Financial Highlights
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
(years ended December 31)
2016
$
2015
$
2014
$
2013
$
2012
$
SUMMARY OF OPERATIONS
Total revenues and investment gains (loss)
335,828
Net income (loss)
Diluted earnings (loss) per share
117,181
34.50
(166,763)
(111,261)
(35.39)
297,551
141,179
41.26
489,676
154,035
243,324
73.20
81,470
25.65
FINANCIAL DATA
Total assets
Total equity
COMMON STOCK INFORMATION
2,563,217
942,562
2,146,380
856,290
2,020,142
821,740
1,400,326
630,362
728,409
358,831
The company’s common shares are listed on the Toronto Stock Exchange under the symbol SEC.
FISCAL QUARTER
First
Second
Third
Fourth
2016
2015
$
$
High
153.00
173.00
154.00
181.99
Low
122.42
126.00
134.91
148.47
High
169.00
198.00
200.00
165.51
Low
151.07
166.13
160.25
151.05
TOTAL ASSETS ($ thousands)
TOTAL EQUITY ($ thousands)
BOOK VALUE PER SHARE
2,563,217
942,362
304.00
2,146,380
2,020,142
856,290
821,740
1,400,326
630,362
728,409
358,831
276.00
264.00
201.69
117.50
2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
2016 annual report
1
OVERALL PERFORMANCE
The biggest global story in the fourth quarter was the historic
and surprising outcome of the U.S. Presidential election.
Following the Donald Trump victory, U.S. equity markets
moved higher, confounding expectations of many that a Trump
win would damage equity markets. As Trump kept rising in
the polls prior to Election Day, stocks had moved lower. In
fact, U.S. equities fell for nine straight sessions up to the Friday
before November 8, the longest losing streak since 1980, “…as
investors grew increasingly nervous about the rising odds of
Republican presidential hopeful Donald Trump prevailing over
Democratic rival Hillary Clinton” (CBS News). After an initial
plunge of more than 5% in the S&P 500 futures by midnight of
Election Day (CNBC), which seemed to confirm investor fears
about a Trump win, equity markets surprised nearly everyone
and rallied. An explanation for the about-face in sentiment
stems from Trump’s pro-business stance and expected policy
moves which many perceive will stimulate growth. These
policies include cuts to corporate income tax rates (which
directly should boost net income); lower personal federal
income tax rates (which should boost consumer discretionary
income); reduction in regulations (which should lower both
corporate expenses and friction in conducting business); and
a major infrastructure spending program (which should boost
investment and economic activity). Most of the benefits of
these policies should flow to domestically focused firms. Not
surprisingly, the Russell 2000 index, comprised of smaller cap,
domestic stocks, outperformed the S&P 500 index, comprised
of large cap, more multi-national stocks, from the close of
November 7 until the year end.
As we move into 2017, we would like to make some
observations about the state of equity markets. First, due
to expectations after the US election, there is an argument
that earnings for domestic companies could be going higher,
(though difficult to quantify yet), due to expected lower
income tax rates, regulatory relief and multiplier effects on the
economy from infrastructure spending and lower consumer
tax rates. Second, there has been some evidence of the return
of “animal spirits” that goes beyond the stock market. The
Reuters/University of Michigan consumer sentiment index
rose to 98.0 in a fourth quarter survey, its highest level of
2016 and the second highest reading since January 2004. The
Wells Fargo/Gallup Small Business Index rose 12 points to a
level of 80 in Q4, its third increase in the past four quarters
and its highest level since Q1 2008. A survey-record of 36%
of respondents expected to increase hiring in 2017. The post-
election results of the Duke University/CFO Magazine Global
Business Outlook Optimism Index show that it jumped to its
highest level in nearly a decade. Third, technical factors could
also support equity prices. Since the election, there has been
a notable inflection in the flow of funds into domestic equity
mutual funds and ETFs. The Investment Company Institute
reported that domestic equity mutual funds and ETFs had
outflows of -$107 billion in 2015, and another -$109 billion
of outflows through October 31 2016. In the five weeks after
the election, things turned around dramatically with inflows
amounting to +$23 billion. In summary, the net result of these
three factors: higher earnings (better fundamentals) + more
optimism (animal spirits) + equity inflows (better technicals)
= tailwinds into 2017. With this as a backdrop many market
participants feel optimistic about the prospects for the market
in 2017.
2
President Trump has ushered in a new paradigm in U.S.
government and the power of the bully pulpit. The element
of uncertainty he projects seems to be the defining feature of
his leadership. Traditionally, financial markets react poorly
to uncertainty, yet so far equity investors have embraced his
election. One might attribute this positive reception to the
trade-off between a willing acceptance of uncertainty against
the potential for significant policy change that he can foment
by using this “keep them guessing” strategy as a negotiating
tactic. This tension between uncertainty and fundamental
change will no doubt get reflected through the ups and downs
of the equity markets ahead. At Senvest we have always
been staunch believers in the American economic system and
generally operate with a “cup-half-full” disposition. Until we
see otherwise with likely policy implementation (even though
we do not agree with many of Mr. Trump’s positions), we
simply remain watchful of Trump’s potential policy impact
on global trade and geo-politics that could have longer term
implications for equities.
Senvest Capital Inc (“Senvest” or the “Company”) bounced
back in 2016, a year filled with surprises. We entered 2016 with
the Russell 2000 in a bear market and one of the worst starts
to a year ever. Worries of a potential recession seemed to pre-
occupy pundits and investors. In the past, we have discussed
how we look beyond the noise and worry and take a clinical
approach to macro and market data, and our belief was that it
didn’t portend a recession in 2016. In addition to worries about
the economy, unexpected tectonic political developments – the
Brexit vote in the UK and the Presidential election of Donald
Trump - sparked equity markets higher, contrary to the dire
expectations of many market “experts.” We experienced losses
in the first quarter of 2016 which were mostly unrealized,
mark-to-market losses but we were profitable for the rest of
the year. Most of the major benchmarks were also up for the
year after a rough beginning. At Senvest, we don’t manage our
portfolio in response to every market shift but rather keep an
eye on the data and hold a portfolio built from “bottoms-up”
stock picking. We believe that investing in un-loved, under-
appreciated, misunderstood and therefore undervalued stocks
represents a timeless strategy.
Some of our largest holdings as at December 31, 2016 were,
Tower Semiconductors (TSEM), Paramount Resources (POU),
Deckers Outdoor (DECK), Depomed (DEPO), Radware (RDWR)
and Northstar Realty Finance (NRF). Of this group, TSEM, POU
and NRF increased in price in the fourth quarter while DECK
and DEPO declined in price. TSEM led the way with a 25%
price increase in Q4 and was the largest gainer in the quarter,
while DEPO was our largest loser. TSEM, POU and Ceva
(CEVA) were our largest gainers for the 2016 year as a whole.
Activist investor Starboard Value LP (“Starboard”) which had
filed a 13D which indicated it owned a 9.8% stake in DEPO
reached an agreement in October with the company to allow
certain Starboard representatives on the DEPO board. NRF,
asset manager NorthStar Asset Management (“NSAM”) and
institutional asset management REIT Colony Capital (CLNY)
completed their three way stock merger in January 2017. The
new entity is called Colony Northstar (CLNS).
Senvest recorded a net income attributable to the owners of
the parent of $96.8 million or $34.50 per basic and diluted
common share for the year ended December 31, 2016. This
compares to net loss attributable to owners of the parent of
($99.8) million or ($35.39) per basic and diluted common
Management’s Discussion and Analysis2016 annual report share for the 2015 year. After a 2015 year where there was
significant appreciation in the US dollar versus the Canadian
dollar, 2016 resulted in a reversal of some of that appreciation.
For the 2016 year the result has been a currency translation
loss of about $24.7 million. This amount is not reported in
the Company’s income statement rather it is reflected in its
Comprehensive income.
The Company’s income from equity investments in 2016
as a whole was the biggest contributor to the net income
recorded and offset the losses on equity investments incurred
earlier in the year. The net gain on equity investments and
other holdings (and also equities sold short and derivative
liabilities) totalled $322 million in the current year versus a
loss of ($225.1) million in 2015. In the fourth quarter the net
gain on equity investments totalled $63.3million. Due to the
depreciation of the US dollar versus other major currencies,
our foreign exchange loss for the year was approximately $6.5
million.
The Senvest Master Fund (Senvest Partners fund) is focused
primarily on small and mid-cap companies. The fund recorded
a profit of 23.25% net of fees for the year, and was up more
than 3% in the fourth quarter. Since inception in 1997 the
fund is up over 2700%. With most of the long portfolio
invested in small and mid-cap stocks, the fund outperformed
its most relevant benchmark the Russell 2000 for the year. The
fund has also outperformed the S&P 500 index for the year
but does not consider the S&P 500 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 profit of 14.4% net of fees for the year 2016, and was up
more than 4% in the fourth quarter. Since inception the Israel
fund is up over 1000%. The two funds had a total of over $1
billion of net assets under management at December 31, 2016.
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. The value of this investment
declined by over 10% in 2016. The investment period of the
fund was recently extended until December 2018 and there
will be an option to further extend this to December 2019.
BOC Management followed through and listed the bank’s
shares on the FTSE on January 19, 2017. As per the bank’s
circular, the listing “is expected to improve the liquidity of
the BOC’s shares, which will enhance BOC’s visibility and
lead to a broader base of investors capable of supporting BOC
in the long-term. A dual listing (on the LSE and the CSE)
is expected to enhance interest in the BOC Group and draw
attention to Cyprus’ well performing economy. This should
further enhance the confidence of all stakeholders in the
BOC. Furthermore, a listing on the LSE will help position BOC
amongst a broader group of international peers.” BOC will no
longer maintain a listing on the Athens Exchange as it no
longer conducts banking activities in Greece but will remain
listed on the CSE, in order to enable easy access to its shares
for domestic Cypriot holders.
In order to achieve the LSE listing and gain eligibility to enter
the “premier” market, which should warrant inclusion in the
FTSE UK index series, the Bank has established a new holding
company in Ireland, Bank of Cyprus Holdings, (“BOCH”), as
the ultimate holding company of the Group. The introduction
of the new parent company was carried out by a formal
procedure, known as the “scheme of arrangement”, under
Cypriot company law. The scheme was approved by 99.7% of
the shareholders at an Extraordinary General Meeting (“EGM”)
that was convened for this purpose on December 13, 2016,
and also sanctioned by the Nicosia District Court on December
21 2016. Under the scheme, existing shares were cancelled,
and shareholders received one BOCH share for each 20 BOC
shares cancelled, so as to maintain their existing percentage
ownership of the Group.
On January 5, 2017 the bank announced the full repayment of
the Emergency Liquidity Assistance (ELA) funding. The bank
has repaid €11.4 billion of ELA since 2013, including €3.8 billion
since the beginning of 2016. The repayment of ELA is another
significant milestone for BOC in its journey back to strength
since 2013. This repayment was achieved through a number
of actions including the recapitalization of the bank in 2014
(when we made our investment), an extensive deleveraging
of non-core assets and operations, a significant increase in
customer deposits over the past two years, the repayment and
maturity of Cyprus Government bonds, and the conversion
of assets into ECB eligible collateral. According to BOC CEO
John Hourican, “The full repayment of ELA funding has been
a strategic objective of the Bank over the past three years and
signifies the normalization of the Bank’s funding structure.
This should further strengthen stakeholder confidence that
the Bank is becoming a stronger, safer and a more focused
institution capable of delivering appropriate shareholder
returns over the medium term.” The ELA repayment conveys a
message to market participants of a fully normalized European
bank and enables the bank to pay less for new deposits while
removing a significant obstacle that had prevented the premier
LSE listing, and the potential future payment of dividends.
The bank successfully launched and priced a €250 million Tier
2 unsecured, subordinated 10-year bond on January 12, 2017,
which we participated in. The issue was oversubscribed and
priced at par with a coupon of 9.25%. The issuance marked
the successful return of BOC to debt capital markets and
was another significant milestone for the bank. The issuance
should have a positive impact on the Bank’s total capital ratio.
Following the €250 million Tier 2 bond issuance in January
2017, the bank estimated its total capital increased to about
15.9%, providing a sizeable cushion above minimum total
capital requirements.
The Company has a portfolio of real estate investments,
investing as a minority partner in selected properties. Real
estate investments totalled $37.8 million as at December
31, 2016. About $17.3 million 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. The
decrease in total real estate investments of about $11.5 million
from the prior year was not due to a decline in fair values but
rather to net distributions of about $15m. These current year
distributions were received mostly from the REITs.
3
Management’s Discussion and Analysis2016 annual report 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. After two years of rising operating costs, there
was a decrease in such costs for the 2016 year. However total
expenses for 2016 were 15% more than 2015 as a result of
a large increase in employee costs due to higher incentive
compensation incurred over the prior year.
The Company consolidates the Senvest Management LLC entity
that serves as the investment manager of Senvest Partners
and Senvest Israel Partners as well as the general partners
of the funds. The portion of the expected residual returns
of structured entities that do not belong to the Company is
reflected as a non-controlling interest on the statement of
financial position. This non-controlling interest is owned by
an executive of the Company and totalled $98.1 million as at
December 31, 2016 from $80 million as at December 31, 2015.
At the end of December 31, 2016, Senvest had total consolidated
assets of $2,563.2 million versus $2,146.4 million at the end
of 2015. The main reason for this was the change in equity
investments and other holdings. Equity investments and other
holdings increased to $2,289.3 million from $2,036.3 million
last December. The Company purchased $1,008.6 million of
investment holdings in the year and sold $924.8 million of
such holdings. Both amounts were less than the prior year.
The Company’s liabilities increased to $1,620.7 million
versus $1,290.1 million at the end of 2015. One of the main
contributors to this increase was due to the larger liability
for redeemable units. The primary reason for the increase in
this account was the appreciation of the interests of the non-
Senvest investors in the funds. In addition the equities sold
short and derivative liabilities also increased significantly
from the prior year. The proceeds of equities sold short were
$1,675.2 million and the amount of shorts covered was
$1,208.9 million in the year. This net selling resulted in a large
increase in our short position. As with the longs, both these
figures were less than the amounts for the prior year. The 2016
year, as a whole, was a less volatile year than 2015 and as
result there was less trading that took place.
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.
4
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.
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, 2016, the Company had 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 monetary 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 Company has foreign currency exposure to the Canadian
dollar, the British pound sterling, the Euro, the Norwegian
krone, the Japanese yen, and the Israeli shekel.
Equity price risk
Equity price risk is the risk that the fair value of equity
investments and other holdings and equities sold short and
derivatives 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 and derivatives 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.
Management’s Discussion and Analysis2016 annual report
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. In
addition the Company has entered into derivative financial
instruments which have a notional value greater than their
fair value which is recorded in the financial statements. This
creates a risk that the Company could settle these instruments
at a value greater or less than the amount that they have been
recorded in the 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 derivatives 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 derivatives. The Company closely monitors both its
equity investments and other holdings and its equities sold
short and derivatives.
The impact of a 30% change in the market prices of the Company’s equity holdings with quoted value and derivatives equities sold
short and derivative liabilities as at December 31, 2016 would be as follows (in thousands):
Equity holdings-listed securities
Equities sold short and derivative
liabilities
Before-tax impact on net earnings
Fair value
2,194,242
(727,598)
Estimated fair value
30% price increase
Estimated fair value
30% price decrease
2,852,515
(945,877)
439,993
1,535,969
(509,319)
(439,993)
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.
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 options and warrants
to purchase or sell equities, equity indices and currencies,
equity swaps, foreign currency forward contracts, and foreign
currency futures contracts. These derivative instruments are
marked to market. There is deemed to be no credit risk for
futures and certain 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.
Equity swaps represent future cash flows that are agreed to
be exchanged between the Company and counterparties at set
dates in the future. Foreign currency forward contracts are
contracts to buy or sell foreign currencies at a specified price
at a future point in time.
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):
Total liabilities
Total common equity
Debt to Capital ratio
December 31,
2016
December 31,
2015
$1,620.7
$ 942.6
1.72
$1,290.1
$856.3
1.51
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 increased to 1.72 at the end of December 2016 from 1.51
at the end of 2015.
5
Management’s Discussion and Analysis2016 annual report The Company tries to manage the above risks by monitoring its
leverage, actively following its investee companies and trying
to react to market conditions. At the same time the Company
expects its portfolio to exhibit a higher degree of volatility
than portfolios that invest in larger more stable companies
and that invest within more defined limits. As at December
31 2016 over 92% of the Company’s portfolio was invested in
Level 1 securities. The Company monitors its Level 1 securities
as percentage of its total investments however it does not have
a fixed number that this percentage cannot fall below.
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
statements. These estimates have a significant risk of causing
a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.
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 LLC (SML), RIMA Senvest Master
Fund GP LLC, and Senvest Israel Partners GP LLC., three
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 of Senvest Master
Fund LP and Senvest Israel Partners GP LLC is the General
Partner of Senvest Israel Partners Master Fund LP.
Management considers that the Company has control of Senvest
Master Fund LP, Senvest Israel Partners Master Fund 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 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
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.
Fair value estimates of financial instruments
The fair value of financial instruments where no active market
exists or where quoted 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 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. Changes in assumptions about these factors
could affect the reported fair value of financial instruments.
Investment Risk
To the extent not discussed above the Company is subject to
additional risks with respect to the investments made.
The value of the Company’s portfolio may decrease as well as
increase, due to a variety of factors, including general economic
conditions, and market factors. Additionally, investment
decisions made by the Company may not always be profitable
or prove to have been correct. Investment strategies, at any
given time, may incur significant losses. Losses can occur for
a number of reasons, including but not limited to an overall
decline in the underlying market, a lack of liquidity in the
underlying markets, excessive volatility in a particular market,
government intervention or monetary and/or fiscal policies of
a specific region or country. The profitability of a significant
portion of the Company’s investments also depends to a great
extent upon the Company’s ability to correctly assess the
future course of the price movements of securities and other
investments. There can be no assurance that the Company
will be able to accurately predict these price movements.
The Company’s investment strategy is speculative and involves
risk. The Company trades in options and other derivatives, as
well as using short sales and utilizing leverage. The portfolio
may not be diversified among a wide range of issuers or
industries. In addition, the Company may take concentrated
positions in its high conviction ideas, invest in high yield
securities or invest in foreign markets outside the US and
Canada. Accordingly, the investment portfolio may be subject
to more rapid change in value than would be the case if the
Company were required to maintain a wide diversification in
the portfolios among industries, areas, types of securities and
issuers.
The Company may make investments in the securities of high
growth companies. More specifically the Company may have
significant investments in smaller-to-medium sized companies
with market capitalizations of less than $2 billion US. While
smaller companies may have potential for rapid growth, they
often involve higher risks because they lack the management
experience, financial resources, product diversification, and
competitive strengths of larger corporations. These factors
make smaller companies far more likely than their larger
counterparts to experience significant operating and financial
setbacks that threaten their short-term and long-term viability.
In addition, in many instances, the frequency and volume
of their trading is substantially less than is typical of larger
companies. As a result, the securities of smaller companies may
be subject to wider price fluctuations, and exiting investments
in such securities at appropriate prices may be difficult, or
subject to substantial delay. Furthermore some of the portfolio
may be invested in technology, technology-related markets
and biotech. These types of companies may allocate greater
than usual amounts to research and product development. The
securities of such companies may experience above-average
price movements associated with the perceived prospects of
success of the research and development programs. Also these
companies could be adversely affected by lack of commercial
acceptance of a new product or products or by technological
change and obsolescence. Some of these companies may have
limited operating histories. As a result, these companies may
face undeveloped or limited markets, have limited products,
have no proven profit-making history, operate at a loss or
with substantial variations in operating results from period
to period, have limited access to capital and/or be in the
developmental stages of their businesses.
6
Management’s Discussion and Analysis2016 annual report 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 92% 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 less than 4% 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 less than 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 2016, 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. Senvest Cyprus
Recovery Investment Fund LP has units that cannot be redeemed
until December 2018. 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.
7
Management’s Discussion and Analysis2016 annual report QUARTERLY RESULTS
(In thousands except for earnings (loss) per share information)
Year
2016-4
2016-3
2016-2
2016-1
2015-4
2015-3
2015-2
2015-1
Total revenue
and investments
gain (loss)
Net income
(loss) –owners
of the parent
Earnings (loss)
per share
64,623
328,896
73,023
(130,714)
16,102
(286,928)
(50,115)
154,177
26,923
109,942
14,748
(54,830)
5,470
(143,444)
(29,819)
67,965
9.67
39.08
5.22
(19.47)
1.99
(50.72)
(10.87)
24.33
CONTRACTUAL OBLIGATIONS
(In thousands)
Less than 1 year
1-3 years
4-5 years
Due to Brokers
Operating leases
Investment commitments
Total
56,754
1,391
8,635
66,780
-
2,536
-
2,536
-
2,490
-
Total
56,754
6,417
8,635
2,490
71,806
SELECTED ANNUAL INFORMATION
(In thousands except for earnings (loss) per share information)
Total revenue and investment gains (loss)
Net income (loss) – owners of the parent
Earnings (loss) per share
2016
335,828
96,783
34.50
2015
(166,763)
(99,826)
(35.39)
2014
297,551
117,298
41.26
Total assets
2,563,217
2,146,380
2,020,142
The Company has had wide swings in profitability from quarter
to quarter in the past two years, as seen above. Of the eight
most recent quarters, there have been five profitable quarters
and three losing quarters. Also the highest earning quarter
showed a profit of over $100 million and the least profitable
quarter had a loss of over $100 million. These wide swings are
primarily due to the large quarterly mark to market adjustments
in the Company’s portfolio of public holdings. If we examine
the 2016 year on its own, the first quarter showed a large loss
while the three remaining quarters showed profitability. This
pattern followed the US stock markets, which had a difficult
first part of the year followed by a profitable period up to
the end of the year. However we expect the volatility and
choppiness of the markets to result in wide profit swings from
year to year and from quarter to quarter. Reference is made to
the section on Investment risk above.
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 27, 2016 Senvest commenced a new normal course
issuer bid to purchase a maximum of 56,000 of its own
common shares until June 26, 2017. There were 39,800 shares
repurchased under the bid during the 2016 year. The number
of common shares outstanding as at December 31, 2016 was
2,777,824 and as at March 10, 2017 was 2,774,724. There were
no stock options outstanding as at December 31 2016.
The Company has financing with a bank, composed of a credit
facility and a guarantee facility. 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. The
Company also has margin facilities with brokers.
8
Management’s Discussion and Analysis2016 annual report Impact of Certain Income Tax Rules and Upcoming IFRS
OTHER FINANCIAL INFORMATION
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
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.
For the Company the proposed IFRS standards for Revenue and
Leases are expected to have a low impact on accounting policies
and procedures and the internal control environment. The
proposed IFRS 9 standard on Financial Instruments is expected
to have an impact on financial statement disclosure rather than
classification and measurement.
Related party transactions
The Company consolidates the Senvest Management LLC entity
that serves as the investment manager of Senvest Partners and
Senvest Israel Partners as well as the general partners of the
funds. The portion of the expected residual returns of structured
entities that do not belong to the Company is reflected as a
non-controlling interest on the statement of financial position.
This non-controlling interest is owned by an executive of the
Company and totalled $98.1 million as at December 31, 2016
from $80 million as at December 31, 2015.
There is additional financial information about the Company on
Sedar at www.sedar.com and on the Company’s website at www.
senvest.com, as well the Company’s or Senvest Management’s
U.S. SEC section 13 and other filings on www.sec.gov.
INTERNAL CONTROLS
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed
by us in reports filed or submitted under Canadian securities
laws is recorded, processed, summarized and reported within the
time periods specified under those laws, and include controls
and procedures that are designed to ensure that the information
is accumulated and communicated to management, including
Senvest’s President and CEO and Vice-President and CFO, to allow
timely decisions regarding required disclosure. As at December 31,
2016, management evaluated, under the supervision of and with
the participation of the CEO and the CFO, the effectiveness of our
disclosure controls and procedures, under National Instrument
52-109 – Certification of Disclosure in Issuers’ Annual and Interim
Filings. Based on that evaluation, the CEO and CFO concluded
that our disclosure controls and procedures were effective as at
December 31, 2016.
Significant Equity Investments
Internal control over financial reporting
For information on a summary of financial information from
certain significant investees please refer to the 2016 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”,
“think” 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 30, 2017 and will not be updated or revised
except as required by applicable securities law.
Management is responsible for establishing and maintaining
adequate internal control over financial reporting under National
Instrument 52-109. Our internal control over financial reporting
is a process designed under the supervision of the CEO and CFO to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with IFRS. However, because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements on a timely basis. Management
evaluated, under the supervision of and with the participation
of the CEO and the CFO, the effectiveness of our internal control
over financial reporting as at December 31, 2016, based on the
criteria established in the Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on that evaluation, the
CEO and CFO concluded that our internal control over financial
reporting was effective as at December 31, 2016. There have
been no changes during the year ended December 31, 2016 in
our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Victor Mashaal
Chairman of the Board and President
March 30, 2017
(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, 2016, and should
be read in conjunction with the 2016 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 reasonable,
but caution the reader that these assumptions regarding future events, many of which are beyond our
control may ultimately prove to be incorrect.)
9
Management’s Discussion and Analysis2016 annual report
Management’s Report
The consolidated financial statements for the fiscal year ended December 31, 2016 and December 31, 2015, 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 30, 2017
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, 2016 and 2015 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.
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, 2016 and 2015 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 30, 2017
10
2016 annual reportThe notes on pages 16 to 46 are an integral part of these consolidated financial statements. Consolidated Statements of Financial Position
AS AT DECEMBER 31, 2016 AND 2015
(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
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
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
5(b)
6
10(b)
11
2016
$
26,978
459
191,602
2015
$
29,926
458
11,449
2,289,288
2,036,287
12,461
37,812
-
4,617
14,047
49,362
127
4,724
2,563,217
2,146,380
509
20,055
56,754
727,644
2,299
3,315
1,253
47,599
761,227
252
8,876
236,310
364,668
1,869
3,086
1,191
42,501
631,337
1,620,655
1,290,090
23,057
180,596
640,816
844,469
98,093
23,376
203,142
549,774
776,292
79,998
942,562
856,290
2,563,217
2,146,380
11
2016 annual reportThe notes on pages 16 to 46 are an integral part of these consolidated financial statements.
Consolidated Statements of Income (Loss)
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(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 (loss) of associates
Foreign exchange gain (loss)
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
Note
7
2016
$
4,184
10,561
810
2015
$
3,285
11,920
346
15,555
15,551
321,977
5,258
(505)
(6,457)
(225,105)
6,973
2,373
33,445
320,273
(182,314)
335,828
(166,763)
27,769
-
18,669
7,960
9,917
12,563
228
17,088
9,042
16,867
64,315
55,788
133,726
(116,873)
137,787
(105,678)
Income tax expense
10(a)
20,606
5,583
Net income (loss) for the year
Net income (loss) attributable to:
Owners of the parent
Non-controlling interests
117,181
(111,261)
96,783
20,398
(99,826)
(11,435)
Earnings (loss) per share attributable to owners of the parent:
Basic and diluted
12(a)
34.50
(35.39)
12
2016 annual reportThe notes on pages 16 to 46 are an integral part of these consolidated financial statements. Consolidated Statements of Comprehensive Income
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(IN THOUSANDS OF CANADIAN DOLLARS)
Net income (loss) for the year
Other comprehensive income (loss)
Currency translation differences
Comprehensive income for the year
Comprehensive income attributable to:
Owners of the parent
Non-controlling interests
2016
$
2015
$
117,181
(111,261)
(24,667)
149,104
92,514
37,843
74,237
18,277
34,633
3,210
Other comprehensive income is composed solely of items that will not be reclassified subsequently to net income (loss).
13
2016 annual reportThe notes on pages 16 to 46 are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Equity
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(IN THOUSANDS OF CANADIAN DOLLARS)
Equity attributable to owners of the parent
Share
capital
$
Note
Accumulated
other
comprehensive
income
$
Retained
earnings
$
Non-
controlling
interests
$
Total
$
Total
equity
$
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
-
-
-
-
(99,826)
(99,826)
(11,435)
(111,261)
134,459
-
134,459
14,645
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
Net income for the year
Other comprehensive income
Comprehensive income (loss) for the year
-
-
-
-
96,783
96,783
(22,546)
-
(22,546)
20,398
(2,121)
117,181
(24,667)
(22,546)
96,783
74,237
18,277
92,514
Repurchase of common shares
11
(319)
Contribution from non-controlling interests
Distributions to non-controlling interests
-
-
-
-
-
(5,741)
(6,060)
-
-
-
-
-
1,590
(1,772)
(6,060)
1,590
(1,772)
Balance – December 31, 2016
23,057
180,596
640,816
844,469
98,093
942,562
14
2016 annual reportThe notes on pages 16 to 46 are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(IN THOUSANDS OF CANADIAN DOLLARS)
Note
2016
$
2015
$
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
Net cash used in operating activities
Investing activities
Transfers to restricted short-term investments
Purchase 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
Net cash used in investing activities
Financing activities
Contribution from non-controlling interests
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 (decrease) 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
13(a)
13(b)
117,181
(186,721)
(111,261)
92,707
(1,008,552)
(1,408,240)
(1,208,881)
(2,116,922)
924,817
1,675,155
15,662
(336,884)
(8,223)
1,274,906
1,834,513
6,061
359,734
(68,502)
(15)
(520)
78
(4,127)
(3,956)
(12,547)
2,674
647
922
1,178
(1,170)
(14,496)
1,590
(1,772)
262
-
(6,060)
-
35,243
(21,929)
7,334
(2,059)
(889)
29,926
26,978
7,737
6,051
4,607
16,044
15,538
-
(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
15
2016 annual reportThe notes on pages 16 to 46 are an integral part of these consolidated financial statements. 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 15 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 30, 2017.
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 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 (loss). 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 (loss).
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 (loss). 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 Master Fund, L.P. and Senvest
Cyprus Recovery Investment Fund, L.P. (together, the Funds
or individually, the Fund) that are not owned by the Company.
Senvest Master Fund, L.P. and Senvest Israel Partners Master Fund,
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
Master Fund, 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 Fund, L.P. has units that cannot be redeemed
until July of 2017. These units are recognized initially at fair value,
net of any transaction costs incurred, and subsequently units are
measured at the redemption amount.
16
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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 (loss) and comprehensive income (loss) 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 (loss).
All foreign exchange gains and losses are presented in the
consolidated statement of income (loss) in foreign exchange gain
(loss).
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
(loss) 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 (loss) related to the foreign operation are
recognized in net income (loss). 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 (loss) 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 (loss) 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
derivatives 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. The Company does not classify any derivatives
as hedges in a hedging relationship.
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.
17
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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 (loss). 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 and financial liabilities designated as fair
value through profit or loss
Financial assets and financial liabilities 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 (loss).
Subsequent to initial recognition, all financial assets and
financial liabilities 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 (loss) 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 (loss) 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 the consolidated statement of income (loss)
in interest income based on the effective interest rate.
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.
c) Financial liabilities at amortized cost
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.
18
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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 (loss) 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.
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
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.
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
instrument using the effective interest method.
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 (loss).
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.
19
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
• 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 at
fair value through profit or loss, fair value through other
comprehensive income 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 at fair value through profit or loss. 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 on its
gross carrying amount. Finally, IFRS 9 introduces a new
hedge accounting model that aligns 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.
• IFRS 16, Leases, was published in January 2016 by the IASB.
This standard will replace the current guidance in IAS 17,
Leases, 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 is adopted. The Company is currently assessing the impact
of this standard on the consolidated financial statements.
• IFRS 10, Consolidated Financial Statements, and IAS 28,
Investments in Associates and Joint Ventures, were amended
in 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.
Earnings per share
Basic earnings per share is calculated by dividing the net income
(loss) 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.
New and amended accounting standard adopted in 2016
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, 2016:
• IAS 1, Presentation of Financial Statements, was amended
to clarify guidance on materiality and aggregation, the
presentation of subtotals, the structure of financial statements
and the disclosure of accounting policies. The Company
determined that the adoption of the amended standard had no
significant impact on its 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, 2017 and have not been applied in preparing
these consolidated financial statements. The Company has not
early adopted this standard and 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.
20
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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 fiscal year.
Management considers the Company to have control of Senvest
Master Fund, L.P., Senvest Israel Partners, Master Fund L.P. and
Senvest Cyprus Recovery Investment Fund, 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.
Fair value of financial instruments
4 Cash and cash equivalents
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 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.
Changes in assumptions about these factors could affect the
reported fair value of financial instruments.
Refer to note 14 for risk sensitivity information for the Company’s
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 the Company to have 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 sub-advisory services, the Company is
entitled to receive 60% of the management and incentive fees
earned by RIMA each fiscal year.
Cash on hand and on deposit
Short-term investments
2016
$
26,616
362
2015
$
29,658
268
26,978
29,926
5 Credit facilities and due to brokers
a) Credit facilities
Bank advances
In 2014, 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, 2016,
$509 was outstanding (2015 – $252). 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 (2015 – 450 thousand euros) to issue standby
letters of credit. 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.
As at December 31, 2016, no standby letters of credit were
outstanding; however, the Company has provided a $459
(2015 – $458) 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.
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. As at December 31, 2016
and 2015, the Company had met the requirements of all the
covenants.
21
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) b) Due from and due to brokers
The Company has margin facilities with its prime brokers. As
at December 31, 2016 and 2015, 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, 2016, listed equity securities
and due from brokers amounting to $2,347 have been pledged
as collateral (2015 – $1,897). 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 from and due to brokers balances are presented on a net
basis by broker in the consolidated statement 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
$
191,602
14,011
Gross amounts
due from brokers
$
11,449
67,338
Gross amounts
due to brokers
$
-
70,765
Gross amounts
due to brokers
$
-
303,648
2016
Net
amount
$
191,602
(56,754)
2015
Net
amount
$
11,449
(236,310)
22
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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
Note
2016
$
2015
$
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
6(a)
6(b)
6(c)
2,151,422
1,883,412
23,491
60,228
62,774
33,129
2,235,141
1,979,315
2,004
8,745
290
43,108
1,850
8,931
4,484
41,707
2,289,288
2,036,287
2,235,141
1,979,315
54,147
56,972
Equities sold short and derivative liabilities
Note
2016
$
2015
$
Liabilities
Financial liabilities held for trading
Equities sold short
Listed equity securities (proceeds of $783,973; 2015 – $376,819)
Derivative financial liabilities (proceeds of $2,825; 2015 – $14,857)
6 (a)
725,798
1,846
727,644
350,777
13,891
364,668
23
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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, equity
swaps, foreign currency forward contracts and foreign currency
futures contracts. 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 swaps,
options, warrants, rights, foreign currency futures contracts,
foreign currency forward contracts and swaps and options sold
short included in equity investments and other holdings or
equities sold short and derivative liabilities:
b) This holding is an investment in an offshore fund providing
pooled securitized products and credit instruments. The
underlying
investments are structured debt obligations
including sub-prime and Alt-A residential mortgage-backed
securities, commercial mortgage-backed securities, asset-
backed securities and collateralized debt obligations. There is
no established market for this investment.
c) 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.
Fair value
of derivative
financial
assets
$
40,043
773
76
9,913
6,571
2,852
Notional
value
$
223,963
14,988
3,999
289,056
186,000
58,672
As at
December 31,
2016
Fair value
of derivative
financial
liabilities
$
139
1,661
-
46
-
-
Notional
value
$
9,581
39,411
-
209,461
-
-
776,678
60,228
258,453
1,846
For the
year ended
December 31,
2016
Net change in value
$
37,403
587
(15)
4,052
(3,386)
(3,052)
35,589
Equity swaps
Equity options
Warrants and rights
Foreign currency options
Foreign currency futures contracts
Foreign currency forward contracts
Equity options
Warrants and rights
Foreign currency options
Notional
value
$
98,104
12,782
732,219
As at
December 31,
2015
Fair value
of derivative
financial
liabilities
$
For the
year ended
December 31,
2015
Net change in value
$
Fair value
of derivative
financial
assets
$
Notional
value
$
3,728
240
29,161
123,926
13,891
-
-
-
-
(5,012)
147
17,365
12,500
843,105
33,129
123,926
13,891
24
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 77
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 is as follows:
Aggregate carrying amount of individually immaterial associates
Aggregate amounts of the Company’s share of:
Net income (loss) from continuing operations and
comprehensive income
2016
$
12,461
2015
$
14,047
(505)
2,373
Commitments, contingent liabilities and borrowing arrangements of associates
There are no commitments, contingent liabilities or borrowing arrangements relating to the Company’s interests in these 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)
2016
$
20,518
17,294
2015
$
20,120
29,242
37,812
49,362
37,812
49,362
a) 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 2016 and 2015, distributions received from interests in private entities represented a return of capital and were deducted from
the cost of the investments.
b) 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 2016 and 2015, distributions received from a REIT are included in net change in fair value of real estate investments on the
consolidated statement of income (loss).
25
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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
$
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
2,235,141
Real estate investments
Other assets*
Bank advances
Trade and other payables
Due to brokers
-
-
-
-
-
Equities sold short and derivative liabilities
(727,644)
Redemptions payable
Subscriptions received in advance
-
-
-
-
-
54,147
37,812
-
-
-
-
-
-
-
26,978
459
191,602
-
-
252
-
-
-
-
-
-
-
-
-
-
-
-
(509)
(20,055)
(56,754)
(3,315)
(2,299)
2016
Total
$
26,978
459
191,602
2,289,288
37,812
252
(509)
(20,055)
(56,754)
(727,644)
(3,315)
(2,299)
Amounts recognized in consolidated statement
of income (loss)
Net change in fair value
Interest income (expense)
Net dividend income
1,507,497
91,959
219,291
(82,932)
1,735,815
324,417
3,846
10,343
2,818
29
218
338,606
3,065
-
309
-
309
-
(18,464)
-
327,235
(14,280)
10,561
(18,464)
323,516
* Includes loans to employees but excludes capital assets and other non-financial assets.
26
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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
$
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
1,979,315
Real estate investments
Other assets*
Bank advances
Trade and other payables
Due to brokers
-
-
-
-
-
Equities sold short and derivative liabilities
(364,668)
Redemptions payable
Subscriptions received in advance
-
-
-
-
-
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)
Amounts recognized in consolidated statement of
income (loss)
Net change in fair value
Interest income (expense)
Net dividend income
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
-
(218,132)
(17,030)
-
(13,745)
11,920
(17,030)
(219,957)
* Includes loans to employees but excludes capital assets and other non-financial assets.
27
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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
2016
$
7,720
6,603
14,323
6,283
20,606
2015
$
6,958
(1,401)
5,557
26
5,583
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 ate of 26.9% (2015 – 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 gains
Non-deductible expenses
Foreign exchange
Unrecognized deferred income tax assets
Other
Income tax expense
2016
$
2015
$
137,787
(105,678)
37,065
(1,912)
2,645
(4,616)
-
(9,017)
163
(4,175)
489
(36)
20,606
(28,427)
(406)
3,481
3,076
(804)
(2,871)
230
31,817
(196)
(317)
5,583
28
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The 2014 Federal Budget (the “Budget”) made income tax changes to parts of Canada’s foreign affiliate regime which became effective
January 1, 2015. 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 2016 and 2015 income tax expense, income tax liabilities and cash flows.
b) The analysis of deferred income tax assets and liabilities is as follows:
Deferred income tax assets
Deferred tax assets to be recovered
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
2016
$
2015
$
-
-
-
-
-
-
47,599
-
47,599
42,501
-
42,501
29
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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.
Deffered income tax assets
As at December 31, 2014
Credited to consolidated
statement of income (loss)
Foreign exchange differences
As at December 31, 2015
Credited (charged) to consolidated
statement of income (loss)
Foreign exchange differences
As at December 31, 2016
Deffered income tax liabilities
As at December 31, 2014
Charged (credited) to consolidated
statement of income (loss)
Foreign exchange differences
As at December 31, 2015
Credited (charged) to consolidated
statement of income (loss)
Foreign exchange differences
As at December 31, 2016
Equity
investments
and other
holdings
$
Investments
in
associates
$
Real estate
investments
$
90
256
39
385
1,013
1
1,399
-
100
8
108
(103)
(5)
-
398
12
77
487
(240)
(17)
230
Tax loss
carry-
forward
$
-
130
11
141
900
8
1,049
Equity investments
and other holdings
$
2,034
Investments in
associates
$
27,976
Real estate
investments
$
774
1,185
489
3,708
(685)
(120)
2,903
(441)
5,366
32,901
5,012
(914)
36,999
908
224
1,906
(146)
(59)
1,701
Other
$
-
458
37
495
(474)
(21)
-
Other
$
5,307
(674)
969
5,602
3,197
(125)
8,674
Total
$
488
956
172
1,616
1,096
(34)
2,678
Total
$
36,091
978
7,048
44,117
7,378
(1,218)
50,277
Deferred income tax assets for temporary differences totalling $8,253 (2015 – $4,810) and non-expiring capital loss carry-forwards
totalling $8,974 (2015 – $8,422) have not been recognized in the consolidated financial statements.
Deferred income tax liabilities have not been recognized on unremitted earnings totalling $62,938 as at December 31, 2016
(2015 – $63,495) 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 the foreseeable future.
30
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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
Number of shares
2,817,624
(39,800)
-
2,777,824
2016
Amount
$
23,376
(319)
-
23,057
Number of shares
2,794,324
(21,700)
45,000
2,817,624
2015
Amount
$
16,091
(172)
7,457
23,376
In 2016, the Company began a normal course issuer bid to purchase a maximum of 56,000 of its own common shares before
June 27, 2017. In 2016, the Company purchased 39,800 common shares (2015 – 21,700) for a total cash consideration of
$6,060 (2015 – $3,804). 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 2016 and 2015.
12
Earnings (loss) 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
2016
$
96,783
2015
$
(99,826)
2,805,213
2,820,974
34.50
(35.39)
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. For the
year ended December 31, 2016, there are no dilutive instruments.
31
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 13
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 (loss) 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:
Note
10 (a)
Note
Decrease (increase) in
Due from brokers
Income taxes receivable
Other assets
Increase (decrease) in
Trade and other payables
Due to brokers
Income taxes payable
2016
$
(321,977)
(5,258)
505
-
133,726
6,283
(186,721)
2015
$
225,105
(6,973)
(2,373)
(6,205)
(116,873)
26
92,707
2016
$
2015
$
(178,156)
185,229
121
27
62
3,043
11,296
(170,268)
96
(336,884)
(25,247)
200,082
(3,435)
359,734
32
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 14
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, 2016, the Company has
listed equity securities of $2,153,407 (2015 – $1,885,262). It can sell these securities to reduce its floating rate debt. As at December
31, 2016, a 1% (2015 – 1%) increase or decrease in interest rates, with all other variables remaining constant, would impact interest
expense by approximately $573 over the next 12 months (2015 – $2,366).
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
2016
2015
Between nil and 0.81%
Between nil and 1.25%
Between 0.15% and 0.30%
Between 0.15% and 1.18%
Between 1.26% and 11.0%
Between 1.46% and 12.0%
Non-interest bearing
Non-interest bearing
Prime rate plus 0.25%
Prime rate plus 0.25%
1.0%
Non-interest bearing
0.00% to 0.88%
1.0%
Non-interest bearing
0.00% to 3.81%
33
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The Company also holds debt securities held for trading of $23,490 (2015 – $62,774). 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
happens 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 and 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
2016
$
(709)
749
2015
$
(1,752)
1,837
Currency risk
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
$
138,618
9,431
2,171
-
-
-
150,220
Financial
assets
$
1,052
-
5,600
-
-
6,652
Financial
liabilities
$
(6,852)
(2,888)
(10,247)
(791)
(2,865)
(22,144)
(45,787)
Financial
liabilities
$
(28,616)
(7,378)
(218,114)
(4,440)
(19,352)
(277,900)
Net
exposure
$
131,766
6,543
(8,076)
(791)
(2,865)
(22,144)
104,433
Net
exposure
$
(27,564)
(7,378)
(212,514)
(4,440)
(19,352)
(271,248)
2016
Net effect of a
10% increase
or decrease
$
13,177
654
(808)
(79)
(287)
(2,214)
10,443
2015
Net effect of a
10% increase
or decrease
$
(2,756)
(738)
(21,251)
(444)
(1,935)
(27,124)
Canadian dollar
British pound sterling
Euro
Norwegian krone
Japanese yen
Israeli shekel
Canadian dollar
British pound sterling
Euro
Norwegian krone
Israeli shekel
34
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Equity price risk
Equity price risk is the risk that the fair value of equity investments and other holdings and equities sold short and derivatives 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 and derivatives are based on quoted market prices as at the consolidated statement of financial
position date. Changes in the market price of quoted securities and derivatives 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. In addition, the Company has entered into derivative financial instruments which have a notional
value greater than their fair value which is recorded in the consolidated financial statements. This information is disclosed in note 6(a)
to these consolidated financial statements. This creates a risk that the Company could settle these instruments at a value greater or less
than the amount that they have been 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 derivatives 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 derivatives. The Company closely monitors both its equity investments and other
holdings and its equities sold short and derivatives.
The impact of a 30% change in the market prices of the Company’s listed equity investments and derivatives, equities sold short and
derivatives would be as follows:
Equity investments and other holdings
Listed equity securities and derivatives
Equities sold short and derivative liabilities
Pre-tax impact on net income
Equity investments and other holdings
Listed equity securities and derivatives
Equities sold short and derivative liabilities
Pre-tax impact on net income
Fair value
$
2,194,242
(727,598)
Fair value
$
1,888,990
(364,668)
Estimated fair value
with a 30%
price increase
$
2016
Estimated fair value
with a 30%
price decrease
$
2,852,515
(945,877)
439,993
1,535,969
(509,319)
(439,993)
2015
Estimated fair value
with a 30%
price increase
$
Estimated fair value
with a 30%
price decrease
$
2,455,687
(474,068)
457,297
1,322,293
(255,268)
(457,297)
The above analysis assumes that listed equity investments, derivatives 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 one differently.
35
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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, equity swaps, foreign currency forward contracts and foreign currency futures contracts. These
derivative instruments are marked to market. There is deemed to be no credit risk for futures and certain options because they are
traded on exchanges. The warrant contracts and certain options are not traded on an exchange and allow the Company to purchase
underlying equities at a fixed price. Equity swaps represent future cash flows that are agreed to be exchanged between the Company
and counterparties at set dates in the future. Foreign currency forward contracts are contracts to buy or sell foreign currencies at a
specified price at a point in time in the future.
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 rating 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
2016
$
26,978
459
191,602
-
23,490
2016
$
252
2015
$
29,926
458
11,449
4,186
58,588
2015
$
271
* Related parties with which the Company has not experienced defaults in the past.
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 (2015 – one year). The liquidity risk related to these liabilities is managed by
maintaining a portfolio of liquid investment assets.
36
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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
2016
$1,620,655
$942,562
1.72
2015
$1,290,090
$856,290
1.51
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.
37
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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, 2016 and 2015:
Level 1
$
Level 2
$
Level 3
$
2016
Total
$
2,150,822
-
6,571
601
23,490
53,657
-
-
-
2,151,423
23,490
60,228
1,984
-
9,055
-
43,108
37,812
54,147
37,812
2,159,377
86,803
80,920
2,327,100
725,798
-
725,798
-
1,846
1,846
-
-
-
725,798
1,846
727,644
Level 1
$
Level 2
$
Level 3
$
2015
Total
$
1,880,980
-
-
1,795
-
2,432
62,774
33,129
13,075
-
-
-
-
1,883,412
62,774
33,129
42,102
49,362
56,972
49,362
1,882,775
111,410
91,464
2,085,649
350,777
-
350,777
-
13,891
13,891
-
-
-
350,777
13,891
364,668
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
38
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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
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
Financial instruments in Level 3
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, 2016 and 2015, 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 the subsequent distribution to the holders.
39
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The following tables present the changes in Level 3 instruments:
As at December 31, 2015
Purchases
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
As at December 31, 2016
As at December 31, 2014
Purchases
Sales proceeds
Distributions
Gains 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
$
49,362
520
(15,662)
5,258
-
(1,666)
37,812
Real estate
investments
$
36,983
4,127
-
(6,061)
6,973
-
7,340
Unlisted
securities
$
42,102
3,956
-
2,257
(4,009)
(1,198)
43,108
Unlisted
securities
$
13,197
20,956
(864)
(2,921)
6,956
225
4,553
As at December 31, 2015
49,362
42,102
In 2016 and 2015, there were no transfers between levels in the Company’s financial instruments.
2016
Total
$
91,464
4,476
(15,662)
7,515
(4,009)
(2,864)
80,920
2015
Total
$
50,180
25,083
(864)
(8,982)
13,929
225
11,893
91,464
40
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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, 2016.
Description
Fair value
(rounded)
2016
$
Valuation
technique
Significant
unobservable inputs
Weighted
average
input
Reasonably
possible
shifts +/−
Unlisted private equity holdings
Software developers
12,000
Unlisted private equity holdings
Internet services
15,000
Comparable
company
approach
Comparable
company
approach
Revenue estimate
$36,000
$3,000
Revenue multiple
M&A multiple
Number of users
EV/User
1.57
3.97
114.4M
113.69
10%
10%
10M
10%
Change in
value
$
+/-300
+/-400
+/-800
+/-800
+/-900
Unlisted private equity holdings
Other
16,000
Comparable
company
approach
Revenue estimate
$8M-11.5M
$1,000
+/-100
Revenue multiple
1.97-3.55
10% +/-50-100
M&A multiple
Yield to maturity
Probability of success
1.88
12.48%-
12.92%
78%
10%
10%
+/-100
+/-100
10%
+/-600
WACC
11.19%
2%
+/- 2,000
+/-1,000
Real estate income trusts (REITs)
17,300
Discounted
cash flows
Discount rate
7.0%-12%
Capitalization rate
5.5%-9.0%
Discounted cash
flow term
Rental growth rate
10-13 years
(12.0)%-
39.10%
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 analysis of the
change in inputs would
not reveal a fair change
in value.
Real estate investments
in private entities
20,500
Capitalization
model
Rate of return
8.0%
1.0%
+1,700
-1,300
41
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(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
17,000
Unlisted private equity holdings
Internet services
15,000
Unlisted private equity holdings
Other
10,000
Real estate income trusts (REITs)
29,000
Comparable
company
approach
Comparable
company
approach
Comparable
company
approach
Discounted
cash flows
Revenue estimate
$34,000 1000$ -$3,000
+/-400-900
Revenue multiple
1.74-2.03
10% +/-400-500
M&A multiple
Number of users
EV/User
4.13
80M
96.80
10%
10M
10%
+/-700
+/-900
+/-700
Revenue estimate $4,000-$6,000
$1,000
+/-200-300
Revenue multiple
2.06-4.16
M&A multiple
3.11
10%
10%
+/-100
+/-200
Discount rate
7.5%-20% The REITs consist of
Capitalization rate
Discounted cash
flow term
4.6%-9%
3-33 years
Rental growth rate
(16.7)-26.3
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
20,000 Capitalization
model
Rate of return
7.0%
1.0%
+ 1,900
- 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
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
15
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, 2016 and 2015. The principal operating subsidiaries and structured entities and their activities are as follows.
Name
Senvest Global (KY) L.P.
Senvest Global L.P.
RIMA Senvest Master Fund GP, L.L.C.
Senvest Israel Partners GP, L.L.C.
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 Master Fund, L.P.
Senvest Cyprus Recovery Investment Fund, L.P.
Punto Box SL
Country of
incorporation
Cayman Islands
United States
United States
United States
Canada
United States
Canada
United States
United States
Cayman Islands
Cayman Islands
Cayman Islands
% Interest held
2016
2015
100
100
-
-
100
100
100
100
-
45
47
59
100
100
-
-
100
100
100
100
-
41
44
59
Spain
100
100
Nature of
business
Investment company
Investment company
General partner of Senvest Master
Fund, L.P.
General partner of Senvest Israel
Partners Master Fund L.P.
Real estate
Real estate
Investment company
Investment company
Investment manager of the Funds
Investment fund
Investment fund
Investment fund
Real estate
The total non-controlling interest for the year is $18,277 (2015 – $3,210), which is mostly attributed to Senvest Management L.L.C. The
change in redemption amount of liability for redeemable units for the year is $133,726 (2015 – $(116,873)), all of which is attributed
to the Funds.
43
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Set out below is the summarized financial information for each subsidiary that has non-controlling interest that is material to the
group. The amounts disclosed are before inter-company eliminations.
Summarized balance sheets
Senvest Management L.L.C.
Assets
Liabilities
Net assets
Accumulated NCI
2016
$
253,064
157,225
95,839
95,839
2015
$
207,154
127,156
79,998
79,998
The participation owned by the parent company is reflected as a liability in the subsidiary’s financial statements.
Summarized statements of comprehensive income (loss)
Revenue and net investment gains (losses)
Expenses
Net income (loss)
Other comprehensive income (loss)
Total comprehensive income
Net income (loss) allocated to NCI
2016
$
42,044
22,325
19,719
(2,153)
17,566
19,719
2015
$
197
11,632
(11,435)
14,645
3,210
(11,435)
The participation allocated to the parent company is reflected as a part of the statement of income (loss) in the subsidiary’s financial
statements.
Dividends paid to NCI
Summarized statements of cash flows
Cash flow from operating activities
Cash flow from financing activities
Net decrease in cash and cash equivalents
2016
$
1,772
2016
$
1,640
(1,772)
(132)
2015
$
7,200
2015
$
6,688
(7,200)
(512)
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 L.L.C.
became employees of Senvest Management L.L.C. The results of Senvest Global L.P. will be consolidated into the accounts of the parent
company the same way that those of Senvest International L.L.C. were.
No guarantees or collateral were provided to the subsidiaries and structured entities except for the guarantee of an operating lease of
Senvest Management L.L.C. The amounts in question have been included in the Company’s commitments in note 17(a). The Company
is not liable for any other contingent liabilities arising in its subsidiaries and structured entities and will not settle any other liabilities
on their behalf.
44
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 16
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
2016
$
9,423
39
-
9,462
2015
$
1,458
38
749
2,245
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 in 2016 totals $73,762 (2015 – $56,693).
17
Commitments
a) The future minimum rental payments for premises under long-term leases are as follows:
2017
2018
2019
2020
2021
Thereafter
$
1,391
1,249
1,287
1,341
1,149
3,621
b) As required by certain of the Company’s equity investments and other holdings, the Company has capital commitments of $409.
c) As required by certain of the Company’s real estate investments, the Company has capital commitments of $8,226.
45
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 18
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
$
3,266
7,890
278
United
States
$
2,749
7,723
23
Canada
$
313
(22)
532
Canada
$
166
(11)
303
Great
Britain
$
1
605
-
Great
Britain
$
15
(89)
-
Rest of
European
Union
$
(396)
450
-
Rest of
European
Union
$
121
1,473
20
Argentina
$
-
104
-
Argentina
$
-
119
-
Other
$
1,000
1,534
-
Other
$
234
2,705
-
2016
Total
$
4,184
10,561
810
2015
Total
$
3,285
11,920
346
Revenue
Interest income
Net dividend income
Other income
Revenue
Interest income
Net dividend income
Other income
46
2016 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2016 AND 2015(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 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 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.
1 Place Ville-Marie
Suite 3000
Montreal (Quebec) H3B 4N8
TRANSFER AGENT & REGISTRAR
Computershare Trust Company of Canada
1500 Robert-Bourassa Boulevard
7th Floor
Montréal (Québec) H3A 3S8
Computershare Trust Company of Canada
100 University Street
Toronto (Ontario) M5J 2Y1
2016 annual report
47