Mosaic Capital Corporation
Consolidated Financial Statements
For the Year Ended December 31, 2012
(audited)
MOSAIC CAPITAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2012
(audited)
Contents Page
Independent Auditor's Report 2
Consolidated Balance Sheets 3
Consolidated Statements of Comprehensive Income 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 7 - 47
INDEPENDENT AUDITOR’S REPORT To the Shareholders of Mosaic Capital Corporation We have audited the accompanying consolidated financial statements of Mosaic Capital Corporation, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years then ended, and the notes to the consolidated financial statements. 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 Mosaic Capital Corporation as at December 31, 2012 and 2011, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. April 19, 2013 Calgary, Alberta Chartered Accountants
Mosaic Capital Corporation Consolidated Balance Sheets
(shown in thousands of Canadian dollars)
December 31, December 31,
N o tes 2012 2011
Assets $ $
Current assets
Cash and cash equivalents 7 30,818 20,303
Restricted cash 7 131 130
Accounts receivable 5(b) & 8 22,248 5,869
Inventories 9 2,513 586
Deposits and prepaid expenses 661 406
Lease incentive 30 -
Income taxes recoverable 920 -
Assets held for sale 12 19,524 -
Total current assets 76,845 27,294
Non-current assets
Property held for development 10 2,726 439
Income producing properties 13 - 19,595
Property, plant and equipment 14 6,319 4,685
Employee share purchase plan 15 549 445
Goodw ill and other intangible assets 16 35,966 17,585
Total non-current assets 45,560 42,749
Total assets 122,405 70,043
Liabilities
Current liabilities
Operating loan 26 5,828 -
Accounts payable and accrued liabilities 5(c) 10,083 2,347
Dividends payable 5(c) & 19(iv) 622 424
Deferred contract revenue 11 4,732 -
Current portion of mortages payable 18 - 216
Current portion of notes payable 17 2,528 310
Total current liabilities 23,793 3,297
Non-current liabilities
Mortgages payable 18 - 4,646
Notes payable 17 3,611 309
Deferred income tax liability 30 759 488
Security deposits 69 66
Total non-current liabilities 4,439 5,509
Total Liabilities 28,232 8,806
Shareholders' Equity
Preferred securities 19 69,060 45,677
Series "A" shares 19 135 135
Common shares 19 15,981 15,981
Contributed surplus 19 782 505
Non-controlling interest 25 11,602 4,698
Accumulated deficit (3,387) (5,759)
Total equity attributable to equity holders 94,173 61,237
Total liabilities and shareholders' equity 122,405 70,043
-Commitments and contingent liabilities (note 34) -Subsequent events (note 35)
See accompanying notes to the consolidated financial statements.
These consolidated financial statements were approved by the board of directors on April 19, 2013. (signed) "Harold Kunik", Director (signed) "John Mackay", Director
Mosaic Capital Corporation
Consolidated Statements of Comprehensive Income
For the Years Ended December 31 (shown in thousands of Canadian dollars, except per share amounts)
N o tes 2012 2011
$ $
Revenue 27 75,815 23,654
Operating expenses 59,051 18,267
Income from operations 16,764 5,387
Accretion expense 17 155 4
Amortization of buildings 13 147 234
Amortization of tangible assets 14 1,023 694
Amortization of intangible assets 16 2,624 951
Securities based compensation 21 & 22 828 505
(Gain) loss on sale of assets (23) 20
4,754 2,408
Income before f inance 12,010 2,979
Finance income 29 86 92
Finance expense 29 502 247
(416) (155)
Income before other items 11,594 2,824
Other income and expenses
Acquisition costs - 552
Income from continuing operations before tax 11,594 2,272
Income tax expense (recovery)
Current 30 1,503 124
Deferred 30 (496) 369
1,007 493
Net income from continuing operations 10,587 1,779
Preferred security interest - the Fund - (1,182)
Fair value adjustment 17 342 -
Net lncome from discontinued operations, net of tax 33 - 76
Net Income and comprehensive income 10,929 673
Income (loss) and comprehensive income (loss) attributable to:
Shareholders' 8,919 (295)
Non-controlling interest 25 2,010 968
10,929 673
Earnings per share:
Net income (loss) per common share from continuing operations
Basic 20 0.36 (0.52)
Diluted 20 0.34 (0.52)
Net income (loss) per common share
Basic 20 0.40 (0.51)
Diluted 20 0.38 (0.51)
See accompanying notes to the consolidated financial statements.
Mosaic Capital Corporation
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31 (shown in thousands of Canadian dollars, except share amounts)
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Notes
Num
ber
of P
refe
rred
Sec
uriti
es
(in t
hous
ands
)
Pre
ferr
ed S
ecur
ities
Sta
ted
Val
ue
Num
ber
of S
erie
s "A
" S
hare
s
(in t
hous
ands
)
Ser
ies
"A"
Sha
res
Sta
ted
Val
ue
Num
ber
of C
omm
on S
hare
s
(in t
hous
ands
)
Com
mon
Sha
res
Sta
ted
Val
ue
Con
trib
uted
Sur
plus
Num
ber
of C
omm
on T
rust
Uni
ts (
in t
hous
ands
)
Com
mon
Tru
st U
nits
Sta
ted
Val
ue
Tot
al C
apita
l Sta
ted
Val
ue
Non
-Con
trol
ling
Inte
rest
Def
icit
Tot
al E
quity
$ - $ $ $ $ $ $ $ $
Balance as at January 1, 2011 - - - - - - 26 2,802 16 42 4,598 (2,071) 2,569
Issue of common trust units/shares - - 21 135 8,138 15,981 (26) (2,802) (16) 16,074 - - 16,074
Issue of preferred trust units/securities 5,089 45,859 - - - - - - - 45,859 - - 45,859
Redemption of preferred units (22) (182) - - - - - - - (182) - - (182)
Distributions to non-controlling interests - - - - - - - - - - (868) - (868)
Div idends declared on preferred securities - - - - - - - - - - - (3,381) (3,381)
Div idends declared on series "A" shares - - - - - - - - - - - (12) (12)
Securities based compensation ex pense - - - - - - 505 - - 505 - - 505
Income (loss) for the y ear - - - - - - - - - - 968 (295) 673
Balance as at December 31, 2011 5,067 45,677 21 135 8,138 15,981 505 - - 62,298 4,698 (5,759) 61,237
Adjustment on sale of subsidiary - - - - - - - - - - - 27 27
Issue of preferred securities 19 2,375 25,054 - - - - - - - 25,054 - - 25,054
Security transaction costs 19 - (1,671) - - - - - - - (1,671) - - (1,671)
Distributions to non-controlling interests 25 - - - - - - - - - - (1,081) - (1,081)
Contributions from non-controlling interests 25 - - - - - - - - - - 5,975 - 5,975
Div idends declared on preferred securites 19 - - - - - - - - - - - (5,658) (5,658)
Div idends declared on series "A" shares 19 - - - - - - - - - - - (21) (21)
Div idends declared on common shares 19 - - - - - - - - - - - (895) (895)
Securities based compensation ex pense - - - - - - 277 - - 277 - - 277
Income for the y ear - - - - - - - - - - 2,010 8,919 10,929
Balance at December 31, 2012 7,442 69,060 21 135 8,138 15,981 782 - - 85,958 11,602 (3,387) 94,173
See accompanying notes to the consolidated financial statements.
Mosaic Capital Corporation
Consolidated Statements of Cash Flows For the Years Ended December 31 (shown in thousands of Canadian dollars)
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Note s 2 0 12 2 0 11
$ $
Cash and cash equivalents provided by (used in):
Cash flows from operating activities
Income (loss) attributed to shareholders for the year 8,919 (295)
Adjustments for:
Accretion of notes payable 17 155 4
Amortization of buildings 13 147 234
Amortization of tangible assets 14 1,023 694
Amortization of intangible assets 16 2,624 951
Securities based compensation 21 & 22 828 505
Deferred tax expense (recovery) 30 (496) 369
Fair value adjustment 17 (342) -
(Gain) loss on sale of assets (23) 20
Non- controlling interest 25 2,010 968
Sub- total changes prior to non- cash working capital 14,845 3,450
Changes in non- cash working capital 31 (1,359) (1,830)
Net cash provided by operating activities 13,486 1,620
Cash flows from investing activities
Additions to intangible assets 16 (47) (110)
Additions to property, plant and equipment, net 14 (1,464) (883)
Business combination 6 (22,103) 6,805
Disposals of income producing properties 13 - 9,963
Additions to income producing properties 13 (75) -
Disposal of property held for development 10 439 642
Additions to property held for development 10 (2,726)
Employee share purchase plan 15 (104) (445)
Net cash provided by (used in) investing activities (26,080) 15,972
Cash flows from financing activities
Net proceeds from issue of preferred securities 19 23,383 -
Additions to notes payable 17 7,385 348
Net proceeds from operating loan 26 5,828 -
Restricted cash - (9)
Distributions to non- controlling interests 25 (531) (873)
Dividends to preferred security holders 19 (3,819) (1,854)
Dividends to preferred security holders for DRIP 19 (1,641) (1,105)
Dividends to series "A" shareholders 19 (21) (10)
Redemption of preferred securitiesRedemption of preferred securities - (182)
Redemption of units - (188)
Dividends to common shareholders' 19 (895) -
Exercise of stock options - 135
Repayment of mortgages 18 (4,862) (3,630)
Repayment of notes payable 17 (1,718) (316)
Net cash provided by (used in) financing activities 23,109 (7,684)
Change in cash and cash equivalents 10,515 9,908
Cash and cash equivalents, beginning of year 20,303 10,395
Cash and cash equivalents, end of year 30,818 20,303
Other information:
Interest received 86 92
Interest paid 502 247 See accompanying notes to the consolidated financial statements.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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1. GENERAL BUSINESS DESCRIPTION
Mosaic Capital Corporation
Mosaic Capital Corporation ("Mosaic" or the "Company") was incorporated under the Business Corporations Act (Alberta) on February 11, 2011. Mosaic is a Calgary based investment company that owns a portfolio of established businesses that generate cash flow from their operations in niche markets. Mosaic is widely held and is a parent company. Mosaic's portfolio businesses operate in the printing, oil and gas services, technology, infrastructure, industrial supply, and real estate industries. The Company continues to acquire and invest in businesses that have attributes similar to its existing businesses.
Effective May 1, 2011, Mosaic Diversified Income Fund (the "Fund") was acquired by Mosaic pursuant to the terms of a plan of arrangement (the "Arrangement") approved April 28, 2011. Under the terms of the Arrangement, the Fund became a wholly owned subsidiary of Mosaic. The holders of preferred trust units of the Fund received one preferred security and 0.143 common shares in the capital of Mosaic for each preferred unit held in the Fund. The holders of common units of the Fund received 1,631.7 common shares in Mosaic for each common unit held in the Fund. The unit holders of the Fund, as a group, held approximately 62% of the common shares and 70% of the class "A" preferred securities of Mosaic as of May 1, 2011.
Effective May 1, 2011, First West Properties Ltd. ("FWP") was acquired by Mosaic pursuant to the terms of the Arrangement approved April 28, 2011. Under the Arrangement FWP became a wholly-owned subsidiary of Mosaic. In connection with the transaction, class "A" common voting shareholders of FWP received, for each class "A" common voting share held, 0.077 of a preferred security and 0.154 of a common share of Mosaic. In addition, holders of class "A" common voting share purchase options of FWP exchanged those options for Mosaic unit options on a basis so as to put the holders in materially the same economic position as they were prior to the Arrangement. The Mosaic unit options entitle the holders to receive the same mix of preferred securities and common shares as holders of class "A" common voting shares of FWP received under the Arrangement. The shareholders of FWP, as a group, held approximately 38% of the common shares and 30% of the preferred securities of Mosaic as of May 1, 2011.
The common shares and preferred securities of Mosaic were listed and commenced trading on the TSX Venture Exchange and trade under the symbols "M" and "M.PR.A."
The address and principal place of business of Mosaic is Suite 400, 2424 - 4th Street SW, Calgary,
Alberta, Canada, T2S 2T4.
Mosaic Diversified Income Fund
The Fund is an unincorporated open-ended, limited purpose trust established under the laws of the Province of Alberta pursuant to a Declaration of Trust dated October 26, 2005. The Declaration of Trust was subsequently amended and restated February 21, 2006 and further amended and restated November 1, 2010. The Fund was formed to invest in a diversified group of income producing businesses and is wholly owned by Mosaic.
As at December 31, 2012, the Fund has indirectly invested in four operating entities:
Printing Unlimited L.P. ("Printing Unlimited") is a wholly-owned subsidiary of the Fund based in Fort McMurray, Alberta, and prints, among other things, marketing and promotional materials, annual reports, operation manuals and handbooks, safety tags, stationary, carbonless forms, and photocopies.
Allied Cathodic Services L.P. ("Allied Cathodic") is based in Estevan, Saskatchewan, and installs, maintains and replaces cathodic protection systems for oil and gas production facilities in southeast Saskatchewan and southwest Manitoba. The Fund holds an 80% interest in Allied Cathodic.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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Polar Geomatic Solutions L.P. ("Polar") is based in Red Deer, Alberta and principally provides products and services (including a web-based landowner information database ("LOID
®")) to create, manage and
maintain land related stakeholder information associated with an asset or project. Polar's services, and the LOID
® system, are primarily used by pipeline companies to facilitate stakeholder notifications and
ensure compliance with landowner consultation and emergency response planning requirements under applicable legislation. The Fund owns 90% of Polar.
Remote Waste L.P. ("Remote Waste") is 75% owned by the Fund and is based in Sexsmith, Alberta. Remote Waste manufactures and rents modular wastewater treatment systems for use in remote work camps.
First West
FWP was incorporated under the Business Corporations Act (Alberta) on June 7, 1996. Until its voluntary dissolution effective December 31, 2012 FWP was an Alberta based real estate investment company that was wholly owned by Mosaic and had a portfolio of real estate assets in secondary markets in western Canada. During the last half of 2012 the business then being carried on by FWP was reorganized and is now being carried on by First West Properties L.P. ("FWPLP") and its subsidiary First West Developments L.P. ("FWDLP"). Hereafter as used in these consolidated financial statements "First West" means and refers, collectively, to FWPLP and FWDLP and their respective businesses carried on thereby.
Mosaic Capital LP
Mosaic Capital L.P. is wholly-owned by Mosaic and was formed to invest in new business acquisitions and to date has directly invested in the following operating entities:
Ambassador Mechanical Corp. ("Ambassador Mechanical") is 75% owned by Mosaic Capital L.P. and is based in Winnipeg, Manitoba. Ambassador Mechanical provides mechanical equipment provisioning and installation services in areas ranging from plumbing and gas fitting to heating, ventilation and air conditioning.
Kendall's Supply Ltd. ("Kendall's Supply") is 90% owned by Mosaic Capital LP and is based in Estevan, Saskatchewan. Kendall's Supply has serviced southeastern Saskatchewan since 1944 and is a supplier of parts and supplies to companies in the oil and gas, mining, power generation, construction, automotive and agriculture industries.
2. BASIS OF PREPARATION
a. Statement of compliance
The consolidated financial statements present Mosaic's financial position and financial results of operations as at and for the years ended December 31, 2012 and 2011 and have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The consolidated financial statements were approved for issuance by the board of directors of Mosaic on April 19, 2013.
b. Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments, if any, and held for trading financial assets, which are measured at fair value with changes in fair value recorded in earnings.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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c. Functional and presentation currency
These consolidated financial statements are presented in thousands of Canadian dollars, which is Mosaic's functional currency.
d. Use of estimates and judgments
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Judgments, estimates and underlying assumptions are reviewed on a continuous basis and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
In preparing the consolidated financial statements, Mosaic makes significant judgments including the determination of whether an acquisition constitutes a business combination, the determination of whether an ownership interest constitutes significant influence or control, the application of tax rules and regulations, recognition and measurement of infrastructure revenue, infrastructure costs and deferred contract revenue, identification of cash-generating units ("CGUs") and the assessment of asset impairment indicators.
Areas that require significant estimates and assumptions are set out in the following paragraphs.
Amortization of property, plant and equipment and other intangible assets
The amounts recorded for amortization of components of property, plant and equipment and intangible assets are based on remaining lives and the residual values of the related assets.
Valuation of property, plant and equipment and goodwill and other intangible assets
The amounts recorded for property, plant and equipment and goodwill and intangible assets and the valuation of CGUs are based on estimates of future cash flows, remaining lives and periods of future benefits and the residual values of the related assets.
Valuation of accounts receivable
The valuation of accounts receivable is based on management's assessment of the financial strength of its customers and their ability and willingness to pay the amounts outstanding.
Income taxes
The amounts recorded for deferred income taxes are based on estimates as to the timing of the reversal of temporary differences and the tax rates expected to apply in the period of reversal. They are also based on estimates of the probability of Mosaic utilizing certain tax pools and assets which in turn are dependent on estimates of future taxable income. The availability of tax pools is subject to audit and interpretation by taxation authorities.
Valuation of stock options and restricted securities units
When not directly observable in active markets, Mosaic uses third-party models and valuation methodologies that utilize observable market data to estimate the valuation of stock options and restricted securities units. In addition to market information, Mosaic incorporates transaction specific details that market participants would utilize in a fair value measurement.
Infrastructure revenue, infrastructure costs, deferred contract revenue and costs and estimated earnings in excess of billings.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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The amounts recorded for infrastructure revenue, infrastructure costs, deferred contract revenue, and costs and estimated earnings in excess of billings include amounts derived using the percentage of completion method applied to infrastructure contracts. Percentage of completion is calculated based on the costs incurred on each infrastructure contract at the end of the respective accounting period divided by the total estimated costs for the contract. To determine the estimated cost to complete the infrastructure contract, judgment, assumptions and estimates are required to evaluate issues related to schedule, material and labour costs, labour productivity, changes in contract scope and subcontractor costs. Due to the nature of infrastructure contracts, estimates may change significantly from one accounting period to the next.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to the periods presented in these consolidated financial statements.
(a) Principles of consolidation
The consolidated financial statements include the accounts of the following:
Mosaic Capital Corporation;
Mosaic Diversified Income Fund and its subsidiaries;
Mosaic Capital LP and its subsidiaries and;
First West
(b) Subsidiaries and business combinations
Subsidiaries are entities over which Mosaic has control, where control is defined as the power to govern financial and operating policies. A controlling position is assumed to exist where Mosaic holds, directly or indirectly, a voting interest exceeding 50% and where no other group or shareholder exercise substantive participating rights which would enable it to veto or to block ordinary decisions taken by Mosaic. Subsidiaries are fully consolidated from the date control is transferred to Mosaic, and are de-consolidated from the date control ceases.
The acquisition method of accounting is used to account for the acquisition of subsidiaries as follows:
cost is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the closing date;
identifiable assets acquired and liabilities assumed are measured at their fair values at the acquisition date;
the excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill and is allocated to each of the CGUs expected to benefit from the combination's synergies; and
If the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net assets is re-assessed and any remaining differences is recognized directly in the consolidated statement of comprehensive income.
Non-controlling interest ("NCI") is calculated on the acquisition method which means that all balance sheet and income statement items are included in the consolidation at their full value. Non-controlling interest is eliminated by showing the NCI portion in shareholders'/unitholders' equity and in the income allocation on the consolidated statement of comprehensive income. The value used to calculate and deduct NCI is the percentage of ownership that is owned by the NCI.
Step acquisitions for NCI's are accounted for by calculating the NCI up to the date of a change and calculating NCI's beyond that date at the new percentage ownership.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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If the initial accounting for a business combination can only be determined provisionally, subsequent adjustments to the allocation may be recognized if they occur within 12 months of the acquisition date. After 12 months, adjustments are recognized through income. The adjustments made as a result of finalizing the provisional accounting are retrospectively recognized from the acquisition date. As a result, adjustments to amortization are retrospectively recorded to reflect the final purchase accounting.
Intercompany transactions between subsidiaries are eliminated on consolidation.
Transaction costs, other than those associated with the issue of debt or equity securities, that Mosaic incurs in connection with a business combination are expensed as incurred.
(c) Cash and cash equivalents
Cash and cash equivalents may consist of cash on hand, amounts on deposit with banks, guaranteed investment certificates held with banks and other short term highly liquid investments with maturities within 90 days or less at the date of issue.
(d) Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
(i) Financial assets
Financial assets include cash and cash equivalents, restricted cash, accounts receivable and deposits. Purchases and sales of financial assets are recognized on the settlement date, which is the date on which the asset is delivered to Mosaic. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or Mosaic has transferred substantially all risks and rewards of ownership. Financial assets are classified in the following categories at the time of initial recognition based on the purpose for which the financial assets are acquired:
Financial assets at fair value through profit or loss
Classification
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management and its performance is evaluated on a fair value basis in accordance with Mosaic's documented risk management or investment strategy. Mosaic has designated cash and cash equivalents and restricted cash as held for trading. Derivatives are also categorized as held for trading unless they are designated as hedges.
Recognition and measurement
Financial assets carried at fair value through profit or loss are initially recognized and subsequently carried at fair value, with changes in fair value recognized in income. Transaction costs are expensed when incurred.
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. They are included in current assets, except for those
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Assets in this category include accounts receivable and deposits.
Recognition and measurement
Loans and receivables are initially recognized at fair value plus transaction costs and subsequently carried at amortized cost using the effective interest method, less any impairment losses. Interest income is recognized by applying the effective interest rate, except for assets with short terms to maturity where the recognition of interest would be immaterial.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They consist of investments in equity securities and certain debt securities. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Changes in fair value of available-for-sale financial assets are recognized in other comprehensive income. Mosaic has not designated any financial assets as available-for-sale.
Reclassification of financial assets
Reclassification is only permitted in rare circumstances and where the asset is no longer held for the purpose of selling in the short-term. In all cases, reclassifications of financial assets are limited to debt instruments. Reclassifications are accounted for at the fair value of the financial asset at the date of reclassification.
(ii) Financial liabilities
Financial liabilities primarily consist of accounts payable and accrued liabilities, operating loan, notes and dividends payable, income taxes payable and security deposits. Financial liabilities are initially measured at fair value and subsequently measured at amortized cost for liabilities that are not hedged, and fair value for liabilities that are hedged. Mosaic currently does not have any hedges.
(iii) Derivative financial instruments
Mosaic may enter into certain financial derivative contracts in order to manage the exposure to market risks from price fluctuations. These instruments are not used for trading or speculative purposes. Transaction costs are recognized in income as incurred. Proceeds and costs realized from holding these financial instruments are recognized in income at the time each contract is settled.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in income. Mosaic has not identified any embedded derivatives in any of its financial instruments or contracts.
(iv) Equity instruments
Preferred securities, series "A" preferred shares, and common shares of Mosaic are classified as equity. Incremental costs directly attributable to the issue of preferred securities and
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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common shares, including commissions paid to underwriters and legal fees, are recognized as a deduction from equity, net of any tax effects.
(v) Impairment
At each balance sheet date, Mosaic assesses whether there is objective evidence that a financial asset, other than those at fair value through profit or loss, or a group of financial assets could be impaired. When indicators of impairment exist, an impairment calculation for the respective assets is prepared. When an impairment has occurred, the cumulative loss is recognized in income.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Objective evidence of impairment for a portfolio of receivables could include Mosaic's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 90 days, as well as observable changes in national or local economic conditions that correlate with default on receivables.
For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of accounts receivable, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in income. When an account receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are recognized in income in the period of recovery.
When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to income in the period.
With the exception of available-for-sale financial assets, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through income to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.
In respect of available-for-sale financial assets, impairment losses previously recognized in income are not reversed through income. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income.
(e) Property, plant and equipment
(i) Assets owned
Property, plant and equipment are carried at historical cost less any accumulated amortization and impairment losses. Historical cost includes the acquisition cost or production cost as well as the costs directly attributable to bringing the asset to the location and condition necessary for its use in operations. When property, plant and equipment include significant components with different useful lives, they are recorded and amortized separately. Amortization is computed based on the estimated useful life of the assets or components. Useful life is reviewed at the end of each reporting period. Assets financed by finance lease contracts are capitalized at the
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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lower of the fair value of future minimum lease payments and market value and the related debt is recorded in notes payable.
(ii) Subsequent costs
Mosaic recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to Mosaic and the cost of the item can be measured reliably. All other costs are recognized in income as incurred.
(iii) Amortization
Amortization is charged to income over the estimated useful lives of each component of an item of property, plant and equipment as follows:
Buildings Declining balance 2%
Computer equipment Declining balance 30%
Furniture and fixtures Declining balance 20%
Leasehold Improvements Straight-line Term of Lease
Motor vehicles Declining balance 30%
Parts inventory Declining balance 20%
Production equipment Declining balance 20%
Rental equipment Declining balance 5%
The residual value, if significant, is reassessed annually.
(f) Intangible assets
(i) Intangible assets
Intangible assets that are acquired by Mosaic are stated at cost less accumulated amortization and impairment losses.
(ii) Subsequent expenditures
Subsequent expenditures on capitalized intangible assets are capitalized only when they increase the future economic benefits embodied in the specific intangible asset to which they relate. All other expenditures are expensed as incurred.
(iii) Amortization
Amortization is charged to income on a straight-line basis over the estimated useful lives of intangible assets, unless such lives are indefinite. Goodwill and intangible assets are tested for impairment annually. Trade names are considered indefinite useful life intangible assets and, like goodwill, are not amortized. Intangible assets are amortized from the date they are available for use. These assets are amortized as follows:
Computer software Straight-line 1 year Customer relationships Straight-line 15 years
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Employee agreements Straight-line 10 years Backlog Straight-line 1 year Intellectual property Straight-line 15 years Non-compete agreements Straight-line 5 years Step up leases Term of lease Term of lease
(g) Goodwill
Mosaic records goodwill relating to a business combination when the purchase price exceeds the fair value of the net identifiable assets and liabilities of the acquired business. Goodwill is reported at cost less any impairment. Goodwill impairments are not recovered.
(h) Impairment
When events or changes in the economic environment indicate a risk of impairment of goodwill, other intangible assets or property, plant and equipment, an impairment test is performed to determine whether the carrying amount of the asset or group of assets under consideration exceeds its or their recoverable amount. Recoverable amount is defined as the higher of an asset's fair value less costs to sell and its value in use. Value in use is equal to the present value of future cash flows expected to be derived from the use and sale of the asset.
In addition, asset impairment tests are subject to the following provisions:
Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the group of assets. Such groups of assets are referred to as CGUs.
Irrespective of whether there is any indication of impairment, goodwill and other indefinite life intangible assets are subject to an annual impairment test. This test is performed during the fourth quarter of each year. The recoverable value of each of Mosaic's CGUs is compared to the carrying amount of the corresponding assets (including goodwill).
Value in use is determined based on cash flow projections consistent with the most recent budget and business plan approved by management. The discount rate applied reflects current assessments by the market of the time value of money and the risks specific to the asset or CGU.
Fair value less costs to sell is the estimated amount obtainable from the sale of the asset or CGU in an arm's length transaction between knowledgeable and willing parties, less costs to sell. These values are determined based on market data (comparison with similar listed companies, value attributed in recent transactions and stock market prices), or in the absence of reliable data, based on discounted future cash flows.
If the recoverable amount is less than the carrying amount of an asset or CGU, an impairment loss is recognized for the difference. In the case of a CGU, this impairment loss is recorded in priority against goodwill.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.
In assessing goodwill and indefinite-lived intangible assets for impairment at December 31, 2012, Mosaic compared the aggregate recoverable amount of the assets included in the CGUs to their respective carrying amounts. The recoverable amount has been determined based on the expected future cash flows from the CGUs. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to CGUs and then to reduce
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the carrying amount of the other assets in the CGU on a pro rata basis. No impairment was required to be recognized at December 31, 2012.
(i) Inventory
Inventory is recorded at the lower of cost and net realizable value. Costs are measured using both the average cost and the first-in, first-out methods. Net realizable value is the estimated selling price of specific items less costs to sell.
(j) Revenue recognition
(i) Revenue
Revenues are recognized when the services and equipment rentals are provided and only when collectability is reasonably assured. Services are generally sold based upon service order or customer contracts that include fixed or determinable prices based on daily, hourly or job rates.
(ii) Infrastructure revenue
Infrastructure revenue is recognized in income in proportion to the stage of completion of the contract. Revenue from fixed price infrastructure contracts is recognized on the percentage of completion basis. Percentage of completion is calculated based on the costs incurred on each infrastructure contract to the end of the respective accounting period divided by the total estimated costs. Revenue from cost reimbursable contracts is recognized progressively on the basis of costs incurred during the period plus the estimated fee earned. Revenue from unit price contracts in the heavy infrastructure and civil infrastructure is recognized based on the amount of billable work completed. For agency relationships, such as infrastructure management, where the Company acts as an agent for its clients, fee revenue is recognized, in accordance with the contract terms. If the outcome of an infrastructure contract cannot be estimated reliably for management to estimate the ultimate profitability of the contract with a reasonable degree of certainty, revenue may be recognized however profit may not be recognized.
Revenue from change orders is recognized to the extent that management estimates that realization is probable. Any excess of progress billings over earned revenue on infrastructure contracts is carried as deferred contract revenue in the financial statements. Any excess of costs and estimated earnings over progress billings on infrastructure contracts is carried as costs and estimated earnings in excess of billings in the financial statements. Losses from any infrastructure contracts are recognized in full in the period the loss becomes apparent.
(iii) Infrastructure costs
Infrastructure costs are expensed as incurred unless they result in an asset related to future contract activity. Infrastructure costs include all expenses that relate directly to execution of the specific contract, including site labour and site supervision, direct materials, subcontractor costs, equipment rentals, design and technical assistance, and warranty claims. Infrastructure costs also include overheads that can be attributed to the project in a systematic and consistent manner and include general insurance and bonding costs, and staff costs relating to project management. Infrastructure costs also include expenditures for services which are specifically recoverable from the customer under the terms of the contract.
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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(iv) Property rental income
Revenue from rental properties is recognized when a tenant commences occupancy of a rental unit or site and rent is due. Rental income from income producing properties is recognized on a straight line basis over the lease term. Mosaic retains all of the benefits and risks of ownership of its rental properties and therefore accounts for leases with its tenants as operating leases.
Incentives for lessees to enter lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease.
(v) Service charges and expenses recoverable from tenants
Income arising from expenses recharged to tenants is recognized in the period in which the expense can be contractually recovered.
(k) Property acquisitions
Upon acquisition of commercial properties, Mosaic performs an assessment of the fair value of the properties' related tangible and intangible assets and liabilities (including land, buildings, in-place leases, above-and below-market leases, and any other assumed assets and liabilities) and allocates the purchase price to the acquired assets and liabilities based on these fair values.
Mosaic assesses and considers fair value based on discounted cash flow projections that take into account relevant discount and capitalization rates and any other relevant sources of market information available. Estimates of future cash flows are based on factors that include historical operating results, if available, and anticipated trends, local markets and underlying economic conditions.
Mosaic allocates the purchase price based on the following:
Land – The amount allocated to land is based on a combination of an appraisal estimate of its fair value and management's best estimate.
Buildings – The amount allocated to buildings is based on a combination of an appraisal estimate of its fair value and management's best estimate.
In-place leases – In-place lease values are determined based on estimated costs required for each lease that represents the net operating income lost during an estimated lease-up period that would be required to replace the existing leases at the time of purchase.
Tenant relationships – Tenant relationship values are determined based on costs avoided if the respective tenants were to renew their leases at the end of the existing term, adjusted for the estimated probability that the tenants will renew.
Above-and below-market leases – Values ascribed to above-and below-market existing leases are determined based on the present value of the difference between the rents payable under the terms of the respective leases and estimated future market rents at the date of acquisition.
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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(l) Income producing properties
(i) Completed income producing property
Income producing properties are recorded at cost, including acquisition costs. Acquisition costs include transfer taxes and various professional fees.
Income producing property is derecognized when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected from its disposal. Income producing property is held as available for sale when they meet certain conditions. Any gains or losses on the retirement or disposal of income producing properties are recognized in income in the period of retirement or disposal.
Transfers are made to income producing property when, and only when, there is a change in use, evidenced by the end of the owner occupation or commencement of operating leases. Transfers are made from income producing property when, and only when, there is a change in use, evidenced by commencement of owner occupation or commencement of development with a view to sale.
(ii) Income producing property under construction
The cost of development properties includes direct development costs and borrowing costs directly attributable to the development.
(m) Property held for development
Property held for development includes initial acquisition costs, plus other direct costs and operating expenses incurred during the period of development.
(n) Income taxes
Income tax expense comprises current and deferred tax. Income tax expense is recognized in income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences, and the carry forward of non-capital losses, can be utilized.
Deferred tax is not recognized from the initial recognition (other than in a business combination) of other assets or liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same taxation authority on the same taxable
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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entity, or on different taxable entities where Mosaic has the intention and ability to settle current tax liabilities and assets on a net basis.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future profit will allow the deferred tax asset to be recovered and/or the carrying value of temporary differences exceed their tax basis.
(o) Provisions and contingent liabilities
Provisions are recognised when there is a present legal or constructive obligation arising as a result
of a past event for which it is probable that an outflow of economic benefits will be required to settle
the obligation and where a reliable estimate can be made of the amount of the obligation. Provisions
are stated at the present value of the expenditure expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
(p) Securities based compensation
The fair value of employee security and share options is measured using a Black Scholes pricing model. Measurement inputs include the share price on the grant date, the exercise price of the instrument, the expected volatility, the weighted average expected life of the instruments, the expected dividends and the risk-free interest rate. Service and non-market performance conditions are not taken into account in determining fair value. At the end of each reporting period, Mosaic revises its estimate of the number of equity instruments expected to vest.
(q) Earnings per share
Mosaic presents basic and diluted earnings per share ("EPS") data for its common shares. Basic EPS is calculated by dividing the net income attributable to shareholders of Mosaic less distributions approved for preferred securities by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the net income or loss attributable to owners and the weighted average number of common shares outstanding for the effects of all potentially dilutive instruments.
(r) Recent accounting pronouncements
All accounting standards effective for periods on or before December 31, 2012 have been adopted, where applicable. The following new IFRS pronouncements have been issued but are not yet effective. Mosaic does not anticipate that the new standards and amendments below will have a significant effect on the consolidated financial statements, except for additional disclosures.
IFRS 7 Financial Instruments: Disclosures
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
Amendments to IAS 1, Presentation of Financial Statements
Amendments to IAS 16, Property, Plant & Equipment
Amendments to IAS 32, Financial Instruments: Presentation
IAS 12 – Income Taxes
IAS 27 – Consolidated and Separate Financial Statements
IAS 28 – Investments in Associates and Joint Ventures
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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4. DETERMINATION OF FAIR VALUES
A number of Mosaic's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
(i) Property, plant and equipment, intangible assets and goodwill
The fair value of property, plant and equipment, intangible assets and goodwill recognized in a business combination, is based on market values. The market value of property, plant and equipment is the estimated amount for which the asset could be exchanged on the acquisition date between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of intangible assets is estimated with reference to the discounted cash flows expected to be derived from these assets.
(ii) Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, dividends payable and notes payable
The fair value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, dividends payable and operating loan approximates their carrying value due to their short term to maturity. Notes payable are recorded initially at cost, and subsequently amortized, reflecting debt discounts or premiums where interest rates negotiated with third parties differ from estimated market rates, which in management's opinion reflects their estimated fair values.
(iii) Common share and preferred security options
The fair value of options to purchase common shares and preferred securities are measured using the Black-Scholes option pricing model. Measurement inputs include security price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility of similar sized companies based on publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds).
For financial assets and liabilities carried at fair value, the significance of inputs used in making fair value measurements are examined and classified according to a fair value hierarchy. Fair values of financial assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Financial assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly and are based on valuation models and techniques where the inputs are derived from a quoted index. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement.
Cash and cash equivalents and restricted cash are measured at fair value based on a Level 1 designation.
5. FINANCIAL RISK AND CAPITAL MANAGEMENT
a. Overview
Mosaic's activities expose it to a variety of financial risks that arise as a result of its investment and financing activities such as:
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credit risk;
interest rate risk;
liquidity risk; and
market risk.
Mosaic employs risk management strategies and polices to ensure that any exposure to risk are in compliance with its business objectives and risk tolerance levels. While the board of directors has the overall responsibility for the establishment and oversight of Mosaic's risk management framework, the Company's management has the responsibility to monitor and mitigate these risks.
b. Credit risk
Mosaic's accounts receivable are due from a wide range of customers in a variety of different industries and are subject to normal credit risk. The maximum exposure to credit risk is as follows:
December 31, 2012 December 31, 2011
$ $
Cash and cash equivalents 30,818 20,303
Restricted cash 131 130
Accounts receivable 22,248 5,869
53,197 26,302
Carrying amount
Cash and cash equivalents
Mosaic manages the credit exposure related to cash and cash equivalents by selecting Canadian chartered banks with high credit ratings. Given these credit ratings, management does not expect any counterparty to fail to meet its obligations.
Accounts receivable
Mosaic offers a diverse variety of products and services to a wide range of customers and does not have any significant exposure to any one customer. The credit quality of trade receivables is considered adequate. The Company provides allowances for any customer accounts where collectability is doubtful.
c. Liquidity risk
Liquidity risk is the risk that Mosaic will not be able to meet its financial obligations as they are due. Mosaic's approach to managing liquidity is to monitor cash requirements, maintain available lines of credit and to ensure it will have sufficient liquidity to meet its liabilities when due. Mosaic's ongoing liquidity is impacted by various external events and conditions and the global economic conditions.
Mosaic's financial liabilities consist of accounts payable and accrued liabilities, dividends payable, the operating loan, tenant security deposits, mortgages payable and notes payable.
Mosaic expects to pay its financial liabilities in the normal course of operations and to fund future operational and capital requirements through operating cash flow, as well as future equity and debt financing. At December 31, 2012, all of the Company’s financial liabilities, with the exception of the notes payable, are due within the next year. The payment schedule for the notes payable is set out in note 17.
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d. Market risk
Market risk is the risk that changes in market prices, such as interest and foreign exchange rates will affect the Company’s net earnings or the value of its financial instruments. The objective of Mosaic is to manage and mitigate market risk exposures within acceptable limits, while maximizing returns.
e. Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The notes payable bear a fixed interest rate, and are not exposed to interest rate risk. Mosaic is exposed to interest rate risk to the extent that some of its borrowings are at floating rates.
At December 31, 2012 the sensitivity in net income for each 1% change in interest rates would be approximately $58 and is not significant.
f. Capital management
The Company’s objective when managing capital is to safeguard its ability to continue as a going concern. It does this by monitoring liquidity with a view to meeting near term working capital requirements. Business and asset acquisitions are structured with a combination of equity and debt financing to ensure debt servicing is manageable. Capital is defined as notes payable, the operating loan, mortgages payable, non-controlling interest and shareholders' equity.
The total managed capital for Mosaic is summarized below:
December 31, 2012 December 31, 2011
$ $
Operating loan 5,828 -
Notes payable 6,139 619
Mortgages payable - 4,862
Non-controlling interest 11,602 4,698
Shareholders' equity attributable to Mosaic 82,571 56,539
106,140 66,718
6. BUSINESS COMBINATIONS
Ambassador Mechanical
Effective January 1, 2012, Mosaic completed the acquisition of a 75% interest in the business now carried on by Ambassador Mechanical by acquiring the operating assets and liabilities of Ambassador Mechanical Ltd. The acquisition of Ambassador Mechanical was done as part of Mosaic's ongoing business plan to make long term investments in mid-market companies.
This business combination has been accounted for using the acquisition method, whereby the assets acquired and the liabilities assumed were recorded at their fair values. The fair values of the net assets acquired were determined by management using a combination of available third party market prices, the condition of the assets acquired, current industry conditions and the discounted future cash flows expected to be received from the assets and paid to settle the outstanding liabilities. Ambassador Mechanical's operating results have been included in Mosaic's revenues and expenses from January 1, 2012.
The following summarizes the allocation of the aggregate consideration for the Ambassador Mechanical acquisition:
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As at January 1, 2012 Amount $
Cash 1,448
Working capital 5,128
Property, plant and equipment 1,128
Deferred income taxes (767)
Goodwill 5,432
Other intangible assets 7,131
Enterprise value 19,500
Non-controlling interest (4,875)
Mosaic contribution 14,625
Subsequent to the initial allocation of the consideration reported in the first quarter of 2012, information not available at the acquisition date resulted in the identification of a deferred income tax liability of $767. A corresponding adjustment was made to increase Goodwill to $5,432 from $4,665 previously reported.
Consideration for the acquisition consisted of the following:
Reference Original value $ Value at December 31, 2012 $
Cash paid at close 10,275 -
Vendor take-back loan 3,600 2,459
Working capital holdback 750 750
Mosaic contribution 14,625 3,209
Intangible assets recognized on the acquisition are attributable mainly to customer relationships, the trade name and customer backlog. 75% of the goodwill is expected to be deductible for tax purposes.
Acquisition costs in the amount of $10 were expensed in the period.
Kendall's Supply
Effective August 1, 2012, Mosaic completed the acquisition of 90% of the outstanding common shares of Kendall's Supply. The acquisition of Kendall's Supply was done as part of Mosaic's ongoing business plan to make long term investments in mid-market companies.
This business combination has been accounted for using the acquisition method, whereby the assets acquired and the liabilities assumed were recorded at their fair values. The fair values of the net assets acquired were determined by management using a combination of available third party market prices, the condition of the assets acquired, current industry conditions and the discounted future cash flows expected to be received from the assets and paid to settle the outstanding liabilities. Kendall's Supply’s operating results have been included in Mosaic's revenues and expenses from August 1, 2012.
The following summarizes the estimated allocation of the aggregate consideration for the Kendall's Supply acquisition:
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As at August 1, 2012 Amount $
Cash 618
Inventory 1,041
Working capital 882
Property, plant and equipment 64
Goodwill 3,695
Other intangible assets 4,700
Enterprise value 11,000
Non-controlling interest (1,100)
Mosaic Capital contribution 9,900
Consideration for the acquisition consisted of the following:
Reference Original value $ Value at December 31, 2012 $
Cash paid at close 6,780 -
Vendor take-back loan 2,970 2,692
Working capital holdback 150 150
Mosaic Capital Portion 9,900 2,842
Intangible assets recognized on the acquisition are attributable mainly to customer relationships and employment agreements. None of the goodwill is expected to be deductible for tax purposes.
Acquisition costs in the amount of $17 were expensed in the period.
7. CASH AND RESTRICTED CASH
Cash and cash equivalents is comprised of amounts held in the Company’s bank accounts. Restricted cash is comprised of deposits with Canadian Chartered banks which are pledged as security relating to the use of corporate credit cards and payroll processing.
8. ACCOUNTS RECEIVABLE
The Company's accounts receivable are comprised of the following:
December 31, 2012 December 31, 2011
$ $
Trade receivables 15,455 5,004
Holdbacks receivable 4,320 -
Other 2,473 865
22,248 5,869
Carrying amount
Holdbacks receivable represent amounts billed on infrastructure contracts which are not due until the contract work is substantially completed and the applicable lien period has expired.
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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Trade receivables are aged as follows:
December 31, 2012 December 31, 2011
$ $
Current (0 - 30 days) 7,156 2,662
31 to 60 days 5,499 1,837
61 to 90 days 1,418 355
Past due (greater than 90 days) 1,567 365
Allowance for doubtful accounts (185) (215)
15,455 5,004
Mosaic has an allowance for doubtful accounts as at December 31, 2012 of $185 (December 31, 2011 - $215). When determining whether past due accounts are recoverable, Mosaic factors in the past credit history of the customers. Mosaic considers all amounts greater than 90 days as past due. Amounts greater than 90 days are considered collectible at December 31, 2012.
9. INVENTORIES
December 31, 2012 December 31, 2011
$ $
Raw materials and consumables 706 586
Parts for resale 1,109 -
Work in progress 698 -
2,513 586
The cost of inventories recognized as an expense during the year in respect of continuing operations was $21,624 (2011 - $2,651).
10. PROPERTY HELD FOR DEVELOPMENT
On October 23, 2012, FWDLP completed the purchase of vacant land in Regina, Saskatchewan for a purchase price of $2,500. Subsequent development costs of $226 have been incurred during the year. On February 29, 2012, FWP completed the sale of a parcel of land (which cost $439) located in Lethbridge, Alberta for aggregate consideration of $527 less disposal costs of $11.
11. INFRASTRUCTURE CONTRACTS
Costs incurred and earned revenue net of billings, on uncompleted contracts is presented in the consolidated balance sheets under the following captions:
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Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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2012 2011
$ $
Earned revenue on projects to date 43,558 -
Less: billings on projects to date (47,592) -
Net balance sheet position (4,034) -
Reported as:
Costs in excess of billings (Work in
progress) 698 -
Deferred contract revenue (4,732) -
(4,034) -
Statement of income amounts related to these contracts are as follows:
2012 2011
$ $
Infrastructure contract revenue 43,558 -
Infrastructure contract expense (32,402) -
Infrastructure contract profit 11,156 -
December 31
December 31
12. ASSETS HELD FOR SALE
Assets held for sale are comprised of three commercial buildings which are listed and available for immediate sale in their present condition. On February 1, 2013, two of the buildings were sold for aggregate consideration of $14,700. The sale of the remaining building is highly probable and is expected that it will take place within the next six to twelve months.
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13. INCOME PRODUCING PROPERTIES
Land Buildings Total
Land Buildings Total
$ $ $
Balance at January 1, 2011 - - -
Additions 7,298 21,908 29,206
Disposals (2,353) (7,060) (9,413)
4,945 14,848 19,793
Additions - 76 76
Reclassified to assets held for sale (4,945) (14,924) (19,869)
- - -
- - -
Amortization for the year - 234 234
Disposals - (36) (36)
- 198 198
Amortization for the year - 147 147
Reclassified to assets held for sale - (345) (345)
- - -
At December 31, 2011 4,945 14,650 19,595 At December 31, 2012 - - -
Balance at December 31, 2012
Net book value
Cost
Balance at December 31, 2011
Balance at December 31, 2012
Balance at January 1, 2011
Accumulated amortization
Balance at December 31, 2011
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14. PROPERTY, PLANT AND EQUIPMENT
Land M otor Vehicles Computer
Equipment
Production
and Rental
equipment
Furniture
and
Fixtures
Parts
Inventory
Leasehold
Improvements Total
$ $ $ $ $ $ $
57 1,070 382 4,265 142 438 5 6,359
Additions - 504 69 387 27 - - 987
Disposals (57) (108) - - - - - (165)
- 1,466 451 4,652 169 438 5 7,181
Acquisitions - 745 16 420 11 - - 1,192
Additions - 304 250 320 156 - 625 1,655
Disposals - (136) - (210) (15) - (5) (366)
- 2,379 717 5,182 321 438 625 9,662
A ccumulated amo rt izat io n
- 473 204 976 64 143 3 1,862
Amortization for the year - 275 65 272 19 60 2 694
Disposals - (60) - - - - - (60)
- 688 269 1,248 83 203 5 2,496
Amortization for the year - 493 86 349 27 47 21 1,023
Disposals - (79) - (90) (2) - (5) (176)
- 1,102 355 1,507 108 250 21 3,343
At December 31, 2011 - 778 182 3,404 86 235 - 4,685
At December 31, 2012 - 1,277 362 3,675 213 188 604 6,319
N et bo o k value
Balance at December 31, 2011
Balance at December 31, 2012
C o st
Balance at December 31, 2011
Balance at January 1, 2011
Balance at January 1, 2011
Balance at December 31, 2012
15. EMPLOYEE SHARE PURCHASE PLAN
Directors, officers and key employees ("employee" or collectively "employees") of Mosaic are eligible to
participate in the employee share purchase plan (the "ESPP"). Under the ESPP, employees who have
been invited to participate in the ESPP may contribute up to such amount as is determined from time to
time by management. The amount, if any, contributed by an employee is matched by the Company
through a matching loan (the "Loan") secured by a promissory note bearing interest at 1% and
repayable by the employee over a term not to exceed five years. The employee contribution, together
with the funds loaned by Mosaic, are then provided to the trustee of the ESPP and the trustee uses such
funds to purchase common shares of Mosaic through the facilities of the TSX Venture Exchange. The
trustee is responsible for determining the pricing and timing of purchases of the common shares. The
common shares purchased on behalf of an employee are held as security for their Loan. Should the
employee's position terminate, their Loan is repayable, subject to certain exceptions, within 30 days of
the termination date. Should the common shares be sold by the employee, the proceeds of such sale
shall first be applied in repayment of the Loan and then any remaining balance remitted to the employee.
If any dividends or other distributions are paid on the common shares held under the ESPP for the
benefit of the employee, the proceeds are used to reduce the Loan made to such employee.
The outstanding amount of loans under the ESPP was $549 as at December 31, 2012 (December 31,
2011 - $445).
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-30-
16. GOODWILL AND OTHER INTANGIBLES
Goodwill Trade
Name
Customer
Relationships Backlog
Intellectual
Property
Employment
Agreements
Non-compete
Agreements
Computer
Software Step up
leases Total
C o st $ $ $ $ $ $ $ $ $ $
B alance at January 1, 2011 7,906 - 11,389 - 1,460 199 117 218 - 21,289
Acquisitions - - - - - - - 94 50 144
Disposals - - - - - - - (56) - (56)
B alance at D ember 31, 2011 7,906 - 11,389 - 1,460 199 117 256 50 21,377
Acquisitions 9,127 1,395 8,600 1,200 - 500 136 23 29 21,010
Disposals - - - - - - (8) (7) (5) (20)
B alance at D ecember 31, 2012 17,033 1,395 19,989 1,200 1,460 699 245 272 74 42,367
A ccumulated amo rt izat io n
B alance at January 1, 2011 - - 2,297 - 256 61 58 191 - 2,863
Amortization for the year - - 759 - 98 20 24 50 - 951
Disposals - - - - - - - (22) - (22)
B alance at D ecember 31, 2011 - - 3,056 - 354 81 82 219 - 3,792
Amortization for the year - - 1,200 1,200 97 30 49 48 - 2,624
Disposals - - - - - - (8) (7) - (15)
B alance at D ecember 31, 2012 - - 4,256 1,200 451 111 123 260 - 6,401
N et bo o k value
At December 31, 2011 7,906 - 8,333 - 1,106 118 35 37 50 17,585
At December 31, 2012 17,033 1,395 15,733 - 1,009 588 122 12 74 35,966
Goodwill
Mosaic allocates goodwill to its CGUs. The recoverable amount of each CGU has been determined
based on value-in-use calculations. Those calculations use cash flow projections based on actual
operating results and the 5 year projection from management. Cash flows for a further 5 year period
are extrapolated using a 2 - 5% growth rate. These assumptions are based on management's
assessment of the expected growth for each entity.
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Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-31-
17. NOTES PAYABLE
December 31, 2012 December 31, 2011
$ $
Vendor take back loan related to the acquisition of
Ambassador Mechanical. The loan bears interest
at 5% per annum and is repayable in blended
monthly payments of $108 to November 2014.
2,338 -
Vendor take back loan related to the acquisition of
Kendall's Supply. The loan bears interest at 8%
per annum and is repayable in blended monthly
payments of $93 to August 2015.
2,626 -
Equipment loans and a leasehold improvement
loan from a financial institution to a limit of $350
and $500 respectively The loans bear interest at
bank prime plus 1% per annum and are repayable
in blended monthly payments over a 36 month
period. The notes are secured by a general
security agreement and a registered first charge
on purchased equipment.
605 -
Note payable to a former minority partner. The
note was repayable with monthly payments of $5
and a lump sum payment of $110 on Jan 1, 2012.
Interest was calculated on the lower of $110 or the
outstanding balance of the loan at 5%. The note
was secured by a first charge on the partnership
units purchased.
- 139
Capital leases bearing interest at 5% per annum,
repayable in blended quarterly payments of $10 to
March 2017
166 41
Capital lease bearing no interest, repayable in
monthly payments of $2 to September 2013
23 -
Vehicle financing bearing interest at a blended
rate of between 0.0% to 8.6%, repayable in
blended monthly payments of between $1 and $2.
Expiry of the financing ranges from December 31,
2012 to July 31, 2015. The financings are secured
by a specific charge over the vehicles financed.
381 439
6,139 619
Less: Current portion (2,528) (310)
3,611 309
The note payable issued as partial consideration for the acquisition of Ambassador Mechanical bears
interest at 5% and the fair value interest rate has been determined to be 10%. The note payable issued
as partial consideration for the acquisition of Kendall's Supply bears interest at 8% and the fair value
interest rate has been determined to be 10%. The fair value interest rate on all notes payable has been
assessed. As a result the notes payable are reported at a different carrying value than the actual face
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-32-
value which resulted in a non-cash fair value gain of $342 which is expensed as accretion over the life of
the notes. The difference between the notes payable carrying value of $6,139 and the face value of
$6,326 relates to the un-accreted balance of the debt discount of $187 at December 31, 2012
(December 31, 2011 - $Nil). During the year, accretion expense was $155 (2011 - $4).
Payments of principal amounts owing are scheduled as follows:
$
2013 2,531
2014 2,591
2015 925
2016 142
2017 137
6,326
Cash Payments
18. MORTGAGES PAYABLE
One of Mosaic's subsidiaries had previously entered into various loans with a Canadian chartered bank,
and in respect to each, had issued a mortgage and a demand promissory note. The demand
promissory note would have come into effect if there was a default. Mosaic repaid in full these
mortgages during the year ended December 31, 2012 from proceeds drawn on the operating loan.
19. SHARES AND SECURITIES
Mosaic is authorized to issue the following shares and other securities.
(i) Common shares
Authorized: Unlimited
The holders of common shares are entitled to one vote per share at all meetings of shareholders except separate meetings of the holders of another class or series of shares. The common shares carry an entitlement to dividends, if and when declared by the board of directors and to the distribution of the residual assets of Mosaic in the event of its liquidation, dissolution or winding-up.
(ii) Preferred shares
Authorized: Unlimited
The preferred shares are issuable in series. The preferred shares of each series rank on a parity with the preferred shares of every other series with respect to dividends and return of capital and are entitled to a preference over the common shares and any other shares ranking junior to the preferred shares with respect to priority in the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of the Company. The board of directors are empowered to fix the number of shares and the rights to be attached to the preferred shares of each series, including the amount of dividends and any conversion, voting and redemption rights. Subject to the Company’s Articles of Incorporation and to applicable law, the preferred shares as a class are not entitled to receive notice of or attend or vote at meetings of shareholders.
The board of directors has created Series "A" shares. The Series "A" shares are non-voting and entitle the holders thereof to a dividend equal to the dividend payments made on the preferred securities. Each Series "A" share is redeemable for one preferred security.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-33-
(iii) Preferred securities
Authorized: Unlimited
The preferred securities were created and issued under the subordinated securities indenture ("Preferred Securities Indenture") dated April 29, 2011 between Mosaic and Olympia Trust Company as trustee. The preferred securities are non-voting, unsecured, subordinated, perpetual securities having no fixed maturity date or redemption and are issuable in denominations of $10 and integral multiples thereof and bear simple interest at the rate of 10% per annum calculated on the principal amount annually not in advance.
On October 30, 2012, Mosaic closed an offering of preferred securities at a price of $10.55 per security for gross proceeds of $25,054. Transaction costs of $1,671 were incurred related to this offering and were netted against the preferred securities stated value.
(iv) Distributions and dividends to security holders and shareholders:
Preferred
securities
Series "A"
shares Common shares Totals
$ $ $ $
Dividends/distributions unpaid - December 31, 2011 422 2 - 424
Dividends/distributions declared 5,658 21 895 6,574
Dividends/distributions paid 5,460 21 895 6,376
Dividends/distributions unpaid December 31, 2012 620 2 - 622
For the year ended December 31, 2012
20. EARNINGS PER SHARE
For purposes of this calculation, the prior period common units have been converted into the equivalent number of common shares. The earnings available to common shareholders are also net of preferred security dividends and series "A" share dividends paid.
[remainder of page intentionally left blank]
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-34-
2012 2011
Net income from continuing operations 10,587$ 1,779$
Less: Non-controlling interest (2,010) (968)
Less: Preferred unit interest - (1,182)
Less: Preferred security dividends (5,658) (3,381)
Less: Series "A" share dividends (21) (12)
Net income (loss) from continuing operations for common
shareholders 2,898 (3,764)
Weighted average number of common shares 8,138 7,116
Basic EPS from continuing operations 0.36 (0.52)
Fair value adjustment 342 -
Weighted average number of common shares 8,138 7,116
Basic EPS from fair value adjustment 0.04 -
Loss from discontinued operations - 76
Weighted average number of common shares 8,138 7,116
Basic EPS from discontinued operations - 0.01
Net income (loss) per common share 0.40 (0.51)
Average number shares for options 222 233
Average number shares for RSUs 166 -
Diluted average number of shares 8,526 7,349
Diluted EPS from continuing operations 0.34 (0.52)
Diluted EPS from other income 0.04 -
Diluted EPS from discontinued operations - 0.01
Diluted EPS 0.38 (0.51)
A dividend of $0.02 per common share was paid on February 15, 2012. A dividend of $0.03 per common share was paid on May 15, 2012, August 15, 2012 and November 15, 2012 respectively.
21. STOCK OPTIONS
The board of directors has adopted an amended and restated securities-based compensation plan
which was approved by the holders of common shares at the annual and special meeting of
shareholders held June 27, 2012. The securities-based compensation plan is intended to afford
persons who provide services to Mosaic with an opportunity to obtain a proprietary interest in the
Company and to assist in attracting, retaining and encouraging the continued involvement of such
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-35-
persons with Mosaic. The securities-based compensation plan permits the granting of equity incentive
awards, including stock options, stock appreciation rights, restricted stock, restricted stock units,
performance awards and other securities-based awards to directors, officers, employees and
consultants of Mosaic and its subsidiaries. The number of common shares that will be available for
issuance under the securities-based compensation plan will not exceed 10% of the issued and
outstanding common shares on a rolling basis. Subject to the rules and regulations of all applicable
regulatory authorities to which Mosaic is subject, the number of preferred securities reserved for
issuance pursuant to the securities-based compensation plan is unlimited. The number of series "A"
shares issuable pursuant to the securities-based compensation plan is limited to the number issuable
pursuant to the options described immediately below.
Immediately prior to the completion of the Arrangement, FWP had outstanding options to purchase
1,525,000 common shares of FWP (the "FWP Options"). Pursuant to the terms of the Arrangement,
the FWP Options were exchanged for Mosaic unit options on a basis so as to put the holders in
materially the same economic position as they were prior to the Arrangement. The Mosaic unit options
entitle the holders to receive the same mix of preferred securities and common shares as holders of
common shares of FWP received under the Arrangement, namely 0.154 common shares per option and
0.077 series "A" shares per option. Upon completion of the Arrangement, 1,525,000 Mosaic unit
options were issued which entitled the holders thereof to acquire, in aggregate, 234,850 common shares
and 117,425 series "A" shares. These options are issued under, and subject to, the securities-based
compensation plan.
Activity
Number of
Common Shares
for issue under
Options
Weighted
Exercise
Price
Number of Series
"A" Shares for
issue under
Options
Weighted
Exercise
Price
$ $
Outstanding December 31, 2011 233,310 3.51 95,865 7.12
Exercised - - - -
Expired (11,550) - (5,775) -
Outstanding December 31, 2012 221,760 3.52 90,090 7.16
The following tables indicate the expiry dates upon which the Mosaic common shares and series "A" shares cease to be able to be obtained upon exercise of Mosaic unit options.
Number of Common Shares for issue under
Options
Exercise
Price Expiry Date
$
179,410 3.25 June 6, 2017
30,800 4.87 August 22, 2017
11,550 4.12 December 31, 2019
221,760 Total
Number of Series "A" Shares for issue under
Options
Exercise
Price Expiry Date
$
68,915 6.49 June 6, 2017
15,400 9.74 August 22, 2017
5,775 8.25 December 31, 2019
90,090 Total
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-36-
Other than as set forth in note 22 below Mosaic did not issue any securities for securities-based compensation during the years ended December 31, 2012 or December 31, 2011.
Non-cash compensation expense: 2012 2011
$ $
Stock options - 505
Restricted securities units 828 -
Total 828 505
Mosaic accounts for its securities-based compensation using the fair value method for all stock options. Mosaic expenses the fair value of the stock options that are expected to vest over the vesting period. For the year ended December 31, 2012 Mosaic recorded non-cash compensation expense of $Nil (2011 - $505) for stock options. The fair values of all options granted during the period are estimated at the date of grant using a Black-Scholes option pricing model. Expected volatility is estimated by considering historic average stock price volatility.
The assumptions used in the Black-Scholes model to determine the fair value of options for common shares are as follows:
Grant date
of options Unit price
Weighted
average fair
value
Exercise
price
Annual
dividend
yield of
options Volatility
Risk free
interest
rate
Expected
remaining
life of the
options
$ $
May 1, 2011 5.00 2.64 3.25 0% 36% 3% 6.10 years
May 1, 2011 5.00 2.64 4.87 0% 36% 3% 6.14 years
May 1, 2011 5.00 2.64 4.12 0% 36% 3% 8.67 years
The assumptions used in the Black-Scholes model to determine the fair value of options for series "A" shares are as follows:
Grant date
of options Unit price
Weighted
average fair
value
Exercise
price
Annual
dividend
yield of
options Volatility
Risk free
interest
rate
Expected
remaining
life of the
options
$ $ $
May 1, 2011 10.00 1.77 6.49 10% 36% 2.88% 6.10 years
May 1, 2011 10.00 1.77 9.74 10% 36% 2.88% 6.14 years
May 1, 2011 10.00 1.77 8.25 10% 36% 2.88% 8.67 years
22. RESTRICTED SECURITIES UNITS
Mosaic has conditionally issued, as part of its variable compensation incentive program for the 2012 year (the "Plan"), 377,271 restricted securities units ("RSUs") to its executive officers and certain consultants and employees. The terms of the Plan provide that the RSUs issued are subject to
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-37-
cancellation in whole or in part to the extent that specified performance criteria are not met. Accordingly, the maximum potential numbers of RSUs have been conditionally issued but a portion of them may be cancelled in early 2013. The RSUs are to be settled on a one-for-one basis for the underlying security and have been issued pursuant to Mosaic's securities-based compensation plan. Vesting of the RSUs for each grantee is subject to personal and corporate performance criteria being met and to an allocation at the election of the grantee between RSUs for Mosaic common shares, Mosaic preferred securities or a combination thereof. The attainment of the performance criteria will be assessed and determined by the board of directors of Mosaic in early 2013. The RSUs held by a grantee will vest yearly in three equal tranches starting on the date on which the board of directors makes its determination as to the degree of success in attaining the performance criteria, which determination will determine the corresponding number of RSUs to remain available for vesting and those to be cancelled (if any) for each grantee. Mosaic has reserved a maximum of 377,271 common shares (each at a price of $3.30) and 144,935 preferred securities (each at a price of $8.59) to be issued upon settlement of the RSUs and receipt of the underlying securities by the grantees.
In addition to the foregoing, Mosaic has granted, as part of its incentive program for the 2011 year, 25,455 RSUs to one of its executive officers. These RSUs vest immediately and are to be settled in common shares on a one-for-one basis. Mosaic has reserved 25,455 common shares (each at a price of $3.30), to be issued upon settlement of the RSUs and receipt of the underlying securities by the grantee.
The accrued value of RSUs as of December 31, 2012 was $828 (December 31, 2011 - $Nil).
Non-cash compensation expense: 2012 2011
$ $
Stock options - 505
Restricted securities units 828 -
Total 828 505
Mosaic accounts for its securities-based compensation using the fair value method for all RSUs. Mosaic expenses the fair value of the RSUs that are expected to vest over the vesting period. For the year ended December 31, 2012 Mosaic recorded non-cash compensation expense of $828 (2011 - $Nil) for RSUs. The fair values of all RSUs granted during the period are estimated at the date of grant using a Black-Scholes option pricing model. Expected volatility is estimated by considering historic average stock price volatility.
The assumptions used in the Black-Scholes model to determine the fair value of RSUs are as follows:
Grant date of
RSUs Unit price
Weighted
average fair
value
Exercise
price
Annual
dividend
yield of
RSUs Volatility
Risk free
interest
rate
Expected
remaining
life of the
RSUs
$ $ $
June 28, 2012 10.00 10.00 8.59 0% 55% 1% 2.25 years
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-38-
23. SEGMENTED INFORMATION
Mosaic's reportable business segments include strategic business units that offer different products and services but share similar economic characteristics and/or operate in similar geographic locations and represent those components of the Company that are evaluated regularly by the chief operating decision maker in assessing performance and allocating resources. The Company’s chief operating decision maker is a group of executive directors and directors at large.
Mosaic has three reportable business segments:
Real Estate consists of a portfolio of income producing commercial and industrial real estate assets in Lethbridge and Fort McMurray, Alberta and Regina Saskatchewan.
Industrial consists of the business operations conducted through Printing Unlimited, Allied Cathodic,
Polar, Remote Waste, Ambassador Mechanical and Kendall's Supply.
Corporate consists of the Company’s cost centres that are not included in the reportable segments above and primarily relates to general corporate activities that are not allocated to the Industrial and Real Estate segments.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in note 3. Mosaic evaluates each segment's performance based on operating income. Mosaic's method of calculating operating income may differ from that of other corporations and therefore may not be comparable to measures utilized by them. There are no inter-segment revenues.
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Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-39-
Segment ed Income and Expenses
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
In thousands of Canadian dollars 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011
A sset s $ $ $ $ $ $ $ $ $ $
Current assets
Cash and cash equivalents 15,848 11,358 135 1,849 15,983 13,207 14,835 7,096 30,818 20,303
Restricted cash 120 120 - 10 120 130 11 - 131 130
Accounts receivable 22,128 5,844 54 9 22,182 5,853 66 16 22,248 5,869
Inventory 2,513 586 - - 2,513 586 - - 2,513 586
Deposits and prepaid expenses 362 103 20 264 382 367 279 39 661 406
Lease incent ive - - 30 - 30 - - - 30 -
Income taxes recoverable 920 - - - 920 - - - 920 -
Assets held for sale - - 19,524 - 19,524 - - - 19,524 -
Total current assets 41,891 18,011 19,763 2,132 61,654 20,143 15,191 7,151 76,845 27,294
Non-current assets
Property held for development - - 2,726 439 2,726 439 - - 2,726 439
Income producing propert ies - - - 19,595 - 19,595 - - - 19,595
Investments - 31 - - - 31 - (31) - -
Property, plant and equipment 6,267 4,622 - 17 6,267 4,639 52 46 6,319 4,685
Employee share purchase plan - - - - - - 549 445 549 445
Goodwill and other intangible assets 35,887 17,513 74 50 35,961 17,563 5 22 35,966 17,585
Total non-current assets 42,154 22,166 2,800 20,101 44,954 42,267 606 482 45,560 42,749
Total assets 84,045 40,177 22,563 22,233 106,608 62,410 15,797 7,633 122,405 70,043
Liab il it ies
Current liabilit ies
Operat ing Loan - - - - - - 5,828 - 5,828 -
Accounts payable and accrued liabilit ies 8,867 1,355 61 174 8,928 1,529 1,155 818 10,083 2,347
Dividends payable - - - - - - 622 424 622 424
Deferred contract revenue 4,732 - - - 4,732 - - - 4,732 -
Due to (from) related part ies 846 6 1,916 - 2,762 6 (2,762) (6) - -
Current port ion of mortgages payable - - - 216 - 216 - - - 216
Current port ion of notes payable 2,528 310 - - 2,528 310 - - 2,528 310
Total current liabilit ies 16,973 1,671 1,977 390 18,950 2,061 4,843 1,236 23,793 3,297
Non-current liabilit ies
M ortgages payable - - - 4,646 - 4,646 - - - 4,646
Notes payable 3,611 309 - - 3,611 309 - - 3,611 309
Deferred income tax liability 2,080 488 (86) - 1,994 488 (1,235) - 759 488
Security deposits - - 69 66 69 66 - - 69 66
Total non-current liabilit ies 5,691 797 (17) 4,712 5,674 5,509 (1,235) - 4,439 5,509
Total Liabilit ies 22,664 2,468 1,960 5,102 24,624 7,570 3,608 1,236 28,232 8,806
Shareho lder/ U nit ho lder Equit y
Preferred securit ies - - - - - - 69,060 45,677 69,060 45,677
Series " A" shares - - - - - - 135 135 135 135
Common shares 18,080 - 19,538 16,946 37,618 16,946 (21,637) (965) 15,981 15,981
Preferred trust units 32,877 32,877 - - 32,877 32,877 (32,877) (32,877) - -
Contributed surplus - - - - - - 782 505 782 505
Common trust units - 16 - - - 16 - (16) - -
Non-controlling interest 11,602 4,698 - - 11,602 4,698 - - 11,602 4,698
Retained earnings (def icit ) (1,178) 118 1,065 185 (113) 303 (3,274) (6,062) (3,387) (5,759)
Total Equity attributable to equity holders 61,381 37,709 20,603 17,131 81,984 54,840 12,189 6,397 94,173 61,237
Total liabilit ies and shareholder/unitholder equity 84,045 40,177 22,563 22,233 106,608 62,410 15,797 7,633 122,405 70,043
Segments Sub-Total as atIndustrial as at Real Estate as at Consolidated as atCorporate as at
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-40-
Segment ed Income and Expenses
In thousands of Canadian dollars 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011$ $ $ $ $ $ $ $ $ $
R evenue 72,336 22,229 3,479 1,425 75,815 23,654 - - 75,815 23,654
Operat ing expenses 54,901 15,342 1,099 811 56,000 16,153 3,051 2,118 59,051 18,271
Income f rom Operat ions 17,435 6,887 2,380 614 19,815 7,501 (3,051) (2,118) 16,764 5,383
Accret ion expense 155 - - - 155 - - - 155 -
Amort izat ion of buildings - - 147 234 147 234 - - 147 234
Amort izat ion of tangible assets 1,003 683 4 3 1,007 686 16 8 1,023 694
Amort izat ion of intangible assets 2,600 946 - - 2,600 946 24 5 2,624 951
Share based compensat ion - - - - - - 828 505 828 505
(Gain) Loss on sale of assets 13 20 (36) - (23) 20 - - (23) 20
3,771 1,649 115 237 3,886 1,886 868 518 4,754 2,404
Income ( loss) bef o re f inance 13,664 5,238 2,265 377 15,929 5,615 (3,919) (2,636) 12,010 2,979
Finance income 80 17 - 75 80 92 6 - 86 92
Finance expense 287 28 215 219 502 247 - - 502 247
(207) (11) (215) (144) (422) (155) 6 - (416) (155)
Income ( loss) bef o re o t her it ems 13,457 5,227 2,050 233 15,507 5,460 (3,913) (2,636) 11,594 2,824
Other income and expenses
Acquisit ion costs - - - - - - - 552 - 552
Income (loss) from cont inuing operat ions before tax 13,457 5,227 2,050 233 15,507 5,460 (3,913) (3,188) 11,594 2,272
Income tax expense (recovery)
Current 1,204 - 299 124 1,503 124 - - 1,503 124
Deferred 459 369 280 - 739 369 (1,235) - (496) 369
1,663 369 579 124 2,242 493 (1,235) - 1,007 493
N et income ( loss) f rom cont inuing operat ions 11,79 4 4 ,8 58 1,4 71 10 9 13 ,2 6 5 4 ,9 6 7 ( 2 ,6 78 ) ( 3 ,18 8 ) 10 ,58 7 1,779
Preferred trust unit interest - the Fund - - - - - - - (1,182) - (1,182)
Fair value adjustment 342 - - - 342 - - - 342 -
Net income (loss) from discont inued operat ions, net of tax - - - 76 - 76 - - - 76
12 ,13 6 4 ,8 58 1,4 71 18 5 13 ,6 0 7 5,0 4 3 ( 2 ,6 78 ) ( 4 ,3 70 ) 10 ,9 2 9 6 73
Income and comprehensive income attributed to:
Shareholders' 10,126 3,890 1,471 185 11,597 4,075 (2,678) (4,370) 8,919 (295)
Non-Controlling interest 2,010 968 - - 2,010 968 - - 2,010 968
12 ,13 6 4 ,8 58 1,4 71 18 5 13 ,6 0 7 5,0 4 3 ( 2 ,6 78 ) ( 4 ,3 70 ) 10 ,9 2 9 6 73
ConsolidatedCorporate
N et income ( loss) and comprehensive income
Segments Sub-TotalIndustrial Real Estate
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
-41-
24. CONSOLIDATED ENTITIES
Country of
Parent Entity Incorporation December 31, 2012 December 31, 2011
Mosaic Capital Corporation Canada
Significant Cash Generating Units
Mosaic Diversified Income Fund Canada 100.00% 100.00%
Mosaic Capital LP Canada 100.00% -
First West Properties LP Canada 100.00% 100.00%
Ownership Interest
25. NON-CONTROLLING INTEREST
Non-controlling interest consists of the capital contributions and accumulated earnings of the minority partners in operating entities of the Fund and Mosaic L.P., less distributions to minority partners in those entities.
During the year ended December 31, 2012, $2,010 (2011 - $968) of Mosaic's net income was allocated to non-controlling interests and distributions of $1,081 (2011 - $868) were paid to holders of the non-controlling interests. Capital contributions of $5,975 were received during the year as part of the acquisitions of Ambassador Mechanical and Kendall's Supply.
26. OPERATING LOAN
On January 6, 2012, Ambassador Mechanical obtained a revolving demand credit facility with a Canadian financial institution of the lesser of $3,000 or the combined value of eligible assigned accounts receivable and inventories as documented in the facility, to be used to finance its normal course operations. As at December 31, 2012, Ambassador Mechanical has not drawn on the facility. Borrowings under the facility are secured by a first charge on all assets of Ambassador Mechanical, presently owned and after acquired. Interest is charged at a rate per annum equal to prime rate of the lending institution plus 0.5%.
Ambassador Mechanical is subject to the following financial covenants with respect to this facility:
(i) Cash flow available for debt servicing is to be 1.25 or better.
(ii) The debt to net worth ratio is to be 2.5:1 or better.
Debt consists of total liabilities of Ambassador Mechanical. Net worth is defined as and consists of
share capital, retained earnings, and contributed surplus.
Ambassador Mechanical is in compliance with the above covenants as at December 31, 2012.
Mosaic
Effective August 1, 2012, Mosaic put in place a $10 million revolving facility and a $5.8 million fixed term facility (collectively, the "Credit Facilities"). Borrowings under the Credit Facilities are due on demand and may also be accelerated and declared due and payable upon the occurrence of certain stipulated events of default typical for such commercial loans. The Credit Facilities are secured by an overdraft lending agreement, a general security agreement from Mosaic and First West, a full liability guarantee by First West, a first charge blanket mortgage on the income producing properties of First West, an
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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assignment of rents and or leases from First West, and an assignment of risk casualty and liability insurance. Borrowings under the Credit Facilities bear interest at a rate per annum equal to prime rate of the Canadian Western Bank plus 1.0%. Advances under the revolving portion of the Credit Facilities are repayable as to interest only until demanded whereas advances under the fixed term portion of the Credit Facilities are to be repaid by blended monthly payments of principal and interest.
The Credit Facilities require Mosaic to maintain (i) a debt service coverage ratio of not less than 1.30:1 from First West's income producing properties, and (ii) a loan to value ratio of not more than 65%, based upon the value of First West's income producing properties. For purposes of the calculations of these two ratios, the Credit Facilities are considered to be fully drawn.
Mosaic is in compliance with the above covenants as at December 31, 2012.
As at December 31, 2012, Mosaic had a $Nil balance on the revolving portion of the Credit Facilities, which was disclosed as cash (December 31, 2011 - $Nil) and $5,828 (December 31, 2011 - $Nil) on the fixed term portion of the Credit Facilities.
27. REVENUE
2012 2011
$ $
Infrastructure contract revenue 43,558 -
Revenue related to assets held for sale 3,480 -
Other revenue 28,777 23,654
75,815 23,654
28. PERSONNEL EXPENSES
The aggregate consolidated payroll expense of employees, officers and directors was as follows:
2012 2011
$ $
Salaries 10,942 8,776
Securities based compensation (i) 828 -
11,770 8,776
(i) Represents the securities-based compensation associated with RSUs granted to all employees,
officers and directors as recorded in the consolidated financial statements.
(ii) Key management personnel include executive officers and certain key consultants. Executive officers are paid a salary and are eligible to participate in Mosaic's securities-based compensation plan. The executive officers include the Executive Chairman and Chief Executive Officer, President and Chief Financial Officer and the Vice President Corporate Affairs. Key management personnel compensation is comprised of the following:
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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2012 2011
$ $
Salaries 784 1,284
Securities based compensation (iii) 287 -
1,071 1,284
(iii) Represents the securities-based compensation associated with RSUs granted to executive officers and non-executive directors as recorded in the consolidated financial statements.
29. FINANCE INCOME AND EXPENSES
2012 2011
$ $
Finance income
Interest income on cash and cash
equivalents 86 92
Finance expenses
Interest expense on notes payable 502 247
(416) (155)
Net finance income (expense)
recognized in profit or loss
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Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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30. INCOME TAXES
Reconciliation of effective tax rate:
2012 2011
$ $
Income before tax 11,594 2,272
Statutory Tax Rate 25.00% 26.50%
2,899 602
Stock based compensation 207 134
Prior year First West tax reassessment - 124
Unrecognized deferred income tax asset - 568
Reversal of prior year deferred income tax asset (568) -
Distributions on preferred securities (1,415) (896)
Other (116) (39)
1,007 493
Deferred tax assets and liabilities are attributable to the following:
December 31, 2012 December 30, 2011
$ $
Deferred tax liabilities
Property, plant and equipment 414 484
Holdback adjustment 770 -
Intangible assets 866 122
Total deferred tax liabilities 2,050 606
Less deferred tax assets
Unamortized share issuance costs 359 91
Non-capital tax losses 897 17
Capital lease obligation 35 10
Total deferred tax assets 1,291 118
Net deferred tax liability 759 488
Net deferred tax liability
Balance, Beginning of Year 488 119
Deferred tax created on business combination 767 -
Deferred income tax expense (recovery) (496) 369
Balance, End of Year 759 488
Mosaic Capital has available the following estimated non-capital loss carry forwards for which a deferred tax asset has been recognized in the consolidated financial statements:
Year of expiry Amount $
2032 897
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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31. SUPPLEMENTAL CASH FLOW INFORMATION
Change in non-cash operating working capital:
2012 2011
$ $
Accounts receivable (3,620) (1,483)
Inventory (845) (33)
Prepaids (114) (321)
Lease incentive (30) -
Deferred contract revenue 1,576 -
Accounts payable and acrued liabilities 2,399 891
Income taxes recoverable (920) -
Dividends/Distributions payable 198 (969)
Security Deposits (3) (66)
Other - 151
(1,359) (1,830)
December 31,
32. RELATED PARTY TRANSACTIONS
Consulting fees in the amount of $180 ( 2011 - $159) were paid for the year ended December 31, 2012 to a company controlled by a director of Mosaic (formerly a trustee of the Fund) in the course of business related to Mosaic.
Consulting fees in the amount of $Nil ( 2011 - $100) were paid for the year ended December 31, 2012 to a company controlled by one of the officers of Mosaic (then an officer of the administrator of the Fund) in the course of business related to the Arrangement.
Rent in the amount of $98 (2011 - $Nil) was paid for the year ended December 31, 2012 to entities being controlled by minority partners.
Related party transactions are in the normal course of operations and are recorded at fair value.
33. DISCONTINUED OPERATIONS
In June 2011, FWP completed the sale of a property in Saskatoon, Saskatchewan. The results of this income producing property have been presented as discontinued operations.
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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2012 2011
$ $
Impact on statement of income (loss):
Revenue and other income - 327
Operating expenses - 145
Loss from operations - 182
Loss on sale of properties - 106
Loss before tax - 76
Income tax expense
Current - -
Deferred - -
- -
Net loss from discontinued operations, net of
tax - 76
2012 2011
$ $
Impact on statement of cash flows:
Cash flows from operating activities - (11)
Cash flows from investing activities - 4,607
Cash flows from financing activities - (1,599)
Net cash in (out) - 2,997
34. COMMITMENTS AND CONTINGENT LIABILITIES
Mosaic has commitments under operating leases for office and shop space and equipment. Amounts to be paid under these leases are approximately as follows:
Year Amount
$
2013 825
2014 705
2015 557
2016 427
2017 271
2,785
Outstanding surety lien bonds issued on behalf of Ambassador Mechanical in connection with liens by subcontractors and suppliers at December 31, 2012 totaled $Nil (December 31, 2011 - $Nil).
Mosaic is contingently liable for the usual contractor's obligations relating to performance and completion of construction contracts. These include Mosaic's contingent liability for the performance obligations of its subcontractors. Where possible and appropriate, Mosaic obtains performance bonds or alternative security from subcontractors. However, where this is not possible, Mosaic is exposed to the risk that subcontractors will fail to meet their performance obligations. In that eventuality, Mosaic would be obliged to complete the subcontractor's contract, generally by engaging another subcontractor and the cost of completing the work could exceed the original subcontract price. Mosaic makes
Mosaic Capital Corporation
Notes to the Consolidated Financial Statements For the Years Ended December 31 (shown in thousands of Canadian dollars)
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appropriate provisions in the financial statements for all known liabilities relating to subcontractor defaults.
Mosaic and its subsidiaries are involved in litigation and claims from time to time. Management is not presently aware of any litigation or claims where likelihood and quantum of liability can be reasonably estimated and which would materially affect the financial position or results of operations of Mosaic. In addition, Mosaic or its subsidiaries may provide indemnifications, in the normal course of business, that are often standard contractual terms to counterparties in certain transactions, such as purchase and sale agreements or service contracts. The terms of these indemnifications will vary based upon the contract, the nature of which prevents Mosaic from making a reasonable estimate of the maximum potential amounts that may be required to be paid.
35. SUBSEQUENT EVENTS
On January 15, 2013 Mosaic paid a distribution of $620 to holders of preferred securities and a dividend of $2 to all holders of series "A" shares that were outstanding as of December 31, 2012.
On January 18, 2013 Mosaic declared the cash distribution for the month of January 2013 in respect of its preferred securities to all holders of preferred securities of record as of January 31, 2013. This distribution of $620 was paid February 15, 2013.
On January 18, 2013 Mosaic declared a quarterly dividend on Mosaic's common shares of $0.03 per share. This dividend was paid February 15, 2013 to all holders of record as of January 31, 2013.
On February 1, 2013 Mosaic announced sale of two Lethbridge, Alberta warehouses for aggregate consideration of $14,700.
On February 1, 2013 Mosaic paid down $5,769 on the fixed term portion of the Credit Facilities.
On February 20, 2013 Mosaic announced the cash distribution for the month of February 2013 in respect of its preferred securities to all holders of preferred securities of record as of February 28, 2013. This distribution of $620 was paid March 15, 2013.
On March 18, 2013 Mosaic announced the cash distribution for the month of March 2013 in respect of its preferred securities to all holders of preferred securities of record as of March 29, 2013. This distribution of $620 was paid April 15, 2013.
On April 17, 2013 Mosaic declared the cash distribution for the month of April 2013 in respect of its preferred securities to all holders of preferred securities of record as of April 30, 2013. This distribution will be on paid May 15, 2013.
On April 17, 2013 Mosaic declared a quarterly dividend on Mosaic's common shares of $0.03 per share. This dividend will be paid May 15, 2013 to all holders of record as of April 30, 2013.