ANNUAL REPORT
2015
CORPORATE PROFILE
SENVEST CAPITAL INC. AND ITS SUBSIDIARIES HAVE BUSINESS
ACTIVITIES IN MERCHANT BANKING, ASSET MANAGEMENT,
REAL ESTATE AND ELECTRONIC SECURITY.
ANNUAL MEETING
THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD
AT THE MONT-ROYAL CENTER, 2200 MANSFIELD STREET,
MONTREAL, QUEBEC ON JUNE 13, 2016 AT 10:00 A.M.
CONTENTS
1. FINANCIAL HIGHLIGHTS
2. MANAGEMENT’S DISCUSSION & ANALYSIS
10. FINANCIAL DATA
46. INVESTOR INFORMATION
SENVEST CAPITAL INC.
1000 RUE SHERBROOKE ST WEST, SUITE 2400
MONTREAL, (QUEBEC) H3A 3G4
(514) 281-8082
Financial Highlights
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
(years ended December 31)
2015
$
2014
$
2013
$
2012
$
2011
$
SUMMARY OF OPERATIONS
Total revenues and investment gains (loss)
(166,763 )
Net income (loss)
Diluted earnings (loss) per share
(111,261 )
(35.39 )
297,551
141,179
41.26
489,676
243,324
73.20
154,035
81,470
25.65
(84,712 )
(88,026 )
(28.61 )
FINANCIAL DATA
Total assets
Total equity
COMMON STOCK INFORMATION
2,146,380
856,290
2 020,142
821,740
1 400,326
630,362
728,409
358,831
348,101
284,685
The company’s common shares are listed on the Toronto Stock Exchange under the symbol SEC.
FISCAL QUARTER
First
Second
Third
Fourth
2015
2014
$
$
High
169.00
198.00
200.00
165.51
Low
151.07
166.13
160.25
151.05
High
163.75
170.25
154.00
154.49
Low
136.56
149.50
142.03
120.20
TOTAL ASSETS ($ thousands)
TOTAL EQUITY ($ thousands)
BOOK VALUE PER SHARE ($ thousands)
2,146,380
2,020,142
1,400,326
728,409
348,101
856,290
821,740
630,362
276.00
264.00
201.69
358,831
284,685
117.50
93.44
2011 2012 2013
2014 2015
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
The numbers for 2011 presented in the above tables are calculated prior to the adoption of IFRS 10
2015 annual report
1
Management’s Discussion and Analysis
OVERALL PERFORMANCE
The fourth quarter began with equity markets increasing in October
and the S&P 500 having its best monthly performance in four
years. After tepid August and September U.S. macroeconomic
data, job growth surged for October with a gain in payrolls far
greater than expected (271k jobs vs. 180k according to a Reuter’s
poll of economists). Unemployment declined to 5% and perhaps
more significantly, wages gained at an annual pace of 2.5%.
Domestic markets reacted adversely to the good news, however,
as equity indices initially dipped lower during November. After
hitting monthly lows about half way through November, stocks
rallied and the S&P turned slightly positive while the Russell 2000
gained enough to push into positive territory for the year albeit
for only a brief time. There was no “Santa Claus” rally during
the month of December and stocks, especially small caps, sank to
finish the year on a negative note. The on-again, off-again Fed
“lift-off” of short term interest rates was finally settled with an
interest hike in December. Rather than settling the markets, the
rate hike seemed to elicit a negative reaction with the market slide
continuing into the 2016 year.
The “crash” in oil prices has certainly resulted in a depression
in the US domestic energy exploration and production market.
Shale oil producers have dramatically curtailed capital investment
spending. This drop in spending, coupled with a strong U.S.
dollar which makes U.S. manufactured products less competitive
globally and decreases exports, have together resulted in an
industrial decline in the U.S. The effects have also been borne out
in weak manufacturing data reported in the last part of the year.
While low oil prices have had an immediate negative effect on
the industrial economy and the industrial labor market, over time
the positive effects of lower oil prices on the broader economy
will emerge principally through higher disposable income for
consumers. A positive factor to consider is that the shape of
the yield curve remained upward sloping (and had not inverted)
at the end of the year. Since the 1950’s an inverted curve has
signaled every recession (Federal Reserve Bank of Dallas). Also
employment growth, at an average of 280,000 jobs added per
month in the fourth quarter of 2015 has remained quite strong.
Senvest Capital Inc. (“Senvest” or the “Company”) had a difficult
year in 2015. Most of the major benchmarks were flat to down
for the year but our decline was significantly greater. The bulk of
our losses in 2015 were unrealized, mark-to-market losses. Most
of our 2015 loss occurred in the third quarter. Our fourth quarter
yielded a small profit however the market volatility that started
in the middle of 2015 carried over into the first quarter of 2016.
Some of our largest holdings as at December 31, 2015 were, Tower
Semiconductors, Depomed, NorthStar Realty Finance, Deckers
Outdoors, Radware, and Ceva. Of these, Northstar Realty and
Deckers both declined over 40% in 2015 and Radware declined
30%. The fourth quarter saw holdings both increase and decrease
with the net result being a small increase in profit.
In light of the continuing market turmoil since August, we have
made a conscious effort to focus on those investments that we felt
offered the strongest bounce-back and risk-reward opportunity. As
a result, we sold down some holdings, eliminated some remaining
stub positions, trimmed certain core investments that hadn’t
suffered from declining prices and added selectively to other core
positions. We also partly covered certain short positions as their
stock prices traded lower. We continue to focus the portfolio on
those investments that have suffered from declining stock prices
and in which we have high conviction in their upside potential.
Investors often overreact and are prone to alarm and drastic
pessimism at times, focusing entirely on negative news flow
and creating a negative feedback loop in the market. A common
reaction for investors is to continue the negative trend by selling,
while ignoring key variables and fundamentals that may indicate
a company (or industry) will endure and be stronger in the long
run. Our research strives to determine whether a company’s
prospects are actually better than what investors in the market
are currently predicting, and whether conditions will improve
significantly within our longer investment time horizon.
Senvest recorded a net loss attributable to the common shareholders
of ($99.8) million or ($35.39) per diluted common share for the
year ended December 31, 2015. This compares to net earnings
attributable to common shareholders of $117.3 million or $41.26
per diluted common share for the 2014 year. The significant
appreciation in the US dollar versus the Canadian dollar in the
year resulted in a currency translation income of about $134
million to the income attributable to common shareholders. This
amount is not reported in the Company’s income statement rather
it is reflected in the Comprehensive income. The Company remains
committed to being profitable over the long-term. However the
volatility and choppiness of the markets will result in wide profit
swings from year to year and from quarter to quarter.
The Company’s loss from equity investments in 2015 was the
biggest contributor to the net loss recorded. The net loss on
equity investments and other holdings totaled ($225.1) million
in the current year versus a gain of $233.1 million the prior year.
The Company continued its use of currencies in 2015 to both
protect and enhance the portfolio’s returns. Due to the continued
appreciation of the US dollar over other major currencies, our
foreign exchange gain for the year was approximately $33.4
million.
The Senvest Partners fund is focused primarily on small and mid-
cap companies. The fund recorded a loss of 17.3% net of fees for
2015. It is up over 2200% since inception in 1997. With most of
the long portfolio invested in small and mid- cap stocks, the fund
underperformed its most relevant benchmark the Russell 2000,
which was down 12% for the year. The fund also underperformed
the S&P 500 index for the year although it does not consider
that index as a benchmark. The Senvest Israel Partners fund was
initiated in 2003 to focus on investing in Israel related companies.
This fund recorded a gain of about 6.6% for the year. The two funds
had a total of over $1 billion of net assets under management at
December 31, 2015. Both of these funds are consolidated into the
accounts of the Company.
Senvest Cyprus Recovery Investment Partners, LP fund (“SCRIF”)
owns an investment in the Bank of Cyprus (“BOC”) which was
purchased in 2014. In 2015 the Cypriot economy came out of
recession and Cyprus GDP grew quarter over quarter over the
last nine months of the year. The 2015 economic data was better
than many analysts expected. Structural measures have been
taken by the Cypriot government to help banks reduce non-
performing loans (NPLs) with the implementation of a foreclosure
law and an insolvency framework. There were also signs of
significant investments in Cyprus by foreign investors in the last
year. BOC’s management continued to deliver on its strategic
plan of increasing its capital levels as a result of reducing its
risk weighted assets, producing organic capital generation, and
disposing of non-core assets.
2
2015 annual report
Management’s Discussion and Analysis
Despite a number of positive developments for the BOC and the
Cypriot economy in 2015, there continues to be a considerable
disconnect between the fundamental improvements of the BOC
and the economy versus the performance of the BOC stock (down
over 30% in 2015). Capital flight out of emerging markets seems
to continue to affect market appetite for BOC shares and that has
likely kept the shares trading at low levels. The Greek market
turbulence continued to affect sentiment for Greek assets and
for the BOC, despite the fact that the Bank has little exposure to
Greece. However, we believe that management’s plan to list BOC
shares on the FTSE in 2016 will greatly improve liquidity of the
shares and attract institutional investors. Together with investor
recognition of continued improvements of its fundamentals
(continued restructuring and reduction of NPLs, asset disposals,
and a stronger Tier 1 capital ratio) as well as a new listing on
the London exchange, could form a catalyst that may lift any
overhang on the bank’s stock price.
The Company has a portfolio of real estate investments, investing
as a minority partner in selected properties. Real estate investments
totaled $49.4 million as at December 31, 2015. About 60% of this
amount represents investments in different US REITs. These REITs
are not publicly traded and there is no established market for
them. The most likely scenario for a disposal of these holdings
is an eventual sale of the underlying real estate properties of the
REITs and the distribution to its holders. The remaining amounts
are minority interests in private entities whose main assets are
real estate properties. As described above for the REITs, the most
likely scenario for a disposal of these holdings is an eventual sale
of the underlying real estate properties.
From time to time the Company enters into derivative financial
instruments consisting primarily of options and warrants to
purchase or sell equities, equity indices and currencies. All
contracts are denominated in US dollars. There is deemed to
be no credit risk for the options that are traded on exchanges.
The warrant contracts are not exchange traded and allow the
company to purchase underlying equities at a fixed price. The
maximum exposure to credit risk associated with these warrants
or with non-exchange traded options is their recorded amount.
The Company has made significant investments in its US
operations, primarily in people, systems, technology and new
office space. This investment represents a significant effort in a
short amount of time to raise the quality of its infrastructure and
personnel. As a result the Company’s operating costs have been
increasing in the past year from historical levels.
The Company consolidates the Senvest Management LLC (formerly
called Rima Senvest Management LLC), entity that serves as the
investment manager of the Senvest funds. The portion of the
expected residual returns of the entity that does not belong to the
Company is reflected as non-controlling interest on the statement
of financial position. This non-controlling interest is owned by an
executive of the Company and totaled $80 million as at December
31, 2015 from $83.7 million as at December 31, 2014.
As part of an internal reorganization, in October 2015 the
Company wound up its Senvest International LLC wholly-owned
subsidiary and transferred significantly all of the net assets to a
new wholly owned entity called Senvest Global (KY) LP. This new
entity is now managed by Senvest Management LLC. As a result
all of the employees of Senvest International became employees
of Senvest Management. The results of Senvest Global will be
consolidated into the accounts of the parent company the same
way that Senvest International was.
At the end of December 31, 2015, Senvest had total consolidated
assets of $2,146.4 million versus $2,020.1 million at the end
of 2014. The main reason for this was the change in equity
investments and other holdings. Equity investments and other
holdings increased to $2,036.3 million from $1,770.5 million last
December. The Company purchased $1,408.2 million of investment
holdings in the year and sold $1,274.9 million of such holdings.
Both amounts were more than the prior year. The Company’s
liabilities have correspondingly increased to $1,290.1 million
versus $1,198.4 million at the end of 2014 primarily because of
the increases in due to brokers and liability for redeemable units.
The proceeds of equities sold short were $1,834.5 million and the
amount of shorts covered was $2,116.9 million in the year. Both
these figures were more than the amounts for the prior year.
Functional currency
Items included in the financial statements of each of the
Company’s entities are measured using the currency of the
primary economic environment in which the entity operates
(the functional currency). The functional currency of the parent
company is the US dollar.
Presentation currency
The Company has adopted the Canadian dollar as its presentation
currency, which in the opinion of management is the most
appropriate presentation currency. Historically, the Company’s
consolidated financial statements have been presented in Canadian
dollars, and since the company’s shares are listed on a Canadian
stock exchange, management believes it would better serve the
use of shareholders to continue issuing consolidated financial
statements in Canadian dollars. The US dollar consolidated
financial statements are translated into the presentation currency
as follows: assets and liabilities – at the closing rate at the date
of the consolidated statement of financial position; and income
and expenses – at the average rate for the period. All resulting
changes are recognized in other comprehensive income (loss) as
currency translation differences. Equity items are translated using
the historical rate.
Risks
Financial risk factors
The Company’s activities expose it to a variety of financial risks:
market risk (including fair value interest rate risk, cash flow
interest rate risk, currency risk and equity price risk), credit risk
and liquidity risk.
The Company’s overall risk management program seeks to
maximize the returns derived for the level of risk to which the
Company is exposed and seeks to minimize potential adverse
effects on the Company’s financial performance. Managing these
risks is carried out by management under policies approved by
the Board.
2015 annual report
3
Management’s Discussion and Analysis
The Company uses different methods to measure and manage the
various types of risk to which it is exposed; these methods are
explained below
Market risk
Fair value and cash flow interest rate risks
Interest rate risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate as a result of changes in
market interest rates.
The majority of the Company’s debt is based on floating rates
which expose the Company to cash flow interest rate risk. The
Company does not have a long-term stream of cash flows that
it can match against this type of fixed debt, so it prefers to use
short-term floating rate debt. The Company does not mitigate
its exposure to interest rate fluctuation on floating rate debt. If
interest rates spike, then the Company could enter into interest rate
swaps or more probably just reduce its debt level. As at December
31, 2015, the Company has listed sufficient equity securities that
it can sell to reduce its floating rate debt to zero.
Currency risks
Currency risk refers to the risk that values of financial assets
and liabilities denominated in foreign currencies will vary as
a result of changes in underlying foreign exchange rates. The
Company’s functional currency is the US dollar. The following are
the main financial assets and financial liabilities that have items
denominated in currencies other than the US dollar: cash and
cash equivalents, due from/to brokers, bank advances, equity and
other holdings, real estate investments, other assets, equities sold
short and derivative liabilities and accounts payable.
Equity price risk
Equity price risk is the risk that the fair value of equity investments
and other holdings and equities sold short and derivative
liabilities will vary as a result of changes in the market prices of
the holdings. The majority of the Company’s equity investments
and other holdings and all of the equities sold short are based
on quoted market prices as at the consolidated statement of
financial position date. Changes in the market price of quoted
securities may be related to a change in the financial outlook of
the investee entities or due to the market in general. Where non-
monetary financial instruments − for example, equity securities
− are denominated in currencies other than the US dollar, the
price, initially expressed in a foreign currency and then converted
into US dollars, will also fluctuate because of changes in foreign
exchange rates.
Equities sold short represent obligations of the Company to make
future delivery of specific securities and create an obligation
to purchase the security at market prices prevailing at the later
delivery date. This creates the risk that the company’s ultimate
obligation to satisfy the delivery requirements will exceed the
amount of the proceeds initially received or the liability recorded
in the consolidated financial statements.
The Company’s equity investments and other holdings have a
downside risk limited to their carrying value, while the risk of
equities sold short and derivative liabilities is open ended. The
Company is subject to commercial margin requirements which
act as a barrier to the open-ended risks of the equities sold short
and derivative liabilities. The Company closely monitors both its
equity investments and other holdings and its equities sold short
and derivative liabilities.
The impact of a 30% change in the market prices of the Company’s equity holdings with quoted value, equities sold short and
derivative liabilities as at December 31, 2015 would be as follows (in thousands):
Fair value
1,888,990
(364,668)
Estimated fair value
30% price increase
Estimated fair value
30% price decrease
2,455,687
(474,068)
457,297
1,322,293
(255,268)
(457,297)
Equity holdings-listed securities
Equities sold short and derivative
liabilities
Before-tax impact on net earnings
Liquidity risk
Liquidity risk is the risk the Company will encounter difficulties in meeting its financial obligations. The Company’s largest assets
are equity investments and other holdings. Most of these assets are made up of equities in public holdings which can be liquidated
in a relatively short time. Due to its large holding of liquid assets, the Company believes that it has sufficient resources to meet its
obligations.
All financial liabilities other than equities sold short and derivative liabilities as at the consolidated statement of financial position
date mature or are expected to be repaid within one year. The liquidity risk related to these liabilities is managed by maintaining a
portfolio of liquid investment assets.
4
2015 annual report
Management’s Discussion and Analysis
Credit risk
Credit risk is the risk that a counterparty will fail to fulfill its obligations under a contract and will cause the Company to suffer a loss.
All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered
minimal, as delivery of securities sold is executed only once the broker has received payment. Payment is made on a purchase once
the securities have been received by the broker. The trade will fail if either party fails to meet its obligations.
The Company is also exposed to counterparty credit risk on its cash and cash equivalents, restricted short term investment and due
from brokers
From time to time, the Company enters into derivative financial instruments consisting primarily of warrants and options to purchase
or sell equity indices and currencies. These derivative instruments are marked to market. There is deemed to be no credit risk for
the options because they are traded on exchanges. The warrant contracts are not traded on an exchange and allow the company to
purchase underlying equities at a fixed price.
Capital risk management
The Company’s objective when managing its capital is to maintain a solid capital structure appropriate for the nature of its business.
The Company considers its capital to be its shareholders equity. The Company manages its capital structure in light of changes in
economic conditions. To maintain or adjust its capital structure, the Company initiates normal course issuer bids or adjusts the amount
of dividends paid. The Company monitors capital on the basis of its debt-to-capital ratio, which is as follows (in millions):
December 31, 2015
December 31, 2014
Total liabilities
Total common equity
Debt to Capital ratio
$1,290.1
$ 856.3
1.51
$ 1,198.4
$ 821.7
1.46
The Company’s goal is to maintain a debt to Capital ratio below 2.0 in order to limit the amount of risk. The Company believes that
limiting its debt to Capital ratio in this manner is the best way to control risk. The Company’s debt to capital ratio was 1.51 at the end
of December 2015 from 1.46 at the end of 2014.
Critical accounting estimates and judgments
The Company makes estimates and assumptions concerning the
future that will, by definition, seldom equal actual results. The
following are the estimates applied by management that most
significantly affect the Company’s consolidated financial state-
ments. These estimates have a significant risk of causing a mate-
rial adjustment to the carrying amounts of assets and liabilities
within the next financial year.
Critical accounting judgments
Management considers that the Company has control of Senvest
Master Fund LP, Senvest Israel Partners LP and Senvest Cyprus
Recovery Investment Partners LP even though the Company has
less than 50% of the voting rights in each of the Funds. The Com-
pany assessed that the removal rights of non-affiliated unithold-
ers are exercisable but not strong enough given the Company’s
decision-making authority over relevant activities, the remuner-
ation to which it is entitled and its exposure to returns. The Com-
pany, through its structured entity, is the majority unitholder of
each of the Funds and acts as a principal while there are no other
unitholders forming a group to exercise their votes collectively.
Consolidation of entities in which the company holds less than
50% of the voting rights
Fair value estimates of financial instruments
Management considers that the company has de facto control of
Senvest Management LLC (SML) and RIMA Senvest Master Fund
GP LLC, two legal entities wholly owned by an executive of the
Company, because of the Company’s board representation and
the contractual terms of the investment advisory agreement. SML
is the investment adviser to the Funds, whereas RIMA Senvest
Master Fund GP LLC is the General Partner. As compensation
for its investment sub-advisory services, the company is entitled
to receive 60% of the management and incentive fees earned by
SML each fiscal year.
The fair value of financial instruments where no active market
exists or where quoted prices are not otherwise available are de-
termined by using valuation techniques. In these cases, the fair
values are estimated from observable data in respect of similar
financial instruments or by using models. Where market observ-
able inputs are not available, they are estimated based on ap-
propriate assumptions. To the extent practical, models use only
observable data; however, areas such as credit risk (both the
company’s own credit risk and counterparty credit risk), vola-
tilities and correlations require management to make estimates.
Changes in assumptions about these factors could affect the re-
ported fair value of financial instruments.
2015 annual report
5
Management’s Discussion and Analysis
Financial instruments in Level 1
The fair value of financial assets and financial liabilities traded
in active markets are based on quoted market prices at the close
of trading on the year-end date. The quoted market price used
for financial assets and financial liabilities held by the Company
is the close price. Investments classified in Level 1 include
active listed equities and derivatives traded on an exchange. The
financial assets classified as Level 1 were over 90% of the total
financial assets.
Financial instruments in Level 2
Financial instruments classified with Level 2 trade in markets
that are not considered to be active but are valued based on
quoted market prices, dealer quotations or valuation techniques
that use market data. These valuation techniques maximize
the use of observable market data where available and rely as
little as possible on entity-specific estimates. If all significant
inputs required to fair value an instrument are observable, the
instrument is included in Level 2. These include corporate bonds,
thinly traded listed equities, over-the-counter derivatives and
private equities.
The Company uses a variety of methods and makes assumptions
that are based on market conditions existing at each year-end
date. Valuation techniques used for non-standardized financial
instruments such as options and other over-the-counter derivatives
include the use of comparable recent arm’s length transactions,
reference to other instruments that are substantially the same,
discounted cash flow analyses, option pricing models and other
valuation techniques commonly used by market participants,
making maximum use of market inputs and relying as little as
possible on entity-specific inputs. The financial assets classified
as Level 2 were about 5% of the total financial assets.
Financial instruments in Level 3
Investments classified in Level 3 have significant unobservable
inputs, as they trade infrequently. Level 3 instruments consist
mainly of unlisted equity investments and real estate investments.
As observable prices are not available for these securities, the
Company has used valuation techniques to derive the fair value.
The financial assets classified as Level 3 were about 4% of the
total fair value of financial assets.
Level 3 valuations are reviewed by the Company’s Chief Financial
Officer (CFO), who reports directly to the Board on a quarterly basis
in line with the Company’s reporting dates. On an annual basis,
close to the year-end date, the Company obtains independent,
third party appraisals to determine the fair value of the Company’s
most significant Level 3 holdings. The Company’s CFO reviews
the results of the independent valuations. Emphasis is placed on
the valuation model used to determine its appropriateness, the
assumptions made to determine whether it is consistent with the
nature of the investment, and market conditions and inputs such
as cash flow and discount rates to determine reasonableness.
As at December 31 2015, Level 3 instruments are in various
entities and industries. The real estate investments are made up
of investments in private real estate companies and in real estate
income trusts. The real estate companies are involved with various
types of buildings in different geographical locations. For the main
Level 3 instruments, the Company relied on appraisals carried out
by independent third party valuators or on recent transactions.
There was no established market for any of these investments,
so the most likely scenario is a disposal of the underlying assets.
For the investments in real estate income trusts, the company
relied mainly on audited financial statements, valuing the assets
at fair value. The most likely scenario is an eventual sale of the
underlying properties and their subsequent distribution to the
holders.
Liability for redeemable units
Liability for redeemable units represents the units in the
consolidated funds that are not owned by the Company. One
class of units may be redeemed as of the end of the first calendar
quarter that occurs not less than one year after the date that such
units were purchased and at the end of each calendar quarter
thereafter. A second class may be redeemed as of the end of
the first month that occurs not less than 25 months after the
date such units were purchased and at the end of each calendar
quarter thereafter. A third class may be redeemed as of the end of
any calendar month; provided, however, that redemptions made
within the first 24 months will be subject to a redemption fee
which is payable to the funds. In addition there are notice periods
of 30 to 60 days that must be given prior to any redemption. A
fourth class may only be redeemed after two years. These units
are recognized initially at fair value, net of any transaction costs
incurred, and subsequently measured at redemption amount. At
the individual fund level this item is not shown as a liability but
as part of shareholders equity. It is deemed to be a liability only
for the consolidated financial statements as they are prepared
from the point of view of the parent company.
Income taxes
The Company is subject to income taxes in numerous jurisdictions.
Significant judgment is required in determining the worldwide
provisions for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain.
The Company recognizes liabilities for anticipated tax audit
issues based on estimates of whether additional taxes will be due.
Where the final tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact
the current and deferred income tax assets and liabilities in the
year in which such determination is made.
6
2015 annual report
Management’s Discussion and Analysis
Year
2015-4
2015-3
2015-2
2015-1
2014-4
2014-3
2014-2
2014-1
QUARTERLY RESULTS
(In thousands except for earnings (loss) per share information)
Total revenue
and investments
gain (loss)
Net income
(loss) -owners
of the parent
Earnings (loss)
per share
16,102
(286,928 )
(50,115 )
154,178
216,314
(52,697 )
(16,237 )
150,171
5,470
(143,444 )
(29,819 )
67,967
93,075
(25,547 )
(19,793 )
69,563
CONTRACTUAL OBLIGATIONS
(In thousands)
1.99
(50.72 )
(10.87 )
24.21
32.63
(9.11 )
(7.09 )
4.83
Less than 1 year
1-3 years
4-5 years
Total
Due to Brokers
Operating leases
Investment commitments
Total
236,310
1,421
1,302
239,033
-
2,707
-
2,707
-
2,694
-
2 694
236,310
6,822
1,302
244,434
SELECTED ANNUAL INFORMATION
(In thousands except for Earnings per share information)
2015
2014
2013
Total revenue and investment gains (losses)
Net income (loss) – common shares
Earnings (loss) per share
(166,763 )
(99,826 )
(35.39 )
297,551
117,298
41.26
489,676
206,516
73.20
Total assets
2,146,380
2,020,142
1,400,326
The Company maintains accounts with several major financial
institutions in the U.S. who function as the Company’s main
prime brokers. The Company has assets with the prime brokers
pledged as collateral for leverage. Although the prime brokers
are large financial institutions there is no guarantee that any
financial institution will not become insolvent. In addition there
may be practical or time problems associated with enforcing the
Company’s rights to its assets in the case of such insolvency.
While both the U.S. Bankruptcy Code and the Securities Investor
Protection Act seek to protect customer property in the event of
a failure, insolvency or liquidation of a broker dealer, there is no
certainty that, in the event of a failure of a broker dealer that
has custody of the Company’s assets, the company would not
incur losses due to its assets being unavailable for a period of
time, ultimately less than full recovery of its assets, or both. As a
significant majority of the Company’s assets are in custody with
four prime brokers, such losses could be significant.
On June 25, 2015 Senvest commenced a new normal course issuer
bid to purchase a maximum of 130,000 of its own common shares
before June 24, 2016. The Company has repurchased 17,400 shares
under its new bid. The number of common shares outstanding as
at December 31, 2015 was 2,817,624 and as at March 15, 2016
was 2,816,724. There were no stock options outstanding as at
December 31 2015.
The Company’ has a credit facility with a bank, composed of a
credit facility and a guarantee facility. The Company also has
margin facilities with brokers. The Company has available a 12
million euro guarantee facility that would allow standby letters of
credit to be issued on behalf of the Company. In addition, a first
ranking movable hypothec in the amount of $30 million on all of
its assets has been granted as collateral for both of the facilities.
According to the terms of the facilities, the Company is required
to comply with certain financial covenants. During the period, the
Company met the requirements of all the covenants.
Impact of New Income Tax Rules
There were important tax changes to parts of Canada’s foreign
affiliate regime effective January 1, 2015. These changes have
an effect on the mechanism by which certain foreign income of
2015 annual report
7
Management’s Discussion and Analysis
the Company is taxed in Canada. They will negatively impact the
Company’s income tax expense and income tax liability, as well
as the Company’s cash flow, for current and future taxation years.
Related party transactions
The Company consolidates the Senvest Management LLC
(formerly called Rima Senvest Management LLC), entity that
serves as the investment manager of Senvest Partners and Senvest
Israel Partners. The portion of the expected residual returns of
the entity that does not belong to the Company is reflected as
non-controlling interest on the statement of financial position.
This non-controlling interest is owned by an executive of the
Company and totaled $80 million as at December 31, 2015 from
$83.7 million as at December 31, 2014.
Significant Equity Investments
For information on a summary of financial information from
certain significant investees please refer to the 2015 annual
report. The accounts of Senvest Partners, Senvest Israel Partners
and Senvest Cyprus recovery Investment Fund are consolidated
with the Company’s accounts.
FORWARD LOOKING STATEMENTS
This MD&A contains “forward looking statements” which reflect
the current expectations of management regarding our future
growth, results of operations, performance and business prospects
and opportunities. Wherever possible, words such as “may”,
“would”, “could”, “will”, “anticipate”,“believe”, “plan”, “expect”,
“intend”, “estimate”, “aim”, “endeavour”, “likely” and similar
expressions have been used to identify these forward looking
statements. These statements reflect our current beliefs with respect
to future events and are based on information currently available
to us. Forward looking statements involve significant known
and unknown risks, uncertainties and assumptions. Many factors
could cause our actual results, performance or achievements to
be materially different from any future results, performance or
achievements that may be expressed or implied by such forward
looking statements including, without limitation, those Risk
Factors listed in the Company’s annual information form. Should
one or more of these risks or uncertainties materialize, or should
assumptions underlying the forward looking statements prove
incorrect, actual results, performance or achievements could vary
materially from those expressed or implied by the forward looking
statements contained in this MD&A. These forward looking
statements are made as of March 29, 2016 and will not be updated
or revised except as required by applicable securities law.
OTHER FINANCIAL INFORMATION
There is additional financial information about the Company
on Sedar at www.sedar.com, as well the Company’s or Senvest
Management’s US SEC section 13 and section 16 filings on www.
sec.gov and on the Company’s website at www.senvest.com.
INTERNAL CONTROLS
The Company’s President and Chief Executive Officer and its
Vice-President and Chief Financial Officer are responsible for
establishing and maintaining the Company’s disclosure controls
and procedures. After evaluating the effectiveness of the
Company’s disclosure controls and procedures as at December 31,
2015 they have concluded that the Company’s disclosure controls
and procedures are adequate and effective to ensure that material
information relating to the company and its subsidiaries would
have been known to them.
Internal control over financial reporting (ICFR) is designed to
provide reasonable assurance regarding the reliability of the
Company’s financial reporting and its compliance with Generally
Accepted Accounting Principles in its financial statements. The
President and Chief Executive Officer and the Vice-President
and Chief Financial Officer have supervised the evaluation of
the design and effectiveness of the Company’s internal controls
over financial reporting as of December 31, 2015 and believe
the design and effectiveness to be adequate to provide such
reasonable assurance using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework (2013). There have been
no changes in the Company’s ICFR during the year ended December
31, 2015, that have materially affected, or are reasonably likely to
materially affect, the effectiveness of the ICFR.
Victor Mashaal
Chairman of the Board and President
March 29, 2016
(Management Discussion and Analysis (“MD&A”) provides a review of Senvest Capital Inc.’s operations, performance and financial
condition for the period ended December 31, 2015, and should be read in conjunction with the 2015 annual report. Readers are
also requested to read the Annual Information Form as well as visit the SEDAR website at www.sedar.com for additional information.
This MD&A also contains certain forward-looking statements with respect to the Corporation. These forward-looking statements, by
their nature necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated
by these forward-looking statements. We consider the assumptions on which these forward-looking statements are based to be rea-
sonable, but caution the reader that these assumptions regarding future events, many of which are beyond our control may ultimately
prove to be incorrect.)
8
2015 annual report
Management’s Report
The consolidated financial statements for the fiscal year ended December 31, 2015 and December 31, 2014, were prepared by the
management of Senvest Capital Inc., reviewed by the Audit Committee and approved by the Board of Directors. They were prepared
in accordance with International Financial Reporting Standards and are consistent with the company’s business.
The company and its subsidiaries maintain a high quality of internal controls, designed to provide reasonable assurance that the
financial information is accurate and reliable. The information included in this Annual Report is consistent with the financial
statements contained herein.
The financial statements have been audited by PricewaterhouseCoopers LLP, the company’s auditors, whose report is provided below.
Victor Mashaal
Chairman of Board and President
Senvest Capital Inc.
March 29, 2016
Independent Auditor’s Report
To the Shareholders of Senvest Capital Inc.
We have audited the accompanying consolidated financial statements of Senvest Capital Inc. and its subsidiaries, which comprise the
consolidated statements of financial position as at December 31, 2015 and 2014 and the consolidated statements of income (loss),
comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary
of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Senvest Capital
Inc. and its subsidiaries as at December 31, 2015 and 2014 and their financial performance and their cash flows for the years then
ended in accordance with International Financial Reporting Standards.
1 CPA auditor, CA, public accountancy permit No. A125840
Montréal, Quebec
March 29, 2016
2015 annual report
9
Consolidated Statements of Financial Position
AS AT DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS)
Assets
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Equity investments and other holdings
Investments in associates
Real estate investments
Income taxes receivable
Deferred income tax assets
Other assets
Total assets
Liabilities
Bank advances
Trade and other payables
Due to brokers
Equities sold short and derivative liabilities
Redemptions payable
Subscriptions received in advance
Income taxes payable
Liabilities under cash-settled share-based payments
Deferred income tax liabilities
Liability for redeemable units
Total liabilities
Equity
Equity attributable to owners of the parent
Share capital
Accumulated other comprehensive income
Retained earnings
Total equity attributable to owners of the parent
Non-controlling interests
Total equity
Total liabilities and equity
Approved by the Board of Directors
Victor Mashaal, Director
Frank Daniel, Director
Note
4
5(a)
5(b)
6
7
8
10(b)
5(b)
6
12
10(b)
11
2015
$
29,926
458
11,449
2,036,287
14,047
49,362
127
-
4,724
2014
$
16,263
455
177,659
1,770,540
11,164
36,983
162
607
6,309
2,146,380
2,020,142
252
8,876
236,310
364,668
1,869
3,086
1,191
-
42,501
631,337
-
30,348
16,541
555,901
1,819
5,858
4,115
6,233
36,209
541,378
1,290,090
1,198,402
23,376
203,142
549,774
776,292
79,998
856,290
16,091
68,683
653,232
738,006
83,734
821,740
2,146,380
2,020,142
The notes on pages 15 to 45 are an integral part of these consolidated financial statements.
10
2015 annual report
Consolidated Statements of Income (loss)
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
Revenue
Interest income
Net dividend income
Other income
Investment gains (losses)
Net change in fair value of equity investments and other holdings
Net change in fair value of real estate investments
Share of profit of associates
Foreign exchange gain
Total revenue and net investment gains (losses)
Operating costs and other expenses
Employee benefit expense
Share-based compensation expense
Interest expense
Transaction costs
Other operating expenses
Change in redemption amount of redeemable units
Income (loss) before income tax
Income tax expense
Net income (loss) for the year
Net income (loss) attributable to:
Owners of the parent
Non-controlling interests
Earnings (loss) per share attributable to owners of the parent:
Basic
Diluted
Note
7
12(a)
10(a)
13(a)
13(b)
2015
$
3,285
11,920
346
15,551
(225,105 )
6,973
2,373
33,445
(182,314 )
(166,763 )
12,563
228
17,088
9,042
16,867
55,788
(116,873 )
(105,678 )
5,583
(111,261 )
(99,826 )
(11,435 )
(35.39 )
(35.39 )
2014
$
2,790
8,811
534
12,135
233,058
2,541
1,870
47,947
285,416
297,551
31,616
62
5,125
7,572
10,316
54,691
80,407
162,453
21,274
141,179
117,298
23,881
41.91
41.26
The notes on pages 15 to 45 are an integral part of these consolidated financial statements.
2015 annual report
11
Consolidated Statements of Comprehensive Income
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS)
Net income (loss) for the year
Other comprehensive income
Currency translation differences
Comprehensive income for the year
Comprehensive income attributable to:
Owners of the parent
Non-controlling interests
2015
$
2014
$
(111,261 )
141,179
149,104
37,843
63,397
204,576
34,633
3,210
174,183
30,393
Other comprehensive income is composed solely of items that will not be reclassified subsequently to net income (loss).
The notes on pages 15 to 45 are an integral part of these consolidated financial statements.
12
2015 annual report
Consolidated Statements of Changes in Equity
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS)
Equity attributable to owners of the parent
Note
Share
capital
$
Accumulated
other
comprehensive
income
$
Retained
earnings
$
Total
$
Non-
controlling
interests
$
Total
equity
$
Balance – December 31, 2013
15,499
11,798
537,760 565,057
65,305
630,362
Net income for the year
Other comprehensive income
Comprehensive income for the year
-
-
-
-
56,885
117,298
-
117,298
56,885
23,881
6,512
141,179
63,397
56,885
117,298 174,183
30,393
204,576
Repurchase of common shares
Exercise of options
Distributions to non-controlling interests
11
11
(69 )
661
-
-
-
-
(1,826 )
-
-
(1,895 )
661
-
-
-
(11,964 )
(1,895 )
661
(11,964 )
Balance – December 31, 2014
16,091
68,683
653,232 738,006
83,734
821,740
Net loss for the year
Other comprehensive income
Comprehensive income (loss) for the year
-
-
-
-
134,459
(99,826 )
(99,826 )
- 134,459
(11,435 )
14,645
(111,261 )
149,104
134,459
(99,826 )
34,633
3,210
37,843
Repurchase of common shares
Exercise of options
Distributions to non-controlling interests
11
11
(172 )
7,457
-
-
-
-
(3,632 )
-
-
(3,804 )
7,457
-
-
-
(6,946 )
(3,804 )
7,457
(6,946 )
Balance – December 31, 2015
23,376
203,142
549,774 776,292
79,998
856,290
The notes on pages 15 to 45 are an integral part of these consolidated financial statements.
2015 annual report
13
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS)
Note
2015
$
2014
$
Cash flows provided by (used in)
Operating activities
Net income (loss) for the year
Adjustments for non-cash items
Purchase of equity investments and other holdings held for trading
Purchase of equities sold short and derivative liabilities
Proceeds on sale of equity investments and other holdings held for trading
Proceeds from equities sold short and derivative liabilities
Dividends and distributions received from real estate investments
Changes in working capital items
14(a )
14(b )
(111,261 )
92,707
(1,408,240 )
(2,116,922 )
1,274,906
1,834,513
6,061
359,734
141,179
(148,408 )
(1,096,593 )
(813,059 )
938,205
1,295,623
6,603
(353,355 )
Net cash used in operating activities
(68,502 )
(29,805 )
Investing activities
Transfers to restricted short-term investments
Purchase of real estate investments
Proceeds on sale of real estate investments
Purchase of equity investments and other holdings
designated as fair value through profit or loss
Proceeds on sale of equity investments and other holdings
designated as fair value through profit or loss
Proceeds from investments in associates
78
(4,127 )
-
(12,547 )
922
1,178
17,131
(5,951 )
366
(1,893 )
871
10,411
Net cash provided by (used in) investing activities
(14,496 )
20,935
Financing activities
Distributions paid to non-controlling interests
Increase in bank advances
Proceeds on exercise of options
Repurchase of common shares
Repurchase of share options
Proceeds from issuance of redeemable units
Amounts paid on redemption of redeemable units
Net cash provided by financing activities
Increase in cash and cash equivalents during the year
Effect of changes in foreign exchange rates on cash and
cash equivalents
Cash and cash equivalents – Beginning of year
Cash and cash equivalents – End of year
4
Amounts of cash flows classified in operating activities:
Cash paid for interest
Cash paid for dividends on equities sold short
Cash received on interest
Cash received on dividends
Cash paid for income taxes
(6,946 )
233
7,457
(3,804 )
(665 )
120,989
(24,685 )
92,579
9,581
4,082
16,263
29,926
8,385
10,488
3,272
19,015
6,011
(11,964 )
-
661
(1,895 )
-
69,251
(44,504 )
11,549
2,679
1,066
12,518
16,263
2,782
4,220
2,548
12,534
12,127
The notes on pages 15 to 45 are an integral part of these consolidated financial statements.
14
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
1 General information
Senvest Capital Inc. (the “Company”) was incorporated under
Part I of the Canada Corporations Act on November 20, 1968
under the name Sensormatic Electronics Canada Limited, and was
continued under the Canada Business Corporations Act under
the same name effective July 23, 1979. On April 21, 1991, the
Company changed its name to Senvest Capital Inc. The Company
and its subsidiaries hold investments in equity and real estate
holdings that are located predominantly in the United States. The
Company’s head office and principal place of business is located
at 1000 Sherbrooke Street West, Suite 2400, Montréal, Quebec
H3A 3G4. The Company’s shares are traded on the Toronto
Stock Exchange under the symbol “SEC”. Refer to note 16 for the
composition of the Company.
2 Summary of significant accounting policies
Basis of preparation
The Company prepares its consolidated financial statements in
accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards
Board (IASB) as set out in Part I of the Chartered Professional
Accountants of Canada (CPA Canada) Handbook – Accounting.
The Board of Directors (Board) approved these consolidated
financial statements for issue on March 29, 2016.
The preparation of consolidated financial statements in conformity
with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgment in the
process of applying the Company’s accounting policies. The
areas involving a higher degree of judgment or complexity or
areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in note 3.
Basis of measurement
The consolidated financial statements have been prepared under
the historical cost convention, except for financial assets and
financial liabilities held at fair value through profit or loss,
including derivative instruments and liabilities under cash-settled
share-based payments which have been measured at fair value.
Consolidation
The financial statements of the Company consolidate the accounts
of the Company, its subsidiaries and its structured entities. All
intercompany transactions, balances and unrealized gains
and losses from intercompany transactions are eliminated on
consolidation. Where applicable, amounts reported by subsidiaries,
associates and structured entities have been adjusted to conform
with the Company’s accounting policies.
Subsidiaries
Subsidiaries are all entities (including structured entities) over
which the Company has control. The Company controls an
entity when it is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect
those returns through its power over the entity. Subsidiaries are
consolidated from the date on which control is transferred to the
Company. They are deconsolidated from the date that control
ceases.
Investments in associates
Associates are entities over which the Company has significant
influence but not control, generally accompanying a holding of
between 20% to 50% of the voting rights. The financial results
of the Company’s investments in its associates are included in
the Company’s consolidated financial statements according to the
equity method.
Subsequent to the acquisition date, the Company’s share of profits
or losses of associates is recognized in the consolidated statement
of income. The cumulative post-acquisition movements are
adjusted against the carrying amount of the investment. When the
Company’s share of losses in an associate equals or exceeds its
interest in the associate, including any other unsecured receivables,
the Company does not recognize further losses, unless it has
incurred obligations or made payments on behalf of the associate.
Dilution gains and losses arising from changes in interests in
investments in associates are recognized in the consolidated
statement of income.
The Company assesses at each year-end whether there is any
objective evidence that its interests in associates are impaired.
If impaired, the carrying value of the Company’s share of the
underlying assets of associates is written down to its estimated
recoverable amount (being the higher of fair value less cost to
sell and value in use) and charged to the consolidated statement
of income. In accordance with International Accounting Standard
(IAS) 36, Impairment of Assets, impairment losses are reversed
in subsequent years if the recoverable amount of the investment
subsequently increases and the increase can be related objectively
to an event occurring after the impairment was recognized.
Liability for redeemable units
Liability for redeemable units represents the units in Senvest
Master Fund, L.P., Senvest Israel Partners, L.P. and Senvest Cyprus
Recovery Investment Partners, L.P. Fund (the Funds or individually
the Fund) that are not owned by the Company. Senvest Master
Fund, L.P. and Senvest Israel Partners, L.P. have one class of
units that may be redeemed as of the end of the first calendar
quarter that occurs not less than one year after the date that such
units were purchased and at the end of each calendar quarter
thereafter. A second class may be redeemed as of the end of the
first month that occurs not less than 25 months after the date
such units were purchased and at the end of each calendar quarter
thereafter. A third class may be redeemed as of the end of any
calendar month; however, redemptions made within the first 24
months will be subject to a redemption fee of 3% to 5% which is
payable to Senvest Master Fund, L.P. and Senvest Israel Partners,
L.P. In addition there are notice periods of 30 to 60 days that
must be given prior to any redemption. Senvest Cyprus Recovery
Investment Partners, L.P. Fund has units that cannot be redeemed
for at least two years. These units are recognized initially at fair
value, net of any transaction costs incurred, and subsequently
units are measured at the redemption amount.
2015 annual report
15
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Redeemable units are issued and redeemed at the holder’s option
at prices based on each Fund’s net asset value per unit at the time
of subscription or redemption. Each Fund’s net asset value per
unit is calculated by dividing the net assets attributable to the
holders of each class of redeemable units by the total number
of outstanding redeemable units for each respective class. In
accordance with the provisions of the Funds’ offering documents,
investment positions are valued at the close price for the purpose
of determining the net asset value per unit for subscriptions and
redemptions.
Non-controlling interests
Non-controlling interests represent equity interests in the
consolidated structured entity owned by outside parties. The
share of net assets of the structured entity attributable to non-
controlling interests is presented as a component of equity. Their
share of net income and comprehensive income is recognized
directly in equity. Changes in the parent company’s ownership
interest in the structured entity that do not result in a loss of
control are accounted for as equity transactions.
Foreign currency translation
Functional currency
Items included in the financial statements of each of the
Company’s entities are measured using the currency of the
primary economic environment in which the entity operates
(the functional currency). The functional currency of the parent
company is the US dollar.
Transactions and balances
Foreign currency transactions are translated into the relevant
functional currency using the exchange rates prevailing at the
dates of the transactions. Foreign exchange gains and losses
resulting from the settlement of foreign currency transactions
and from the translation at year-end exchange rates of monetary
assets and liabilities denominated in currencies other than an
entity’s functional currency are recognized in the consolidated
statement of income.
All foreign exchange gains and losses are presented in the
consolidated statement of income in foreign exchange gain.
Consolidation and foreign operations
The financial statements of an entity that has a functional
currency different from that of the parent Company are translated
into US dollars as follows: assets and liabilities – at the closing
rate at the date of the consolidated statement of financial position;
and income and expenses – at the average rate for the period (as
this is considered a reasonable approximation of actual rates). All
resulting changes are recognized in other comprehensive income
as currency translation differences.
When an entity disposes of its interest in a foreign operation, or
loses control or significant influence over a foreign operation,
the foreign exchange gains or losses accumulated in other
comprehensive income related to the foreign operation are
recognized in net income. If an entity disposes of part of an interest
in a foreign operation which remains a subsidiary, a proportionate
amount of foreign exchange gains or losses accumulated in other
comprehensive income related to the subsidiary are reallocated
between controlling and non-controlling interests.
Presentation currency
The Company has adopted the Canadian dollar as its presentation
currency, which in the opinion of management is the most
appropriate presentation currency. Historically, the Company’s
consolidated financial statements have been presented in
Canadian dollars, and since the Company’s shares are listed on
a Canadian stock exchange, management believes it would better
serve the use of shareholders to continue issuing consolidated
financial statements
in Canadian dollars. The US dollar
consolidated financial statements described above are translated
into the presentation currency as follows: assets and liabilities
– at the closing rate at the date of the consolidated statement
of financial position; and income and expenses – at the average
rate for the period. All resulting changes are recognized in other
comprehensive income as currency translation differences. Equity
items are translated using the historical rate.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits held
with banks and other short-term highly liquid investments with
original maturities of three months or less.
Financial instruments
At initial recognition, the Company classifies its financial
instruments in the following categories, depending on the purpose
for which the instruments were acquired:
a)
Financial assets and financial liabilities at fair value through
profit or loss
Classification
The Company classifies its equity investments and other
holdings, real estate investments and equities sold short and
derivative liabilities as financial assets or financial liabilities
at fair value through profit or loss. This category has two
subcategories: financial assets or financial liabilities held for
trading and those designated at fair value through profit or
loss.
i)
Financial assets and financial liabilities held for trading
A financial asset or financial liability is classified as held for
trading if it is acquired or incurred principally for the purpose
of selling or repurchasing in the near term or if on initial
recognition it is part of a portfolio of identifiable financial
investments that are managed together and for which there is
evidence of a recent actual pattern of short-term profit taking.
Derivatives are also categorized as held for trading.
16
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The Company does not classify any derivatives as hedges in a
hedging relationship.
the consolidated statement of income in interest income based
on the effective interest rate.
The Company makes short sales in which a borrowed security
is sold in anticipation of a decline in the market value of
that security, or it may use short sales for various arbitrage
transactions.
From time to time, the Company enters into derivative financial
instruments for speculative purposes. These instruments are
marked to market, and the corresponding gains and losses
for the year are recognized in the consolidated statement of
income. The carrying value of these instruments is fair value,
which approximates the gain or loss that would be realized if
the position were closed out as at the consolidated statement
of financial position date. The fair value is included in equity
investments and other holdings if in an asset position or
equities sold short and derivative liabilities if in a liability
position.
ii)
Financial assets designated as fair value through profit or loss
Financial assets designated as fair value through profit or loss
are financial instruments that are not classified as held for
trading but are managed, and their performance is evaluated
on a fair value basis in accordance with the Company’s
documented investment strategy.
The Company’s policy requires management to evaluate
the information about these financial assets and financial
liabilities on a fair value basis together with other related
financial information.
Recognition, derecognition and measurement
Regular purchases and sales of investments are recognized on
the trade date – the date on which the Company commits to
purchase or sell the investment. Financial assets and financial
liabilities at fair value through profit or loss are initially
recognized at fair value. Transaction costs are expensed as
incurred in the consolidated statement of income.
Subsequent to initial recognition, all financial assets at fair
value through profit or loss are measured at fair value. Gains
and losses arising from changes in the fair value of financial
assets or financial liabilities at fair value through profit or loss
are presented in the consolidated statement of income in net
change in fair value of equity investments and other holdings
or net change in fair value of real estate investments in the
period in which they arise.
Dividend income from financial assets at fair value through
profit or loss is recognized in the consolidated statement of
income as net dividend income when the Company’s right to
receive payment is established. Dividend expense on equities
sold short is included in net dividend income. Interest on debt
securities at fair value through profit or loss is recognized in
Financial assets and financial liabilities are recognized when
the Company becomes a party to the contractual provisions
of the instrument. Financial assets are derecognized when
the rights to receive cash flows from the assets have expired
or have been transferred and the Company has transferred
substantially all risks and rewards of ownership.
Financial assets and financial liabilities are offset and the net
amount reported in the consolidated statement of financial
position when there is a legally enforceable right to offset
the recognized amounts and when there is an intention to
settle on a net basis or realize the asset and settle the liability
simultaneously.
b)
Loans and receivables
Classification
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an
active market. The Company’s loans and receivables comprise
cash and cash equivalents, restricted short-term investments
and due from brokers, as well as loans to employees, which are
included in other assets.
Recognition, derecognition and measurement
Loans and receivables are initially recognized at fair value.
Subsequently, loans and receivables are measured at amortized
cost using the effective interest method less a provision for
impairment.
At each reporting date, the Company assesses whether there
is objective evidence that a financial asset is impaired. If such
evidence exists, the Company recognizes an impairment loss
as follows:
.
.
The loss is the difference between the amortized cost of the
loan or receivable and the present value of the estimated
future cash flows, discounted using the instrument’s
original effective interest rate. The carrying amount of the
asset is reduced by this amount either directly or indirectly
through the use of an allowance account.
Impairment losses on financial assets carried at amortized
cost are reversed in subsequent periods if the amount
of the loss decreases and the decrease can be related
objectively to an event occurring after the impairment was
recognized.
2015 annual report
17
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Financial liabilities at amortized cost
c)
Classification
Financial liabilities at amortized cost comprise bank advances,
trade and other payables, due to brokers, redemptions payable
and subscriptions received in advance.
Recognition, derecognition and measurement
Trade and other payables are initially recognized at fair
value. Subsequently, trade and other payables are measured
at amortized cost using the effective interest method.
Bank advances, due to brokers, redemptions payable and
subscriptions received in advance are recognized initially
at fair value, net of any transaction costs incurred (where
applicable), and subsequently at amortized cost using the
effective interest method.
Due from and to brokers
Amounts due from and to brokers represent positive and negative
cash balances or margin accounts, and pending trades on the
purchase or sale of securities.
Where terms in the prime brokerage agreements permit the prime
broker to settle margin balances with cash accounts or collateral,
the due from brokers cash balances are offset against the due to
brokers margin balances at each prime broker.
A provision for impairment of amounts due from brokers is
established when there is objective evidence that the Company
will not be able to collect all amounts due from the relevant
broker. Significant financial difficulties of the broker, probability
that the broker will enter bankruptcy or financial reorganization,
and default in payments are considered indicators that the
amount due from brokers is impaired. Once a financial asset or
a group of similar financial assets has been written down as a
result of an impairment loss, interest income is recognized using
the rate of interest used to discount the future cash flows for the
purpose of measuring the impairment loss.
Provision
A provision is recognized if, as a result of a past event, the
Company has a present legal or constructive obligation that
can be estimated reliably and it is probable that an outflow of
economic benefits will be required to settle the obligation.
Income tax
Income tax comprises current and deferred tax. Income tax is
recognized in the consolidated statement of income except to
the extent that it relates to items recognized directly in equity, in
which case the income tax is also recognized directly in equity.
to situations in which applicable tax regulation is subject to
interpretation. It establishes provisions where appropriate on the
basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognized, using the liability method,
on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated
financial statements. However, deferred tax liabilities are not
recognized if they arise from the initial recognition of goodwill;
deferred income tax is not accounted for if it arises from initial
recognition of an asset or liability in a transaction other than a
business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss. Deferred income tax
is determined using tax rates (and laws) that have been enacted or
substantively enacted at the consolidated statement of financial
position date and will apply when it is expected that the related
deferred income tax asset will be realized or the deferred income
tax liability settled.
Deferred income tax assets are recognized only to the extent that
it is probable that future taxable profit will be available against
which the temporary differences can be used.
Deferred income tax is provided on temporary differences
arising on investments in subsidiaries and associates, except for
deferred income tax liability where the timing of the reversal of
the temporary difference is controlled by the Company and it is
probable that the temporary difference will not reverse in the
foreseeable future.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets
and liabilities relate to income taxes levied by the same taxation
authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances on a
net basis.
Interest income and dividend income
Interest income
Interest income is recognized using the effective interest method.
It includes interest income from cash and cash equivalents and
interest on debt securities at fair value through profit or loss.
Dividend income
Dividend income is recognized when the Company’s right to
receive payments is established.
Transaction costs
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of an investment.
Current income tax is calculated on the basis of the tax laws
enacted or substantively enacted at the consolidated statement of
financial position date in the countries where the Company and its
subsidiaries operate and generate taxable income. Management
periodically evaluates positions taken in tax returns with respect
Transaction costs related to financial assets and financial
liabilities at fair value through profit or loss are expensed as
incurred. Transaction costs for all other financial instruments are
capitalized, except for instruments with maturity dates, in which
case transaction costs are amortized over the expected life of the
18
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
instrument using the effective interest method.
New and amended accounting standard adopted in 2015
Employee benefits
Post-employment benefit obligations
Employees of companies included in these consolidated financial
statements have entitlements under Company pension plans
which are defined contribution pension plans. The cost of
defined contribution pension plans is charged to expense as
the contributions become payable and is included in the same
line item as the related compensation cost in the consolidated
statement of income.
Share-based payments
The Company grants stock options to certain employees, directors
and senior executives. Stock options vest on the grant date and
expire after 10 years. The fair value of each award is measured
at the date of grant using the Black-Scholes option pricing
model. The stock option plan allows the employees, directors and
senior executives the choice whether to settle in cash or equity
instruments. The liability incurred is measured at fair value, and
the Company recognizes immediately the compensation expense
and a liability payable for the option. The fair value of the liability
is remeasured at each reporting date and at the settlement date.
Any changes in fair value are recognized in profit or loss as
share-based compensation expense for the year. If the entity pays
in cash on settlement rather than by issuing equity instruments,
that payment will be applied to settle the liability in full.
Share capital
.
.
Common shares are classified as equity. Incremental costs directly
attributable to the issue of new common shares or options are
recorded in equity as a deduction, net of tax, from the proceeds.
Dividend distribution
Dividends on the Company’s common shares are recognized in
the Company’s consolidated statement of changes in equity in
the year in which the dividends are declared and approved by the
Company’s Board.
.
Earnings per share
Basic earnings per share is calculated by dividing the net income
for the year attributable to equity owners of the parent by the
weighted average number of common shares outstanding during
the year.
Diluted earnings per share are calculated by adjusting the
weighted average number of common shares outstanding to
assume conversion of all potentially dilutive instruments. The
Company’s potentially dilutive common shares comprise stock
options granted to employees, directors and senior executives.
In calculating diluted earnings per share, the assumed proceeds
on exercise of options are regarded as having been used to
repurchase common shares at the average market price during
the year.
The Company presents the standards and amendments that are
relevant to its activities and transactions. The following standard
and amendment has been adopted by the Company for the first
time for the financial year beginning on January 1, 2015:
IFRS 8, Operating Segments, has been amended to require
disclosure of judgments made in aggregating segments and
to require a reconciliation of segment assets to the entity’s
assets when segment assets are reported. This amendment was
effective for years beginning on or after July 1, 2014. The
adoption of this amendment did not have a significant impact
on the consolidated financial statements.
Accounting standards and amendments issued but not yet applied
The Company presents the developments that are relevant to its
activities and transactions. The following revised standard and
amendments are effective for annual periods beginning on or
after January 1, 2016 and have not been applied in preparing
these consolidated financial statements. The Company has not
early adopted any new standards or amendments.
IFRS 15, Revenue from Contracts with Customers, deals with
revenue recognition and establishes principles for reporting
useful information to users of financial statements about
the nature, amount, timing and uncertainty of revenue and
cash flows arising from an entity’s contracts with customers.
Revenue is recognized when a customer obtains control of a
good or service and thus has the ability to direct the use and
obtain the benefits from the good or service. The standard
replaces IAS 18, Revenue, and IAS 11, Construction Contracts,
and related interpretations. The standard is effective for
annual periods beginning on or after January 1, 2018 and
earlier application is permitted. The Company is assessing the
impact of IFRS 15.
In July 2014, the IASB issued the complete version of IFRS
9, first issued in November 2009, which brings together
the classification and measurement, impairment and hedge
accounting phases of the IASB’s project to replace IAS 39,
Financial Instruments: Recognition and Measurement. IFRS
9 introduces a principles-based approach to the classification
of financial assets based on an entity’s business model
and the nature of the cash flows of the asset. All financial
assets, including hybrid contracts, are measured as at FVTPL,
fair value through OCI or amortized cost. For financial
liabilities, IFRS 9 includes the requirements for classification
and measurement previously included in IAS 39. IFRS 9
also introduces an expected loss impairment model for all
financial assets not as at FVTPL. The model has three stages:
(1) on initial recognition, 12-month expected credit losses
are recognized in profit or loss and a loss allowance is
established; (2) if credit risk increases significantly and the
resulting credit risk is not considered to be low, full lifetime
expected credit losses are recognized; and (3) when a financial
asset is considered impaired, interest revenue is calculated
based on the carrying amount of the asset, net of the loss
allowance, rather than its gross carrying amount. Finally,
IFRS 9 introduces a new hedge accounting model that aligns
2015 annual report
19
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
the accounting for hedge relationships more closely with an
entity’s risk management activities, permits hedge accounting
to be applied more broadly to a greater variety of hedging
instruments and risks and requires additional disclosures. The
Company is currently assessing the impact of this standard on
the consolidated financial statements.
financial instruments or by using models. Where market observable
inputs are not available, they are estimated based on appropriate
assumptions. To the extent practical, models use only observable
data; however, areas such as credit risk (both the Company’s
own credit risk and counterparty credit risk), volatilities and
correlations require management to make estimates.
.
.
.
.
IFRS 16, Leases, was published in January 2016 by the IASB.
This standard will replace the current guidance in IAS 17
and require lessees to recognize an asset and a lease liability
reflecting a “right-of-use asset” and future lease payments,
respectively, for virtually all lease contracts. The standard
applies to annual periods beginning on or after January 1,
2019, with earlier application permitted if IFRS 15, Revenue
from Contracts with Customers, is adopted.
IFRS 10, Consolidated Financial Statements, and IAS 28,
Investments in Associates and Joint Ventures, were amended
in September 2014 to address an inconsistency between those
standards when accounting for the sale or a contribution of
assets between an investor and its associate or joint venture.
The main consequence of the amendments is that a full gain
or loss is recognized when the transaction involves a business
combination, whereas a partial gain is recognized when the
transaction involves assets that do not constitute a business.
The mandatory effective date of this amendment will be
determined by the IASB at a future date. Voluntary application
is permitted.
IAS 1, Presentation of Financial Statements, was amended
in December 2014, to clarify guidance on materiality and
aggregation, the presentation of subtotals, the structure
of financial statements and the disclosure of accounting
policies. These amendments are required to be applied for
annual periods beginning on or after January 1, 2016. Earlier
application is permitted.
3 Critical accounting estimates and judgments
Critical accounting estimates
The Company makes estimates and assumptions concerning
the future that will, by definition, seldom equal actual results.
The following are the estimates applied by management that
most significantly affect the Company’s consolidated financial
statements. These estimates have a significant risk of causing
a significant adjustment to the carrying amounts of assets and
liabilities within the next financial year.
Fair value of financial instruments
The fair value of financial instruments where no active market
exists or where listed prices are not otherwise available are
determined by using valuation techniques. In these cases, the fair
values are estimated from observable data in respect of similar
20
2015 annual report
Changes in assumptions about these factors could affect the
reported fair value of financial instruments.
Refer to note 15 for risk sensitivity information for financial
instruments.
Income taxes
The Company is subject to income taxes in numerous jurisdictions.
Significant judgment is required in determining the consolidated
provision for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain.
The Company recognizes liabilities for anticipated tax audit
issues based on estimates of whether additional taxes will be due.
Where the final tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact
the current and deferred income tax assets and liabilities in the
year in which such determination is made.
Critical accounting judgments
Consolidation of entities in which the Company holds less than
50% of the voting rights
Management considers that the Company has de facto control of
Senvest Management L.L.C. (RIMA) and RIMA Senvest Master Fund
GP, L.L.C., two legal entities wholly owned by an executive of the
Company, because of the Company’s board representation and the
contractual terms of the investment advisory agreement. RIMA
is the investment adviser to the Funds, whereas RIMA Senvest
Master Fund GP, L.L.C. is the General Partner. As compensation
for its investment sub-advisory services, the Company is entitled
to receive 60% of the management and incentive fees earned by
RIMA each fiscal year.
Management considers that the Company has control of Senvest
Master Fund, L.P., Senvest Israel Partners, L.P. and Senvest Cyprus
Recovery Investment Partners, L.P. even though the Company
has less than 50% of the voting rights in each of the Funds.
The Company assessed that the removal rights of non-affiliated
unitholders are exercisable but not strong enough given the
Company’s decision-making authority over relevant activities, the
remuneration to which it is entitled and its exposure to returns.
The Company, through its structured entities, is the majority
unitholder of each of the Funds and acts as a principal while
there are no other unitholders forming a group to exercise their
votes collectively.
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
4 Cash and cash equivalents
Cash on hand and on deposit
Short-term investments
5 Credit facilities and due to brokers
a) Credit facilities
Bank advances
In 2013, the Company renegotiated its credit facility with
a bank and has available a demand revolving loan (credit
facility) and a guarantee facility. The credit facility is in the
amount of $3,000 and is payable on demand. As at December
31, 2015, $252 was outstanding (2014 – nil). Under the credit
facility, the Company may, upon delivery of a required notice,
opt to pay interest at the bank’s prime rate plus 0.25%, the
bank’s US base rate plus 0.25% or LIBOR plus 1.75% per
annum. All of the credit facility available is also available by
way of banker’s acceptances plus a stamping fee of 1.75% per
annum, or by US dollar advances.
Guarantee facility
The Company also has available a 450 thousand euro guarantee
facility (2014 – 450 thousand euros) to issue standby letters
of credit on behalf of the Company. A fee of 1.0% per annum
on the face amount of each standby letter of credit applies.
All amounts paid by the bank under the guarantee facility are
payable on demand. In February 2014, a 12 million euro letter
of credit entered into in June 2013 was terminated and the
restricted funds that were used to secure the letter of credit
became available for general use. As at December 31, 2015,
no standby letters of credit were outstanding; however, the
Company has provided a $458 (2014 – $455) term deposit
to guarantee future letters of credit. This term deposit has
been disclosed in restricted short-term investments on the
consolidated statement of financial position.
2015
$
29,658
268
29,926
2014
$
16,223
40
16,263
In addition, a first ranking movable hypothec in the amount
of $30,000 on all of the Company’s assets has been granted
as collateral for both the credit and guarantee facilities.
According to the terms of the facilities, the Company is
required to comply with certain financial covenants. During
the years ended December 31, 2015 and 2014, the Company
met the requirements of all the covenants.
b) Due from and due to brokers
The Company has margin facilities with its prime brokers. As
at December 31, 2015 and 2014, the Company’s amounts due
to brokers have no specific repayment terms, and they are
governed by the margin terms set forth in the prime brokerage
agreements. As at December 31, 2015, listed equity securities
and due from brokers amounting to $1,897 have been pledged
as collateral (2014 – $1,825). The fair value of the collateral
listed equity securities is calculated daily and compared to
the Company’s margin limits. The prime brokers can at any
time demand full or partial repayment of the margin balances
and any interest thereon or demand the delivery of additional
assets as collateral.
Due to and due from brokers balances are presented on a net
basis by broker in the consolidated statements of financial
position. Under the prime broker agreements, the broker may
upon events of default offset, net and or regroup any amounts
owed by the Company to the broker by amounts owed to
the Company by the broker. The following tables set out the
offsetting of the Company’s various accounts with prime
brokers.
Due from brokers
Due to brokers
Due from brokers
Due to brokers
Gross
amounts due
from brokers
$
11,449
67,338
Gross
amounts due
from brokers
$
616,783
7,660
Gross
amounts due
to brokers
$
-
303,648
Gross
amounts due
to brokers
$
439,124
24,201
2015
Net
Amount
$
11,449
(236,310 )
2014
Net
Amount
$
177,659
(16,541 )
2015 annual report
21
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
6 Equity investments and other holdings, equities sold short and derivative liabilities
Equity investments and other holdings
Assets
Financial assets held for trading
Equity securities
Debt securities
Derivative financial assets
Financial assets designated as fair value through profit or loss
Equity securities
Unlisted equity securities
Structured fixed income fund units
Private investments
Current portion
Non-current portion
Equities sold short and derivative liabilities
Liabilities
Financial liabilities held for trading
Equities sold short
Listed equity securities (proceeds $376,819;
2014 – $603,510)
Derivative financial liabilities (proceeds $14,857;
2014 – $14,006)
Note
6(a)
6(b)
6(c)
2015
$
2014
$
1,883,412
62,774
33,129
1,645,233
64,141
36,490
1,979,315
1,745,864
1,850
8,931
4,484
41,707
2,109
6,544
3,883
12,140
2,036,287
1,770,540
1,979,315
1,745,864
56,972
24,676
Note
2015
$
2014
$
6(a)
350,777
13,891
364,668
543,418
12,483
555,901
22
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
a)
From time to time, the Company enters into derivative financial instruments consisting primarily of warrants and options to purchase
or sell equity indices and currencies. The following tables list the notional amounts, fair values of derivative financial assets and
financial liabilities and net change in fair value by contract type, including options, warrants, rights and options sold short included
in equity investments and other holdings or equities sold short and derivative liabilities:
As at
December 31,
2015
For the
year ended
December 31,
2015
Notional
Value
$
98,104
12,782
732,219
Fair value
of derivative
financial
assets
$
Fair value
of derivative
financial
liabilities
$
Notional
Value
$
3,728
240
29,161
33,129
123,926
-
-
13,891
-
-
13,891
Net
change in
fair value
$
(5,012 )
147
17,365
12,500
As at
December 31,
2014
For the
year ended
December 31,
2014
Notional
Value
$
126,294
78,134
613,763
Fair value
of derivative
financial
assets
$
17,968
5,831
12,691
36,490
Fair value
of derivative
financial
liabilities
$
Notional
value
$
128,945
-
-
12,483
-
-
Net
change in
fair value
$
3,510
136
5,364
12,483
9,010
Equity options
Warrants and rights
Foreign currency options
Equity options
Warrants and rights
Foreign currency options
b)
c)
This holding is an investment in shares of a private entity that invests in US residential mortgage-backed securities (RMBS) —
structured bonds that represent claims on the cash flows from pools of residential mortgage loans. There is no established market for
this investment.
These holdings are in private entities whose shares/units do not trade in an active market. There is no established market for these
securities. The most likely scenario of a disposal of these holdings is an eventual sale of the underlying entities.
2015 annual report
23
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
7 Investments in associates
The Company has invested in a number of individually insignificant associates that are accounted for using the equity method. The
aggregated financial information on these associates are as follows:
Aggregate carrying amount of individually immaterial associates
Aggregate amounts of the Company’s share of:
Net income from continuing operations and
comprehensive income
2015
$
14,047
2014
$
11,164
2,373
1,870
Commitments, contingent liabilities and borrowing arrangements of associates
There are no commitments, contingent liabilities or borrowing arrangements relating to the Company’s interests in the associates.
8 Real estate investments
Real estate investments comprise the following:
Financial assets designated as fair value through
profit or loss
Investments in private entities
Investments in real estate income trusts
Non-current portion
Note
8(a)
8(b)
2015
$
20,120
29,242
49,362
49,362
2014
$
15,542
21,441
36,983
36,983
a)
b)
These investments are minority interests in private entities whose main assets are real estate properties. There is no established
market for these investments. The most likely scenario for a disposal of these investments is an eventual sale of the underlying
real estate properties.
In 2015 and 2014, distributions received from interests in private entities represented a return of capital and were deducted from
the cost of the investments.
These real estate investments are US real estate income trusts (commonly referred to as REITs). A REIT is an entity that owns and
operates income-producing real estate and annually distributes to its holders at least 90% of its taxable income. The Company’s
investments are non-publicly traded REITs. There is no established market for these REITs. The most likely scenario for a disposal
of these holdings is an eventual sale of the underlying real estate properties of the REITs and the distribution to their holders.
In 2015 and 2014, distributions received from a REIT are included in net change in fair value of real estate investments on the
consolidated statements of income.
24
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
9 Financial instruments by category and related income, expenses and gains and losses
Assets (liabilities)
at fair value through
profit or loss
Held for
trading
$
Designated
$
Loans and
receivables
$
Financial
liabilities at
amortized
cost
$
-
-
-
1,979,315
-
-
-
-
-
(364,668 )
-
-
-
-
-
56,972
49,362
-
-
-
-
-
-
-
29,926
458
11,449
-
-
271
-
-
-
-
-
-
-
-
-
-
-
-
(252)
(8,876)
(236,310)
-
(1,869)
(3,086)
2015
Total
$
29,926
458
11,449
2,036,287
49,362
271
(252 )
(8,876 )
(236,310 )
(364,668 )
(1,869 )
(3,086 )
1,614,647
106,334
42,104
(250,393)
1,512,692
(228,514 )
3,085
8,839
10,382
72
3,081
(216,590 )
13,535
-
128
-
128
-
(17,030)
-
(218,132 )
(13,745 )
11,920
(17,030)
(219,957 )
Assets (liabilities) as per consolidated
statement of financial position
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Equity investments and other holdings
Real estate investments
Other assets*
Bank advances
Trade and other payables
Due to brokers
Equities sold short and derivative liabilities
Redemptions payable
Subscriptions received in advance
Amounts recognized in consolidated
statement of income (loss)
Net change in fair value
Interest income (expense)
Net dividend income
* Includes loans to employees but excludes capital assets and other non-financial assets.
2015 annual report
25
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Assets (liabilities)
at fair value through
profit or loss
Held for
trading
$
Designated
$
Loans and
receivables
$
Financial
liabilities at
amortized
cost
$
2014
Total
$
-
-
-
1,745,864
-
-
-
-
(555,901 )
-
-
-
-
-
24,676
36,983
-
-
-
-
-
-
16,263
455
177,659
-
-
326
-
-
-
-
-
-
-
-
-
-
-
(30,348 )
(16,541 )
-
(1,819 )
(5,858 )
16,263
455
177,659
1,770,540
36,983
326
(30,348 )
(16,541 )
(555,901 )
(1,819 )
(5,858 )
1,189,963
61,659
194,703
(54,566 )
1,391,759
228,464
2,741
8,648
239,853
7,135
-
163
7,298
-
49
-
49
-
(5,125 )
-
235,599
(2,335 )
8,811
(5,125 )
242,075
Assets (liabilities) as per consolidated
statement of financial position
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Equity investments and other holdings
Real estate investments
Other assets*
Trade and other payables
Due to brokers
Equities sold short and derivative liabilities
Redemptions payable
Subscriptions received in advance
Amounts recognized in consolidated
statement of income
Net change in fair value
Interest income (expense)
Net dividend income
* Includes loans to employees but excludes capital assets and other non-financial assets.
26
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
10 Income taxes
a)
Income tax expense
Current tax
Current tax on income for the year
Adjustments in respect of prior years
Deferred tax
Origination and reversal of temporary differences
2015
$
6,958
(1,401)
5,557
26
5,583
2014
$
11,665
459
12,124
9,150
21,274
The tax on the Company’s income before income tax differs from the theoretical amount that would arise using the federal and
provincial statutory tax rate applicable to income of the consolidated entities as follows:
Income (loss) before income tax
Income tax expense (recovery) based on statutory rate of
26.9% (2014 – 26.9%)
Prior year adjustments
Difference in tax rate
Portion of income taxable (recoverable) in hands of
non controlling interests
Non-taxable dividend
Non-taxable portion of capital gain
Non-deductible expenses
Foreign exchange
Recognition of previously unrecognized deferred
income tax assets
Other
Income tax expense
2015
$
2014
$
(105,678 )
162,453
(28,427 )
(406 )
3,481
3,076
(804 )
(2,871 )
230
31,817
(196 )
(317 )
5,583
43,700
703
(14,703 )
(6,423 )
-
(6,422 )
226
2,949
813
431
21,274
On February 11, 2014, the federal Minister of Finance presented the majority government’s 2014 Federal Budget (the “Budget”). The
Budget proposed income tax changes to parts of Canada’s foreign affiliate regime effective January 1, 2015. These proposals became
law in December 2014. These changes had an effect on the mechanism by which certain foreign income of the Company is taxed in
Canada. These changes have had a negative impact on the Company’s 2015 income tax expense, income tax liabilities and cash flows.
2015 annual report
27
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
b)
The analysis of deferred income tax assets and liabilities is as follows:
Deferred income tax assets
Deferred tax assets to be settled
After more than 12 months
Within 12 months
Deferred income tax assets
Deferred income tax liabilities
Deferred tax liabilities to be settled
After more than 12 months
Within 12 months
Deferred income tax liabilities
2015
$
-
-
-
42,501
-
42,501
2014
$
607
-
607
36,209
-
36,209
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of
balances within the same tax jurisdiction, is as follows.
Deferred income tax assets
As at December 31, 2013
Charged to consolidated statement
of income
Foreign exchange differences
As at December 31, 2014
Credited (charged) to consolidated
statement of loss
Foreign exchange differences
As at December 31, 2015
Equity
investments
and other
holdings
$
Investments
in
associates
$
Real estate
investments
$
Tax loss
carry-
forward
$
Other
$
Total
$
332
(259 )
17
90
256
39
385
-
-
-
-
100
8
108
367
381
-
1,080
(2 )
33
398
12
77
487
(396 )
15
-
130
11
141
-
-
(657 )
65
488
458
37
495
956
172
1,616
28
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Deferred income tax liabilities
Equity
investments
and other
holdings
$
Investments
in
associates
$
Real estate
investments
$
Other
$
Total
$
As at December 31, 2013
832
19,343
1,104
3,633
24,912
Charged (credited) to consolidated statement
of income
Foreign exchange differences
As at December 31, 2014
Charged (credited) to consolidated statement
of loss
Foreign exchange differences
As at December 31, 2015
1,072
130
2,034
1,185
489
3,708
6,552
2,081
27,976
(441 )
5,366
32,901
(410 )
80
774
908
224
1,280
394
5,307
(674 )
969
8,494
2,685
36,091
978
7,048
1,906
5,602
44,117
Deferred income tax assets for temporary differences totalling $2,405 (2014 – $4,567) and non-expiring capital loss carryforwards
totalling $4,211 (2014 – nil) have not been recognized in the consolidated financial statements.
Deferred income tax liabilities have not been recognized on unremitted earnings totalling $63,495 as at December 31, 2015 (2014
– $52,916) with respect to the investment in subsidiaries, branches and associates and interest in joint arrangements because the
Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in a foreseeable future.
11 Share capital
Authorized
Unlimited number of common shares, without par value
Movements in the Company’s share capital are as follows:
Balance – Beginning of year
Shares repurchased
Issued for exercise of options
Balance – End of year
2015
2014
Number
of shares
$
2,794,324
(21,700 )
45,000
Amount
$
16,091
(172 )
7,457
Number
of shares
2,801,624
(12,800 )
5,500
Amount
15,499
(69 )
661
2,817,624
23,376
2,794,324
16,091
In 2015, the Company began a normal course issuer bid to purchase a maximum of 130,000 of its own common shares before June
24, 2016. In 2015, the Company purchased 21,700 common shares (2014 – 12,800) for a total cash consideration of $3,804 (2014 –
$1,895). The excess of the consideration paid over the stated capital was charged to retained earnings in the consolidated statement
of changes in equity.
No dividends were declared in 2015 or 2014.
2015 annual report
29
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
12 Share-based payments
The Company has two fixed share option plans which were established for employees, directors and senior executives. Under the first
plan, the Company may grant options for up to 335,500 common shares, all of which have been fully granted to date. Under the second
plan, the Company may grant options for up to 520,000 common shares, of which 441,000 options for common shares have been
granted to date (2014 – 441,000), leaving a balance of 79,000 shares available to be issued under the plan (2014 – 79,000). Under both
plans, options vest on the grant date. The plans permit employees, directors and senior executives to require that the Company settle the
intrinsic fair value of the options for cash. The exercise price of each option may not be lower than the market price of the Company’s
shares on the day preceding the date of grant. The options expire after 10 years.
a) Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
Options outstanding –
Beginning of year
Exercised for shares
Redeemed and cancelled for cash
Options outstanding – End of year
Options exercisable – End of year
2015
Weighted
average
exercise
price
$
21.50
21.50
21.50
-
-
Number
of options
53,500
(5,500 )
-
48,000
48,000
2014
Weighted
average
exercise
price
$
21.13
17.00
-
21.50
21.50
Number
of options
48,000
(45,000 )
(3,000 )
-
-
For the year ended December 31, 2015, the weighted average share price at the time of exercise was $165.78 (2014 – $120.20), the
weighted average share price at the time the options were redeemed and cancelled for cash was $195.00.
Under both plans, a liability for each option is calculated based on the fair value of the options at the consolidated statement of financial
position date. As a result, the related share-based compensation expense for the year was $228; (2014 – $62). The total value of the
liability for vested benefits is nil as all options have been exercised in 2015 (2014 – $6,233).
b) There are no options outstanding as at December 31, 2015. Options outstanding as at December 31, 2014, all of which were
exercisable, were as follows:
Options outstanding
2014
Range of
exercise
price
$
Number
of options
Weighted
average
remaining
contractual life
21.50
48,000
1.0
48,000
Weighted
remaining
exercise
$
21.50
21.50
30
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
13 Earnings per share
a) Basic
Net income (loss) attributable to owners of the parent
Weighted average number of outstanding common shares
Basic earnings (loss) per share
b) Diluted
Net income (loss) attributable to owners of the parent
Removal of share-based compensation expense due to
2015
$
(99,826 )
2,820,974
(35.39 )
2014
$
117,298
2,799,016
41.91
2015
$
2014
$
(99,826 )
117,298
assumption that all options were exercised, net of tax recovery
-
62
Net income (loss) used to determine diluted earnings per share
(99,826 )
117,360
Weighted average number of outstanding common shares issued
Weighted average number of common shares issued on assumed
exercise of share options
Common shares repurchased and cancelled under assumption
of normal course issuer bid
Weighted average number of outstanding common shares for
diluted earnings (loss) per share
Diluted earnings (loss) per share
2,820,974
2,799,016
-
-
52,445
(7,295)
2,820,974
2,844,166
(35.39 )
41.26
All options are deemed to be antidilutive for the year ended December 31, 2015 due to the reported net loss attributable to the
owners of the parent. Accordingly, diluted loss per share is equal to basic loss per share for that year.
2015 annual report
31
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
14 Supplementary information to consolidated statements of cash flows
a) Adjustments for non-cash items are as follows:
Net change in fair value of equity investments and
other holdings
Net change in fair value of real estate investments
Share of profit of associates, adjusted for
distributions received
Share-based compensation expense, adjusted for
settlements paid
Change in redemption amount of redeemable units
Deferred income tax
b) Changes in working capital items are as follows:
Decrease (increase) in
Due from brokers
Income taxes receivable
Other assets
Increase (decrease) in
Trade and other payables
Due to brokers
Income taxes payable
Note
10(a)
2015
$
225,105
(6,973 )
(2,373 )
(6,205 )
(116,873 )
26
92,707
2015
$
185,229
62
3,043
(25,247 )
200,082
(3,435 )
359,734
2014
$
(233,058 )
(2,541 )
(1,870 )
(496 )
80,407
9,150
(148,408 )
2014
$
(168,541 )
(154 )
548
(8,061 )
(175,558 )
(1,589 )
(353,355 )
32
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
15 Financial risks and fair value
Financial risk factors
The Company’s activities expose it to a variety of financial risks: market risk (including fair value interest rate risk, cash flow interest
rate risk, currency risk and equity price risk), credit risk and liquidity risk.
The Company’s overall risk management program seeks to maximize the returns derived for the level of risk to which the Company is
exposed and seeks to minimize potential adverse effects on the Company’s financial performance. Managing these risks is carried out
by management under policies approved by the Board.
The Company uses different methods to measure and manage the various types of risk to which it is exposed; these methods are
explained below.
Market risk
Fair value and cash flow interest rate risks
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in
market interest rates.
The majority of the Company’s debt is based on floating rates which expose the Company to cash flow interest rate risk. The Company
does not have a long-term stream of cash flows that it can match against this type of fixed debt, so it prefers to use short-term floating
rate debt. The Company does not mitigate its exposure to interest rate fluctuation on floating rate debt. If interest rates spike, then the
Company could enter into interest rate swaps or more probably just reduce its debt level. As at December 31, 2015, the Company has
listed equity securities of $1,885,262 (2014 – $1,647,342). It can sell these securities to reduce its floating rate debt. As at December
31, 2015, a 1% (2014 – 1%) increase or decrease in interest rates, with all other variables remaining constant, would impact interest
expense by approximately $2,366 over the next 12 months (2014 – $165).
The Company’s exposure to interest rate risk is summarized as follows:
Cash and cash equivalents
Restricted short-term investments
Debt securities
Loans to employees
Credit facilities
Bank advances
Guarantee facility
Trade and other payables
Due to brokers
2015
2014
Between nil and 1.25%
Between 0.15% and 1.18%
Between 1.459% and 12.0%
Non-interest bearing
Between nil and 1.12%
Between 0.3% and 1.42%
Between 1.579% and 11.0%
Non-interest bearing
Prime rate plus 0.25%
1.0%
Non-interest bearing
0.00% to 3.81%
Prime rate plus 0.20%
1.0%
Non-interest bearing
0.00% to 4.12%
2015 annual report
33
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The Company also holds debt securities held for trading of $62,774 (2014 – $64,141). Debt securities are usually highly sensitive to
interest rate changes. Theoretically, when interest rates rise, it causes the value of debt securities to decline. The opposite generally hap-
pens when interest rates fall, then debt securities usually rise in value. However, interest rates are only one factor affecting the value
of debt securities. Other factors such as the creditworthiness of the issuer and the spreads attached thereto, the state of the economy or
market sentiment can also have a significant effect on debt securities. At any time, one or more factors may have more or less of an
effect on the fair value of debt securities than the change in interest rates. If all other factors are assumed not to change, then a change
of 100 basis points in the yield to maturity will affect the fair value of the debt securities held for trading as follows.
Estimated effect on the fair value of debt securities due to:
An increase of 100 basis points in the yield to maturity
A decrease of 100 basis points in the yield to maturity
Currency risk
2015
$
(1,752 )
1,837
2014
$
(2,192 )
2,316
Currency risk is the risk that the value of monetary financial assets and financial liabilities denominated in foreign currencies will
vary as a result of changes in underlying foreign exchange rates. The Company is exposed to currency risk due to potential variations
in currencies other than the US dollar. The following tables summarize the Company’s main monetary financial assets and financial
liabilities whose fair value is predominantly determined in currencies other than the US dollar, the Company’s functional currency, and
the effect on pre-tax net income of a 10% change in currency exchange rates:
Financial
assets
$
1,052
5,600
-
-
-
6,652
Financial
assets
$
-
-
5,669
198
-
150
-
335
6,352
Financial
liabilities
$
(28,616)
(218,114)
(19,352)
(7,378)
(4,440)
Net
exposure
$
(27,564)
(212,514)
(19,352)
(7,378)
(4,440)
(277,900)
(271,248)
Financial
liabilities
$
(141,489)
(56,937)
(20,301)
(204,078)
(14,362)
(3)
(6,890)
-
Net
exposure
$
(141,489 )
(56,937 )
(14,632 )
(203,880 )
(14,362 )
147
(6,890 )
335
(444,060)
(437,708 )
2015
Net effect of a
10% increase
or decrease
$
(2,756)
(21,251)
(1,935)
(738)
(444)
(27,124)
2014
Net effect of a
10% increase
or decrease
$
(14,149 )
(5,694 )
(1,463 )
(20,388 )
(1,436 )
15
(689 )
34
(43,770 )
Canadian dollar
Euro
Israeli shekel
British pound sterling
Norwegian krone
Japanese yen
Swiss franc
Canadian dollar
Euro
Israeli shekel
British pound sterling
Norwegian krone
Argentine peso
34
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Price risk
Price risk is the risk that the fair value of equity investments and other holdings and equities sold short and derivative liabilities will
vary as a result of changes in the market prices of the holdings. The majority of the Company’s equity investments and other holdings
and all of the equities sold short are based on quoted market prices as at the consolidated statement of financial position date. Changes
in the market price of quoted securities may be related to a change in the financial outlook of the investee entities or due to the market
in general. Where non-monetary financial instruments − for example, equity securities − are traded in currencies other than the US
dollar, the price, initially expressed in a foreign currency and then converted into US dollars, will also fluctuate because of changes
in foreign exchange rates.
Equities sold short represent obligations of the Company to make future delivery of specific securities and create an obligation
to purchase the security at market prices prevailing at the later delivery date. This creates the risk that the Company’s ultimate
obligation to satisfy the delivery requirements will exceed the amount of the proceeds initially received or the liability recorded in the
consolidated financial statements.
The Company’s equity investments and other holdings have a downside risk limited to their carrying value, while the risk of equities
sold short and derivative liabilities is open ended. The Company is subject to commercial margin requirements which act as a barrier
to the open-ended risks of the equities sold short and derivative liabilities. The Company closely monitors both its equity investments
and other holdings and its equities sold short and derivative liabilities.
The impact of a 30% change in the market prices of the Company’s listed equity investments, equities sold short and derivative
liabilities would be as follows:
Equity investments and other holdings
Listed equity securities
Equities sold short and derivative liabilities
Pre-tax impact on net income
Equity investments and other holdings
Listed equity securities
Equities sold short and derivative liabilities
Pre-tax impact on net income
Fair
value
$
Estimated
fair value
with a 30%
price increase
$
2015
Estimated
fair value
with a 30%
price decrease
$
1,888,990
(364,668 )
2,455,687
(474,068 )
1,322,293
(255,268 )
457,297
(457,297 )
Fair
value
$
1,665,310
(555,901 )
Estimated
fair value
with a 30%
price increase
$
2,164,903
(722,671 )
332,823
2014
Estimated
fair value
with a 30%
price decrease
$
1,165,71
(389,131 )
(332,823 )
The above analysis assumes that listed equity investments and equities sold short would increase or decrease at the same rate. As these
portfolios are not hedged together, a change in market prices will affect each differently.
2015 annual report
35
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 201
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Credit risk
Credit risk is the risk that a counterparty will fail to fulfill its obligations under a contract and will cause the Company to suffer a loss.
All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered
minimal, as delivery of securities sold is executed only once the broker has received payment. Payment is made on a purchase once
the securities have been received by the broker. The trade will fail if either party fails to meet its obligations.
The Company is also exposed to counterparty credit risk on its cash and cash equivalents, restricted short term investments and due
from brokers.
The Company manages counterparty credit risk by dealing only with parties approved by the Board.
From time to time, the Company enters into derivative financial instruments consisting primarily of warrants and options to purchase
or sell equity indices and currencies. These derivative instruments are marked to market. There is deemed to be no credit risk for
the options because they are traded on exchanges. The warrant contracts are not traded on an exchange and allow the Company to
purchase underlying equities at a fixed price.
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings
(if available on Standard & Poor’s, Moody’s or Fitch ratings agencies) or to historical information about counterparty default rates.
Credit ratings are presented using Standard & Poor’s rating scale as follows:
Financial Instrument
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Debt securities
Debt securities
Counterparties without external credit rating
Loans to employees*
Rating
A
A
A
B
CCC and below
2015
$
29,926
458
11,449
4,186
58,588
2015
$
271
2014
$
16,263
455
177,659
3,096
61,045
2014
$
326
* Related parties with which the Company has not experienced defaults in the past.
36
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Liquidity risk
Liquidity risk is the risk the Company will encounter difficulties in meeting its financial obligations. The Company’s largest assets are
equity investments and other holdings. Most of these assets are made up of equities in listed companies which can be liquidated in
a relatively short time. Due to its large investments in liquid assets, the Company believes that it has sufficient resources to meet its
obligations as they come due.
All financial liabilities other than equities sold short and derivative liabilities as at the consolidated statement of financial position
date mature or are expected to be repaid within one year (2014 – one year). The liquidity risk related to these liabilities is managed by
maintaining a portfolio of liquid investment assets.
Capital risk management
The Company’s objective when managing its capital is to maintain a solid capital structure appropriate for the nature of its business.
The Company considers its capital to be its equity. The Company manages its capital structure in light of changes in economic
conditions. To maintain or adjust its capital structure, the Company initiates normal course issuer bids or adjusts the amount of
dividends paid. The Company monitors capital on the basis of its debt-to-capital ratio, which is as follows:
Total liabilities
Total equity
Debt-to-capital ratio
2015
2014
$1,290,090
$856,290
1.51
$1,198,402
$821,740
1.46
The Company’s objective is to maintain a debt-to-capital ratio below 2.0. The Company believes that limiting its debt-to-capital ratio
in this manner is the best way to monitor risk. The Company does not have any externally imposed restrictive covenants or capital
requirements, other than those included in the credit facilities (note 5).
Fair value estimation
The tables below analyze financial instruments carried at fair value, by the inputs used in the valuation method. The different levels
have been defined as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly (that is,
as prices) or indirectly (that is, derived from prices)
Level 3 – Inputs that are not based on observable market data
The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of
the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is
assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant
adjustment based on unobservable inputs, that measurement is a Level 3. Assessing the significance of a particular input to the fair
value measurement in its entirety requires judgment, considering factors specific to the asset or liability.
The determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable
data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and
provided by independent sources that are actively involved in the relevant market.
2015 annual report
37
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The following tables analyze within the fair value hierarchy the Company’s financial assets and financial liabilities measured at fair
value as at December 31, 2015 and 2014:
Assets
Financial assets held for trading
Equity securities
Debt securities
Derivative financial assets
Financial assets designated as fair value
through profit or loss
Equity securities
Real estate investments
Liabilities
Financial liabilities held for trading
Equity holdings sold short
Derivative liabilities
Assets
Financial assets held for trading
Equity securities
Debt securities
Derivative financial assets
Financial assets designated as fair value
through profit or loss
Equity securities
Real estate investments
Liabilities
Financial liabilities held for trading
Equity holdings sold short
Derivative liabilities
Level 1
$
Level 2
$
Level 3
$
1,880,980
-
-
1,795
-
1,882,775
2,432
62,774
33,129
13,075
-
111,410
350,777
-
-
13,891
350,777
13,891
-
-
-
42,102
49,362
91,464
-
-
-
Level 1
$
Level 2
$
Level 3
$
1,644,772
-
-
2,109
-
461
64,141
36,490
9,370
-
1,646,881
110,462
-
-
-
13,197
36,983
50,180
2015
Total
$
1,883,412
62,774
33,129
56,972
49,362
2,085,649
350,777
13,891
364,668
2014
Total
$
1,645,233
64,141
36,490
24,676
36,983
1,807,523
543,418
-
543,418
-
12,483
12,483
-
-
-
543,418
12,483
555,901
38
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
Financial instruments in Level 1
The fair value of financial assets and financial liabilities traded in active markets are based on quoted market prices at the close of
trading on the year-end date. The quoted market price used for financial assets and financial liabilities held by the Company is the
close price. Investments classified in Level 1 include active listed equities and derivatives traded on an exchange.
Financial instruments in Level 2
Financial instruments classified with Level 2 trade in markets that are not considered to be active but are valued based on quoted
market prices, broker quotations or valuation techniques such as financial models that use market data. These valuation techniques
maximize the use of observable market data where available and rely as little as possible on entity-specific estimates. If all significant
inputs required to fair value an instrument are observable, the instrument is included in Level 2. These include corporate bonds, thinly
traded listed equities and derivatives, over-the-counter derivatives and private equities.
The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each year-end date.
Valuation techniques used for non-standardized financial instruments such as options and other over-the-counter derivatives include
the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash
flow analyses, option pricing models and other valuation techniques commonly used by market participants, making maximum use of
market inputs and relying as little as possible on entity-specific inputs.
Description
Equity securities
Private equities
Debt securities
Derivatives
Financial instruments in Level 3
Valuation technique
Quoted market prices or broker quotes for similar instruments
Valuation techniques or net asset value based on observable inputs
Quoted market prices or broker quotes for similar instruments
Quoted market prices or broker quotes for similar instruments
Investments classified in Level 3 have significant unobservable inputs, as they trade infrequently. Level 3 instruments consist of
unlisted equity investments and real estate investments. As observable prices are not available for these securities, the Company has
used valuation techniques to derive the fair value.
Level 3 valuations are reviewed by the Company’s chief financial officer (CFO), who reports directly to the Board on a quarterly basis
in line with the Company’s reporting dates. The Board considers the appropriateness of the valuation models and inputs used. On
an annual basis, close to the year-end date, the Company obtains independent, third party appraisals to determine the fair value of
the Company’s most significant Level 3 holdings. The Company’s CFO reviews the results of the independent valuations. Emphasis is
placed on the valuation model used to determine its appropriateness, the assumptions made to determine whether it is consistent with
the nature of the investment, and market conditions and inputs such as cash flow and discount rates to determine reasonableness.
As at December 31, 2015 and 2014, Level 3 instruments are in various entities and industries.
Real estate investments are disclosed in more detail in note 8, comprising investments in private real estate companies and in real
estate income trusts. The real estate companies are involved with various types of buildings in different geographical locations. For the
main Level 3 instruments, the Company relied on appraisals carried out by independent third party valuators. There was no established
market for any of these investments, so the most likely scenario is a disposal of the underlying assets. For the investments in real estate
income trusts, the Company relied mainly on audited financial statements, valuing the assets at fair value. The most likely scenario is
an eventual sale of the underlying properties and their subsequent distribution to the holders.
2015 annual report
39
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The following tables present the changes in Level 3 instruments:
As at December 31, 2014
Purchases
Sales proceeds
Distributions
Gains (losses) recognized in net income
On financial instruments held at end of year
On financial instruments disposed of during the year
Currency translation adjustments
Real estate
investments
$
Unlisted
securities
$
36,983
13,197
4,127
-
(6,061 )
6,973
-
7,340
20,956
(864 )
(2,921 )
6,956
225
4,553
2015
Total
$
50,180
25,083
(864 )
(8,982 )
13,929
225
11,893
As at December 31, 2015
49,362
42,102
91,464
As at December 31, 2013
Transfers out of Level 3
Purchases
Sales proceeds
Distributions
Gains (losses) recognized in net income
On financial instruments held at end of year
On financial instruments disposed of during the year
Currency translation adjustments
Real estate
investments
$
Unlisted
securities
$
32,441
38,605
-
5,951
(366 )
(6,603 )
2,541
-
3,019
(33,207 )
1,893
(829 )
-
4,314
297
2,124
2014
Total
$
71,046
(33,207 )
7,844
(1,195 )
(6,603 )
6,855
297
5,143
As at December 31, 2014
36,983
13,197
50,180
During the year ended December 31, 2014, Talmer Bancorp completed its initial public offering; therefore, the investment was
transferred out of Level 3.
40
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The table below presents the investments whose fair values are measured using valuation techniques classified as Level 3 as at
December 31, 2015:
Description
Fair value
(rounded)
2015
$
Valuation
technique
Significant
unobservable
inputs
Weighted
average
input
Reasonably
possible
shifts+/−
Change
in value
$
Unlisted private equity
holdings –
Software developers
Comparable
company
approach
Revenue estimate
Revenue multiple
M&A multiple
$34,000
1.74-2.03
4.13
$1,000-$3,000
10%
10%
+/-400-900
+/-400-500
+/-700
17,000
Unlisted private equity
holdings –
Internet services
Comparable
company
approach
15,000
Number of users
EV/User
80M
96.80
10M
10%
+/-900
+/-700
Unlisted private equity
holdings –
Other
Comparable
company
approach
Revenue estimate
Revenue multiple
M&A multiple
$4,000-$6,000
2.06-4.16
3.11
10,000
$1,000
10%
10%
+/-200-300
+/-100
+/-200
Real estate income
trusts (REITs)
29,000
Discounted
cash flows
Discount rate
Capitalization
rate
Discounted
cash flow term
Rental
growth rate
7.5%-20%
4.6%-9%
3-33 years
(16.7)-26.3
The REITs consist of numerous
investments in commercial
and residential properties, each
with different unobservable
inputs tailored to best estimate
their fair value. The inputs
disclosed cover the range used
for all the real estate holdings
in the REITs. A general
analysis of the change in
inputs would not reveal a fair
change in value.
Real estate investments in
private entities
Capitalization
model
20,000
Rate of
return
7.0%
1.0%
+1,900
-1,400
2015 annual report
41
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The table below presents the investments whose fair values are measured using valuation techniques classified as Level 3 as at
December 31, 2014:
Description
Fair value
(rounded)
2014
$
Valuation
technique
Significant
unobservable
inputs
Weighted
average
input
Reasonably
possible
shifts+/−
Change
in value
$
Unlisted private equity
holdings
13,000
Comparable
company
valuation
multiples
Revenue
multiple
Revenue
estimate
2.51x
10%
+/−400
$21,000
$3,000
+/−700
Real estate income
trusts (REITs)
21,000
Discounted
cash flows
Discount rate
Capitalization
rate
Discounted
cash flow term
Rental
growth rate
7.7%-11.1%
6.0%-8.0%
10 years
0.0%-10%
The REITs consist of numerous
investments in commercial
and residential properties, each
with different unobservable
inputs tailored to best estimate
their fair value. The inputs
disclosed cover the range used
for all the real estate holdings
in the REITs. A general anal-
ysis of the change in inputs
would not reveal a fair change
in value.
Real estate investments
in private entities
16,000
Capitalization
model
Rate of
return
6.0%
1.0%
+2,000
−1,400
Assets and liabilities not carried at fair value but for which fair value is disclosed
The carrying amount of cash and cash equivalents, restricted short-term investments, due from brokers, bank advances, credit
facilities, trade and other payables, due to brokers, redemptions payable, and subscriptions received in advance represent a
reasonable approximation of their respective fair value due to their short-term nature.
42
2015 annual report
Notes to Consolidated Financial Statement
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
16 Disclosure of the composition of the company
Principal subsidiaries and structured entities
The consolidated financial statements include the accounts of the Company and all of its subsidiaries and structured entities as at
December 31, 2015 and 2014. The principal operating subsidiaries and structured entities and their activities are as follows.
Name
Senvest International L.L.C.
Senvest Global (KY) L.P.
Senvest Global L.P.
RIMA Senvest Master Fund GP L.L.C.
Senvest Global GP Inc.
Argentina Capital Inc.
Pennsylvania Properties Inc.
Senvest Equities Inc.
Senvest Fund Management Inc.
Senvest Management L.L.C.
Senvest Master Fund, L.P.
Senvest Israel Partners, L.P.
Senvest Cyprus Recovery Investment
Partners, L.P. Fund
Senvest ARU Investments Ltd.
A.R.U. Cyprus Equities and
Investments Ltd.
Punto Box SL
Country of
incorporation
United States
Cayman Islands
United States
United States
Canada
Canada
United States
Canada
United States
United States
Cayman Islands
United States
Cayman Islands
Canada
Cyprus
Spain
% Interest held
2015
2014
-
100
100
-
-
100
100
100
100
-
41
44
59
100
80
100
100
-
-
-
-
100
100
100
100
-
44
48
59
100
80
100
Nature of
business
Investment company
Investment company
Investment company
General partner of Senvest
Master Fund, L.P.
General partner of Senvest
Global (KY) L.P and
Senvest Global L.P
Real estate
Real estate
Investment company
Investment company
Investment manager
of the Funds
Investment fund
Investment fund
Investment fund
Investment company
Investment company
Real estate
The total non-controlling interest for the year is $3,210 (2014 – $30,393), which is mostly attributed to Senvest Management L.L.C. The
change in redemption amount of liability for redeemable units for the year is $(116,873) (2014 – $80,407), all of which is attributed
to the Funds.
As part of an internal reorganization, on October 1, 2015, the Company wound up its Senvest International L.L.C. wholly owned
subsidiary and transferred significantly all of the net assets to a new wholly owned entity Senvest Global (KY) L.P. This new entity
will now be managed by Senvest Management L.L.C. going forward. As a result all of the employees of Senvest International became
employees of Senvest Management. The results of Senvest Global will be consolidated into the accounts of the parent company the
same way that Senvest International was.
No guarantees or collateral were provided to the subsidiaries and structured entities. The Company is not liable for any contingent
liabilities arising in its subsidiaries and structured entities and will not settle any liabilities on their behalf.
2015 annual report
43
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
17 Related party transactions
Key management compensation
Key management includes the Board, the president and chief executive officer, the vice president, the secretary treasurer and the chief
financial officer. The compensation paid or payable to key management for employee services is as follows:
Salaries and other short-term employee benefits
Post-employment benefits – Defined contribution
Share-based payments
Management fees
2015
$
1,458
38
749
2,245
2014
$
16,983
36
1,118
18,137
Certain employees and related parties that have invested in the Funds do not pay management fees that are charged to outside
investors. The amount invested by these participants totals $56,693 (2014 – $53,078).
18 Commitments
a) The future minimum rental payments for premises under long-term leases are as follows:
2016
2017
2018
2019
2020
Thereafter
$
1,421
1,427
1,280
1,319
1,375
1,177
b) As required by certain of the Company’s equity investments and other holdings, the Company has capital commitments of $526.
c) As required by certain of the Company’s real estate investments and other holdings, the Company has capital commitments of $776.
44
2015 annual report
Notes to Consolidated Financial Statements
DECEMBER 31, 2015 AND 2014
(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
19 Segmented and geographical information
The Company operates in a single reportable segment, which is the management of its own investments and those of the Funds.
The following tables summarize the Company’s revenues by geographical area for the years ended December 31:
United
States
$
7,723
2,749
23
United
States
$
8,480
2,188
110
Rest of
European
Union
$
1,473
121
20
Canada
$
(11 )
166
303
Rest of
European
Union
$
1,246
323
43
Canada
$
(1,201 )
196
381
Great
Britain
$
(89 )
15
-
Great
Britain
$
24
7
-
Argentina
$
119
-
-
Argentina
$
148
-
-
2015
Total
$
11,920
3,285
346
2014
Total
$
8,811
2,790
534
Other
$
2,705
234
-
Other
$
114
76
-
Revenue
Net dividend income
Interest income
Other income
Revenue
Net dividend income
Interest income
Other income
2015 annual report
45
Board of Directors
Officers
Victor Mashaal
Chairman of the Board & President
Frank Daniel
Secretary-Treasurer
Richard Mashaal
Vice-President
George Malikotsis C.A., C.P.A.
Vice-President, Finance
Senvest Capital Inc.
1000 Sherbrooke West, Suite 2400
Montréal (Québec) H3A 3G4
(514) 281-8082
Victor Mashaal
Chairman of the Board & President
Senvest Capital Inc.
*Ronald G. Assaf
Business Executive
Frank Daniel
Secretary-Treasurer
Senvest Capital Inc.
*David E. Basner
Business Executive
*Jeffrey L. Jonas
Partner, Brown Rudnick Verlack Israel L.L.P.
Richard Mashaal
Vice-President
Senvest Capital Inc.
*Member of the Audit Committee
Investor Information
AUDITORS
PricewaterhouseCoopers L.L.P.
Montréal (Canada)
LEGAL COUNSEL
Howard M. Levine
Blake, Cassels & Graydon L.L.P.
600, de Maisonneuve West, Suite 2200
Montréal (Québec) H3A 3J2
TRANSFER AGENT & REGISTRAR
Computershare Trust Company of Canada
1500 Robert-Bourassa Boulevard
7th Floor
Montréal (Québec) H3A 3S8
Computershare Trust Company of Canada
1000 University Street
Toronto (Ontario) M5J 2Y1
46
2015 annual report