercial properties 46% $ 13,150 11% $ 9,429 $ 9,580 $ 1,076 $ 1,087 $ Power generating operations Financial operations Residential properties Assets under development 12% 9% 5% 9% 3,480 2,562 1,328 2,631 12% 15% 15% – 2,338 2,099 1,028 2,231 1,600 1,597 1,110 1,631 240 268 166 – 81% 23,151 11% 17,125 15,518 1,750 Cash and financial assets Investment in Noranda and Nexfor Accounts receivable and other 6% 6% 7% 1,659 1,881 2,130 7% 5% 2% 1,659 1,874 2,130 1,966 2,151 2,294 120 100 36 142 256 140 – 1,625 131 96 46 960 123 222 118 – 1,423 133 94 44 100% $ 28,821 9% $ 22,788 $21,929 $ 2,006 $ 1,898 $ 1,694 Liabilities Non-recourse borrowings Property specific mortgages $ 7,887 6% $ 7,887 $ 7,160 $ Other debt of subsidiaries Corporate borrowings Accounts and other payables Shareholders’ interests Minority interests of others in assets Preferred equity – corporate and subsidiaries Common equity Total shareholders’ interests 2,950 1,635 1,994 3,859 1,859 8,637 14,355 5% 6% 5% 16% 6% 16% 14% 2,950 1,635 1,994 2,301 1,859 4,162 3,161 1,313 1,718 2,720 1,596 4,261 $ 467 167 98 88 411 109 666 $ 471 198 95 79 391 106 558 400 193 106 84 348 111 452 911 8,322 8,577 1,186 1,055 Per common share $ 47.75 16% $ 23.46 $ 24.68 $ 3.74 $ 3.20 $ 2.55 $ 28,821 9% $ 22,788 $21,929 $ 2,006 $ 1,898 $ 1,694 1 As a percentage of average book value “We are making great strides in integrating the asset management model across our businesses to focus decision making and create competitive advantages.” George Myhal OPERATING CASH FLOWS PERCENTAGE Commercial Properties – U.S. 34% Commercial Properties – Canada & Other 20% 12% Power Generating Operations 8% 13% Other 5% 8% Resource Investments Residential Properties Financial Operations 2 0 0 2 N A C S A R B 23 The underlying value for a Brascan common share was $47.75 at December 31, 2002 compared with $42.90 at the end of 2001, representing an increase in value of 14% including dividend distributions. The following table summarizes the significant contributions to the growth in value: Underlying value, beginning of year Operating cash flow Business initiatives undertaken during 2002 Dilution from privatization of financial business Repurchase of common shares Change in market value of resource investments Other Increase in underlying value during the year Less: dividends paid Underlying value, end of year $ 42.90 3.74 2.37 (0.91) 0.54 (0.12) 0.23 5.85 (1.00) 4.85 $ 47.75 “We have benefitted significantly from the proactive leasing efforts of the last several years. Long-term leases with high quality tenants helps insulate us from economic turbulence.” The largest contribution to the growth in underlying value was the operating cash flow generated during the year. Business initiatives, in particular the expansion of our power generating operations and increased returns in our residential property business, added $2.37 per share. We did suffer dilution on the issuance of common shares in connection with the privatization of our financial business; however we believed that this was justified by the benefits of completely integrating this business. We were also able to mitigate some of this dilution through the repurchase of 7.1 million common shares during the course of the year. Commercial Properties Our commercial property portfolio is comprised largely of premier office properties located in six North American Ric Clark cities, with New York, Boston and Toronto accounting for 74% of the portfolio on a book value basis. In addition, we own properties in Brazil. The composition of the company’s commercial property portfolio at the end of 2002 and 2001 was as follows: COMMERCIAL PROPERTIES – Operating Cash Flow by Region Canada & Other North America 33% YEARS ENDED DECEMBER 31 REGION New York, New York Toronto, Ontario Boston, Massachusetts Denver, Colorado Calgary, Alberta Minneapolis, Minnesota Other North America Brazil Leasable Area 2002 Book Value 2002 2001 Operating Cash Flow1 2001 2000 2002 (000’S SQ.FT.) (US$ MILLIONS) (US$ MILLIONS) 10,113 $ 3,295 $ 3,203 $ 339 $ 329 $ 313 6,883 2,163 3,017 7,570 3,008 1,515 2,216 778 332 354 380 393 129 307 737 332 357 520 391 209 276 36,485 5,968 6,025 – – – – – – 65 32 36 37 28 48 26 611 15 60 64 30 35 34 29 34 29 584 62 55 36,485 $ 5,968 $ 6,025 $ 686 $ 701 $ 9,429 $ 9,580 $ 1,076 $ 1,087 $ $ 57 28 32 29 28 19 33 539 86 19 644 960 63% U.S. – New York – Boston – Denver – Minneapolis 24 4% Brazil Operating income from properties sold Lease termination income and property gains Total US$ Total Cdn$ Underlying value estimate $ 13,150 $13,200 1 Commercial property revenue less operating costs The book value of our portfolio declined during the year, principally as a result of the sale of 50% interests in properties located in Toronto and Calgary for proceeds of US$290 million. These transactions resulted in gains of US$60 million, which are included in lease termination income and property gains. The underlying value of our commercial properties is based on a 7.75% capitalization rate applied to estimated 2003 net operating income, prior to lease termination income and other property gains, which is projected to be US$645 million. This represents a 5.6% increase over the US$611 million earned in 2002 on current properties owned. The capitalization rate is unchanged from that utilized at the end of 2001, although we have sold properties at higher valuations over the past 12 months. Commercial property operations contributed US$686 million (Cdn$1,076 million) of operating cash flow in 2002, similar to 2001 as a result of internal growth on current properties held, the rollover of below market leases and contractual increases embedded in leases, as well as the proactive renegotiation of leases prior to their maturity in order to capture termination income, property gains and higher rental rates. Components of Operating Cash Flow The components of commercial property operating cash flow were as follows: YEARS ENDED DECEMBER 31 (US$ MILLIONS) Operating income from current properties Operating income from properties sold Lease termination income and property gains Operating cash flow – US$ Operating cash flow – Cdn$ 2002 $ 611 15 626 60 $ 686 $ 1,076 2001 $ 584 62 646 55 $ 701 $ 1,087 2000 $ 539 86 625 19 644 960 $ $ The components of the change in commercial property operating cash flow from year to year is broken down into contractual increases in rental rates, rollovers of rents, lease-up of vacancies, acquisitions and dispositions over the past three years as follows: YEARS ENDED DECEMBER 31 (US$ MILLIONS) 2002 2001 2000 “Our active participation in the revitalization of Lower Manhattan strengthens our position as a leading owner of premier New York office properties.” John Zuccotti Prior year’s net operating income before lease termination income and property gains Changes due to: (i) Contractual increases on in-place leases (ii) Rental increases achieved on in-place rents on re-leasing (iii) Lease-up of vacancies (iv) Acquisitions and dispositions, net (v) Lease termination income and property gains Current year operating cash flow – US$ Current year operating cash flow – Cdn$ (i) Contractual increases on in-place leases $ 646 $ 625 $ 579 17 8 5 (50) 626 60 13 17 15 (24) 646 55 $ 686 $ 1,076 $ 701 $ 1,087 $ $ 16 13 7 10 625 19 644 960 COMMERCIAL PROPERTIES – Income from Current Properties US$ MILLIONS 611 584 539 During 2002, contractual increases in leases added US$17 million to net operating income. This compares to a US$13 million increase in 2001 and US$16 million in 2000. Our leases typically have clauses which provide for the 2000 2001 2002 collection of rental revenues in amounts that increase every five years. Given the high credit quality of tenants in our buildings, there is generally lower risk in realizing these increases. It is our policy to record rental revenues in accordance with the actual payments received under the terms of our leases, which typically increase over time. 2 0 0 2 N A C S A R B 25 (ii) Rental increases achieved on in-place rents on re-leasing During 2002, higher rental rates on the re-leasing of space in the portfolio contributed US$8 million of increased cash flow over 2001. At December 31, 2002, average in-place net rent throughout the portfolio was US$21 per square foot, unchanged from December 31, 2001 and higher than the US$19 per square foot in place at December 31, 2000. Despite challenging leasing environments in our major markets, the company was able to maintain its average in-place net rental rate, largely as a result of re-leasing initiatives which were completed at an average rental uplift of US$3 per square foot on space leased in 2001 and significant re-leasing initiatives in 2002 at equivalent rental rates. Average market rents declined by US$4 per square foot in 2002 due to combined pressure from sub-lease space and decreased tenant demand, primarily in Denver, New York and Boston. However, given the low expiry rate of leases in the next two years, this decrease in market rents will not have a substantial impact on net operating income in the short-term. The following table shows the average estimated in-place rents and current market rents for similar space and services in each of the company’s markets: “We have one of the strongest lease profiles in North America with minimal lease expiries over the next few years.” Steve Douglas AS AT DECEMBER 31, 2002 New York, New York Midtown Downtown Toronto, Ontario Boston, Massachusetts Denver, Colorado Calgary, Alberta Minneapolis, Minnesota Other North America Brazil Average – US$ Average – Cdn$ 1 Excludes development sites Leasable Area1 Average Lease Term Average In-Place Net Rent Average Market Net Rent (000’S SQ. FT.) (YEARS) (US$ PER SQ. FT.) (US$ PER SQ. FT.) 1,693 8,420 6,883 2,163 3,017 7,570 3,008 1,515 2,216 36,485 36,485 14 11 7 5 5 10 5 9 5 10 10 $ 36 32 18 30 14 11 11 9 45 $ 55 34 21 40 15 15 11 14 50 $ $ 21 33 $ $ 25 39 Average in-place and market rents are approximately 80% of average market rates, which should provide growth in cash flows as existing space is re-leased. (iii) Lease-up of vacancies A total of approximately 270,000 net square feet of vacant space was leased in 2002 and 2001, contributing US$5 million to net operating income during 2002. Contribution to growth from the leasing of vacant space was larger in 2001 because of vacancies leased in properties acquired in 2000. The company’s total portfolio occupancy rate at December 31, 2002 declined from 97% to 96%, primarily due to vacancy increases in New York, Boston, Denver, and Minneapolis. The leasing profile for 2002, 2001 and 2000 is shown in the following table: “The quality and location of our properties,when combined with disciplined cost management and customer services, produces an important competitive edge.” AS AT DECEMBER 31 THOUSANDS OF SQ. FT. New York, New York Toronto, Ontario Boston, Massachusetts Denver, Colorado Calgary, Alberta Minneapolis, Minnesota Other North America Brazil Jack Delmar Total 1 Excludes development sites 26 2002 2001 2000 Leasable Area1 % Leased Leasable Area1 % Leased Leasable Area1 % Leased 10,113 6,883 2,163 3,017 7,570 3,008 1,515 2,216 36,485 98% 96% 97% 90% 97% 85% 97% 92% 96% 10,113 6,866 2,163 3,014 6,330 3,008 3,171 1,593 36,258 100% 97% 99% 96% 96% 95% 94% 98% 97% 9,846 7,099 2,163 3,156 6,471 3,008 5,157 1,593 38,493 100% 99% 100% 95% 94% 96% 95% 97% 97% (iv) Acquisitions and dispositions,net The sale of properties reduced operating cash flow by US$50 million in 2002 and US$24 million in 2001. This compares with a net increase of US$10 million in 2000 due to properties acquired during that year. In 2002, we sold partial interests in properties located in Toronto and Calgary, following the sale of partnership interests in two Boston office properties during 2001. Other property sales in these two years included two other office buildings and non-core retail assets primarily in Canada. In 2002, we acquired 1.2 million vacant square feet located in Tower Three of our World Financial Center complex in New York City, which is included as an asset under devel- opment pending re-leasing of the property and tenant buildout of premises. (v) Lease termination income and property gains During 2002, we generated US$60 million of gains on the sale of partial interests in office properties referred to above for proceeds of US$290 million. In 2001, the sale of a 49% interest in two Boston properties and a 50% inter- est in Fifth Avenue Place in Calgary resulted in gains of US$24 million and US$30 million, respectively. No gains on the sale of office properties were recorded in 2000. Lease termination payments were nil in 2002, compared to US$1 million in 2001 and US$19 million in 2000. While these types of payments are opportunistic and difficult to predict, the dynamic tenant base typical of our buildings should enable us to generate similar opportunities in the future. Tenant Relationships and Lease Maturities An important characteristic of our tenant profile is its strong credit quality. Special attention is directed at our tenants’ credit quality in order to ensure the long-term sustainability of rental revenues through economic cycles. The tenant profile on average represents an “A” credit rating. Major tenants with over 400,000 square feet of space in the portfolio include Merrill Lynch, RBC Financial Group, CIBC, Petro-Canada, Imperial Oil and J.P. Morgan Chase. Where possible, we endeavour to sign long-term leases. Although each market is different, the majority of our leases have terms ranging from 10 to 20 years. As a result, the average amount of leasable area in the total portfolio maturing annually is less than 5% until 2005. In New York and Boston, where the 2002 to 2005 maturities were aggressively re-leased in 2000 and 2001, scheduled maturities during these three years combined represent less than 5% of our space in these markets. This is particularly important in downtown Manhattan where the portfolio has virtually no leases maturing until late 2005. Given the events of September 11, 2001 and the work required to rebuild transportation infrastructure in downtown Manhattan over the next 24 months, our proactive leasing program has benefitted the company substantially. The following is the breakdown of lease maturities by market: THOUSANDS OF SQ. FT. New York, New York Toronto, Ontario Boston, Massachusetts Denver, Colorado Calgary, Alberta Minneapolis, Minnesota Other North America Brazil Total % of total Currently Available 2003 2004 2005 2006 2007 2008 237 221 48 245 191 386 37 177 35 166 26 263 108 376 83 132 167 260 86 132 112 195 118 104 560 1,069 226 396 275 50 70 131 231 195 587 173 634 482 206 596 52 369 60 234 149 72 107 118 243 276 376 445 307 68 52 27 Total 2010 & Leasable Area1 2009 Beyond 93 315 – 69 111 91 79 263 8,495 4,012 754 1,060 5,683 1,288 763 668 10,113 6,883 2,163 3,017 7,570 3,008 1,515 2,216 1,542 1,189 1,174 2,777 3,104 1,161 1,794 1,021 22,723 36,485 4% 3% 3% 8% 9% 3% 5% 3% 62% 100% 1 Excludes development sites “At this stage of the business cycle,we are actively recycling capital from our mature long- term leased office properties into higher return opportunities.” David Arthur COMMERCIAL PROPERTIES – Lease Expiries PERCENTAGE Currently Available 4% 2010 & Beyond 62% 2003 2004 3% 3% 8% 2005 9% 2006 3% 5% 3% 2007 2008 2009 2 0 0 2 N A C S A R B 27 Power Generating Operations Our power generating operations are predominantly hydroelectric facilities located on river systems in North America, many of which contain reservoirs that enable us to generate increased revenues through the sale of power during the peak periods of high demand. The composition of our power generating operations at December 31, 2002 and 2001 was as follows: YEARS ENDED DECEMBER 31 (MILLIONS) Capacity (MW) 2002 2001 Book Value 2002 2001 Operating Cash Flow 2001 2002 2000 Ontario, Canada Quebec, Canada Northeast United States Other North America Total Underlying value estimate 939 266 157 274 1,636 451 266 – 274 991 $ 1,216 $ 429 304 389 769 442 – 389 $ 131 $ 63 22 24 $ 84 45 – 13 70 47 – 6 $ 2,338 $ 1,600 $ 240 $ 142 $ 123 $ 3,480 $ 2,416 The book value of our power generating assets increased principally due to the acquisition during the year of additional operations totalling 645 megawatts (“MW”) for $650 million. The underlying value of our power generating operations is based on a 12 times multiple of normalized net operating cash flows, assuming 10-year average precipitation levels and an average selling price of US3.5 cents per kilowatt hour (“KWh”). Power generating operations contributed $240 million to operating cash flow in 2002, representing a significant increase over the $142 million and $123 million contributed in 2001 and 2000, respectively. The increase in oper- ating cash flow is due to the acquisition of additional generating capacity during the year, a return to more normal water levels, operational improvements and higher electricity prices. Power Generating Base We own operating interests in 38 power generating stations with a combined generating capacity of 1,636 MW. All but one of these stations are hydroelectric facilities located on river systems in six geographic regions within North America, specifically Ontario, Quebec, British Columbia, Maine, New Hampshire and Louisiana. We also own a 110 MW natural gas-fired combined cycle cogeneration facility located in northern Ontario. These facilities are capable of producing approximately 6,750 gigawatt hours (“GWh”) of electricity annually. “Brascan was among the most active acquirers of high quality hydroelectric power generation assets in 2002,and we see a number of opportunities to maintain this momentum in the current year.” Harry Goldgut POWER GENERATION – By Average Long-Term Generation (GWh) Our power operations are strategically located with transmission interconnections between Ontario and Quebec. Interconnections with adjacent US markets in Michigan and Maine are also planned. These interconnections allow us to sell surplus power into the highest-priced regions. Ontario 48% Quebec 24% Brascan’s power generating operations are located on 14 river systems in nine different watersheds which provides important diversification of water flows to minimize the impact of fluctuating hydrology. Water storage reservoirs represent 25% of total generating capacity and provide additional protection against short-term changes in water supply and enable us to optimize selling prices by generating and selling power during higher-priced peak 14% Northeast U.S. periods. 14% Other North American 28 Our total power generation capacity is summarized in the following table: Ownership Generating Stations Generating Units Installed Capacity (MW) Long-term Average Generation (GWh) 2002 Ontario, Canada Northern Ontario Power Mississagi Power Valerie Falls Power 100% 100% 65% Lake Superior Power – Cogen Plant 100% Quebec, Canada Liévre River Power Pontiac Power Northeast United States Maine Power New Hampshire Power Other North American Power Operations Louisiana HydroElectric Power Powell River Energy Total 100% 100% 100% 100% 75% 50% 12 4 1 1 18 3 2 5 6 6 12 1 2 3 38 22 8 2 3 35 10 7 17 31 21 52 8 7 15 119 331 488 10 110 939 238 28 266 126 31 157 192 82 274 1,610 750 52 850 3,262 1,428 210 1,638 730 185 915 677 261 938 1,636 6,753 “Driving operating synergies within our newly acquired and current operations is a key priority for our power operations in 2003.” We are developing five hydroelectric power plants in Ontario, British Columbia and Brazil. These are included in assets under development as they are not yet at an operational stage. We are also examining a number of Richard Legault opportunities to acquire additional hydroelectric power plants in North America with the objective of continuing to expand our generating base. Operating Margins Our power generating operations are among the lowest cost producers of electricity in North America, with cash operating costs of approximately one cent US per kilowatt hour. This compares favourably with other forms of power generation. Our low cost structure results from the high quality of our assets, the continued application of new tech- nology and the recent re-turbining of many of our facilities. Our power plants are also environmentally preferable to most other forms of electricity generation and therefore receive favourable regulatory treatment. The revenue, costs and operating margins of our power generating operations are as follows: AS AT DECEMBER 31, 2002 US CENTS PER KWH Ontario, Canada Quebec, Canada Northeast United States Other North America Weighted Average Revenue Cash Costs Operating Margins 3.5 3.4 4.0 2.4 3.5 1.1 0.7 1.5 0.4 1.0 2.4 2.7 2.5 2.0 2.5 POWER GENERATION – Operating Costs US CENTS PER KILOWATT HOUR 6.4 4.5 2.6 1.0 Hydro- electric Coal Gas Oil 2 0 0 2 N A C S A R B 29 Cash Flow Growth Operating cash flow from our power generating business increased in 2002 to $240 million, up from $142 million in 2001. The following table illustrates the change in operating cash flows from the company’s power generating business during the past three years: YEARS ENDED DECEMBER 31 (MILLIONS) Prior year’s net operating income (i) Increase in generation from existing capacity (ii) Operational and price improvements (iii) Acquisitions 2002 $ 142 21 33 44 2001 $ 123 (8) 21 6 $ 2000 91 28 4 – Current year operating cash flow $ 240 $ 142 $ 123 (i) Increase in generation from existing capacity Generation from existing capacity increased to 4,356 gigawatt hours during the year, up from 3,777 gigawatt hours in 2001, with the return to more normal precipitation levels across the system after unusually dry conditions in the prior year. Particular increases in hydrology were experienced in northern Ontario and western Quebec, increasing cash flow from our power generating operations by $21 million in 2002 compared to a decline of $8 million in 2001. “We continually strive to optimize our existing power facilities,through improved productivity,increased reliability and enhanced on-peak generating capacity.” (ii) Operational and price improvements During 2002, operational improvements, including our ability to utilize stored water to capture on-peak economics, as well as higher prices, led to an increased contribution of $33 million in 2002 versus $21 million in 2001. Our contracts typically have clauses which provide for price increases every year, primarily linked to inflation. (iii) Acquisitions The acquisition of 16 hydroelectric stations in Ontario, Maine and New Hampshire totalling 645 megawatts contributed an incremental 1,228 gigawatt hours of production in 2002 and an additional $44 million of operating Colin Clark cash flow during the year. This compares to $6 million in 2001. These acquisitions contributed meaningfully during the year and are expected to contribute more fully during 2003. They also further diversify our watersheds, thereby reducing hydrology risk, and position us as a leading generator in Ontario and an important entrant in the New England electricity markets. Contract Profile Brascan maximizes the stability and predictability of power generating revenues through the use of fixed price con- tracts to minimize the impact of price fluctuations, and diversification of watersheds and water storage reservoirs to minimize fluctuation in generation levels. Approximately 86% of Brascan’s projected 2003 revenue is subject to fixed price contracts or regulated rate base agreements. The remaining revenue is generated through the sale of power on a wholesale basis. Due to the low cost of hydroelectric power and the ability to concentrate generation during peak pricing periods, Brascan is able to generate attractive margins on its uncommitted capacity. Brascan’s long-term sales contracts have an average term of 17 years and counterparties are almost exclusively customers with long-standing credit history or investment grade ratings. POWER GENERATION – Operating Cash Flow CDN$ MILLIONS 240 142 123 2000 2001 2002 30 The following table illustrates Brascan’s contract profile over the next five years: Long-term bilateral contracts Financial contracts Total fixed price contracts Uncommitted wholesale Total Financial Operations 2003 2004 2005 2006 74% 72% 72% 72% 12 86 14 24 96 4 20 92 8 6 78 22 2007 72% – 72 28 100% 100% 100% 100% 100% Our financial operations include our asset management, client services, capital market, merchant banking and corporate lending activities. These activities generate steady streams of investment income, commissions and fees. The following table shows the composition of the assets deployed in our financial activities at December 31, 2002 and 2001 together with their underlying values and operating cash flows: YEARS ENDED DECEMBER 31 (MILLIONS) Securities Loans receivable Investments Other / Commissions and fees, net Total Underlying value estimate 1 Investment income and fee revenue,net of directly applicable operating costs Book Value 2002 2001 Operating Cash Flow1 2001 2002 2000 $ 454 $ 277 $ 73 $ 65 $ 1,186 214 1,854 245 1,162 108 1,547 50 115 21 209 59 134 15 214 42 16 148 9 173 49 $ 2,099 $ 1,597 $ 268 $ 256 $ 222 $ 2,562 $ 2,030 “The successful launch of a number of funds furthers our goal of leadership in the alternative asset management business and sets the stage for the introduction of additional funds in the future.” The underlying value of our financial operations is based on the book value of the securities, loans receivable and Jeff Blidner investment balances, plus our fee generating businesses valued at 12 times net fee income. Operating cash flow from our financial business increased in 2002 due to an increased level of invested assets and higher yields during the period. Fees and commission revenues also increased with the continued focus on these businesses. Invested assets include securities, loans receivable and investments owned principally as part of our asset management, capital market and merchant banking activities. Operating cash flow from these assets consists primarily of the associated investment income. Other assets of $245 million represent the non-financial assets employed in our fee generating client service businesses, such as fixed assets, intangibles and goodwill, including $116 million of goodwill which arose on the purchase of minority shareholdings during the year. Commissions and fees are presented net of associated operating expenses and represent commissions and fees generated by our various activities, principally client services and asset management. FINANCIAL OPERATIONS – Diversification of Assets % OF BOOK VALUE Loans Receivable 56% Investments 10% Other 12% 22% Securities 2 0 0 2 N A C S A R B 31 Securities The following table sets out the composition of securities owned by the company as part of our financial operations, together with the associated cash flows: YEARS ENDED DECEMBER 31 (MILLIONS) Book Value 2002 2001 Operating Cash Flow 2001 2002 2000 Debentures Preferred shares Common shares Total $ 259 $ 31 164 $ 59 33 185 $ 454 $ 277 $ 33 2 38 73 $ $ 11 2 52 65 $ $ – – 16 16 Securities are owned as part of the company’s capital market and asset management activities. These investments are typically liquid, publicly quoted securities. The book values of these investments as at the end of 2002 and 2001 approximate their realizable value. Operating cash flows include dividend and interest receipts, as well as gains realized during the year. We expanded our capital market activities during 2002. Emphasis was placed on high yield debentures, with a focus on issuers within our core areas of expertise. Our insight into these industries provides us with an excellent under- standing of the fundamental underpinnings of the securities. We have also increased our holdings in select common share investments, again based on strong fundamental research. Operating cash flows from securities increased during the year, consistent with the increased level of invested assets, supplemented by capital gains on several high yield debenture and common share positions that were closed out during the year. Loans Receivable “Our financial restructuring expertise allows us to partner with leading institutions and investors in conducting these activities.” Sam Pollock The following table sets out the composition of loans receivable held by the company as part of its financial operations, together with the associated cash flows: YEARS ENDED DECEMBER 31 (MILLIONS) Corporate loans Merchant banking loans Restructuring loans Total Book Value 2002 2001 Operating Cash Flow 2001 2002 2000 $ 857 237 92 $ 573 432 157 $ $ 78 28 9 $ 84 39 11 99 43 6 $ 1,186 $ 1,162 $ 115 $ 134 $ 148 FINANCIAL OPERATIONS – Securities Portfolio % OF BOOK VALUE Preferred Shares 7% 36% Common Shares 57% Debentures Loans receivable include corporate, merchant banking and restructuring loans provided to our clients to assist them in achieving their business objectives. Corporate loans provide clients with financing to execute their normal ongoing business operations and, due to their nature, carry a lower yield than merchant banking loans. Merchant banking loans enable our clients to expand their businesses and complete specific strategic initiatives. Restructuring loans assist clients whose businesses are otherwise viable but are experiencing short-term financial difficulties or are improperly capitalized. The following table presents the activity in our loan portfolios together with the average rate of return at year end: YEARS ENDED DECEMBER 31 (MILLIONS) 2001 Advances Repayments 2002 Corporate loans Merchant banking loans Restructuring loans Total $ 573 $ 1,379 $ 1,095 $ 432 157 137 47 332 112 857 237 92 $1,162 $ 1,563 $ 1,539 $ 1,186 1 As at December 31,2002.Excludes fees and participation gains Average Rate1 7% 10% 10% 8% 32 Corporate loans Corporate loans increased during the year as several new opportunities arose where we could assist our clients through the provision of financing of this nature. Despite the increase in corporate loans during the year, we plan to de-emphasize this business going forward and expect these balances to decline. Merchant banking loans We held a reduced portfolio of merchant banking loans at December 31, 2002 compared with 2001, as considerable caution was exercised during the year in pursuing new opportunities. In addition to interest, we generally earn orig- ination and other fees in connection with these loans, and also receive equity participations which provide the opportunity for additional returns. Fees and participations of this nature contributed $14 million during the year, which are included in fee income. Restructuring loans Restructuring loans declined during the year as several initiatives were concluded. New initiatives in the future will be principally conducted through the Tricap Restructuring Fund. This includes investments in debt securities issued by Doman Forest Products, which recently approved a restructuring plan proposed by Tricap Restructuring Fund and other holders of Doman securities. Investments The following table sets out investments owned by Brascan as part of our financial operations, together with the associated cash flows: YEARS ENDED DECEMBER 31 (MILLIONS) Common equity Northgate Exploration Banco Brascan Other Other Total Book Value 2002 2001 Operating Cash Flow 2001 2002 2000 $ 105 $ 59 33 17 2 62 34 10 $ – 21 – – $ – $ 15 – – $ 214 $ 108 $ 21 $ 15 $ – – – 9 9 “We are meeting the needs of institutional investors for alternative-type investments with a growing array of innovative funds backed by operational expertise within the Brascan group.” Bruce Robertson Investments represent common share positions acquired primarily as a result of merchant banking and restructuring activities. In some circumstances, these investments may be less liquid and require active involvement by Brascan. The largest such investment is our 40% common share interest in Northgate Exploration, which has a book value of $105 million and a quoted market value at December 31, 2002 of $124 million. Northgate issued $250 million of FINANCIAL OPERATIONS – Loan Portfolio common share equity during 2002, of which Brascan subscribed for $106 million. Proceeds were used in part to % OF BOOK VALUE repay merchant banking loans from Brascan. Common share investments also include our investment in Banco Brascan, an investment bank in Brazil that is owned 40% by each of Brascan and Mellon Bank. Restructuring 8% Merchant Banking 20% 72% Corporate 2 0 0 2 N A C S A R B 33 Operating Cash Flows The following table illustrates the nature of the earnings from our financial operations. The more stable sources of cash flow, such as interest and dividend income, as well as commissions and fees, represent 84% of total cash flow. YEARS ENDED DECEMBER 31 (MILLIONS) 2002 2001 2000 Investment income Interest income Dividend income Capital gains Commissions and fees, net Fee revenue Commissions, net Expenses $ 126 $ 145 $ 148 40 43 209 326 64 (331) 59 28 41 214 309 66 (333) 42 19 6 173 285 78 (314) 49 Total $ 268 $ 256 $ 222 Interest income declined by $19 million during the year due to a lower interest rate environment as Brascan’s loans receivable are principally floating rate. Dividend income increased significantly during the year, due in large part to increased earnings from our investment in Banco Brascan. Capital gains recorded in 2002 were derived principally from our capital market activities. Commissions and fees increased during the year reflecting the continued expansion of our asset management and client services activities. We continue our efforts to increase the contribution from our fee generating activities, which represented 22% of operating cash flow in 2002. Commissions and fees, net of expenses, originated from the following activities: YEARS ENDED DECEMBER 31 (MILLIONS) Andrew Maleckyj Client services Asset management Capital markets Merchant banking Unallocated expenses Total 1 Fees and commissions,net of expenses Operating Cash Flow1 2001 2002 2000 $ $ $ 35 27 9 14 85 37 2 13 13 65 35 7 11 10 63 (26) (23) (14) $ 59 $ 42 $ 49 Net commissions and fees from our client services group declined modestly during the year, constrained in part by start-up costs for several newer ventures. We provide a wide range of specialized administrative advisory and other business services to corporations, institutions and individuals in areas where we have experience and strong brand recognition. Examples of these services include residential and commercial property brokerage, corporate relocations, residential property appraisals, facilities management, property transaction closing services and voucher services. Asset management fees increased significantly during the year due to the establishment of new investment funds. “Within our financial operations we undertake intensive credit research and analysis to uncover capital market opportunities in order to earn above average returns in the industries in which we have expertise.” FINANCIAL OPERATIONS – Cash Flow Contribution PERCENTAGE Interest Income 47% Net Fees 22% 16% Capital Gains 15% Dividend Income 34 The Imagine Group completed its second full year of operations and continued to expand its finite risk reinsurance activities, leading to an increase in funds under management. The Tricap Restructuring Fund, launched in late 2001, was also active during the year. Capital market fees represent underwriting and advisory fees, which declined during the year in line with reduced capital market activities in North America. We participated in 34 underwriting transactions in 2002 which raised $10 billion for clients and we were also involved in a number of merger, acquisition and debt refinancing advisory mandates. Merchant banking activities resulted in a modest increase in fees and participation gains arising from loan orgination and commitments, as well as participation interests received in prior years. Assets Under Management The fastest growing segment of our financial operations is the management of alternative investments on behalf of institutional investors as well as for our own account. Assets under management increased to $4.2 billion at year end, primarily through the introduction of several new funds and expansion of existing funds. The Brascan Real Estate Finance Fund was established during the year to invest in real estate mezzanine loans in the United States. In addition, we acquired an ownership interest in Queensway Investment Counsel, which provides traditional investment management services to institutional investors in Canada and the United States. AS AT DECEMBER 31 (MILLIONS) Fund Name The Imagine Group Investment Type Fixed income Highstreet Asset Management Equities/fixed income Brascan Real Estate Finance Fund Mezzanine loans Queensway Investment Counsel Tricap Restructuring Fund Diversified Canadian Financial I Diversified Canadian Financial II Mavrix Fund Management Century Property & Casualty Brascan Opportunity Fund Total 1 Includes committed capital and managed assets Equities/fixed income Private equity/debt Preferred shares Preferred shares Mutual funds Fixed income Venture capital Total Assets 1 2002 $ 1,400 735 300 600 416 215 325 100 85 50 2001 $ 1,100 600 – – 400 215 325 75 85 50 $ 4,226 $ 2,850 “Client services for government,institutional and corporate clients are expected to become an increasingly significant contributor to our bottom line.” Cyrus Madon FINANCIAL OPERATIONS – Operating Cash Flow CDN$ MILLIONS 268 256 222 2000 2001 2002 2 0 0 2 N A C S A R B 35 Residential Properties Our residential property activities are focussed on single family home building in North America. We also build residential condominiums in South America. The composition of the residential property portfolio at December 31, 2002 and 2001 was as follows: YEARS ENDED DECEMBER 31 (US$ MILLIONS) California Virginia / Ontario / Florida Alberta / Colorado Brazil Total – US$ Total – Cdn$ Underlying value estimate 1 Revenue less cost of sales Book Value 2002 2001 $ 351 174 64 61 $ 350 179 89 80 $ 650 $ 698 $ 1,028 $ 1,110 $ 1,328 $ 1,120 Operating Cash Flow1 2001 2002 2000 $ $ $ 52 19 24 10 105 166 $ $ $ 45 20 20 5 90 140 $ $ $ 40 16 21 2 79 118 “We believe that the spin-off of our U.S. residential property business will enable us to surface incremental value from our portfolio of premier master-planned communities.” The underlying value of our residential operations of $1,328 million is based on an eight times multiple applied to 2002 operating cash flow of $166 million, compared with a value of $1,120 million at December 31, 2001 based on an eight times multiple applied to 2001 operating cash flow of $140 million. Our residential assets in North America include infrastructure improvements and land and construction in progress in master-planned communities in nine markets located in three geographic regions. The residential assets in South America include infrastructure improvements and land and construction in progress for condominium construction in two markets. The aggregate book value of our residential properties was $1,028 million at December 31, 2002. Sales Levels Ian Cockwell Operating cash flow from our residential operations increased to $166 million in 2002, up from $140 million in 2001 due to increased selling prices and improved margins. Total home sales were 3,248 for the year compared with 3,306 in 2001. Lot sales in 2002, including lots sold to other builders, totalled 6,034 compared with 6,581 in 2001. Details of the home and lot sales by regional market are as follows: RESIDENTIAL PROPERTIES – Geographic Distribution % OF BOOK VALUE Virginia / Ontario / Florida YEARS ENDED DECEMBER 31 UNITS California Virginia Florida Colorado Ontario Alberta Brazil Total Home Sales Lot Sales 2002 2001 2000 2002 2001 2000 1,147 1,228 1,156 1,429 3,117 2,434 470 337 – 374 385 535 482 420 – 330 395 451 566 158 – 480 300 469 3,248 3,306 3,129 791 337 277 441 2,224 535 6,034 735 420 111 398 1,349 451 6,581 797 158 83 1,413 1,302 469 6,656 Alberta / Colorado Sales Revenue Our home building operations generated an average home price in 2002 of US$340,000 per unit, an increase of 5% over 2001 levels. The increase in the average home price was largely due to a higher-end mix of houses sold, especially in California and northern Virginia, and increased pricing on housing sales across North America. California 54% 27% 10% 9% Brazil 36 The following is a breakdown of average prices realized on home sales in the last three years: YEARS ENDED DECEMBER 31 (US$) California Virginia Florida Ontario Alberta Brazil Total – US$ Total – Cdn$ 2002 Average Price Sales 2001 Sales Average Price 2000 Average Price Sales (MILLIONS) (THOUSANDS) (MILLIONS) (THOUSANDS) (MILLIONS) (THOUSANDS) $ 624 193 137 51 38 65 $ 1,108 $ 1,740 $ $ $ 544 411 407 136 99 134 340 534 $ 602 176 145 43 37 72 $ 1,075 $ 1,709 $ $ $ 490 365 345 130 94 160 325 517 $ 542 172 77 71 30 68 $ 960 $ 1,430 $ $ $ 469 304 487 148 100 145 307 457 The backlog of orders as at December 31, 2002 for delivery in 2003 represents approximately 30% of expected 2003 closings, similar to levels experienced at the beginning of the previous year. Assets Under Development Assets under development consist of commercial property development sites and related density rights, residential land acquired for future use in our home building and condominium development businesses, power generating plants under construction and other assets held for or under development. None of these assets currently contribute to our operating cash flows. We prefer to acquire fully developed assets at discounts to their replacement cost. However, we will selectively undertake development initiatives in our core operating businesses when we believe we can adequately assess and manage the risk and where the rewards are sufficiently attractive. In this regard, office properties are developed on “Our residential operations continue to benefit from the low interest rate environment and desire of homeowners to enjoy the lifestyle advantages of master-planned communities.” a selective basis in markets where tenants require expansion space; fully entitled residential land is purchased at Alan Norris substantial discounts to build-out value and developed for use in our residential home building and condominium operations; and power generating sites and other assets are selectively acquired and developed when the risk- adjusted returns substantially exceed those from purchasing existing assets. The composition of our assets under development at December 31, 2002 and 2001 was as follows: AS AT DECEMBER 31 (MILLIONS) Commercial development properties Power generating plants Residential development land and infrastructure Other Total Underlying value estimate Book Value 2001 $ 576 95 790 170 $ 1,631 $ 1,926 2002 $ 1,138 170 750 173 $ 2,231 $ 2,631 RESIDENTIAL PROPERTIES – Average Home Price US$ THOUSANDS 340 325 307 The underlying value of our assets under development is assumed for these purposes to be equal to either their book value or an estimate of sale value under reasonable circumstances at their current stage of development. 2000 2001 2002 2 0 0 2 N A C S A R B 37 Commercial Development Properties Commercial development properties at December 31, 2002 and 2001, included the following projects: AS AT DECEMBER 31 (MILLIONS) 300 Madison Avenue, Manhattan Three World Financial Center, Manhattan Bay-Adelaide Centre, Toronto Penn Station, New York and other lands Total Book Value $ 2002 690 269 114 65 2001 $ 382 – 108 86 $ 1,138 $ 576 The largest asset currently under development is a 1.2 million square foot office tower in midtown New York which is fully leased to CIBC. This premier office tower, located at 42nd Street and Madison Avenue in Manhattan, is expected to be completed in the fall of 2003. Total costs to complete the project are being funded by a non- recourse loan secured by the project and backed by the CIBC lease. During 2002, we acquired a 51% interest in Tower Three of our World Financial Center complex in downtown Manhattan, with 1.2 million square feet of space. The purchase price represented a substantial discount to replacement value and we are currently in the process of refurbishing the space and securing new tenants with the objective of achieving full occupancy during 2004. We own a 50% interest in the Bay-Adelaide Centre development property, located in Toronto’s downtown financial district, which includes fully operational revenue-generating parking facilities. When completed, this development will accommodate 1.8 million square feet of office and residential space. Our other development sites include the proposed new Penn Station at West 31st Street and 9th Avenue in midtown New York which is currently in the permitting process and expected to eventually encompass 2.5 million square feet “Investing in restructuring opportunities within our areas of expertise reduces risk and enhances our ability to maximize returns.” Peter Gordon of office and related space. In São Paulo, Brazil, we own the BCN Office Park, which consists of 800,000 square feet of existing office space in the process of being leased, and 6 million square feet of density for future office and residential buildings to be developed over the next 10 years. Power Generating Plants Power generating plants under development had a book value of $170 million at December 31, 2002. These assets represent the investment to date in five hydroelectric power plants now under construction with total capacity of 136 megawatts – one in northern Ontario, one in British Columbia and three in southern Brazil. AS AT DECEMBER 31 (MILLIONS) Estimated Capacity (MW) Estimated Completion Date Book Value 2002 2001 ASSETS UNDER DEVELOPMENT % OF BOOK VALUE Power Generating Plants 8% Other 8% High Falls Pingston Creek Brazil Other Total 45 30 61 – 136 Q1/2003 Q2/2003 Ongoing Ongoing $ 63 27 52 28 $ 170 $ $ 22 14 24 35 95 51% 33% Commercial Development Properties Residential Development Land 38 Residential Development Land Residential development land and related infrastructure, which had a book value of $750 million at December 31, 2002, is located in the following geographic areas: AS AT DECEMBER 31 (MILLIONS) California Virginia / Ontario / Florida Alberta / Colorado Brazil Total Book Value 2002 $ 364 60 158 168 2001 $ 302 60 213 215 $ 750 $ 790 Improvements made to residential development lands prior to the sale of residential units include the construction of roads, sewers, utilities and other infrastructure related to the development of single family and condominium housing. These assets are located in 14 submarkets across North America and Brazil. Cash and Financial Assets Brascan maintains modest cash balances and utilizes excess cash to repay revolving credit lines and invest in shorter term financial assets which provide a source of liquidity to fund future initiatives. Cash balances at December 31, 2002 were $525 million. Financial assets represent securities that are not actively deployed within our financial operations which can, with varying degrees of timing, be liquidated and utilized to fund strategic acquisitions. The following table shows the composition of these assets together with their underlying values and associated cash flow streams: YEARS ENDED DECEMBER 31 (MILLIONS) Cash Government bonds Corporate bonds Debentures Preferred shares Common shares Securities Total Underlying value estimate 1 Investment income Book Value 2002 2001 $ 525 $ 607 $ 80 263 101 627 63 65 165 106 958 65 1,134 1,359 Operating Cash Flow1 2001 2002 2000 41 8 16 5 46 4 79 $ 44 $ 48 6 9 3 64 5 87 8 6 5 62 4 85 $ 1,659 $ 1,966 $ 120 $ 131 $ 133 $ 1,659 $ 1,966 The market value of the financial assets approximates their realizable value. “The turnaround of Northgate Exploration is a prime example of the integration of our financial restructuring expertise and operational know-how.” Terry Lyons CASH AND FINANCIAL ASSETS % OF BOOK VALUE Preferred Shares 37% Common Shares 4% Cash 32% Debentures 6% 5% 16% Corporate Bonds Government Bonds 2 0 0 2 N A C S A R B 39 Investment in Noranda and Nexfor In addition to our three operating businesses, we own 40% of Noranda, an international base metals company, and 43% of Nexfor, a building products company. YEARS ENDED DECEMBER 31 MILLIONS EXCEPT PER SHARE AMOUNTS Number of Share Shares Price Market Value 2002 2001 Book Value 2002 2001 Operating Cash Flow1 2001 2002 2000 Investment in Noranda 96.6 $14.21 $ 1,373 $ 1,412 $ 1,385 $ 1,680 $ Investment in Nexfor 61.6 8.25 508 441 489 471 $ 76 24 Total 1 Dividend receipts $ 1,881 $ 1,853 $ 1,874 $ 2,151 $ 100 $ 75 21 96 $ $ 75 19 94 The underlying value of our investments in Noranda and Nexfor is based solely on their quoted market prices as at December 31, 2002 and 2001. Cash flows from these investments represent the dividends we receive. We received dividends of $76 million from our investment in Noranda, up from $75 million in 2001 and 2000. During 2002 we reinvested $38 million of the dividends received from Noranda into common shares of Noranda, increas- ing our interest by 2.5 million common shares. During 2002, we received dividends of $24 million on our investment in Nexfor shares, up from $21 million in 2001 and $19 million in 2000 as a result of our purchases of additional shares. Our interest in Nexfor increased from 41% to 43% as a result of our reinvestment of the dividends received into shares of Nexfor. Noranda Inc. During the past two years, Noranda completed the development of a number of world-class mining and processing assets, shut down inefficient production capacity and implemented productivity improvements to enhance performance. Since base metal prices have recently been at historical lows, Noranda has recorded unsatisfactory operating results. Furthermore, the restructuring of its business has resulted in substantial charges arising from closures and other restructuring initiatives, including a significant non-cash writedown on Noranda’s magnesium operations in the fourth quarter of 2002. We are continuing to work with Noranda management to achieve their objectives and extended our support through a commitment to invest $300 million in preferred shares of Noranda to ensure that it is strongly positioned as commodity markets recover. “Decisive action to streamline Noranda’s operations and exit unproductive businesses in 2002 strongly positions us as historically low commodity prices rebound.” Derek Pannell NORANDA – Operating Cash Flow During 2002, Noranda reported a net loss of $700 million compared with a net loss of $92 million in 2001. The following table shows Noranda’s segmented cash flow from operations and net income: % BY SEGMENT YEARS ENDED DECEMBER 31 (MILLIONS) 2002 2001 2000 Cash flow from operations Copper Nickel Aluminum Zinc Discontinued operations and unallocated costs Cash flow from operations Restructuring charges Depreciation and other non-cash items Copper 48% Nickel 36% 16% Aluminum $ 324 241 104 – (156) 513 (647) (566) $ 167 189 92 39 (243) 244 (58) (278) $ 412 501 104 152 (251) 918 – (625) Net income (loss) $ (700) $ (92) $ 293 The decline in cash flow from operations over the past two years was mainly a result of lower prices for the commodities Noranda produces. On average, copper, aluminum and zinc prices were down 7% relative to 40 2001 averages. Noranda is traded on both the New York and Toronto Stock Exchanges. Further information on Noranda is available from its web site at www.noranda.com. Nexfor Inc. During 2002, Nexfor reported net income of US$13 million compared with US$12 million in 2001. Although Nexfor recorded another year of low income due to depressed prices for its products, the market for building products should rebound as the North American economy recovers. This should significantly improve Nexfor’s financial results and enhance the value of our investment in this company. Nexfor successfully expanded its building products operations with the acquisition of three oriented strandboard mills located in the south-central United States and the successful start-up of a fourth facility constructed in Alabama. As a result of these expansions and margin improvement programs, Nexfor is well positioned to generate substantially higher cash flows as prices for its products recovers. The following table shows Nexfor’s segmented cash flow from operations and net income: YEARS ENDED DECEMBER 31 (US$ MILLIONS) 2002 2001 2000 Cash flow from operations Building products Specialty papers Unallocated costs Cash flow from operations Depreciation and other non-cash items Net income – US$ Net income – Cdn$ $ 125 24 (37) 112 (99) 13 20 $ $ $ $ $ 70 47 (33) 84 (72) 12 19 $ 115 91 (25) 181 (87) 94 147 $ $ Nexfor is traded on the Toronto Stock Exchange. Further information on Nexfor is available from its web site at www.nexfor.com. Working Capital and Other Balances The composition of Brascan’s working capital and other balances is as follows: “We continued to strengthen our market position in the U.S.with the acquisition of three mills in 2002,making us the second largest U.S. producer of oriented strandboard.” Dominic Gammiero YEARS ENDED DECEMBER 31 MILLIONS Working capital balances Real estate Power generation Financial International and other Other items Future income tax assets Prepaid expenses and other assets, deferred credits, provisions and other liabilities 2002 2001 Accounts Accounts Receivable Payable Accounts Accounts Receivable Payable Net Net NEXFOR – Operating Cash Flow $ 630 $ 568 $ 124 211 311 159 247 499 1,276 1,473 84 770 854 – 521 521 62 (35) (36) (188) (197) 84 249 333 136 $ 602 $ 486 $ 116 % BY SEGMENT 70 273 533 89 163 481 1,478 1,219 (19) 110 52 259 Specialty Papers 16% 215 601 816 – 215 499 499 84% Building Products 102 317 576 Net working capital and other $ 2,130 $ 1,994 $ $ 2,294 $ 1,718 $ Other operating costs were $88 million, compared with $79 million in 2001 and $84 million in 2000. Costs increased during the year with the increased activity across the operations. 2 0 0 2 N A C S A R B 41 Capital Resources and Liquidity We maintain access to a broad range of financing sources to lower our overall cost of capital and thereby enhance returns for common shareholders. In particular, we endeavour to maximize the use of low risk forms of non-partic- ipating capital to provide stable low cost financial leverage. We also strive to maintain adequate liquidity at all times. During the year, we raised $2 billion through the issuance of preferred equity, income trust units and long-term debt, enabling Brascan to end the year in the strongest position in the company’s history. Our capital resources include corporate debt, borrowings which do not have recourse to Brascan, as well as preferred and common equity issued by Brascan and certain of our operating business units. Following the recent privatization of our financial operations, the minority interests of others in our assets consists principally of public securities issued by our real estate businesses held by shareholders other than Brascan. The following schedule details our consolidated liabilities and shareholders’ interests at the end of 2002 and 2001 and the related cash costs: YEARS ENDED DECEMBER 31 MILLIONS Liabilities Non-recourse borrowings Underlying Value 1 Cost of Capital2 2002 Book Value 2002 2001 Operating Cash Flow 2001 2002 2000 Property specific mortgages $ 7,887 Other debt of subsidiaries Corporate borrowings Accounts and other payables Shareholders’ interests Minority interests of others in assets Preferred equity – corporate and subsidiaries Common equity 2,950 1,635 1,994 3,859 1,859 8,637 14,355 6% 5% 6% 5% 16% 6% 16% 14% $ 7,887 $ 7,160 $ 2,950 1,635 1,994 3,161 1,313 1,718 2,301 2,720 1,859 4,162 8,322 1,596 4,261 8,577 467 167 98 88 411 109 666 $ 471 198 95 79 391 106 558 1,186 1,055 $ 400 193 106 84 348 111 452 911 $ 28,821 9% $ 22,788 $ 21,929 $ 2,006 $ 1,898 $ 1,694 1 Underlying value of liabilities and preferred equity represents the cost to retire on maturity 2 As a percentage of average book value “We are striving to enhance the communication of our strategy and achievements in order to better inform all of our stakeholders.” Katherine Vyse SOURCES OF FINANCING % OF UNDERLYING VALUE Our overall weighted average cost of capital, using a 20% return objective for our common equity, is 9.6%. This reflects the low cost of non-participating preferred equity issued over many years, principally in the form of perpetual preferred shares, as well as the low cost of non-recourse investment grade financings which are achievable due to the high quality of our commercial properties and power generating plants. Corporate Borrowings 5% Non-Recourse Borrowings In addition, the strength and diversification of the income streams generated by our various operating businesses reduce financing costs below that of many peers who operate in only one of our selected business sectors. Through the continuous monitoring of the balance between debt and equity financing, we strive to reduce our weighted 50% 38% average cost of capital on a risk averse basis and thereby improve common shareholder equity returns. Shareholders' Interests 7% Accounts and Other Payables Liabilities Property Specific Mortgages Where appropriate, we finance our operating assets with long-term non-recourse borrowings such as property specific mortgage bonds, which do not have recourse to Brascan or our operating businesses. 42 The composition of the company’s borrowings which have recourse only to specific assets is as follows: YEARS ENDED DECEMBER 31 (MILLIONS) Commercial properties Power generating plants Total 1 Interest expense Average Term Cost of Capital 2002 Book Value 2002 2001 Operating Cash Flow1 2001 2002 2000 11 4 10 6% 8% 6% $ 6,973 $ 6,604 $ 406 $ 432 $ 364 914 556 61 39 36 $ 7,887 $ 7,160 $ 467 $ 471 $ 400 These borrowings leverage common shareholders’ equity with long-term lower risk financing, which is largely fixed rate and has an average maturity of 10 years. Commercial property borrowings represent mortgage debt on real estate properties. Our commercial property operations have very little general corporate indebtedness since we finance this business primarily with non- recourse mortgages on an individual stand-alone property basis. At the end of 2002, these mortgages had an average term of 11 years and a fixed interest rate of 6%. Power generation borrowings consist of non-recourse power plant mortgages with an average fixed interest rate of 8%. We are in the process of refinancing the mortgages coming due in 2003 and anticipate extending the maturities to at least 2008. Principal repayments on property specific mortgages due over the next five years and thereafter are as follows: MILLIONS Real estate Power generation Total 2003 2004 2005 2006 2007 Beyond Total $ 565 $ 252 $ 420 $ 501 $ 442 $ 4,793 $ 6,973 483 8 237 5 3 178 914 $ 1,048 $ 260 $ 657 $ 506 $ 445 $ 4,971 $ 7,887 Other Debt of Subsidiaries The composition of the borrowings which have recourse only to assets owned by the company’s subsidiaries is as “Our strategy in the resource sector is to adopt the same discipline and commitment to return on capital as has been applied in our other operations.” Aaron Regent follows: YEARS ENDED DECEMBER 31 (MILLIONS) Power generating operations Financial operations Residential properties 2 International operations and other Total 1 Interest expense 2 Portion of interest expensed as cost of sales Average Term Cost of Capital 2002 3 4 2 3 3 6% 5% 8% 9% 5% Book Value 2002 2001 $ 592 927 678 753 $ 596 935 826 804 Operating Cash Flow1 2001 2002 2000 $ $ 34 46 20 67 $ 46 44 27 81 51 49 27 66 COMPOSITION OF BORROWINGS % OF BOOK VALUE $ 2,950 $ 3,161 $ 167 $ 198 $ 193 Corporate 13% These borrowings are largely corporate debt, issued by way of corporate bonds, bank credit facilities, financial obligations and other debt borrowed by subsidiaries. Power generating debt consists largely of US public notes 63% 24% which are rated BBB by S&P, Baa3 by Moody’s and BBB(high) by DBRS and which mature in 2004 and 2005. The corporate bonds issued by financial operations are rated A(low) by DBRS and BBB+ by S&P. At December 31, 2002, our financial operations had $463 million undrawn committed credit facilities, which are largely utilized as Property Specific 1 1 Non-recourse back-up facilities for the issuance of commercial paper. Residential property debt consists primarily of construction financing which is repaid from the proceeds on sale of building lots, single family houses and condominiums and is renewed on a rolling basis as new construction commences. Other Debt of Subsidiaries 1 2 0 0 2 N A C S A R B 43 A portion of the outstanding debt of our international operations is denominated in local currencies and is utilized to hedge our operating assets against local currency fluctuations, the most significant being that of the Brazilian Real. Brascan does not guarantee any debt of subsidiaries with the exception of US$272 million included in debt of international operations that is otherwise supported by financial assets within these operations. Principal repayments on other debt of subsidiaries due over the next five years and thereafter are as follows: MILLIONS Power generation Financial operations Residential properties International operations and other 2003 2004 2005 2006 2007 Beyond Total $ – 178 423 181 $ 276 26 182 41 $ 316 136 68 23 $ $ – 125 5 2 $ – 250 – 73 – 212 – 433 $ 592 927 678 753 Total $ 782 $ 525 $ 543 $ 132 $ 323 $ 645 $2,950 Corporate Borrowings Corporate borrowings consist of long-term and short-term obligations of Brascan. Long-term corporate borrowings are in the form of bonds and debentures issued into the Canadian and US capital markets both on a public and private basis. Short-term financing needs are typically met by issuing commercial paper that is backed by long-term fully committed lines of credit with a broad range of North American and international banks. The following table summarizes the nature and terms of Brascan’s corporate credit facilities: YEARS ENDED DECEMBER 31 (MILLIONS) Commercial paper and bank term debt Publicly traded term debt Privately held term debt Total 1 Interest expense Cost of Capital 2002 3% 6% 8% 6% Book Value 2002 2001 Operating Cash Flow1 2001 2002 2000 $ 115 1,343 177 $ 20 1,113 180 $ $ 1,635 $ 1,313 $ 10 73 15 98 $ $ 23 50 22 95 $ 35 45 26 $ 106 “The recent launch of the Royal LePage Residential Royalties Income Fund strengthens our focus on asset management and expands our offerings of structured capital market products.” Simon Dean Brascan had $650 million of committed corporate credit facilities which are utilized principally as back-up credit lines to support commercial paper issuance, of which $603 million were undrawn at year end. Principal repayments on corporate borrowings due over the next five years and thereafter are as follows: MILLIONS 2003 2004 2005 2006 2007 Beyond Total NON-RECOURSE BORROWINGS – Debt of Subsidiaries by Operating Group Commercial paper and bank term debt Publicly traded and privately held term debt Total Credit Ratings $ 83 318 $ 16 160 $ 401 $ 176 $ 16 12 $ 28 $ $ – 2 2 $ – $ 1 1 $ – 1,027 $ 115 1,520 $ 1,027 $ 1,635 Financial Operations 31% 23% Residential Operations Brascan’s commercial paper and term debt are rated by three credit rating agencies and its preferred shares are rated by two agencies. We are committed to arranging our affairs to maintain these ratings as well as to improve them further over time. The credit ratings for the company at December 31, 2002 and at the time of the printing of this report were as follows: 20% 26% Power Generation International Operations & Other Commercial paper Term debt Preferred shares DBRS R-1(low) A(low) Pfd-2 S&P Moody’s A-1(low) A– P2 – Baa3 – We also endeavour to ensure that our operating businesses are committed to maintaining investment grade ratings in order to provide continuous access to a wide range of financings and to enhance borrowing flexibility. 44 Shareholders’ Interests Shareholders’ interests are comprised of three components: common equity participating interests of other share- holders in our operating businesses; non-participating preferred equity issued by the company and its subsidiaries; and common equity of the company. Shareholders’ interests at December 31, 2002 and 2001 were as follows: YEARS ENDED DECEMBER 31 MILLIONS Minority interests of others in assets Real estate operations Power generation Financial operations Other Non-participating preferred equity Corporate Subsidiaries Number Underlying Value 2002 of Shares 2002 Book Value 2002 2001 Operating Cash Flow1 2001 2002 2000 82.3 24.1 $ 3,280 $ 1,829 $ 1,777 $ 371 $ 317 $ 265 367 – 212 260 – 212 181 591 171 20 20 – 10 64 – 12 71 – 3,859 2,301 2,720 411 391 348 1,149 710 1,859 8,637 1,149 710 1,859 4,162 1,107 489 1,596 4,261 70 39 109 666 43 63 106 558 43 68 111 452 $14,355 $ 8,322 $ 8,577 $ 1,186 $ 1,055 $ 911 Common equity 183.9 1 Represents share of operating cash flows attributable to the respective shareholders interests,including cash distributions Minority Interests of Others in Assets The majority of our real estate operations are conducted through Brookfield Properties Corporation and Brookfield Homes Corporation, in which shareholders other than Brascan own an approximate 50% common share interest. During 2002, we purchased the remaining interests of other shareholders in our financial operations business for $359 million in cash and the issuance of 11.4 million common shares and 1.1 million Class A, Series 11 Preferred Shares. Power generating interests represent the interests of unit holders in the Great Lakes Hydro Income Fund. The amounts distributed to other shareholders in the form of cash dividends were $87 million in 2002, $82 million in 2001 and $75 million in 2000. The undistributed cash flows attributable to minority shareholders are retained in the respective operating businesses and are available to expand their operations, reduce indebtedness or repurchase equity. Preferred Equity The company has $1,859 million of non-participating preferred equity outstanding: $1,149 million issued by Brascan and $710 million issued by consolidated subsidiaries of Brascan. The preferred equity is permanent in nature and enables Brascan to expand its equity base at low risk without any dilution to common shareholders. The average cost of this capital at year end was 6%. During 2002, we issued $225 million of new preferred equity: $100 million of 10-year non-cumulative 5.50% preferred shares; and $125 million of 49-year 8.30% preferred securities. Distributions on the latter may be deferred for up to five years and are deductible for tax purposes by the company. Our real estate subsidiary also “The completion of a record number of capital market transactions in 2002 strengthened our financial position,ensuring we can take advantage of investment opportunities as they arise.” Craig Laurie SHAREHOLDER VALUE $ PER SHARE AT DECEMBER 31, 2002 47.75 31.75 23.46 issued $200 million of preferred shares yielding 6%. Subsequent to year end, Brascan completed the issuance of $175 million of 15-year 5.40% preferred shares. All of the securities issued are repayable in common shares at the Book Value Stock Price Underlying Value company’s option on maturity. 2 0 0 2 N A C S A R B 45 Common Equity On a diluted basis, Brascan has 183.9 million common shares outstanding, an increase from 176.4 million at December 31, 2001. During 2002, we issued 11.4 million common shares and 3.0 million share options in exchange for other shareholders’ interests in our financial operations and repurchased 7.1 million common shares under a normal course issuer bid at an average price of $31.58 per share. During 2001, 3.8 million common shares and equivalents were repurchased in a similar manner at a price of $26.98 per share. Brascan has two classes of common shares outstanding: Class A and Class B. Each class of shares elects one-half of the company’s board of directors. The Class B shares are held by EdperPartners Limited, a private company owned by 38 individuals, including the five most senior officers of Brascan. Capital Allocation Capital allocation is considered to be critical to Brascan’s success. Accordingly, we endeavour to apply a rigorous approach to allocating capital among our operating businesses. Capital is invested only when the expected returns exceed predetermined thresholds, taking into consideration risk, upside potential and, if appropriate, strategic considerations such as the establishment of new business activities. Post-investment reviews of all capital allocation decisions are conducted to ensure that anticipated returns are achieved and, if not, to determine the remedial action required and the measures needed to ensure that targeted returns are met on future projects. Liquidity Brascan and its operating businesses endeavour to maintain sufficient financial liquidity at all times in order to participate in attractive investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances. “We continue to seek ways to communicate more effectively with investors and facilitate their access to information.” Diane Horton As at year end, Brascan and its consolidated subsidiaries had $1.1 billion of undrawn committed credit facilities with 12 major financial institutions, largely maintained as back-up facilities for the issuance of commercial paper. We also maintain a significant portfolio of cash and non-strategic financial assets that can be liquidated to fund investments as required. As further described under Results of Operations, Brascan generated $736 million of operating cash flow during 2002 and we expect this amount to increase to $845 million in 2003. Our free cash flow from operations, which includes undistributed cash flow attributable to minority interests in subsidiaries, was $910 million during 2002 and is expected to reach $990 million during 2003. This cash flow is available to pay common share dividends, expand our operating base, reduce debt or repurchase common shares as appropriate. SHARE REPURCHASES MILLIONS OF SHARES 7.1 Use of Derivatives 6.4 3.8 We utilize a number of financial instruments to manage our foreign currency, commodity and interest rate positions. As a general policy, Brascan and its operating businesses endeavour to maintain a balanced position in terms of foreign currency, although unmatched positions may be taken from time to time within predetermined limits. Brascan and its subsidiaries typically maintain a net floating rate liability position because we believe that this results in lower financing costs over the long term. As at December 31, 2002, our net floating rate liability was $1,534 million, with the result that a 100 basis point increase in interest rates would adversely impact operating cash flow by $16.7 million. 2000 2001 2002 The company’s risk management and derivative financial instruments are more fully described in Note 17 to the Consolidated Financial Statements. 46 Corporate Guarantees and Contingent Obligations Brascan conducts its operations through entities that are fully or proportionately consolidated in its financial statements other than equity accounted investments. Equity accounted investments include Noranda and Nexfor, which are owned 40% and 43%, respectively, by Brascan. Brascan provides guarantees from time to time in respect of its merchant banking, asset management and power marketing and financial activities. The company does not guarantee any of the obligations of its subsidiaries or affiliates other than as noted under other debt of subsidiaries, with the exception of $450 million of other contingent obligations included in accounts and other payables relating to the company’s financing and power generating operations, and which are subject to credit rating provisions. These obligations are supported by financial assets of the principal obligor. The company may be contingently liable with respect to litigation and claims that arise in the normal course of business. Cash Resources Operating Cash Flow We believe that the most important measure of our operating performance is the cash flow generated from opera- tions in relation to the capital employed. This is, in part, because we have focussed on owning high quality assets which require little capital investment on a sustaining basis and tend to appreciate in value over time. A summary of the sources of our operating cash flows and the return on common equity is as follows: YEARS ENDED DECEMBER 31 (MILLIONS) 2003E 2002 2001 2000 Operating income Commercial property operations $ 1,031 $ 1,076 $ 1,087 $ 360 267 180 125 60 268 240 166 120 36 256 142 140 131 46 960 222 123 118 133 44 Financial operations Power generating operations Residential property operations Investment income Other Expenses Interest expense Minority share of income before non-cash items Other operating costs Dividends from Noranda and Nexfor 2,023 1,906 1,802 1,600 753 443 82 745 100 732 450 88 636 100 764 454 79 505 96 699 416 84 401 94 CASH FLOW FROM OPERATIONS CDN$ MILLIONS 845 736 601 Cash flow from operations and gains $ 845 $ 736 $ 601 $ 495 495 Cash flow from operations and gains per common share Average book value per common share Cash return on equity $ 4.25 $ 3.74 $ 3.20 $ 2.55 $ 25.00 17% $ 24.07 16% $ 24.46 13% $ 22.98 11% 2000 2001 2002 2003E 2 0 0 2 N A C S A R B 47 “Brascan has paid preferred dividends consistently for more than 60 years and investors’ strong focus on secure income has increased the demand for our preferred securities.” Alan Dean Cash flow per share from operations for the year ended December 31, 2002, including dividends from Noranda and Nexfor, was $3.74 after deducting all financing charges, operating costs and the portion of operating cash flow that is attributable to other investors with interests in our businesses, whether retained or distributed. This represents a 17% increase from the $3.20 per share earned in 2001. Cash flow from operations increased to $736 million from $601 million in 2001. Each of our operating businesses is managed to generate sustainable and increasing cash flow streams, which should result in these businesses appreciating in value over time. The cash flow from operations shown in the following table includes vir- tually no return on the $2.2 billion of assets currently under development for future growth, and includes only the dividends received from our investments in Noranda and Nexfor. We expect cash flow from operations to increase in 2003 to $4.25 per common share. This represents a 14% increase over 2002 and a cash return on equity of 17%. Our expectations are based on contractual increases in property leases in our commercial property portfolio; continued expansion of our financial operations; and higher power generating revenues due primarily to a larger generating base. We also expect to benefit from low financing charges following the continued issuance of lower-cost, long-term financing and a continuing relatively low interest rate environment. Free Cash Flow Brascan’s free cash flow represents the operating cash flow retained in the business after dividend payments to shareholders of subsidiaries, preferred equity distributions to preferred shareholders, and sustaining capital expenditures, which are approximately $60 million for Brascan common shareholders on a levelized basis. Free cash flow is typically used to pay common share dividends, invest in the business for future growth, to reduce borrowings or to repurchase equity. A summary of Brascan’s free cash flow is as follows: YEARS ENDED DECEMBER 31 (MILLIONS) 2003E 2002 2001 2000 “Our ability to withdraw and reallocate capital among our businesses provides us with competitive and financial advantages over single industry companies.” Marcelo Marinho Receipts Net operating income Dividends from Noranda and Nexfor Disbursements Interest expense on borrowings Other operating costs Sustaining capital investments Brascan Minority interests Distributions Minority interests Preferred equity $ 2,023 100 2,123 753 82 60 30 80 128 1,133 $ 1,906 100 2,006 732 88 50 30 87 109 1,096 $ 1,802 96 1,898 764 79 50 30 82 106 1,111 $ 1,600 94 1,694 699 84 50 30 75 111 1,049 Free cash flow $ 990 $ 910 $ 787 $ 645 FREE CASH FLOW CDN$ MILLIONS 990 910 787 645 2000 2001 2002 2003E 48 Utilization of Cash Resources The following table illustrates the utilization of free cash flow generated by our operations and financing initiatives as well as the reallocation of capital between our operating businesses and the repurchase of common equity and other shareholder interests: YEARS ENDED DECEMBER 31 (MILLIONS) Free cash flow Financing Borrowings, net of repayments Net issuance (repurchase) of preferred equity Net repurchase of common shares Brascan Subsidiaries Common share dividends Investing Commercial and residential properties 1 Financial operations and assets 1 Power generation 1 Add back sustaining capital expenditures 2 Investments Net generation (utilization) of cash Net change in non-cash working capital balances 2002 $ 910 2001 $ 787 2000 $ 645 Total $ 2,342 898 399 (225) (384) (175) 513 (265) (224) (853) 80 (63) (1,325) 98 (180) (360) 146 (101) (220) (176) (711) 217 (130) (244) 80 (86) (163) (87) 36 (45) (107) (132) (94) (176) (554) (529) 120 (234) 80 619 56 147 96 493 438 (458) (698) (527) (752) (577) (234) (1,331) 240 470 (1,432) 158 (48) Increase (decrease) in cash $ (82) $ (51) $ 243 $ 110 1 Includes assets under development and excludes property gains 2 Included in free cash flow above “Our focus on maintaining strong investment grade credit ratings allows us to drive down our cost of capital through access to a wide range of low cost financings.” Lisa Chu Reconciliation of Pro Forma and Consolidated Financial Statements We have presented two sets of financial statements in our annual report this year: the audited consolidated financial statements which begin on page 60 and pro forma consolidated financial statements which begin on page 56. The pro forma financial statements consolidate the results of Brookfield Properties in both 2002 and 2001 whereas the audited consolidated financial statements do so only in 2002. We believe that the pro forma financial statements provide the most comparable basis of presentation and INVESTMENTS BY BUSINESS accordingly much of management’s review and analysis is based on these financial statements. Operating results PERCENTAGE for 2002 are the same in both sets of financial statements; however, the 2001 results differ as a result of the consolidation of Brookfield Properties’ results in the pro forma statements only. The balance sheet is the same under either basis of presentation. The following discussion pertains to both the pro forma consolidated financial statements and the audited consolidated financial statements and is intended to assist readers reconcile the two bases of presentation. Commercial & Residential Properties 1 Other 4% 19% 16% Financial Operations & Assets 1 1 Includes assets under development 61% Power Generation 1 2 0 0 2 N A C S A R B 49 Consolidated Balance Sheet Total assets increased from $21.9 billion at December 31, 2001 to $22.8 billion at December 31, 2002. The book value of our commercial property assets declined principally due to the sale of partial interests in properties located in Toronto and Calgary. Power generating and financial operations increased by $0.7 billion and $0.5 billion, respec- tively, reflecting the continued growth in these businesses. Assets under development increased by $0.6 billion due to the continued development of our 300 Madison Avenue property in midtown Manhattan and the acquisition of a 51% interest in Tower Three of the World Financial Center in lower Manhattan. The carrying value of our invest- ment in Noranda and Nexfor declined principally due to the non-cash charge recorded in respect of Noranda’s magnesium business. Liabilities and shareholders’ interests remained largely unchanged since the end of 2001. Property specific mort- gages increased with the project financing of power generating assets acquired in 2002 as well as the arrangement of permanent financing for the 300 Madison Avenue property. Additional information concerning the company’s financial position and liquidity is contained in the relevant sections of management’s discussion and analysis. Consolidated Statement of Income Total Revenues The following table sets out the revenues generated by each of our operating segments: “Our operating and financial businesses worked together very effectively in 2002 to create significant added value in negotiating and financing major asset acquisitions.” YEARS ENDED DECEMBER 31 (MILLIONS) Commercial property operations Power generating operations Financial operations Residential property operations Financial assets John Tremayne Corporate and other 2002 $ 1,644 327 599 2,026 120 94 Pro Forma 2001 $ 1,718 270 589 1,936 131 72 $ 2001 156 270 589 116 87 51 Total $ 4,810 $ 4,716 $ 1,269 Revenues generated in 2002 were largely unchanged from the pro forma 2001 revenues. Commercial property revenues declined with the sale of partial interests in properties during 2002 and 2001. Power generating revenues increased due to the acquisition of additional generating capacity during the year, higher water levels and improved NET OPERATING INCOME prices. Residential property revenues reflect higher selling prices offset in part by lower unit volumes. The pro forma CDN$ MILLION 2001 results differ from the 2001 revenues in that they reflect the consolidation of Brookfield Properties’ revenues 2,023 1,906 1,802 2001 2002 2003E 50 from its commercial property and residential property operations. Net operating income The following table sets out the net operating income generated by each of our operating segments: YEARS ENDED DECEMBER 31 (MILLIONS) Commercial property operations Power generating operations Financial operations Residential property operations Investment income Other Total 2002 $ 1,076 240 268 166 120 36 Pro Forma 2001 $ 1,087 142 256 140 131 46 $ 2001 130 142 256 8 87 25 $ 1,906 $ 1,802 $ 648 Power generating operations contributed the largest increase in net operating income during 2002 due to the acquisition of additional power generating operations, improved water levels and higher pricing. All of the other segments were largely unchanged. Commercial property and residential property net operating income in 2001 increased on a pro forma basis reflect- ing the consolidation of Brookfield Properties’ results, as did investment and other income. Net operating income from each segment is discussed under the relevant section elsewhere in management’s discussion and analysis. Expenses The expenses incurred by the company during 2002 and 2001 are as follows: YEARS ENDED DECEMBER 31 (MILLIONS) Interest expense Minority share of income before non-cash items Other operating costs Total $ 2002 732 450 88 Pro Forma 2001 $ 764 454 79 $ 2001 306 116 11 $ 1,270 $ 1,297 $ 433 Expenses were largely unchanged during 2002 compared to 2001 on a pro forma basis. In addition, consolidated interest expense declined relative to the 2001 pro forma results as lower interest rates offset slightly higher debt lev- els. Minority share of income before non-cash items was relatively unchanged as the privatization of Brascan Financial more than offset the increase in Brookfield Properties’ operating results. The 2001 pro forma results reflect the inclusion of Brookfield Properties’ interest expense and operating costs. Minority share of income before non-cash items for 2001 increased substantially on a pro forma basis with the consolidation of Brookfield Properties’ operating results and reflects the interests of Brookfield Properties’ shareholders other than Brascan in those results. Net income Net income for 2002 and 2001 is determined as follows: YEARS ENDED DECEMBER 31 (MILLIONS) Income before non-cash items Depreciation and amortization Taxes and other non-cash items Minority share of non-cash items Net income prior to equity accounted investments Equity accounted investments Noranda Nexfor Brookfield Properties Net income Per common share – diluted, prior to equity accounted investments Per common share – diluted 2002 $ 636 (188) (164) 130 414 (292) 8 – $ 130 $ 1.93 $ 0.33 Pro Forma 2001 $ 505 (157) (122) 123 349 (44) 6 – $ 311 $ 1.74 $ 1.52 2001 $ 215 (39) 7 – 183 (44) 6 166 $ 311 $ 1.74 $ 1.52 Net income prior to equity accounted investments has shown growth similar to cash flow from operations, increasing to $414 million in 2002. Taking into account the equity accounted losses relating to Noranda as a result of restructuring charges and lower commodity prices, net income declined by $181 million from 2001. “We focus our financial advisory services in the real estate,power generation and resource sectors where we have competitive advantages as a result of our many years of operating in these industries.” Brian Kenning NET INCOME PRIOR TO RESOURCE INVESTMENTS AND GAINS CDN$ MILLIONS 414 349 240 2000 2001 2002 2 0 0 2 N A C S A R B 51 Depreciation and amortization in 2002 increased by $31 million over the 2001 pro forma results, largely due to the acquisition of additional power generating stations. The 2001 pro forma results include $118 million attribut- able to the consolidation of Brookfield Properties. Taxes and other non-cash items in the 2002 results and 2001 pro forma results consist primarily of amounts set aside by Brookfield Properties for future taxes. The minority share of non-cash items in the 2002 and 2001 pro forma results reflects the interest of other Brookfield Properties’ shareholders in the foregoing expenses, whereas in 2001 these expenses were incurred principally by wholly-owned entities, and accordingly a smaller amount is attributable to shareholders other than Brascan. Equity accounted results in 2001 include Brascan’s pro rata interest in Brookfield Properties, which was treated as an equity accounted investment in our audited consolidated financial statements, whereas the pro forma results reflect Brookfield Properties on a consolidated basis. The equity accounted results of Noranda and Nexfor are discussed on pages 40 and 41. Operating Cash Flow “We have successfully launched several income trusts and alternative asset funds with institutional investors to leverage our capital based on our industry specific expertise.” Kelly Marshall Cash flow from operations includes income before non-cash items together with dividends from investments and excludes items such as depreciation, non-cash tax provisions and earnings or losses from equity accounted affiliates. Although we consider net income to be an important performance measure, we do believe that operating cash flow is more relevant in assessing the value being created for our shareholders and have accordingly focussed most of our discussions on operating cash flows throughout management’s discussion and analysis. In particular, the types of assets owned by Brascan tend to appreciate in value rather than depreciate, sustaining capital investments are low relative to depreciation, taxes are generally non-cash, and the realization of investment gains cannot be planned with certainty. Therefore the inclusion of these items does not provide our shareholders with an accurate assessment of underlying operating capacity. In addition, net income includes non-cash equity income and losses relating to our resource investments. As a result, we consider the most appropriate performance measure for Brascan to be cash flow from operations, which includes dividends received from investments. YEARS ENDED DECEMBER 31 (MILLIONS) Net operating income Expenses, excluding non-cash items Income before non-cash items Dividends from: Noranda Nexfor Brookfield Properties 2002 $ 1,906 1,270 636 76 24 – Pro Forma 2001 $ 1,802 1,297 505 75 21 – $ 2001 648 433 215 75 21 40 Cash flow from operations and gains $ 736 $ 601 $ 351 Dividends from Noranda and Nexfor increased slightly during 2002 consistent with the increased shareholdings in each of these companies. Dividends from Brookfield Properties are reflected in the 2001 results as Brookfield Properties is accounted for under the equity method in that basis of presentation whereas the pro forma 2001 results reflect Brookfield Properties on a consolidated basis and hence any inter-corporate dividends are eliminated. 52 Business Environment and Risks Brascan’s financial results are impacted by the performance of each of our operations and various factors particular to our specific operating sectors and geographic locations, as well as by macro-economic factors such as economic growth and changes in currency, interest and inflation rates. Our strategy is to invest in high quality assets which generate sustainable streams of cash flow. While high quality assets may initially generate lower returns on capital than those achievable from lesser quality assets, we believe that the sustainability and future growth of their cash flows is more assured and, as a result, warrant higher valuation levels. We also believe that the high quality of our asset base protects the company against future uncer- tainty and positions us to benefit from future investment opportunities. The following is a brief review of the potential impact these different factors may have on the company’s business operations. Commercial Properties Real estate investments are generally subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions (such as the availability and cost of mortgage funds), local conditions (such as an oversupply of space or a reduction in demand for real estate in the area), the attrac- tiveness of the properties to tenants, competition from others with available space and the ability of the owner to provide adequate maintenance at an economic cost. Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made regardless of whether or not a property is producing sufficient income to service these expenses. Our commercial properties are subject to mortgages, which require significant debt service payments. If our real estate operations were unable or unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or of sale. “Our strategy of acquiring and developing high quality office properties in the downtown cores of select North American cities should allow us to meet the challenges of the current business environ- ment with confidence.” Real estate is relatively illiquid. Such illiquidity will tend to limit our ability to vary the portfolio promptly in response to changing economic or investment conditions. Also, financial difficulties of other property owners resulting in Gordon Arnell distress sales may depress real estate values in the markets in which we operate. Our commercial properties generate a relatively stable source of income from contractual tenant rent payments. Continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. While the outlook for commercial office rents is positive in the longer term, 2003 may not provide the same level of increases in rental rates on renewal as compared to 2002. We are, however, substantially protected against these short-term market conditions, since most of our leases are long-term in nature with an average term of 10 years. A protracted disruption in the economy, such as the onset of a severe recession, could place downward pressure on overall occupancy levels and net effective rents. Our commercial properties operations have insurance covering certain acts of terrorism for up to $450 million of damage and business interruption costs. The company continues to seek additional coverage equal to the full replacement cost of its assets; however, until this type of coverage becomes commercially available on an economically reasonable basis, any damage or business interruption costs as a result of uninsured acts of terrorism could result in a material cost to the company. “The privatization and integration of our financial services business furthered our strategy of owning 100% of our operating businesses.” The downtown Manhattan market, which was adversely impacted by the events of September 11, 2001 is expected to recover before most of the company’s leases begin to expire after 2010. Tim Price 2 0 0 2 N A C S A R B 53 Power Generating Operations Operating income from hydroelectric power generation fluctuates in relation to the availability of water and the ability to generate and deliver power to markets with the highest power rates. While changes in the level of precipitation impact the amount of power generated by individual operations, the diversified locations of our hydro- electric power stations across several different watershed areas in Canada and the United States help to balance the financial impact of these fluctuations. Pricing risk is reduced, as most of our revenues are derived from fixed price contracts, the company’s forward sale of electricity production, and its regulated transmission and distribution business. The Ontario government opened the Ontario electricity market to full competition on May 1, 2002, and has since imposed a retail price cap of $0.043 per kilowatt hour. This retail price cap does not apply to wholesale generation, and is not expected to have an adverse impact on the company. Approximately 40% of net operating income produced by our power generating activities is derived from power sold in Ontario. Financial Operations Our financial operations are cash flow generating businesses which, managed carefully, should produce stable cash flows. Unfavourable economic conditions generally create a higher volume of investment and merchant banking opportunities. In addition, economic conditions which lead to higher interest rate spreads between funds borrowed and funds loaned out, also have a favourable impact on cash flows. The stability of the cash flows will increase as we expand the scope of our asset management activities. Severe economic conditions can, however, have a major impact on profitability. Since we operate largely within our areas of expertise, we are prepared to take ownership of and operate most assets which we finance. As a result, should it be necessary to acquire financed assets, the company generally will be able to do so at a lower cost than if purchased in the equity markets. “Deregulation and turmoil within the North American power industry provided us with a unique opportunity to expand our generation asset base for value.” Ed Kress Residential Properties In the residential land development and home building businesses, markets have been favourable over the past five years with strong demand for well located building lots, particularly in the United States. The value of land and housing assets are affected by consumer confidence, job stability and interest rates due to their impact on home buyers’ decisions. These conditions can affect consumers’ outlooks and, in particular, the price and volume of home purchases. While the current economic conditions would normally reduce the level of home sales, low interest rates and home refinancing have kept home sales near record levels over the past 18 months. A sustained drop in consumer con- fidence or increased interest rates could negatively affect these operations. Resource Investments The financial results of our resource investments are cyclical in nature. Noranda’s and Nexfor’s products are primarily exported to markets in the United States, Europe and Asia. As a result, fluctuations in the level of economic activity and in these export markets influence the demand for and prices of resource products. We do not expect real industrial growth to accelerate until the latter half of 2003 or into 2004. As a result, the oper- ating performance of our resource investments are expected to be negatively affected by depressed commodity prices throughout 2003. Execution of Strategy “With our major resource development programs now completed,our cash flows from this sector will increase significantly, strengthening our competitive position.” Our strategy for building long-term shareholder value is to acquire or develop high quality assets which generate David Kerr sustainable and increasing cash flows, with the objective of achieving higher returns on capital invested. 54 As part of our growth strategy, we endeavour to maintain a high level of liquidity in order to be in a position to invest on a value basis. This entails adding assets to our existing businesses when the competition for assets is lowest, either due to depressed economic conditions or when concerns exist relating to a particular industry. However, there is no certainty that we will continue to be able to acquire or develop additional high quality assets at attractive prices to supplement growth from our existing assets. The successful execution of a value investment strategy requires careful timing and business judgement, as well as the resources to complete asset purchases and restructure them as required, notwithstanding difficulties being experienced in the industry. Our diversified business base and the sustainability of our cash flows provide an impor- tant element of strength in executing this strategy. The conduct of Brascan’s business and the execution of our growth strategy rely heavily on teamwork both within and between business units in order to reduce their costs and enhance returns. We believe that co-operation between our operations, as well as our team-oriented management structure, enable us to respond promptly to opportunities and problems when they arise. Long-term planning is encouraged by aligning senior executives’ interests though substantial share ownership in the company. We have found this approach to be effective in encouraging the successful implementation of busi- ness plans. However, declining share prices may on occasion encourage executives with shorter term objectives to leave or require replacement. This can lead to a loss of business momentum unless the required management changes are quickly and effectively implemented. There is no certainty that management changes will always be successfully implemented. Outlook Our goal is to build long-term shareholder value by acquiring high quality assets at attractive values, by actively working to increase returns from currently owned assets, and by continuously pursuing new opportunities for future growth. With well-established positions in our three operating businesses and management teams dedicated to the creation of value, we believe that we are well positioned to achieve our goal. Pro Forma Financial Statements The following pro forma consolidated financial statements reflect the consolidation of Brookfield Properties through- out. As a result, they differ from the audited consolidated financial statements presented on pages 60 through 85 of this report which reflect the consolidation of Brookfield Properties from December 31, 2001 only and on an equity accounted basis prior to that date. We have included these statements because we believe they assist readers in understanding our business by providing fully comparable financial information. It is important to note that the consolidated balances and 2002 operating results are the same under either presentation, whereas the 2001 and 2000 operating results differ from the operating results contained in our consolidated financial statements for each of these periods, principally due to the different treatment of Brookfield Properties. The differences are discussed in more detail within the preced- ing Reconciliation of Pro Forma and Consolidated Financial Statements. With the exception of the accounting for Brookfield Properties, these pro forma consolidated financial statements are prepared on the same basis as the audited consolidated financial statements. Accordingly, readers are encouraged to refer to the audited consolidated “As a public company list- ed on the New York and Toronto stock exchanges, we aim to meet and exceed the standards of corporate governance evolving in North America.” Bob Harding “A commitment to team- work and dealing fairly with business partners will remain a strategic corner- stone in the expansion of our businesses.” financial statements and the notes thereto which describe the significant accounting policies and provide sup- Jack Cockwell plementary information. 2 0 0 2 N A C S A R B 55 Consolidated Balance Sheet AS AT DECEMBER 31 CDN$ MILLIONS Assets Cash and cash equivalents Financial assets Accounts receivable and other Operating assets Commercial properties Power generating plants Financial operations Residential properties Assets under development Investment in Noranda Inc. and Nexfor Inc. Liabilities Accounts and other payables Corporate borrowings Non-recourse borrowings Property specific mortgages Other debt of subsidiaries Shareholders’ interests Minority interests of others in assets Preferred equity Corporate Subsidiaries Common equity 2002 2001 $ 525 1,134 2,130 9,429 2,338 2,099 1,028 2,231 1,874 $ 607 1,359 2,294 9,580 1,600 1,597 1,110 1,631 2,151 $ 22,788 $ 21,929 $ 1,994 1,635 $ 1,718 1,313 7,887 2,950 2,301 1,149 710 4,162 7,160 3,161 2,720 1,107 489 4,261 $ 22,788 $ 21,929 56 Pro Forma Consolidated Statement of Income UNAUDITED, YEARS ENDED DECEMBER 31 CDN$ MILLIONS, EXCEPT PER SHARE AMOUNTS Total revenues Net operating income Commercial property operations Power generating operations Financial operations Residential property operations Investment income Other Expenses Interest expense Minority share of income before non-cash items Other operating costs Income before non-cash items Depreciation and amortization Taxes and other non-cash items Minority share of non-cash items Equity accounted loss (income) Income from continuing operations Income and gain on sale of discontinued operations Net income Per common share – diluted Income from continuing operations Net income Per common share – basic Income from continuing operations Net income Pro Forma Consolidated Statement of Cash Flow from Operations UNAUDITED, YEARS ENDED DECEMBER 31 CDN$ MILLIONS, EXCEPT PER SHARE AMOUNTS Income before non-cash items Dividends from Noranda Inc. Dividends from Nexfor Inc. Cash flow from operations and gains Cash flow from operations and gains per common share 2002 636 76 24 736 3.74 $ $ $ 2002 2001 2000 $ 4,810 $ 4,716 $ 4,237 1,076 240 268 166 120 36 1,906 732 450 88 636 188 164 (130) 284 130 – 130 0.33 0.33 0.33 0.33 $ $ $ $ $ 1,087 142 256 140 131 46 1,802 764 454 79 505 157 122 (123) 38 311 – 311 1.52 1.52 1.54 1.54 960 123 222 118 133 44 1,600 699 416 84 401 139 137 (115) (148) 388 260 $ 648 $ 1.96 $ 3.41 $ 1.96 $ 3.47 2001 505 75 21 601 3.20 $ 2000 401 75 19 $ 495 $ 2.55 2 0 0 2 N A C S A R B 57 $ $ $ $ $ $ $ $ Pro Forma Consolidated Statement of Cash Flows UNAUDITED, YEARS ENDED DECEMBER 31 CDN$ MILLIONS Operating activities Cash flow from operations and gains Commercial property gains, net of minority share Net change in non-cash working capital balances Financing activities Corporate borrowings, net of repayments Property specific mortgages, net of repayments Other debt of subsidiaries, net of repayments Corporate preferred equity issued Preferred equity of subsidiaries repurchased Preferred equity of subsidiaries issued Common shares and equivalents repurchased Common equity of subsidiaries issued Common shares of consolidated subsidiaries repurchased Undistributed minority share of cash flow Shareholder distributions Investing activities Investment in or sale of operating assets, net Commercial and residential properties Power generating plants Financial operations Assets under development Financial assets Sale of Canadian Hunter Exploration Ltd. Investment in Noranda Inc. and Nexfor Inc. Cash and cash equivalents Increase (decrease) Balance, beginning of year Balance, end of year 2002 2001 2000 $ $ 736 (47) (180) 509 330 763 (195) 199 – 200 (225) 103 (487) 324 (245) 767 304 (778) (446) (600) 225 – (63) (1,358) (82) 607 $ 601 (41) 36 596 (47) (272) (41) 375 (229) – (101) 77 (297) 309 (219) (445) 514 (180) (157) (329) 36 – (86) (202) (51) 658 $ 525 $ 607 $ 495 (14) 96 577 (358) 83 230 – (107) – (132) – (94) 273 (219) (324) (185) (233) 14 (385) 160 619 – (10) 243 415 658 58 Forward-Looking Statements The company’s annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe”, “expect”, “anticipate”, “intend”, “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncer- tainties and other factors, which may cause the actual results, performance or achievements of the company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements include general economic conditions, interest rates, availability of equity and debt financing and other risks detailed from time to time in the company’s continuous disclosure documents, including its 40-F filed with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Brian D. Lawson Executive Vice-President and Chief Financial Officer February 12,2003 2 0 0 2 N A C S A R B 59 Consolidated Financial Statements Management’s Responsibility for the Financial Statements The accompanying financial statements and other financial informa- set out on pages 61 through 85 in accordance with auditing tion have been prepared by the company’s management which is standards generally accepted in Canada to enable them to express responsible for their integrity and objectivity. To fulfill this responsi- to the shareholders their opinion on the consolidated financial bility, the company maintains policies, procedures and systems of statements. Their report is set out below. internal control to ensure that its reporting practices and accounting The consolidated financial statements have been further exam- and administrative procedures are appropriate. These policies and ined by the Board of Directors and by its Audit Committee, which procedures are designed to provide a high degree of assurance that meets with the auditors and management to review the activities of relevant and reliable financial information is produced. each and reports to the Board of Directors. The auditors have direct These financial statements have been prepared in conformity and full access to the Audit Committee and meet with the commit- with accounting principles generally accepted in Canada, and where tee both with and without management present. The Board of appropriate, reflect estimates based on management’s judgment. Directors, directly and through its Audit Committee, oversees The financial information presented throughout this Annual Report management’s financial reporting responsibilities and is responsible is generally consistent with the information contained in the accom- for reviewing and approving the financial statements. panying consolidated financial statements. Management also pre- pared the pro forma consolidated financial statements included on pages 56 through 58 in order to provide additional comparative information for readers. Deloitte & Touche LLP, the independent auditors appointed by the Toronto, Canada Craig J. Laurie shareholders, have examined the consolidated financial statements February 12,2003 Senior Vice-President,Finance Auditors’ Report To the Shareholders of Brascan Corporation: We have audited the consolidated balance sheets of Brascan includes assessing the accounting principles used and significant Corporation as at December 31, 2002 and 2001 and the estimates made by management, as well as evaluating the overall consolidated statements of income, retained earnings, cash flow financial statement presentation. from operations and cash flows for the years then ended. These In our opinion, these consolidated financial statements present financial statements are the responsibility of the company’s man- fairly, in all material respects, the financial position of the company agement. Our responsibility is to express an opinion on these as at December 31, 2002 and 2001 and the results of its operations financial statements based on our audits. and its cash flows for the years then ended in accordance with We conducted our audits in accordance with Canadian general- Canadian generally accepted accounting principles. ly 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 Toronto, Canada Deloitte & Touche, LLP amounts and disclosures in the financial statements. An audit also February 12,2003 Chartered Accountants Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flow from Operations Consolidated Statement of Cash Flows Consolidated Statement of Retained Earnings Notes to Consolidated Financial Statements 60 61 62 62 63 63 64 Consolidated Balance Sheet AS AT DECEMBER 31 CDN$ MILLIONS Assets Cash and cash equivalents Financial assets Accounts receivable and other Operating assets Commercial properties Power generating plants Financial operations Residential properties Assets under development Investment in Noranda Inc. and Nexfor Inc. Liabilities Accounts and other payables Corporate borrowings Non-recourse borrowings Property specific mortgages Other debt of subsidiaries Shareholders’ interests Minority interests of others in assets Preferred equity Corporate Subsidiaries Common equity On behalf of the Board: Note 2002 2001 3 4 5 6 7 8 9 10 11 12 13 13 14 15 15 16 $ 525 1,134 2,130 9,429 2,338 2,099 1,028 2,231 1,874 $ 607 1,359 2,294 9,580 1,600 1,597 1,110 1,631 2,151 $ 22,788 $ 21,929 $ 1,994 1,635 $ 1,718 1,313 7,887 2,950 2,301 1,149 710 4,162 7,160 3,161 2,720 1,107 489 4,261 $ 22,788 $ 21,929 Robert J. Harding, FCA, Director Philip B. Lind, Director 2 0 0 2 N A C S A R B 61 Consolidated Statement of Income YEARS ENDED DECEMBER 31 CDN$ MILLIONS, EXCEPT PER SHARE AMOUNTS Total revenues Net operating income Commercial property operations Power generating operations Financial operations Residential property operations Investment income Other Expenses Interest expense Minority share of income before non-cash items Other operating costs Income before non-cash items Depreciation and amortization Taxes and other non-cash items Minority share of non-cash items Equity accounted loss (income) Net income Net income per common share Diluted Basic Note 18 19 20 19 21 16 Consolidated Statement of Cash Flow from Operations YEARS ENDED DECEMBER 31 CDN$ MILLIONS, EXCEPT PER SHARE AMOUNTS Income before non-cash items Dividends from Noranda Inc. Dividends from Nexfor Inc. Dividends from Brookfield Properties Corporation Cash flow from operations and gains 62 2002 $ 4,810 2001 $ 1,269 1,076 240 268 166 120 36 1,906 732 450 88 636 188 164 (130) 284 130 0.33 0.33 130 142 256 8 87 25 648 306 116 11 215 39 (7) – (128) $ 311 $ 1.52 $ 1.54 2002 636 76 24 – 736 2001 215 75 21 40 351 $ $ $ $ $ $ $ Consolidated Statement of Cash Flows YEARS ENDED DECEMBER 31 CDN$ MILLIONS Operating activities Cash flow from operations and gains Commercial property gains, net of minority share Net change in non-cash working capital balances Financing activities Corporate borrowings, net of repayments Property specific mortgages, net of repayments Other debt of subsidiaries, net of repayments Corporate preferred equity issued Preferred equity of subsidiaries issued Common shares and equivalents repurchased Common equity of subsidiaries issued Common shares of consolidated subsidiaries repurchased Undistributed minority share of cash flow Shareholder distributions Investing activities Investment in or sale of operating assets, net Commercial and residential properties Power generating plants Financial operations Assets under development Financial assets Consolidation of Brookfield Properties Corporation Investment in Noranda Inc. and Nexfor Inc. Cash and cash equivalents Increase (decrease) Balance, beginning of year Balance, end of year Note 24 24 24 25 24 24 24 2 $ 2002 736 (47) (180) 509 330 763 (195) 199 200 (225) 103 (487) 324 (245) 767 304 (778) (446) (600) 225 – (63) (1,358) (82) 607 525 $ Consolidated Statement of Retained Earnings YEARS ENDED DECEMBER 31 CDN$ MILLIONS Retained earnings, beginning of year Net income Preferred equity issue costs Shareholder distributions – Preferred equity – Common equity Amount paid in excess of the book value of common shares purchased for cancellation Retained earnings, end of year Note 25 25 2002 $ 2,447 130 (7) (70) (175) (42) $ 2,283 $ 2001 351 – 13 364 (47) 108 83 375 53 (101) 77 (175) 33 (219) 187 (88) (180) (157) (127) 36 311 (86) (291) 260 347 607 $ 2001 $ 2,367 311 (12) (43) (176) – $ 2,447 2 0 0 2 N A C S A R B 63 Notes to Consolidated Financial Statements 1. SUMMARY OF ACCOUNTING POLICIES Depreciation on buildings is provided on the sinking-fund basis These consolidated financial statements are prepared in accordance over the useful lives of the properties to a maximum of 60 years. The with generally accepted accounting principles as prescribed by the sinking-fund method provides for a depreciation charge of an annual Canadian Institute of Chartered Accountants (“CICA”). The company’s amount increasing on a compounded basis of 5% per annum. accounting policies and its financial disclosure in respect of its Depreciation is determined with reference to the carried value, real estate operations are substantially in accordance with the remaining estimated useful life and residual value of each rental recommendations of the Canadian Institute of Public and Private property. Tenant improvements and re-leasing costs are deferred Real Estate Companies (“CIPPREC”). and amortized over the lives of the leases to which they relate. BASIS OF PRESENTATION POWER GENERATING PLANTS All currency amounts are Canadian dollars unless otherwise stated. Power generating plants are recorded at cost, less accumulated The consolidated financial statements include the accounts of depreciation. Power generating plants are tested annually for Brascan Corporation (“the company”) and the entities over which impairment based on an assessment of net recoverable amounts. it has control. The company accounts for its investments in Noranda Inc. (“Noranda”) and Nexfor Inc. (“Nexfor”), over which it has significant influence, on the equity basis. Interests in jointly controlled partner- ships and corporate joint ventures are proportionately consolidated. ACQUISITIONS The cost of acquiring a company is allocated to its identifiable net assets on the basis of the estimated fair values at the date of purchase. The excess of acquisition costs over the underlying net book values of assets acquired that is not goodwill is amortized over the estimated useful lives of the assets. The company regularly evaluates the carrying values of these amounts based on reviews of estimated future operating income and cash flows on an undis- counted basis, and any impairment is charged against income at that time. Goodwill arising on acquisitions is allocated to reporting units and tested annually for impairment. COMMERCIAL PROPERTIES A write-down to estimated net realizable value is recognized if a plant’s future cash flow is less than its carried value. The projections of the future cash flow take into account the operating plan for each plant and management’s best estimate of the most probable set of economic conditions anticipated to prevail in the market. Depreciation on power generating facilities and equipment is provided at various rates on a straight-line basis over the service lives of the assets, which are 60 years for hydroelectric generation and up to 40 years for transmission, distribution and other assets. FINANCIAL ASSETS AND OPERATIONS Securities are carried at the lower of cost and their estimated net realizable value with any valuation adjustments charged to income. This policy considers the company’s intent to hold an investment through periods where quoted market values may not fully reflect the underlying value of that investment. Accordingly, there are periods where the “fair value” or the “quoted market value” may be less than cost. In these circumstances, the company reviews the Commercial properties held for investment are carried at cost less relevant security to determine if it will recover its carrying value accumulated depreciation. For operating properties and properties within a reasonable period of time and adjust it, if necessary. The held for long-term investment, a write-down to estimated net real- company also considers the degree to which estimation is incorpo- izable value is recognized when a property’s undiscounted future rated into valuations and any potential impairment relative to the cash flow is less than its carried value. The projections of the future magnitude of the related portfolio. cash flow take into account the specific business plan for each prop- In determining fair values, quoted market prices are generally erty and management’s best estimate of the most probable set of used where available and, where not available, management economic conditions anticipated to prevail in the market. estimates the amounts which could be recovered over time or 64 through a transaction with knowledgeable and willing third parties REVENUE AND EXPENSE RECOGNITION under no compulsion to act. Commercial property operations Loans and notes receivable are carried at the lower of cost and Revenue from a commercial property is recognized upon the earlier estimated net realizable value calculated based on expected future of attaining a break-even point in cash flow after debt servicing, or cash flows, discounted at market rates for assets with similar terms the expiration of a reasonable period of time following substantial and investment risks. RESIDENTIAL PROPERTIES completion, subject to the time limitation determined when the project is approved. Prior to this, the property is categorized as a property under development, and revenue related to such property Homes and other properties held for sale, which include properties is applied to reduce development costs. subject to sale agreements, are recorded at the lower of cost and The company has retained substantially all of the risks and net realizable value. Income received relating to homes and other benefits of ownership of its commercial properties and therefore properties held for sale is applied against the carried value of these accounts for leases with its tenants as operating leases. Rental properties. ASSETS UNDER DEVELOPMENT Commercial properties Commercial properties under development consist of properties for revenue includes participating rents and recoveries of operating expenses, including property, capital and large corporation taxes. Power generating operations Revenue from the sale of electricity is recorded at the time power is provided based upon output delivered and capacity provided at rates which a major repositioning program is being conducted and prop- as specified under contract terms or prevailing market rates. erties which are under construction. These properties are recorded at the lower of cost, including pre-development expenditures, and the net recoverable amount. Power generating plants Financial assets and operations Revenue from loans and securities, less a provision for uncollectible interest, fees, commissions or other amounts, is recorded on the accrual basis. Provisions are established in instances where, in the opinion of Power generating plants and infrastructure under development management, there is reasonable doubt concerning the repayment consist of power generating plants under construction. These assets of loans or the realization of the carrying values of securities. are recorded at the lower of cost, including pre-development expen- ditures, and the net recoverable amount. Residential properties Residential development land and infrastructure is recorded at the lower of cost and estimated net realizable value. Costs are allocated to the saleable acreage of each project or subdivision in proportion to the anticipated revenue. Gains on the exchange of assets which do not represent a culmination of the earnings process are deferred until realized by sale. Gains resulting from the exercise of options and other partici- pation rights are recognized when the securities acquired are sold. Commissions from property brokerage are recognized at the time a firm offer is negotiated. Reinsurance contracts that do not result in a reasonable possibility that the company may realize a significant loss from the Capitalized costs insurance risk are accounted for as deposits. Capitalized costs on assets under development and redevelopment Residential property operations include all expenditures incurred in connection with the acquisition, Revenue from the sale of residential land is recorded when the development, construction and initial predetermined start-up period. collection of the sale proceeds is reasonably assured and all other These expenditures consist of costs and interest on debt that is related significant conditions are met. Properties which have been sold, but to these assets. Ancillary income relating specifically to such assets for which these criteria have not been satisfied, are included in during the development period is treated as a reduction of costs. development property or residential inventory assets. 2 0 0 2 N A C S A R B 65 PENSION BENEFITS AND EMPLOYEE FUTURE BENEFITS deferred and shown as a separate component in shareholders’ The cost of retirement benefits for the defined benefit plans and equity. Gains or losses on foreign currency loans and transactions post-employment benefits are recognized as the benefits are earned that are designated as hedges of a net investment in self-sustaining by employees. The company uses the accrued benefit method foreign operations are reported in shareholders’ equity in the same pro-rated on the length of service and management’s best estimate manner as translation adjustments. assumptions to value its pension and other retirement benefits. Foreign-denominated monetary assets and liabilities of Canadian Assets are valued at fair value for purposes of calculating the operations and integrated foreign operations are translated at the expected return on plan assets. For the defined contribution plan, exchange rates prevailing at year-end, and revenue and expenses the company expenses amounts as paid. (other than depreciation) at average rates of exchange during DERIVATIVE FINANCIAL INSTRUMENTS The company and its subsidiaries utilize derivative financial instruments from time to time primarily to manage financial risks, the year. Exchange gains and losses arising on the translation of the accounts are included in consolidated earnings. Non-monetary assets and liabilities are translated at historical rates of exchange. including interest rate, commodity and foreign exchange risks. CASH FLOW FROM OPERATIONS Realized and unrealized gains and losses on derivative financial Cash flow from operations represents net income before non-cash instruments designated as hedges of financial risks are included in charges for depreciation and amortization, taxes and other provi- income in the same period as when the underlying asset, liability or sions and equity accounted income or losses, and includes dividends anticipated transaction affects income. received on the company’s equity accounted investments. Cash flow Financial instruments that are not designated as hedges are from operations is calculated based on amounts attributable to the carried at estimated fair values and gains and losses arising from company’s common and preferred shareholders and excludes changes in fair values are recognized in income in the period the amounts attributable to the minority interests whether or not changes occur. The use of non-hedging derivative contracts is distributed to those shareholders. governed by documented risk management policies and approved limits. Derivative financial instruments of a financing nature are USE OF ESTIMATES recorded at fair value determined on a credit adjusted basis. INCOME TAXES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make esti- mates and assumptions that affect the reported amounts of assets The company uses the asset and liability method whereby future and liabilities and disclosure of contingent assets and liabilities at income tax assets and liabilities are determined based on differ- the date of the financial statements and the reported amounts of ences between the carrying amounts and tax bases of assets and revenues and expenses during the reporting period. Actual results liabilities, and measured using the tax rates and laws that will be in could differ from those estimates. Significant estimates are required effect when the differences are expected to reverse. in the determination of cash flows and probabilities in assessing net FOREIGN EXCHANGE The accounts of self-sustaining foreign operations are translated recoverable amounts and net realizable value; tax provisions; hedge effectiveness; and fair value for disclosure purposes. using the current rate method, under which all assets and liabilities CHANGES IN ACCOUNTING POLICIES are translated at the exchange rate prevailing at year-end, and Effective January 1, 2002, the company adopted, without restate- revenues and expenses at average rates of exchange during the ment of the prior period comparative financial statements, the new year. Gains or losses on translation of these account balances accounting standards issued by the Canadian Institute of Chartered are not included in the consolidated statements of income but are Accountants (“CICA”) on Stock-based Compensation and Other 66 Stock-based Payments, Business Combinations and Goodwill and instruments and hedging activities. Specifically, the guideline Other Intangible Assets. provides detailed guidance on (a) the identification, designation, The company and its consolidated subsidiaries account for stock documentation and effectiveness of hedging relationships, for options using the fair value method. Under the fair value method, purposes of applying hedge accounting; and (b) the discontinuance compensation expense for stock options is measured at fair value at of hedge accounting. the grant date using an option pricing model and recognized over the The CICA issued a draft Accounting Guideline, Consolidation of vesting period. The impact of the adoption of this new standard on Special-Purpose Entitieson August 1, 2002. The proposed guideline the year ended December 31, 2002 was compensation expense provides guidance on determining who is a primary beneficiary of $8 million recorded as a charge to net income. of the special purpose entities and will therefore be required to The new standards on Business Combinationsand Goodwill and consolidate the special purpose entities. Other Intangible Assets require that all business combinations be The CICA issued a draft Accounting Guideline, Disclosure of accounted for using the purchase method and establish specific Guarantees which will require a guarantor to disclose significant criteria for the recognition of intangible assets separately from information about guarantees it has provided to third parties, without goodwill. Under the standards, goodwill is no longer amortized but regard to its evaluation of whether it will have to make any payments is rather subject to impairment tests on at least an annual basis. The under the guarantees. amount of goodwill amortized in 2001 was $10 million. During 2002, the company was required to perform impairment tests on goodwill COMPARATIVE FIGURES recorded as of January 1, 2002. Certain of the prior year’s figures have been reclassified to conform Effective January 1, 2002, the company adopted the new with the 2002 presentation. CICA accounting recommendations on the impairment of long-lived assets. When the carrying value of a long-lived asset is less than 2. INVESTMENT IN its net recoverable amount as determined on an undiscounted basis, BROOKFIELD PROPERTIES CORPORATION an impairment loss is recognized to the extent that its fair value, As a result of the repurchase of common shares by Brookfield measured as the discounted cash flows over the life of the asset Properties Corporation (“Brookfield Properties”) during 2001, when quoted market prices are not readily available, is below the Brascan’s diluted voting interest in this company became greater than asset’s carrying value. FUTURE ACCOUNTING POLICY CHANGES 50%. Accordingly, Brascan commenced consolidating Brookfield Properties’ assets and liabilities effective December 31, 2001. The purchase price consideration, which amounted to $1,559 million as The following future accounting policy changes may have an at December 31, 2001, represents the equity accounted carrying impact on the company, although the impact, if any, has not been value of Brascan’s interest in Brookfield Properties. The allocation of determined at this time. In November 2001, the CICA issued the purchase price was as follows: Accounting Guideline 13, Hedging Relationships (“AcG-13”), which will apply to fiscal years beginning on or after July 1, 2003. The proposed guideline sets out the criteria that must be met in order MILLIONS Assets acquired Liabilities assumed to apply hedge accounting for derivatives and is based on many of Non-controlling and preferred share interests the principles outlined in the U.S. standard relating to derivative Net assets acquired 2001 $ 12,839 8,640 2,640 $ 1,559 2 0 0 2 N A C S A R B 67 3. FINANCIAL ASSETS (b) Prepaid expenses and other assets MILLIONS Government bonds Corporate bonds Debentures Preferred shares Common shares Total 2002 2001 MILLIONS $ 80 263 101 627 63 $ 65 165 106 958 65 Real estate Financial Other Total $ 1,134 $ 1,359 (c) Future income tax assets Financial assets are comprised of securities that are not an MILLIONS active component of the company’s financial operations (see Note 7). Tax assets related to operating and capital losses Tax liabilities related to 2002 2001 $ 479 $ 420 103 188 31 150 $ 770 $ 601 2002 2001 $ 797 $ 958 The fair value of financial assets as at December 31, 2002 was differences in tax and book base (713) (743) $1,118 million (2001 – $1,334 million). The portfolio consists of 46% Future income tax assets $ 84 $ 215 (2001 – 27%) floating rate securities and 54% (2001 – 73%) fixed rate securities with an average yield of 5.9% (2001 – 5.7%). Financial assets include $477 million (2001 – $749 million) of securities of affiliates, principally equity accounted investees. Revenue earned on these securities during the year amounted to $38 million (2001 – $53 million). 4. ACCOUNTS RECEIVABLE AND OTHER MILLIONS Accounts receivable Prepaid expenses and other assets Future income tax assets Total Note 2002 2001 (a) (b) (c) $ 1,276 $ 1,478 770 84 601 215 $ 2,130 $ 2,294 The future income tax assets relate primarily to non-capital losses available to reduce taxable income which may arise in the future. The company and its Canadian subsidiaries have future income tax assets of $391 million that relate to non-capital losses which expire over the next seven years, and $88 million that relate to capital losses which have no expiry. The company’s U.S. sub- sidiaries have future income tax assets of $318 million that relate to net operating losses which expire over the next 18 years. The amount of non-capital losses and deductible temporary differences for which no future income tax assets have been recognized is approximately $1,140 million. 5. COMMERCIAL PROPERTIES (a) Accounts receivable MILLIONS 2002 2001 Commercial properties Less: accumulated depreciation Total $ 630 $ 602 124 211 311 70 273 533 $ 1,276 $ 1,478 (a) Commercial properties carried at a net book value of approxi- mately $3,732 million (2001 – $3,756 million) are situated on land held under leases or other agreements largely expiring after the year 2002 2001 $10,101 672 $ 9,429 $10,164 584 $ 9,580 MILLIONS Real estate Power generation Financial Other Total Included in accounts receivable are Executive Share Ownership 2069. Minimum rental payments on land leases are approximately Plan loans receivable by the corporation from its executives $35 million (2001 – $37 million) annually for the next five years and of $19 million (2001 – $19 million) and similar loans receivable $1,604 million (2001 – $1,662 million) in total on an undiscounted by consolidated subsidiaries from their executives of $39 million basis. (2001 – $38 million). No loans have been made since July 2002. 68 (b) Commercial properties are carried net of $212 million The company records its 75% residual interest in the equity of (2001 – $223 million) which arose on the acquisition of the Louisiana HydroElectric Power under the equity method as it does company’s ownership interests in certain commercial properties. Of not have voting control over the investee. The financial accounts of this amount, nil (2001 – $13 million) relates to lease incentives in place Louisiana HydroElectric Power for 2002 and 2001 are summarized at the time of acquisition, and $212 million (2001 – $210 million) as follows: relates to reductions in the carrying value of commercial properties MILLIONS as a result of the application of the asset and liability method of accounting for income taxes. (c) Construction costs of $14 million (2001 – $27 million) and general and administrative expenses of nil (2001 – $2 million) were Assets Debt Other liabilities Operating revenues Operating expenses capitalized to the commercial property portfolio for properties Net income undergoing redevelopment in 2002. 2002 2001 $ 1,604 1,273 $ 1,568 1,261 155 209 55 24 156 187 53 7 7. FINANCIAL OPERATIONS 6. POWER GENERATING PLANTS MILLIONS Property, plant and equipment Generation Transmission Distribution and other Less: Accumulated depreciation Investment in Louisiana HydroElectric Power 2002 2001 MILLIONS Securities $ 2,111 $ 1,312 Investments and other Loans and notes receivable 157 69 2,337 331 2,006 332 156 65 1,533 264 1,269 331 Total (a) Securities MILLIONS Debentures Preferred shares Common shares Total $ 2,338 $ 1,600 Total Note 2002 2001 (a) (b) (c) $ 454 1,186 459 $ 2,099 $ 277 1,162 158 $ 1,597 2002 2001 $ 259 $ 31 164 59 33 185 $ 454 $ 277 Power generating plants include the cost of the company’s The fair value of securities at December 31, 2002 was 37 hydroelectric generating stations in Ontario, Quebec, Maine, $424 million (2001 – $300 million). New Hampshire and British Columbia, and the Lake Superior Power cogeneration plant. The company’s hydroelectric power facilities operate under various agreements for water rights which extend to or are renew- able over terms through the years 2008 to 2044. During 2002, the company acquired 16 hydroelectric generating stations located in northern Ontario, Maine and New Hampshire with a combined generating capacity of 645 MW for an aggregate cash The portfolio consists of 18% (2001 – 46%) floating rate securi- ties and 82% (2001 – 54%) fixed rate securities with an average yield of 8.0% (2001 – 4.3%) and an average maturity of six years. Securities include $42 million (2001 – $15 million) of affiliates, principally in equity accounted investees owned as part of our financial operations. Revenue earned on these securities during the year amounted to $1 million (2001 – nil). purchase price of $650 million. The operations were acquired in (b) Loans and notes receivable three separate transactions and include interconnections with the Loans and notes receivable include corporate loans, merchant Ontario and New England power grids. banking loans and other loans, either underwritten on a primary basis or acquired in the secondary market. 2 0 0 2 N A C S A R B 69 The fair value of the company’s loans and notes receivable 9. ASSETS UNDER DEVELOPMENT at December 31, 2002 and 2001 approximated their carrying value MILLIONS 2002 2001 based on expected future cash flows, discounted at market rates for Commercial development properties $ 1,138 $ 576 assets with similar terms and investment risks. Loans and notes receivable include US$334 million (2001 – US$430 million) denominated in US dollars carried at a book value of $528 million (2001 – $683 million), as well as $150 million (2001 Power generating plants Residential development land Other Total 170 750 173 95 790 170 $ 2,231 $ 1,631 – $236 million) due from affiliates, which are principally equity Commercial development properties include commercial develop- accounted investees. Interest earned during the year on loans due ment land and rights, primarily for office properties. Power from equity accounted investees amounted to $9 million (2001 – generating plants consist of hydroelectric generating assets $21 million). currently under development in North and South America. Residential The loan portfolio matures between one year and six years, with development land includes infrastructure of master planned an average maturity of two years and consists of 82% floating rate residential communities. loans (2001 – 68%) and 18% fixed rate loans (2001 – 32%) with an The company capitalizes interest and development costs to average yield of 9.1% (2001 – 9.4%). (c) Investments and other MILLIONS Securities Goodwill and other intangibles Total 2002 2001 $ 214 245 $ 459 $ 108 50 $ 158 power generating, commercial and residential development proper- ties. During 2002, $46 million (2001 – $26 million) of interest was capitalized. In connection with residential development operations, these costs are expensed as building lots and homes are sold. During 2002, after interest recoveries, the company recovered a net $32 million (2001 – capitalized $23 million) of interest. Investments include securities held for the longer term as part of 10. INVESTMENT IN NORANDA INC. the company’s merchant banking and restructuring activities as well AND NEXFOR INC. as the company’s investment in funds managed by itself and others. Goodwill and other intangibles represent assets associated with Brascan’s business services activities including contracts, intellec- tual property, and goodwill, as well as $116 million of goodwill arising from the privatization of the financial business during 2002. 8. RESIDENTIAL PROPERTIES MILLIONS Noranda Inc. Nexfor Inc. Total Number of Shares 2002 2001 96.6 61.6 $ 1,385 489 $ 1,874 $ 1,680 471 $ 2,151 Included in the carrying value of the company’s long-term investment in Noranda and Nexfor is an amount of $344 million which represents the excess of acquisition costs over the company’s Residential properties include infrastructure, land and construction share of the net book value of these investments. Amortization of in progress for single family homes and condominiums. $10 million was recorded in 2001. The company, through its subsidiaries, is contingently liable for For 2002, in accordance with the new accounting standard obligations of its partners in its residential development land joint described in Note 1, no amortization was recorded. The carrying ventures. In each case, all of the assets of the joint venture are values of each of Noranda and Nexfor are subject to reviews available first for the purpose of satisfying these obligations, with the to assess whether any impairments are other than temporary. balance shared among the participants in accordance with prede- termined joint venture arrangements. 70 11. ACCOUNTS AND OTHER PAYABLES Principal repayments on corporate borrowings due over the next MILLIONS Accounts payable Other liabilities Total (a) Accounts payable MILLIONS Real estate Power generation Financial Other Total (b) Other liabilities Note 2002 2001 five years and thereafter are as follows: (a) (b) $ 1,473 521 $ 1,994 $ 1,219 499 $ 1,718 2002 2001 $ 568 159 247 499 $ 1,473 $ 486 89 163 481 $ 1,219 MILLIONS 2003 2004 2005 2006 2007 Thereafter Total Annual Repayments $ 401 176 28 2 1 1,027 $ 1,635 The fair value of corporate borrowings at December 31, 2002 exceeds the book value by $27 million (2001 – approximated the book value), determined by way of discounted cash flows using market rates adjusted for the company’s credit spreads. Other liabilities include provisions for tax, currency and other financial obligations, as well as the fair value of the company’s 13. NON-RECOURSE BORROWINGS obligations to deliver securities which it did not own at the time (a) Property specific mortgages of sale. 12. CORPORATE BORROWINGS MILLIONS Commercial paper and bank borrowings Publicly traded term debt Privately held term debt Total MILLIONS Commercial properties Power generating plants 2002 2001 Total 2002 2001 $ 6,973 914 $ 7,887 $ 6,604 556 $ 7,160 $ 115 1,343 177 $ 1,635 $ 20 1,113 180 $ 1,313 Property specific mortgages include $6,083 million (2001 – $5,593 million) repayable in US dollars equivalent to US$3,850 million (2001 – US$3,518 million) and $76 million (2001 – $22 million) in Brazilian Reais equivalent to R$170 million (2001 – R$32 million). The weighted average interest rate at December 31, 2002 was 6.9% (2001 – 7.0%). Principal repayments on property specific mortgages due over the next five years and thereafter are as follows: Commercial paper and bank borrowings include the company’s bank credit facilities, which are in the form of 364-day revolving facilities totalling $650 million as at December 31, 2002, convertible at the company’s option into three-year amortizing term facilities on each anniversary. These facilities are at floating rates and have a MILLIONS weighted average interest rate of 2.5% (2001 – 2.7%). Term debt borrowings which have maturity dates up to 2012, have a weighted average interest rate of 5.2% (2001 – 6.3%), and include $1,501 million (2001 – $1,272 million) repayable in 2003 2004 2005 2006 2007 US dollars equivalent to US$950 million (2001 – US$800 million). Thereafter During 2002, the company issued US$350 million of 7.125% Total publicly traded term debt due June 2012. During 2001, the company issued US$300 million of 8.125% publicly traded term debt due December 2008. Annual Repayments $ 1,048 260 657 506 445 4,971 $ 7,887 2 0 0 2 N A C S A R B 71 (b) Other debt of subsidiaries MILLIONS Financial operations Power generating operations Residential properties International operations and other 2002 $ 927 592 678 753 596 826 804 Total $ 2,950 $ 3,161 Other debt of subsidiaries include $1,882 million (2001 – $2,235 million) repayable in US dollars equivalent to US$1,191 million (2001 – US$1,406 million) and $90 million (2001 – $83 million) in Brazilian Reaisequivalent to R$202 million (2001 – R$121 million). The weighted average interest rate at December 31, 2002 was 7.1% (2001 – 7.0%). Residential properties represent construction financing totalling $678 million (2001 – $826 million), which is repaid from the proceeds on the sale of building lots, single family houses and condominiums. As new homes are constructed, further loan facilities are arranged on a rolling basis. Other debt of subsidiaries include obligations pursuant to financial instruments recorded as liabilities. These amounts include US$272 million of obligations relating to the company’s international operations subject to credit rating provisions, which are supported directly and indirectly by corporate guarantees. Principal repayments on other debt of subsidiaries over the next five years and thereafter are as follows: MILLIONS Financial Power Residential Other Total 2003 2004 2005 2006 2007 Thereafter $ 178 $ – $ 423 $ 181 $ 782 26 136 125 250 212 276 316 – – – 182 68 5 – – 41 23 2 73 433 525 543 132 323 645 Total $ 927 $ 592 $ 678 $ 753 $ 2,950 The fair value of property specific mortgages and other debt of subsidiaries exceeds the book value by $288 million (2001 – below 14. MINORITY INTERESTS OF OTHERS IN ASSETS 2001 Minority interests of others in assets represent the common equity $ 935 in consolidated subsidiaries that is owned by other shareholders. The balances are as follows: MILLIONS Real estate operations Power generation Financial operations Other Total 2002 2001 $ 1,829 $ 1,777 260 – 212 181 591 171 $ 2,301 $ 2,720 During the year ended December 31, 2002, the company completed the privatization of its financial operations conducted through Brascan Financial Corporation (“Brascan Financial”) for consideration of $359 million in cash, 11.4 million common shares, and 1.1 million Class A, Series 11 Preferred Shares. In addition, 3.0 million Brascan Corporation options were issued in exchange for Brascan Financial options pursuant to the tender offer. The fair value of the consideration paid amounted to $773 million with the purchase price being allocated to the estimated fair values of tangible and intangible assets. Goodwill on the transaction amounted to $116 million and has been allocated to the underlying reporting units. During 2001, Great Lakes Power Inc. (operating as “Brascan Power”) was privatized, and the company’s consolidated interests in Brascan Financial increased to 71%. 15. PREFERRED EQUITY – CORPORATE AND SUBSIDIARIES Corporate and subsidiary preferred equity outstanding was comprised of the following: MILLIONS Corporate – preferred shares – preferred securities Note 2002 2001 (a) (b) (c) $ 899 250 1,149 $ 982 125 1,107 710 489 $ 1,859 $ 1,596 the book value by $106 million), determined by way of discounted Subsidiaries cash flows using market rates adjusted for the subsidiaries’ credit – preferred shares spreads. Total 72 (a) Corporate – Preferred Shares During 2002, the company issued 2,940,000 Series 11 5.5% The company has issued the following preferred shares: Preferred Shares for cash proceeds of $73.5 million by way of a MILLIONS Rate Term 2002 2001 public offering and 1,092,401 Series 11 Preferred Shares valued Class A Preferred Shares Series 1 + 5 65% P 1 Retractable $ – Series 2 Series 3 70% P B.A. + 40 b.p. 2 Series 4 + 7 70% P / 8.5% Perpetual Perpetual Perpetual $ 262 Series 8 Series 9 Series 10 Series 11 Total Variable up to P Perpetual 5.63% 5.75% 5.50% Perpetual Perpetual Perpetual 1 Included in accounts and other payables 2 Rate determined in a monthly auction $ $ 65 262 200 70 26 174 250 – 117 70 26 74 250 100 $ 899 $ 982 at $27 million in connection with the privatization of the financial operations. The company also eliminated $83 million Series 3 Preferred Shares and $100 million Series 9 Preferred Shares acquired by subsidiaries. During 2001, the company issued 10,000,000 Series 10 5.75% Preferred Shares for cash proceeds of $250 million by way of a public offering, and 6,950,208 Series 9 5.63% Preferred Shares with an aggregate par value of $174 million were issued on conversion from Series 8 Preferred Shares. The dividend rate on the remaining Series 8 Preferred Shares, which was previously fixed at 6.25% per P – Prime Rate B.A.– Banker’s Acceptance Rate b.p.– Basis Points annum, became a floating rate dividend at the time of the conver- The company is authorized to issue an unlimited number of Class A Preferred Shares and an unlimited number of Class AA Preferred Shares, issuable in series. No Class AA Preferred Shares sion on November 1, 2001. Every fifth anniversary thereafter, the Series 8 Preferred Shares have the right to convert to the Series 9 Preferred Shares on a share-for-share basis and vice versa. have been issued. (b) Corporate – Preferred Securities The following Class A Preferred Shares are issued and The company has the following preferred securities outstanding: outstanding: NUMBER OF SHARES Class A Preferred Shares Series 1 + 5 Series 2 Series 3 Series 4 + 7 Series 8 Series 9 Series 10 Series 11 2002 2001 MILLIONS 8.35% due 2050 8.30% due 2051 18,891 2,619,091 10,465,100 10,465,100 Total 2002 2001 $ 125 125 $ 250 $ 125 – $ 125 1,171 2,800,000 1,049,792 2,950,208 2,000 2,800,000 1,049,792 6,950,208 10,000,000 10,000,000 4,032,401 – During 2002, the company issued $125 million 8.30% preferred securities due 2051, and the company issued 8.35% preferred securities due 2050 for proceeds of $125 million during 2001. The preferred securities are subordinated and unsecured. The company may redeem the preferred securities in whole or in part five years The Class A Preferred Shares have preference over the Class AA after the date of issue at a redemption price equal to 100% of the Preferred Shares, which in turn are entitled to preference over the principal amount of the preferred securities plus accrued and unpaid Class A and Class B common shares on the declaration of dividends distributions thereon to the date of such redemption. The company and other distributions to shareholders. All series of the outstanding may elect to defer interest payments on the preferred securities preferred shares have a par value of $25 per share, except the for periods of up to five years and may settle deferred interest and Class A, Series 3 Preferred Shares which have a par value of principal payments by way of cash, preferred shares or common $100,000 per share. shares of the company. 2 0 0 2 N A C S A R B 73 (c) Subsidiaries – Preferred Shares The Series I and II Convertible Notes are convertible at the option Subsidiaries of the corporation have issued the following perpetual of the holder at any time into a total of 3,105,202 (2001 – preferred shares: 3,106,847) Class A common shares at conversion prices of $32.00 MILLIONS Real estate Financial Other Total 16. COMMON EQUITY 2002 2001 and $31.00 per share, respectively, and are redeemable at any time $ 415 $ 215 at the company’s option. 295 – 264 10 $ 710 $ 489 (b) Class A and Class B common shares The company’s Class A common shares and its Class B common shares are each, as a separate class, entitled to elect one-half of the company’s board of directors. Shareholder approvals for matters other than for the election of directors, must be received from The company is authorized to issue an unlimited number of Class A the holders of the company’s Class A common shares as well as the Limited Voting Shares (“Class A common shares”) and 85,120 Class B common shares, each voting as a separate class. Class B Limited Voting Shares (“Class B common shares”), together During 2002 and 2001 the number of issued and outstanding referred to as common shares. common shares changed as follows: The company’s common shareholders’ equity is comprised of the NUMBER OF SHARES 2002 2001 following: Outstanding at beginning of year 169,781,433 169,375,803 MILLIONS Rate Maturity 2002 2001 Issued (repurchased): Convertible Notes Series I Series II B.A. + 40 b.p. 1 3.9% 2 $ 2085 2088 Class A and B common shares Retained earnings Cumulative translation adjustment 75 24 99 1,920 2,283 (140) $ 75 24 99 1,715 2,447 – Dividend reinvestment plan Management share option plan Management share purchase plan Conversion of debentures In exchange for shares of Brascan Power In exchange for shares of Brascan Financial Common equity $ 4,162 $ 4,261 Normal course issuer bid 14,912 80,000 – 2,293 14,361 11,290 210,616 10,070 – 3,916,793 11,379,399 – (7,120,300) (3,757,500) NUMBER OF SHARES Class A common shares Class B common shares Unexercised options Reserved for conversion of subordinated notes Outstanding at end of year 174,137,737 169,781,433 174,052,617 169,696,313 85,120 85,120 In 2002, under a normal course issuer bid, the company repur- 174,137,737 169,781,433 chased 7,120,300 (2001 – 3,757,500) Class A common shares at a 6,701,708 3,474,717 cost of $225 million (2001 – $101 million). During 2002, 11,379,399 3,105,202 3,106,847 Total diluted common shares 183,944,647 176,362,997 1 Rate determined in a semi-annual auction,maximum 10% 2 Rate determined as 120% of the current common share dividend B.A.– Banker’s Acceptance Rate b.p.– Basis Points (a) Convertible Notes Class A common shares were issued on the privatization of Brascan Financial at a price of $34.00 per share for total consideration of $387 million. During 2001, 3,916,793 Class A common shares were issued on the privatization of Brascan Power at the price of $25.50 per share for total consideration of $100 million. Proceeds from the issuance of common shares pursuant to the company’s dividend The Convertible Notes are subordinate to the company’s senior debt reinvestment plan, management share option plan (“MSOP”) and and the company may, at its option, pay principal and interest due management share purchase plan (“MSPP”), totalled $1.6 million on the notes in Class A common shares of the company. (2001 – $2.2 million). 74 (c) Earnings per share During 2002, three million options were issued to executives The components of basic and diluted earnings per share are of Brascan Financial in exchange for options held by them in that summarized in the following table: company. 2002 2001 At December 31, 2002, the following options to purchase Class A $ 130 $ 311 common shares were outstanding: MILLIONS Net income Convertible note interest Preferred security distributions Preferred share dividends Net income available for common shareholders Weighted average outstanding common shares Dilutive effect of the conversion of notes and options Common shares and common share equivalents (3) (18) (52) (5) (1) (42) $ 57 $ 263 172 10 182 171 3 174 (d) Stock based compensation Options issued under the company’s MSOP vest proportionately over five years and expire 10 years after the grant date. The exercise price is equal to the market price at the grant date. During the first quarter of 2002, the company granted 500,000 options at a price of $28.72 per share. The cost of the options was determined using the Black-Scholes model of valuation, assuming a 7.5 year term, 23% volatility, a weighted average expected dividend yield of 2.67% annually and an interest rate of 5.4%. The cost is charged to employee compensation expense over the five-year vesting period of the options granted. The changes in the number of options during 2002 and 2001 were as follows: 2002 2001 Number of Options (000’s) Weighted Average Exercise Price Number of Options (000’s) Weighted Average Exercise Price Outstanding NUMBER OUTSTANDING (000’S) 1,646 1,685 3,371 6,702 Exercise Price $13.20 - $19.20 $19.30 - $22.70 $24.95 - $32.93 Weighted Average Remaining Life 6.7 yrs. 6.3 yrs. 7.2 yrs. Number Exercisable (000’s) 718 923 1,680 3,321 A Restricted Share Unit Plan is offered to executive officers and non-employee directors of the company. Under this plan, each officer and director may choose to receive all or a percentage of his or her annual incentive bonus or directors fees in the form of deferred share units (“DSUs”). The DSUs are vested over a five year period and accumulate additional DSUs at the same rate as dividends on common shares. Officers and directors are not allowed to convert the DSUs into cash until retirement or cessation of employment. The value of the vested and non-vested DSUs, when converted to cash, will be equivalent to the market value of the common shares at the time the conversion takes place. The value of the DSUs as at December 31, 2002 was $10 million (2001 – $2 million). The increase is due in part to the conversion of Brascan Financial DSUs to Brascan DSUs upon the privatization of that operation. Employee compensation expense for these plans is charged against income over the vesting period of the DSUs. Changes in the amount payable by the company in respect of vested DSUs as a result of dividends and share price movements are recorded as employee compensation expense in the period of the change. at beginning of year 3,475 $24.01 3,013 $23.94 Employee compensation expense related to these plans for the Granted Exercised Converted Cancelled Outstanding at end of year Exercisable at end of year 500 (221) 3,004 (56) 28.72 19.15 23.31 22.70 675 (174) – (39) 22.70 19.54 – 16.55 6,702 $24.25 3,475 $24.01 year ended December 31, 2002 was $3 million (2001 – $1 million). (e) Other Loans receivable from officers of the company of $8 million (2001 – $8 million) owing under the company’s Management Share Purchase Plan are secured by fully paid Class A common shares 3,321 2,119 of the company and are deducted from shareholders’ equity. 2 0 0 2 N A C S A R B 75 17. RISK MANAGEMENT AND subsidiaries held credit derivative contracts with a total notional DERIVATIVE FINANCIAL INSTRUMENTS amount of nil (2001 – $100 million). (a) Derivative financial instruments The company and its subsidiaries use derivative financial instruments including interest rate swaps, cross currency interest rate swaps, commodity swaps, commodity options and foreign exchange forward contracts to manage risk. Management evaluates and monitors the credit risk of its derivative financial instruments and endeavours to minimize credit risk through offset arrangements, collateral, and other credit risk mitiga- tion techniques. The credit risk of derivative financial instruments The company’s subsidiaries also held interest rate swap contracts as at December 31, 2002 with a total notional amount of $2,501 million (2001 – $2,948 million). These interest rate swap contracts were comprised of contracts with a replacement value in excess of that recorded in the company’s accounts of $44 million (2001 – $43 million), and contracts with a replacement cost in excess of that recorded in the company’s accounts of $2 million (2001 – $2 million). The interest rate swap transactions have maturities varying from one to 13 years. is limited to the replacement value of the instrument, and takes (b) Derivative commodity instruments into account any replacement cost and future credit exposure. The The company has entered into energy derivative contracts replacement value or cost of interest rate swap contracts which form primarily to hedge the sale of generated power.The company endeav- part of financing arrangements is calculated by way of discounted cash ours to link forward electricity sale derivatives to specific periods flows using market rates adjusted for credit spreads. in which it anticipates generating electricity for sale.The company also The company endeavours to maintain a matched book of formally assesses, both at the hedge’s inception and on an ongoing currencies. However, unmatched positions are carried, on occasion, basis,whether the derivatives that are used in hedging transactions are within predetermined exposure limits based on expectations for highly effective in offsetting changes in the fair values or cash flows of currencies. These limits are reviewed on a regular basis and the the hedged items. As at December 31, 2002, the energy derivative company believes the exposures are manageable and not material contracts were comprised of contracts with a replacement value in relation to its overall business operations. of $38 million, as well as contracts with a replacement cost At December 31, 2002, the company held US dollar foreign of $71 million. exchange contracts with a notional amount of $2,611 million (2001 – $1,129 million) at an average exchange rate of 1.565 (2001 – 1.581) and a replacement value of $5 million (2001 – replacement cost of $8 million). All of the foreign exchange contracts at December 31, 2002 had a maturity of less than one year. The company also held interest rate swap contracts having a notional amount of $1,394 million (2001 – $777 million) with a replacement value in excess of that recorded in the company’s accounts of $52 million (2001 – replace- The company has entered into forward gold sale contracts to hedge its exposure to fluctuations in the price of gold. As at December 31, 2002 the company held forward contracts for the sale of 500,000 ounces of gold for delivery in 2003 at an average price of US$327 per ounce. The unrealized loss on these contracts was approximately $16 million as at December 31, 2002 which has been deferred. In addition,the company has deferred $4 million of realized gains on gold forwards in accounts and other payables as at December 31, 2002. ment cost of $6 million). These contracts expire over a period (c) Commitments and contingencies of 10 years. The company and its subsidiaries are contingently liable with At December 31, 2002, the company’s subsidiaries held US dollar respect to litigation and claims that arise in the normal course foreign exchange contracts with a notional amount of $1,110 million of business. (2001 – $1,105 million) at an average exchange rate of 1.536 (2001 – In the normal course of business, the company and its subsidiaries 1.539) and a replacement cost of $31 million (2001 – $32 million). enter into financing commitments. At the end of 2002, the company These contracts expire over the next five years. The company’s and its subsidiaries had $418 million (2001 – $251 million) in such 76 commitments outstanding. The company’s subsidiaries maintain The company conducts finite risk reinsurance operations as part credit facilities and other financial assets to fund these commitments. of its asset management activities and accounts for the assets and On September 11, 2001, the company owned eight million square liabilities associated with such contracts as deposits. As at feet of space in four office towers surrounding the World Trade December 31, 2002 the company held reinsurance assets of Center site. $982 million (2001 – $819 million) which were offset in each year The company carries insurance to cover costs incurred by an equal amount of reserves and other liabilities. Letters of credit of to repair damage to One Liberty Plaza, One World Financial Center and $194 million (2001 – $91 million) have been issued in connection with the Winter Garden atrium and common areas of the World Financial these operations. Net fee income earned on reinsurance operations Center, as well as for business interruption. To date, approxi- was $22 million (2001 – nil) representing $278 million (2001 – mately $287 million has been received for property and $784 million) of premium and other revenues offset by $256 million business interruption claims relating to these properties. The (2001 – $784 million) of reserves and other expenses. company’s insurance claim adjustment process is ongoing. Due to the complexity of the issues involved, this process will take additional 18. NET OPERATING INCOME time to conclude. Based upon the company’s review of its insurance Net operating income for each business segment is equal to revenue policies and consultation with outside legal experts, the company less all attributable expenses except interest, depreciation, minority anticipates a substantial recovery of its losses in rental revenue and share of income and tax expenses. The details are as follows: costs associated with the repairs of its properties. As at December 31, 2002 all buildings in downtown Manhattan were reopened and available for re-occupancy. No lease cancel- lations in the New York portfolio occurred as a result of the events of September 11. The company has acquired US$300 million of insurance for dam- (a) Commercial property operations MILLIONS Revenue Expenses Net age and business interruption costs sustained as a result of an act of (b) Power generating operations terrorism. However, a terrorist act could have a material effect on the MILLIONS company’s assets to the extent damages exceed the coverage. The company has reviewed its loan agreements and believes it is in compliance, in all material respects, with the contractual obligations Revenue Expenses Net therein. The company provides guarantees from time to time in respect of its merchant banking, asset management, power marketing and financial activities. The company does not guarantee the obligations of its subsidiaries or affiliates other than as noted under other debt of subsidiaries, with the exception of $450 million of contingent (c) Financial operations MILLIONS Revenue Expenses Net obligations included in accounts and other payables relating to the (d) Residential property operations company’s financing and power generating operations, and which MILLIONS are subject to credit rating provisions. These obligations are supported by financial assets of the principal obligor. Revenue Expenses Net 2002 2001 $ 1,644 568 $ 1,076 $ 156 26 $ 130 2002 2001 $ 327 87 $ 240 $ 270 128 $ 142 2002 2001 $ 599 331 $ 268 $ 589 333 $ 256 2002 2001 $ 2,026 1,860 $ 166 $ 116 108 $ 8 2 0 0 2 N A C S A R B 77 (e) Other operations 21. EQUITY ACCOUNTED INCOME (LOSS) MILLIONS Revenue Expenses Net 2002 $ 214 58 $ 156 $ 138 26 $ 112 19. MINORITY INTERESTS OF OTHERS Minority interests of others is segregated into their share of income before non-cash items and their share of non-cash items. The 2001 The company’s equity accounted income (loss) consists of the following: MILLIONS 2002 2001 Brookfield Properties Corporation $ – $ 166 Noranda Inc. Nexfor Inc. Total (292) 8 (44) 6 $ (284) $ 128 minority share of income before non-cash items represents the 22. JOINT VENTURES portion of income before non-cash items attributable to the minority The following amounts represent the company’s proportionate interests, whether remitted or unremitted. The minority share of non- interest in incorporated and unincorporated joint ventures reflected cash items represents the portion of depreciation and amortization in the company’s accounts: and taxes and other provisions attributable to minority interests. The details of minority interest expense are as follows: MILLIONS Assets 2002 2001 Liabilities MILLIONS Distributed as dividends Preferred Common Undistributed Minority share of income before non-cash items Minority share of non-cash items $ 39 87 194 $ 44 39 33 Operating revenues Operating expenses Net income Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities $ 450 $ 116 130 – 23. POST EMPLOYMENT BENEFITS Minority interest expense $ 320 $ 116 2002 2001 $ 2,925 1,718 $ 2,152 1,135 524 259 56 138 – (53) 243 177 18 28 (79) 47 Minority interest expense $ 320 $ 116 20. INCOME TAXES The company offers a number of pension plans to its employees. The company’s obligations under its defined benefit pension plans are determined periodically through the preparation of actuarial valuations. As of December 31, 2002, the assets of the plans totalled The difference between the statutory income tax rate of 39% (2001 $44 million (2001 – $40 million) and the accrued benefit obligation – 41%) and the effective income tax rate of 33% (2001 – -8%) is amounted to $46 million (2001 – $38 million) for a net accrued attributable principally to dividends subject to tax prior to receipt benefit liability of $2 million (2001 – net asset of $2 million). The by the company of -26% (2001 – -30%), equity accounted earnings benefit plan expense for 2002 was $0.4 million (2001 – $0.3 million). that have already been tax effected by the investees of 28% (2001 – The discount rate used was 6.75% with an increase in the rate of -15%) and other of -8% (2001 – -4%). compensation of 3.8% and an investment rate of 7% (2001 – 7%). 78 24. SUPPLEMENTAL CASH FLOW INFORMATION 25. SHAREHOLDER DISTRIBUTIONS MILLIONS Corporate borrowings Issuances Repayments Net Property specific mortgages Issuances Repayments Net Other debt of subsidiaries Issuances Repayments Net Commercial and residential properties Dispositions of Investment in Net Financial operations Securities sold Securities purchased Loans collected Loans advanced Net Financial assets Securities sold Securities purchased Net 2002 2001 MILLIONS 2002 2001 $ 648 (318) $ 330 $ 1,253 (490) $ 763 $ 95 (290) $ (195) $ 466 (162) $ 304 $ 477 (524) $ (47) $ 208 (100) $ 108 $ 136 (53) $ 83 $ 50 (138) $ (88) Common equity Common share dividends Convertible note interest Preferred equity Preferred share dividends Preferred security distributions $ 172 $ 171 3 175 52 18 70 5 176 42 1 43 Total $ 245 $ 219 26. DIFFERENCE FROM UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Canadian generally accepted accounting principles (“Canadian GAAP”) differ in some respects from the principles that the company would follow if its consolidated financial statements were prepared in accordance with accounting principles generally accepted in the $ 31 $ 365 United States (“US GAAP”). (468) 1,410 (1,419) (289) 2,424 (2,657) $ (446) $ (157) $ 497 (272) $ 225 $ 483 (447) $ 36 The effects of the significant accounting differences between Canadian GAAP and US GAAP on the company’s balance sheets and the statements of income, retained earnings and cash flow for the years then ended are quantified and described in this note. Under Canadian GAAP, companies are permitted to provide supplementary measures of net income, including cash flow from operations in the consolidated financial statements, provided that these measures are not given the same prominence as reported Cash taxes paid were $17 million (2001 – $18 million) and income or income per share. This is not permitted under US GAAP. are included in other operating costs. Cash interest paid totalled $727 million (2001 – $315 million). 2 0 0 2 N A C S A R B 79 (a) Income statement differences As a result of differences in the original carrying value of The significant differences in accounting principles between the Noranda’s Magnesium project under Canadian GAAP and US GAAP, company’s income statements and those prepared under US GAAP there is a difference in the amount of the asset impairment charge are summarized in the following table: in 2002. MILLIONS Note 2002 2001* Canadian GAAP requires recognition of a pension valuation $ 130 $ 311 expected future benefit. Changes in the pension valuation allowance allowance for any excess of the prepaid benefit expense over the Net income as reported under Canadian GAAP Adjustments: Increase (reduction) of equity accounted income Change in deferred income taxes Convertible note and (i) (ii) preferred security distributions (iii) Stock options Market value adjustments Increased commercial property income Increased commercial property depreciation Minority shareholders’ interests and other (iv) (v) (vi) (vii) (viii) Net income Basic Diluted 22 78 (21) (22) (26) 22 (100) (23) (81) 53 (6) (13) 10 – – (14) are recognized in the Consolidated Statement of Income. US GAAP does not specifically address pension valuation allowances. In 2002, US regulators determined that such allowances would not be permitted under US GAAP. In light of these recent developments, Noranda retroactively eliminated the effects of recognizing pension valuation allowances in prior years. Accordingly, the company’s 2001 comparative amounts have been restated to increase opening retained earnings under US GAAP in 2001 by $41 million and decrease net income under US GAAP by $16 million or $0.09 per share for the year ended December 31, 2001. (ii) – Deferred income taxes The change in deferred income taxes includes the tax effect of the income statement adjustments under US GAAP. Also, under Canadian GAAP, tax rates are applied to temporary differences and losses $ 0.04 $ 0.03 $ 1.28 $ 1.25 carried forward when they are substantively enacted. Under US GAAP, tax rates are applied to temporary differences and losses carried Net income under US GAAP $ 60 $ 260 Per share amounts under US GAAP * Restated for pension valuation allowance - see Note 26(a)(i) forward only when they are enacted. (i) – Equity accounted income Under US GAAP, the company’s equity accounted income has been adjusted for differences in the accounting treatment by the underly- ing company as follows: (iii) – Convertible note and preferred security distributions Under Canadian GAAP, the company’s subordinated convertible notes and preferred securities are treated as equity with interest paid thereon recorded as a distribution from retained earnings. This results from the company’s ability to repay these notes and meet Accounting Treatment Canadian GAAP USGAAP interest obligations by delivering its common shares to the holders. For 2002 and 2001 Start-up costs Pension accounting Derivative instruments and hedging activities For 2001 only Stock option plans defer and amortize valuation allowance See Note 26 (a)(v) expense as incurred no valuation allowance recorded upon exercise liability method Rental revenue recognition as it becomes due straight-line Under US GAAP, the subordinated convertible notes and preferred securities would be recorded as indebtedness with the corresponding interest paid recorded as a charge to income. (iv) – Stock options In 2001, under Canadian GAAP, no compensation expense was recorded in respect of stock options granted or for changes in their fair value during the year. Under US GAAP, Statement of Financial Accounting Standards No. 123 – Accounting for Stock-Based Depreciation on rental property sinking fund straight-line Compensation (“SFAS 123”) established financial accounting and reporting standards for stock-based employee compensation plans. 80 As allowed under SFAS 123, the company measured compensa- $38 million), a decrease in other comprehensive income of tion expense for options granted to employees in accordance with $17 million (2001 – $8 million) and an increase in net income Accounting Principles Board No. 25 (“APB 25”). Given the ability of of $9 million (2001 – nil) within the company’s consolidated financial the option holders to require the company to settle the intrinsic value statements for the year ended December 31, 2002. During the year of the option in cash, the change in the intrinsic value was recorded ended December 31, 2002, $1 million (2001 – $13 million) of net as a charge or credit to income on a quarterly basis. Accordingly, the derivative losses were reclassified from other comprehensive change in the intrinsic value of the stock compensation of both income to income. Over the next 12 months, principally on the the company and its subsidiaries was recorded as a charge to income settlement of certain contracts in Noranda the company expects under US GAAP. to reclassify $10 million, representing its share of net losses Effective January 1, 2002, the company’s stock option plan was on these contracts from other comprehensive income to income. amended to eliminate the option holders’ ability to require the company to settle the intrinsic value of the option in cash. The company also adopted the fair value method for newly issued stock options. (vi) – Increased commercial property income Under Canadian GAAP, rental revenue is recognized over the term of the lease as it becomes due where increases in rent are (v) – Market value adjustments intended to offset the estimated effects of inflation. Under US GAAP, Under Canadian GAAP, the company records short-term investments rental revenue is recognized on a straight-line basis over the term at the lower of cost and net realizable value, with any unrealized of the lease. losses in value included in the determination of net income. Under US GAAP, trading securities are carried at market, with unrealized gains and losses included in the determination of net income. The unrealized adjustment for the year ended December 31, 2002 was -$28 million (2001 – $10 million). Under US GAAP, all derivative financial instruments are recog- nized in the financial statements and measured at fair value. Changes in the fair value of derivative financial instruments are (vii) – Increased commercial property depreciation Under Canadian GAAP, commercial properties have been depreci- ated using the sinking-fund method. Under US GAAP, commercial properties are depreciated on a straight-line basis. (viii) – Minority interests of others in assets Minority interests of others in assets have been adjusted for the differences between Canadian GAAP and US GAAP. recognized periodically in either income or shareholders’ equity (b) Comprehensive income (as a component of other comprehensive income), depending US GAAP requires a statement of comprehensive income which on whether the derivative is being used to hedge changes in fair incorporates net income and certain changes in equity. Comprehen- value or cash flows. For derivatives designated as cash flow hedges, sive income (loss) is as follows: the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified into net income when the hedged item affects net income. Changes in the fair value of derivative financial instruments that are not designated in a hedging relationship and ineffective portions of hedges are recognized periodically in income. The unrealized adjustment for the year ended December 31, 2002 was $2 million (2001 – nil). MILLIONS Note 2002 2001 Net income under US GAAP Market value adjustments Minimum pension liability adjustment by Noranda and Nexfor Foreign currency translation adjustments Taxes on other comprehensive income (i) (ii) (iii) $ 60 10 $ (160) (176) 74 260 (38) (41) (57) 54 The effects of accounting for derivatives in accordance with Comprehensive income (loss) $ (192) $ 178 US GAAP resulted in an increase in assets of $150 million (2001 – $30 million), an increase in liabilities of $166 million (2001 – 2 0 0 2 N A C S A R B 81 (i) – Market value adjustments (iii) – Foreign currency translation adjustments Under Canadian GAAP, the company records investments other than Canadian GAAP provides that the carrying values of assets and trading securities at cost and writes them down when other liabilities denominated in foreign currencies that are held by self- than temporary impairment occurs. Under US GAAP, these securities sustaining operations are revalued at current exchange rates. meet the definition of available for sale, which includes securities for US GAAP requires that the change in the cumulative translation which the company has no immediate plans to sell but which may adjustment account be recorded in other comprehensive income. be sold in the future, and are carried at fair value based on quoted The amount recorded by the company represents the change in market prices. Changes in unrealized gains and losses and related the cumulative translation adjustment account. The resulting income tax effects are recorded as other comprehensive income. changes in the carrying values of assets which arise from foreign Realized gains and losses, net of tax and declines in value judged currency conversion are not necessarily reflective of changes in to be other than temporary, are included in the determination underlying value. of income. During 2002, the company recorded $28 million (2001 – $4 million) of net unrealized gains as other comprehensive income. Under Canadian GAAP, changes in the fair value of derivatives that are designated as cash flow hedges are not recognized in income. Under US GAAP, changes in the fair value of the effective portions of such derivatives are reported in other comprehensive income whereas the offsetting changes in value of the cash flows being hedged are not. The amounts recorded in other comprehen- sive income are subsequently reclassified into net income at the same time as the cash flows being hedged are recorded in net income. The company’s share of the amounts recorded by Noranda and Nexfor for derivatives that qualify as hedges under US GAAP is $12 million (2001 – -$37 million) which is included in compre- hensive income. During 2002, the company also recorded in other comprehensive income a $30 million (2001 – $5 million) decrease in the fair value of contracts for the forward sale of production from the company’s power generating operations. (ii) – Minimum pension liability adjustment by Noranda and Nexfor US GAAP requires the excess of any unfunded accumulated benefit obligation (with certain other adjustments) to be reflected as an additional minimum pension liability in the consolidated balance sheet with an offsetting adjustment to intangible assets to the extent of unrecognized prior service costs, with the remainder recorded in other comprehensive income. The company has reflected its proportionate share of these adjustments recorded by Noranda and Nexfor. (c) Balance sheet differences The incorporation of the significant differences in accounting princi- ples under Canadian GAAP and US GAAP results in the following adjustment of the company’s balance sheet: MILLIONS Assets Note 2002 2001 Cash and cash equivalents Accounts receivable and other Securities Loans and notes receivables Operating assets Commercial properties Power generating plants Residential properties Assets under development Corporate investments (i) (ii) (iii) (iii) (iv) $ 525 2,497 1,574 1,645 8,808 2,338 1,028 2,231 1,655 $ 607 2,500 1,622 1,320 9,060 1,600 1,110 1,631 2,034 Total assets under US GAAP $ 22,301 $ 21,484 Liabilities and shareholders’ equity Accounts and other payables Corporate borrowings Non-recourse borrowings Property specific mortgages Other debt of subsidiaries Convertible and subordinated notes Minority interests of others in assets Preferred equity – Corporate – Subsidiaries Common equity Total liabilities (v) $ 2,050 1,635 $ 1,698 1,313 7,887 3,006 349 2,179 899 710 3,586 7,160 3,180 224 2,628 982 489 3,810 and equity under US GAAP $ 22,301 $ 21,484 82 The significant difference in each category between Canadian MILLIONS 2002 2001 GAAP and US GAAP are as follows: (i) – Deferred income taxes The deferred income tax asset under US GAAP is included in accounts receivable and other and is calculated as follows: MILLIONS 2002 2001 Corporate investments under Canadian GAAP Accumulated other comprehensive loss Retained earnings adjustment Corporate investments under US GAAP Tax assets related to operating and capital losses Tax liabilities related to differences in tax and book basis Valuation allowance Deferred income tax asset under US GAAP (ii) – Securities $ 1,245 $ 1,383 (348) (448) (480) (425) (v) – Common Equity MILLIONS Common equity under Canadian GAAP Reversal of Canadian GAAP $ 449 $ 478 cumulative translation adjustment Under Canadian GAAP, the company records its trading securities which are short-term investments at the lower of cost and net realizable value. Unrealized losses in value are included in the determination comprehensive income (loss) Paid in capital-stock options Reclassification of convertible notes Cumulative adjustments to retained earnings under US GAAP Accumulated other $ 1,874 (165) (54) $ 2,151 (24) (93) $ 1,655 $ 2,034 2002 2001 $ 4,162 $ 4,261 140 36 (99) (195) (458) – – (99) (146) (206) of income. Under US GAAP, trading securities are carried at market, Common equity under US GAAP $ 3,586 $ 3,810 with unrealized gains and losses included in income. Investments which meet the definition of available for sale secu- rities are accounted for as described in this note under (b)(i). As a result of the above adjustments, the components of common equity under US GAAP are as follows: MILLIONS Securities under Canadian GAAP Net unrealized losses for trading securities Net unrealized gains (losses) on available for sale securities 2002 2001 MILLIONS $ 1,588 $ 1,636 (29) 15 (1) (13) Common shares Paid in capital-stock options Accumulated other comprehensive loss Retained earnings Common equity under US GAAP 2002 $ 1,910 36 (458) 2,098 $ 3,586 2001 $ 1,705 – (206) 2,311 $ 3,810 Securities under US GAAP $ 1,574 $ 1,622 (iii) – Joint ventures Under US GAAP, proportionate consolidation of investments in joint ventures is generally not permitted. Under certain rules for foreign private issuers promulgated by the United States Securities and Exchange Commission (“SEC”), the company has continued to follow the proportionate consolidation method. Additional joint venture information is provided in Note 22. (iv) – Corporate investments The company’s corporate investments balance is comprised of its investments in Noranda Inc. and Nexfor Inc. For US GAAP purposes, the company’s corporate investments have been adjusted to reflect the cumulative impact of calculating (d) Cash flow statement differences Under Canadian GAAP, interest on convertible notes is classified as a shareholder distribution. Under US GAAP, interest on these notes is classified as an operating activity. The summarized cash flow statement under US GAAP is as follows: MILLIONS 2002 2001 Cash flows provided from (used for) the following activities: Operating under Canadian GAAP Convertible note interest Preferred security distributions Operating under US GAAP Financing Investing Net increase (decrease) in cash $ 509 (3) (18) 488 788 (1,358) $ 364 (5) (1) 358 193 (291) earnings of its equity accounted affiliates on a US GAAP basis. and cash equivalents under US GAAP $ (82) $ 260 2 0 0 2 N A C S A R B 83 (e) Changes in accounting policies In January 2003, the FASB issued FASB Interpretation 46 In July 2001, the Financial Accounting Standards Board (“FASB”) (FIN 46), Consolidation of Variable Interest Entities. This standard issued Statement of Financial Accounting Standards, Business addresses the application of consolidation policies and disclosure Combinations (SFAS 141), and Goodwill and Other Intangible requirements for these entities. Assets (SFAS 142). The company adopted the new standards as In November 2002, the FASB issued FIN 45, Guarantor’s of January 1, 2002. Accounting and Disclosure Requirements for Guarantees,Including The standards require that all business combinations be Indirect Guarantees of Indebtedness of Others. This standard accounted for using the purchase method and establish specific requires a guarantor to recognize a liability for the fair value of the criteria for the recognition of intangible assets separately from obligations it has undertaken in issuing the guarantee, and elabo- goodwill. Under the standards, goodwill will no longer be amortized rates on the disclosures to be made by a guarantor. but will be subject to impairment tests on at least an annual basis. In October 2001, the FASB issued Accounting for the Impairment 27. SEGMENTED INFORMATION or Disposal of Long-Lived Assets (SFAS 144), which is effective for The company’s presentation of reportable segments is based on financial statements issued for fiscal years beginning after how management has organized the business in making operating December 15, 2001. SFAS 144 applies to all long-lived assets, and capital allocation decisions and assessing performance. The including discontinued operations, and it develops one accounting company has five reportable segments: model for long-lived assets that are to be disposed of by sale. (i) commercial property operations, which are principally office (f) Future accounting policy changes properties located in major North American cities; (ii) power generating operations, which are predominantly The following future accounting policy changes may have hydroelectric power generating facilities on North American an impact on the company, although the impact, if any, has not been river systems; determined at this time. In June 2002, the FASB issued SFAS 146, (iii) financial operations, which include asset management, Accounting for Costs Associated with Exit or Disposal Activities. The client services, capital markets, merchant banking and cor- standard requires a liability to be recognized for costs associated porate lending activities; with exit or disposal activities when they are incurred rather than the (iv) residential property operations, which represent the date upon which a company commits to an exit plan. This standard company’s residential development and home building is effective for exit or disposal activities that are initiated after operations; and December 31, 2002. (v) resource investments, which are comprised of the company’s In August 2001, FASB issued Accounting for Asset Retirement ownership interests in Noranda Inc. and Nexfor Inc. Obligations (SFAS 143), which is effective for financial statements Non-operating assets and related revenue, cash flow and issued for fiscal years beginning after June 15, 2002. SFAS 143 income are presented as financial assets and corporate and other. addresses the recognition and remeasurement of obligations asso- ciated with the retirement of a tangible long-lived asset. 84 Revenue, cash flow from operations, income and assets by reportable segments are as follows: MILLIONS Revenue operations Income Assets Revenue 2002 Cash flow from Commercial property operations Power generating operations Financial operations Residential property operations Resource investments Financial assets Corporate and other Interest and other unallocated expenses $ 1,644 $ 1,076 $ 1,076 $ 10,567 $ 327 599 2,026 – 120 94 $ 4,810 240 268 166 100 120 36 240 268 166 2,508 2,099 1,778 (284) 1,874 120 36 1,134 2,828 2,006 1,270 1,622 $ 22,788 1,492 $ 1,269 2001 Cash flow from operations Income Assets $ $ 170 142 256 8 96 87 25 784 433 $10,156 1,695 1,556 1,900 2,151 1,439 3,032 $21,929 296 142 256 8 (38) 87 25 776 465 156 270 589 116 – 87 51 Cash flow / income from continuing operations $ 736 $ 130 $ 351 $ 311 Revenue and assets by geographic segment are as follows: MILLIONS Canada United States South America and other Revenue / Assets 2002 2001 Revenue $ 1,412 2,832 566 $ 4,810 Assets $ 8,355 11,046 3,387 $22,788 Revenue $ 652 12 605 $ 1,269 Assets $ 8,265 10,134 3,530 $21,929 2 0 0 2 N A C S A R B 85 Management Team CChhaaiirrmmeenn Robert J. Harding, FCA Chairman of the Board Roberto P.C. de Andrade International Gordon E. Arnell Real Estate Jack L. Cockwell Group Chairman Alex G. Balogh Resources David W. Kerr Resources MMaannaaggiinngg PPaarrttnneerrss J. Bruce Flatt President and Chief Executive Officer Jeffrey M. Blidner Asset Management Richard B. Clark Commercial Real Estate Ian G. Cockwell Residential Real Estate George E. Myhal Chief Operating Officer Steven J. Douglas Commercial Real Estate Dominic Gammiero Building Products Harry A. Goldgut Power Generation Robert Desbois Energy Portfolio Manager Dennis H. Friedrich Commercial Real Estate J. Peter Gordon Restructuring Brad Huntington Reinsurance Lars-Eric Johansson Resources Brian G. Kenning Merchant Banking Trevor D. Kerr Capital Markets Paul G. Kerrigan Residential Real Estate SSeenniioorr OOppeerraattiinngg EExxeeccuuttiivveess David D. Arthur Commercial Real Estate Colum P. Bastable Commercial Property Services Barry Blattman Real Estate Finance G. Mark Brown Commercial Real Estate Colin L. Clark Power Generation Laurent Cusson Power Marketing Simon Dean Residential Services Jack Delmar International Real Estate CCoorrppoorraattee OOffffiicceerrss Bryan K. Davis Senior Vice-President Capital Markets Jack S. Sidhu Senior Vice-President Treasury Jennifer Auyeung Assistant Controller 86 Edward C. Kress Power Generation Timothy R. Price Financial Operations John E. Zuccotti Real Estate Brian D. Lawson Chief Financial Officer Richard Legault Power Generation Marcelo J.S. Marinho International Derek Pannell Resources Frank N.C. Lochan Commercial Financing Terry A. Lyons Merchant Banking Cyrus Madon Business Development Andrew I. Maleckyj Capital Markets Kelly J. Marshall Corporate Finance Jeff Martin Power Operations Peter E. Nesbitt Residential Real Estate Alan Norris Residential Real Estate Sam J.B. Pollock Business Development Aaron W. Regent Resources Bruce K. Robertson Financial Services Antonio Novaes International Power Generation Martin Schady Resources A. Paulo Sodré International Financial Operations Steve Tiller Commercial Property Services John C. Tremayne Building Products Donald Tremblay Power Generation Karen Weaver Commercial Real Estate Alan V. Dean Senior Vice-President Corporate Affairs and Secretary Joseph S. Freedman Senior Vice-President and General Counsel Katherine C. Vyse Senior Vice-President Investor Relations and Communications Steve Adams Vice-President Technology Lisa W.F. Chu Controller M. Diane Horton Director, Investor Relations Craig J. Laurie Senior Vice-President Finance Sachin G. Shah Assistant Treasurer Directors BBooaarrdd ooff DDiirreeccttoorrss Dr. Roberto P. Cezar de Andrade Director since 1981.Dr.Andrade,a resident of Rio de Janeiro,Brazil is Executive Chairman of Brascan’s Brazilian operations and an Advisory Board Member of Whirlpool Brazil,Guardian Industries and Encana Brazil.He is also Chairman of the Board of Trustees of the Brazilian Symphony Orchestra and Vice-Chair of the Brazilian Foundation for Sustainable Development. Julia E. Foster Director since 1996 and a member of the Board’s Audit Committee.Ms.Foster,a resident of Toronto, Canada,is the Chair of the Ontario Arts Council and past President of the Olympic Trust of Canada.She is also is a Trustee of the Hospital for Sick Children and a director of the Centre for Cultural Management at the University of Waterloo. The Hon. Roy MacLaren, P.C. Director since 2001,Lead Director and Chairman of the Board’s Governance and Nominating Committee. Mr.MacLaren,a resident of Toronto,Canada,is also a director of Standard Life (UK),Patheon Inc.and the Canadian Opera Company.He is a former Minister of International Trade for Canada and former High Commissioner to the United Kingdom. Lord Black of Crossharbour, P.C.(Can), O.C. Director since 1986 and a member of the Board’s Management Resources and Compensation Committee.Lord Black,a resident of London,England, is Chairman and CEO of Hollinger Inc.and Chairman of Telegraph Group Ltd.(UK).He is also a director of Canwest Global Communications Corp.,CIBC and The Centre for Policy Studies. James K. Gray, O.C. Director since 1997 and a member of the Board’s Audit Committee.Mr.Gray,a resident of Calgary, Canada,is a director of Canadian National Railways and Emera Inc.and Chairman of the Canada West Foundation.He is also the founder and former Chairman of Canadian Hunter Exploration Ltd. G. Wallace F. McCain, O.C. Director-elect.Mr.McCain,a resident of Toronto, Canada,is Chairman of Maple Leaf Foods Inc.,Vice- Chairman of McCain Foods Limited and a director of Canada Bread Company and James Richardson International Limited.He is also a board member of St.Michael’s Hospital and Wycliffe College at the University of Toronto. The Hon. James J. Blanchard Director since 1996 and a member of the Board’s Governance and Nominating Committee. Mr.Blanchard,a resident of Beverly Hills,Michigan, U.S.A.,is a Partner in the law firm of Piper Rudnick. He is a former Governor of the State of Michigan and former Ambassador of the U.S.A.to Canada. Lynda C. Hamilton Director since 1997.Ms.Hamilton,a resident of Toronto,Canada,is President and CEO of Edper Investments Limited.She is also a director of the Artists’ Health Centre Foundation,the Dancer Transition Resource Centre and the Royal LePage Shelter Foundation. Dr. Jack M. Mintz Director since 2002 and a member of the Board’s Audit Committee.Dr.Mintz,a resident of Toronto, Canada,is President and CEO of the C.D.Howe Institute and Professor,Joseph L.Rotman School of Management at the University of Toronto.He is also a director of the Royal Ontario Museum Foundation. Jack L. Cockwell Director since 1970 and Group Chairman of Brascan. Mr.Cockwell,a resident of Toronto,Canada,is also a director of Astral Media Inc.and a number of Brascan’s operating companies,and was formerly President and CEO of Brascan.He is Chairman of the Board of Trustees of the Royal Ontario Museum and a director of the C.D.Howe Institute. Robert J. Harding, FCA Director since 1992 and Chairman of Brascan. Mr.Harding,a resident of Toronto,Canada,is also a director of Burlington Resources Inc.and a number of Brascan’s operating companies.He is Chairman of the Board of Governors of the University of Waterloo, Chair of Campaign Waterloo and a Trustee of the United Way of Greater Toronto. George E. Myhal Director-elect.Mr.Myhal,a resident of Toronto, Canada,is President and CEO of Brascan Financial Corporation,and a director of Noranda Inc.He is also Chair of the Dean’s Advisory Board,Faculty of Applied Science at the University of Toronto,a member of that University’s Governing Council and a director of Harbourfront Centre. The Hon. J. Trevor Eyton, O.C. Director since 1970.Mr.Eyton,a resident of Toronto, Canada,is a Member of the Senate of Canada.He is also a director of Noranda Inc.,Coca-Cola Enterprises Inc.and General Motors of Canada Limited.He is Chairman of Canada’s Sports Hall of Fame and a Governor of the Canadian Olympic Foundation and Junior Achievement of Canada. David W. Kerr Director since 1992.Mr.Kerr,a resident of Toronto, Canada,is Chairman of Noranda Inc.and a director of a number of Brascan’s operating companies.He is also a director of Canada Life Financial Corporation, Sustainable Development Technology Canada and Canadian Special Olympics Foundation,and an Advisory Board Member of York University’s Schulich School of Business. Saul Shulman, Q.C. Director since 1997 and Chairman of the Board’s Management Resources and Compensation Committee.Mr.Shulman,a resident of Toronto, Canada,is a Senior Partner in the law firm of Goodman &Carr.He is also Chairman of Summit Real Estate Investment Trust and chairman of a number of private charitable foundations. J. Bruce Flatt Director since 2001 and President and CEO of Brascan.Mr.Flatt,a resident of Toronto,Canada is also a director of a number of Brascan’s operating companies.Mr.Flatt was previously President and CEO of Brookfield Properties Corporation. Philip B. Lind, O.C. Director since 1994 and Chairman of the Board’s Audit Committee.Mr.Lind,a resident of Toronto,Canada,is one of the founders and currently Vice-Chairman of Rogers Communications Inc.He is also a director of Canadian General Tower Limited and a board member of the Power Plant Art Museum. George S. Taylor Director since 1994 and a member of the Board’s Management Resources and Compensation Committee.Mr.Taylor,a resident of St.Mary’s, Ontario,Canada,is a director of Great Lakes Power Inc.,Teknion Corporation,Trojan Technologies Inc.and the London Health Sciences Centre,and Chairman of the John P.Robarts Research Institute. 2 0 0 2 N A C S A R B 87 Five-Year Financial Review MILLIONS, EXCEPT PER SHARE AMOUNTS 2002 2001 2000 1999 1998 Per Common Share (fully diluted) Book value Cash flow from operations Cash return on book equity Net income Prior to resource investments and gains Including resource investments and gains Market trading price – TSX Market trading price – NYSE Dividends Paid Yield Total (millions) Assets Common equity Revenues Operating income Cash flow from operations Net income Prior to resource investments and gains Including resource investments and gains Number of common shares outstanding $23.46 3.74 16% 1.93 0.33 31.75 $24.68 3.20 13% 1.74 1.52 28.75 $24.24 2.55 11% 1.12 3.41 21.95 $21.72 2.00 9% 0.78 2.15 19.10 $20.58 1.70 8% 0.87 2.12 21.30 US$20.50 US$18.06 US$14.56 US$13.50 US$13.94 1.00 3.1% 1.00 3.5% 0.99 4.5% 0.98 5.1% 0.98 4.6% $22,788 $21,929 $21,467 $20,174 $20,598 4,162 4,810 1,906 736 414 130 174.1 4,261 4,716 1,802 601 349 311 169.8 4,181 4,237 1,600 495 240 648 169.4 3,882 3,575 1,391 398 180 423 173.8 3,753 3,510 1,302 343 193 415 169.6 Note: Financial results reflect Brookfield Properties on a consolidated basis REVENUES CDN$ MILLIONS OPERATING INCOME CDN$ MILLIONS CASH FLOW FROM OPERATIONS CASH RETURN ON BOOK EQUITY 4,810 4,716 4,237 1,802 1,906 1,600 1,391 1,302 3,510 3,575 CDN$ PER SHARE PERCENTAGE 3.74 3.20 2.55 2.00 1.70 9% 8% 16% 13% 11% 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 88 Shareholder Information Shareholder Enquiries Shareholder enquiries are welcomed and should be directed to Katherine Vyse, Senior Vice-President, Investor Relations and Communications at 416-363-9491 or kvyse@brascancorp.com. Alternatively shareholders may contact the company at its head office: Brascan Corporation Suite 300, BCE Place, Box 762, 181 Bay Street Toronto, Ontario M5J 2T3 Telephone: Facsimile: Web Site: E-Mail: 416-363-9491 416-363-2856 www.brascancorp.com enquiries@brascancorp.com Shareholder enquiries relating to dividends, address changes and share certificates should be directed to the company’s Transfer Agent: CIBC Mellon Trust Company P.O. Box 7010, Adelaide Street Postal Station Toronto, Ontario M5C 2W9 Telephone: 416-643-5500 or 1-800-387-0825 (Toll free throughout North America) 416-643-5501 www.cibcmellon.com Facsimile: Web Site: Investor Relations and Communications We are committed to informing our shareholders of our progress through a comprehensive communications program which includes publication of materials such as our annual report, quarterly interim reports, supplemen- tary information package and periodic press releases. We also maintain a web site that provides ready access to these materials, as well as statutory filings, stock and dividend information and web archived events. Meeting with shareholders is an integral part of our communications program. Directors and management meet with Brascan’s shareholders at our annual meeting and are available to respond to questions at any time. Management also meets on a regular basis with investment analysts, financial advisors and media to ensure that accurate information is available to investors. The text of the Brascan 2002 Annual Report is available in French on request from the company and is filed with and available through SEDAR at www.sedar.com. Annual Meeting of Shareholders The company’s 2003 Annual Meeting of Shareholders will be held at 3:00 p.m. on Tuesday, April 29, 2003 at The Design Exchange, 234 Bay Street, Toronto, Ontario and will be webcast on Brascan’s web site at www.brascancorp.com. Stock Exchange Listings Class A Common Shares Class A Preference Shares Series 1 Series 2 Series 3 Series 4 Series 8 Series 9 Series 10 Series 11 Series 12 Preferred Securities 8.35% 8.30% Symbol BNN.A BNN.PR.A BNN.PR.B BNN.PR.F BNN.PR.C BNN.PR.E BNN.PR.G BNN.PR.H BNN.PR.I BNN.PR.J BNN.PR.S BNN.PR.T Stock Exchange New York, Toronto, Brussels Toronto Toronto Canadian Venture Toronto Toronto Toronto Toronto Toronto Toronto Toronto Toronto Dividend Record and Payment Dates Class A Common Shares 1 Class A Preference Shares 1 Series 1, 2, 4, 10, 11 and 12 Series 3 Series 8 Series 9 Preferred Securities 2 8.35% and 8.30% Record Date Payment Date First day of February, May, August and November Last day of February, May, August and November 15th day of March, June, September and December Second Wednesday of each month Last day of each month 15th day of January, April, July and October Last day of March, June, September and December Thursday following second Wednesday of each month 12th day of following month First day of February, May, August and November 15th day of March, June, September and December Last day of March, June, September and December 1 All dividend payments are subject to declaration by the Board of Directors 2 Interest payments Dividend Reinvestment Plan Registered holders of Class A Common Shares who are resident in Canada may elect to receive their dividends in the form of newly issued Class A Common Shares at a price equal to the weighted average price at which the shares traded on the Toronto Stock Exchange during the five trading days immediately preceding the payment date of such dividends. The utilization of the Plan allows current shareholders to acquire additional shares in the company without payment of commissions. Further details on the Plan and a Participation Form can be obtained from our Head Office or from our web site. Brascan Corporation Suite 300,BCEPlace,181 Bay Street,Box 762 Toronto,Ontario,Canada M5J 2T3 Tel: 416-363-9491 Fax: 416-363-2856 One Liberty Plaza,165 Broadway,6th Floor New York,New York,U.S.A. 10006 Tel: 212-369-2300 Fax: 212-369-2301 > > > BNN TSX / NYSE For more information on Brascan,visit our web site at: www.brascancorp.com The site contains the latest news releases on Brascan developments as well as quarterly financial reports and statements. The Brascan web site is your best way of keeping up to date with our activities year-round. B r a s c a n C o r p o r a t i o n 2 0 0 2 A N N U A L R E P O R T