Firm Capital Mortgage Investment Corporation (the "Corporation")
(TSX: FC), today released its financial statements for its
predecessor entity Firm Capital Mortgage Investment Trust (the
"Trust") for the fiscal year ended December 31, 2010.
EARNINGS & RETURN ON EQUITY
Net earnings for the year ended December 31, 2010 totaled
$14,235,843 compared to $14,453,196 for the year ended December 31,
2009. For the fourth quarter ended December 31, 2010, net earnings
amounted to $3,757,347 compared to $3,285,321 for the same period
ended in 2009. 2010 basic weighted average net earnings per unit of
$1.008 compared to $1.041 per unit for 2009. The 2010 net earnings
represent an annualized return on average Unitholders' equity of
10.52% per annum. This return on Unitholders' equity equates to 947
basis points per annum over the average One Year Government of
Canada Treasury Bill yield for the year and is well in excess of
the Corporation's target yield objective of 400 basis points per
annum over the One Year Treasury Bill yield.
DISTRIBUTION OVERVIEW 2010:
Monthly distributions for 2010 equaled $.078 per month, for a
total $0.936 per unit, which, together with the year end Special
Distribution of $0.070, represents total distributions for 2010 of
$1.006 per unit, a decrease from 2009 distributions of $1.041 per
unit.
INVESTMENT PORTFOLIO TURNS:
In 2010 annual mortgages discharged was $133 million with new
mortgages funded of $169 million. This represents a significant
turn of the portfolio enabling management to re-invest the funds in
evolving market conditions. As the portfolio revolves, the Trust is
able to manage the portfolio size and return on equity based on the
pricing of new investments.
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Trust's mortgage portfolio as at December 31,
2010 are as follows:
-- Total Gross Mortgage Portfolio equals $205,310,929
-- Conventional first mortgages, being those mortgages with loan to values
less than 75%, comprise 87.2% of our total portfolio, and total
Conventional mortgages with loan to values under 75% comprise 93.9% of
our total portfolio.
-- Special Profit Mortgage Investments total 6.1% of the portfolio.
-- Approximately 70% of the portfolio matures within 12 months. This
results in a continuously revolving portfolio, allowing management to
assess market conditions.
-- The Average Face Interest Rate on the portfolio is 9.21% per annum.
-- Regionally, the portfolio is diversified approximately as follows:
Ontario 75.9%, Alberta 15.2%, British Columbia 3.1%, with the balance
(5.8%) being in other provinces.
-- Mortgage portfolio breakdown by loan size is as follows:
Amount Number of Mortgages Total Amount
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$0-$1,000,000 44 21,699,044
$1,000,001-$2,000,000 26 37,249,909
$2,000,001-$3,000,000 13 33,347,737
$3,000,001-$4,000,000 8 28,610,069
$4,000,001-$5,000,000 8 35,830,295
$5,000,001-$10,000,000 8 48,573,875
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Total 107 $ 205,310,929
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LOAN LOSS PROVISION UPDATE:
Management has always taken a proactive approach to allowance
provision reserves. This is a prudent approach to protecting our
Shareholders' equity. Loan loss provisions at the start of the
fiscal year amounted to $2,700,000. During 2010 a further $280,000
was added to the provision for a total of $2,980,000, representing
1.45% of the gross loan portfolio.
FINANCING UPDATE:
The Corporation is pleased to announce that at the end of
September 2010 its principal banker renewed its warehousing credit
facility for a further year to mature September 30, 2011 with a
right at maturity to lock in any balance outstanding for a second
year term, should a renewal not be concluded at the end of the
first year renewal. The Corporation currently has $21.4 million
drawn on its credit facility.
UNRECOGNIZED INCOME COLLECTED:
As at December 31, 2010, the Trust has banked non-refundable fee
income of $372,514, which will be recognized as income over the
term of the corresponding investments.
DIVIDEND AND SHARE PURCHASE PLAN:
The Corporation has in place a Dividend Reinvestment Plan (DRIP)
and Unit Purchase Plan that is available to its Shareholders. The
plans allows participants to have their monthly cash dividends
reinvested in additional shares and grants participants the right
to purchase, without commission, additional shares, up to a maximum
of $12,000 per annum.
ABOUT THE CORPORATION
The Corporation, through its Mortgage Banker, Firm Capital
Corporation, is a non-bank lender providing residential and
commercial short-term bridge and conventional real estate
financing, including construction, mezzanine and equity
investments. The Corporation's investment objective is the
preservation of Shareholders' equity, while providing Shareholders
with a stable stream of monthly dividends from investments. The
Corporation achieves its investment objectives by pursuing a
strategy of growth through investments in selected niche markets
that are under-serviced by large lending institutions. Lending
activities to date continue to develop a diversified mortgage
portfolio, producing a stable return to Shareholders. Full reports
of the financial results of the Corporation for the year are
outlined in the audited financial statements and the related
management discussion and analysis of Firm Capital, available on
the SEDAR website at www.sedar.com. In addition, supplemental
information is available on Firm Capital's website at
www.firmcapital.com.
Forward-Looking Statements
This news release contains forward-looking statements within the
meaning of applicable securities laws including, among others,
statements concerning our objectives, our strategies to achieve
those objectives, our performance, our mortgage portfolio and our
distributions, as well as statements with respect to management's
beliefs, estimates, and intentions, and similar statements
concerning anticipated future events, results, circumstances,
performance or expectations that are not historical facts.
Forward-looking statements generally can be identified by the use
of forward-looking terminology such as "outlook", "objective",
"may", "will", "expect", "intent", "estimate", "anticipate",
"believe", "should", "plans" or "continue" or similar expressions
suggesting future outcomes or events. Such forward-looking
statements reflect management's current beliefs and are based on
information currently available to management.
These statements are not guarantees of future performance and
are based on our estimates and assumptions that are subject to
risks and uncertainties, including those described in our Annual
Information Form under "Risk Factors" (a copy of which can be
obtained at www.sedar.com), which could cause our actual results
and performance to differ materially from the forward-looking
statements contained in this circular. Those risks and
uncertainties include, among others, risks associated with mortgage
lending, dependence on the Corporation's manager and mortgage
banker, competition for mortgage lending, real estate values,
interest rate fluctuations, environmental matters, Unitholder
liability and the introduction of new tax rules. Material factors
or assumptions that were applied in drawing a conclusion or making
an estimate set out in the forward-looking information include,
among others, that the Corporation is able to invest in mortgages
at rates consistent with rates historically achieved; adequate
mortgage investment opportunities are presented to the Corporation;
and adequate bank indebtedness and bank loans are available to the
Corporation. Although the forward-looking information continued in
this new release is based upon what management believes are
reasonable assumptions, there can be no assurance that actual
results and performance will be consistent with these
forward-looking statements.
All forward-looking statements in this news release are
qualified by these cautionary statements. Except as required by
applicable law, the Corporation undertakes no obligation to
publicly update or revise any forward-looking statement, whether as
a result of new information, future events or otherwise.
Audited Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Years Ended December 31, 2010 and 2009
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
December 31, 2010 and 2009
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2010 2009
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Assets
Cash $ - $ 1,444,339
Amounts receivable and prepaid expenses (note
4) 2,371,563 1,706,383
Mortgage investments (note 5) 202,330,929 167,128,297
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$ 204,702,492 $ 170,279,019
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Liabilities and Unitholders' Equity
Liabilities:
Bank indebtedness (note 6) $ 5,005,825 $ -
Accounts payable and accrued liabilities 1,482,580 410,064
Unearned income 372,514 202,481
Unitholder distribution payable 2,127,845 2,543,120
Loans payable (note 7) 4,289,249 10,714,637
Convertible debentures (note 8) 53,628,803 23,681,244
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66,906,816 37,551,546
Unitholders' equity (note 9): 137,795,676 132,727,473
Issued and outstanding:
14,377,333 units (2009 - 13,896,829)
Commitments (note 5)
Contingent liabilities (note 15)
Subsequent events (note 20)
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$ 204,702,492 $ 170,279,019
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See accompanying notes to financial statements.
On Behalf of The Directors:
"Eli Dadouch"
"Jonathan Mair"
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FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Earnings
Years Ended December 31, 2010 and 2009
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2010 2009
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Interest and fees earned, net of Trust Manager
interest allocation (note 13) $ 18,703,612 $ 18,401,481
Less interest expense (note 14) 2,877,078 2,820,560
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Net interest and fee income 15,826,534 15,580,921
Expenses:
General and administrative 1,310,691 827,725
Change in unrealized loss in value of
mortgages (note 5) 280,000 300,000
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1,590,691 1,127,725
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Net earnings for the year $ 14,235,843 $ 14,453,196
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Net earnings per unit (note 10)
Basic $ 1.008 $ 1.041
Diluted $ 0.984 $ 1.011
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Changes in Unitholders' Equity
Years Ended December 31, 2010 and 2009
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2010 2009
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Trust units (note 9):
Balance, beginning of year $ 132,355,149 $ 131,636,584
Proceeds from issuance of units 4,818,103 204,583
Conversion of debentures to units 20,000 513,982
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Balance, end of year $ 137,193,252 $ 132,355,149
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Equity component of convertible debentures
(note 8):
Balance, beginning of year $ 372,324 $ 380,482
Equity component of debenture issued during
the year 230,000 -
Conversion of debenture to units - (8,158)
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Balance, end of year $ 602,324 $ 372,324
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Cumulative earnings:
Balance, beginning of year $ 95,327,964 $ 80,874,768
Net earnings for the year 14,235,843 14,453,196
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Balance, end of year $ 109,563,807 $ 95,327,964
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Cumulative distributions to unitholders:
Balance, beginning of year $ 95,327,964 $ 80,874,768
Distributions to unitholders (note 11) 14,235,843 14,453,196
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Balance, end of year $ 109,563,807 $ 95,327,964
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Total unitholders' equity $ 137,795,676 $ 132,727,473
Units issued and outstanding (note 9) 14,377,333 13,896,829
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Cash Flows
Years Ended December 31, 2010 and 2009
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2010 2009
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Cash provided by (used in):
Operating activities:
Net earnings $ 14,235,843 $ 14,453,196
Net changes in non-cash items
Change in unrealized loss in value of
mortgages 280,000 300,000
Implicit interest rate in excess of
coupon rate - convertible debentures 57,689 51,218
Deferred finance cost amortization
- convertible debentures 228,941 170,989
(Increase) decrease in amounts receivable
and prepaid expenses (665,180) 279,729
Increase (decrease) in accounts payable
and accrued liabilities 1,072,516 (208,477)
Increase (decrease) in unearned income 170,033 (73,375)
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15,379,842 14,973,280
Financing activities:
Proceeds from issuance of units 4,818,103 196,425
Proceeds from convertible debenture issued 31,443,000
Debenture offering costs (1,531,971)
Increase (decrease) in bank indebtedness 5,005,825 (27,337,813)
Decrease in loans payable (6,425,388) (27,014,591)
Distributions to unitholders paid during
year (14,651,118) (15,340,466)
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18,658,450 (69,496,445)
Investing activities:
Funding of mortgage investments (168,832,314) (94,267,430)
Discharge of mortgage investments 133,349,682 150,234,934
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(35,482,632) 55,967,504
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Increase (decrease) in cash $ (1,444,339) $ 1,444,339
Cash, beginning of year 1,444,339 -
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Cash, end of year $ - $ 1,444,339
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Supplemental cash flow information
Interest paid (note 14) $ 2,230,662 $ 2,719,095
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Years Ended December 31, 2010 and 2009
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1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a
closed-end trust created for the benefit of the unitholders,
pursuant to the Declaration of Trust dated July 13, 1999, as
amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage
banker is Firm Capital Corporation and the trust manager is FC
Treasury Management Inc.
2. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial
disclosure are in accordance with Canadian generally accepted
accounting principles ("GAAP").
(a) Use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year.
The most significant estimates that the Trust is required to
make relate to the fair value of the mortgage investments (notes
2(b) and 5). These estimates may include assumptions regarding
local real estate market conditions, interest rates and the
availability of credit, cost and terms of financing, the impact of
present or future legislation or regulation, prior encumbrances and
other factors affecting the mortgage and underlying security of the
mortgage investments.
These assumptions are limited by the availability of reliable
comparable data, economic uncertainty, ongoing geopolitical
concerns and the uncertainty of predictions concerning future
events. Illiquid credit markets, volatile equity markets and
declines in consumer spending have combined to increase the
uncertainty inherent in such estimates and assumptions.
Accordingly, by their nature, estimates of fair value are
subjective and do not necessarily result in precise determinations.
Should the underlying assumptions change, the estimated fair value
could vary by a material amount.
(b) Mortgage investments:
Mortgage investments are stated at estimated fair value with
changes in fair value reflected in net earnings in accordance with
Canadian Institute of Chartered Accountants ("CICA") Accounting
Guideline 18 and CICA Handbook Section 3855. Fair value is the
amount of consideration that would be agreed upon in an arm's
length transaction between knowledgeable, willing parties who are
under no compulsion to act. The fair value of Mortgage investments
approximates their carrying values due to the fact that the
majority of the mortgages are (i) short-term in nature with terms
of 12 months or less, (ii) repayable in full, at any time at the
option of the borrower prior to maturity without penalty, and (iii)
have minimum specified interest rates for mortgages with floating
rates linked to bank prime. When, in management's opinion,
collection of principal on a particular mortgage investment is no
longer reasonably assured, the fair value of the mortgage
investment is reduced to reflect the estimated net realizable
recovery from the collateral securing the mortgage loan.
(c) Convertible debentures:
The Trust's convertible debentures are classified into debt and
equity components. The equity component represents the estimated
value of the conversion rights of the holders.
(d) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and is
recorded net of the Trust Manager interest spread described in note
13. Commitment fees received are amortized over the expected term
of the mortgage.
(ii) Special mortgage investments:
Special profit participations earned by the Trust on special
mortgage investments are recognized and included in interest and
fees earned only once the receipt of such amounts is certain.
(e) Unit-based compensation:
The Trust has unit-based compensation plans (i.e. incentive
option plan) which are described in note 9. The Trust accounts for
its unit-based compensation using the fair value method, under
which compensation expense is measured at the grant date and
recognized over the vesting period.
(f) Basic and diluted net earnings per unit:
Basic net earnings per unit is computed by dividing net earnings
for the period by the weighted average number of units outstanding
during the year. Diluted net earnings per unit is computed
similarly to basic net earnings per unit, except that the weighted
average number of units outstanding is increased to include
additional units from the assumed exercise of incentive option
units and the conversion of the convertible debentures, if
dilutive. The number of additional units is calculated by assuming
that outstanding incentive options were exercised and that proceeds
from such exercises were used to acquire units at the average
market price during the year. The additional units would also
include those units issuable upon the assumed conversion of the
convertible debentures, with an adjustment to net earnings for the
year to add back any interest paid to the debenture holders. These
common equivalent units are not included in the calculation of the
weighted average number of units outstanding for diluted earnings
per unit when the effect would be anti-dilutive.
(g) Comprehensive income:
CICA Section 1530, "Comprehensive Income", requires the
presentation of a Statement of Comprehensive Income where certain
gains and losses that would otherwise be recorded as part of net
earnings are presented in other comprehensive income until it is
considered appropriate to recognize it in net earnings. The Trust
does not have any material income from these sources and as such a
Statement of Comprehensive Income has not been included in these
financial statements.
(h) Financial instruments - recognition and measurement:
CICA Section 3855, "Financial Instruments - Recognition and
Measurement", establishes standards for recognizing and measuring
financial assets and financial liabilities including non-financial
derivatives. In accordance with this standard, the Trust is
required to classify its financial assets as one of the following:
(i) held-to-maturity, (ii) loans and receivables, (iii) held for
trading or (iv) available for sale. All financial liabilities must
be classified as: (i) held for trading or (ii) other liabilities.
The Trust's designations on adoption are as follows:
Cash and amounts receivable are classified as "loans and
receivables" and are measured at amortized cost.
Bank indebtedness, Accounts payable and accrued liabilities,
Unitholder distribution payable, Loans payable and Convertible
debentures are classified as "other liabilities" and are measured
at fair value on inception and amortized using the effective
interest rate method.
3. Accounting changes:
Future accounting changes:
The Canadian Accounting Standards Board ("AcSB") confirmed that
the adoption of International Financial Reporting Standards
("IFRS") would be effective for the interim and annual periods
beginning on or after January 1, 2011 for Canadian publicly
accountable profit-oriented enterprises. IFRS will replace Canada's
current GAAP for these enterprises. Comparative IFRS information
for the previous fiscal year will also have to be reported. These
new standards are expected to be effective for the Trust in the
first quarter of 2011.
The Trust is currently evaluating the impact of adopting IFRS
and its primary accounting principles and developing its change
over plan.
4. Amounts receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid
expenses as at December 31, 2010 and 2009:
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2010 2009
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Interest receivable $ 1,803,224 $ 1,450,807
Prepaid expenses 111,800 160,903
Special income receivable 389,198 -
Fees receivable 67,341 94,673
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Amounts receivable and prepaid expenses $ 2,371,563 $ 1,706,383
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5. Mortgage investments:
The following is a breakdown of the mortgage investments as at
December 31, 2010 and 2009:
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2010 Amount % 2009 Amount %
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Conventional first mortgages $179,004,150 87.2 $135,464,430 79.8
Conventional non-first mortgages 13,785,737 6.7 12,768,832 7.5
Special mortgage investments 12,521,042 6.1 21,595,035 12.7
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Total mortgage investments (at
cost) $205,310,929 100.0 $169,828,297 100.0
Fair value adjustment (2,980,000) (2,700,000)
Fair value $202,330,929 $167,128,297
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Conventional first mortgages are loans secured by a first
priority mortgage charge with loan to values not exceeding 75%.
Conventional non-first mortgages are loans with mortgages not
registered in first priority with loan to values not exceeding 75%.
Special mortgage investments are loans that in some cases have
loans to value that exceed or may exceed 75% and are the
investments that are the source of all special profit
participations earned by the Trust.
Mortgages are stated at fair value as discussed in Note 2(b).
The fair value adjustment in the amount of $2,980,000 as at
December 31, 2010 (2009 - $2,700,000) represents the total amount
of management's estimate of the shortfall between the mortgage
investment principal balances and the estimated net realizable
recovery from the collateral securing the mortgage loans.
In June 2009, the AcSB amended CICA Handbook Section 3862,
Financial Instruments - Disclosures, by providing enhanced
disclosure requirements for fair value measurements of financial
instruments and liquidity risks. HB 3862 establishes a three-level
valuation hierarchy for disclosure of financial instruments
measured at fair value based upon the degree to which the inputs
used to value an asset or liability as of the measurement date are
observable:
Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
The Trust's mortgage investments are measured at fair value
using inputs not based on observable data. As a result, all
mortgage investments have been classified in Level 3 of the
valuation hierarchy.
A reconciliation of Level 3 assets is as follows:
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2010 2009
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Mortgage investment balance, beginning of
year $ 167,128,297 $ 223,395,801
Funding of mortgage investments 168,832,314 94,267,430
Discharge of mortgage investments (133,349,682) (150,234,934)
Change in unrealized loss included in
earnings (280,000) (300,000)
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Mortgage investment balance, end of year $ 202,330,929 $ 167,128,297
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The mortgages are secured by real property, bear interest at the
weighted average rate of 9.21% (2009 - 10.05%) and mature between
2011 and 2015.
The unadvanced funds under the existing mortgage portfolio
(which are commitments of the Trust) amounted to $18,406,862 as at
December 31, 2010 (2009 - $12,709,686).
Principal repayments based on contractual maturity dates are as
follows:
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2011 134,653,814
2012 56,204,179
2013 6,400,718
2014 6,821,210
2015 and thereafter 1,231,008
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$ 205,310,929
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Borrowers who have open mortgages have the option to repay
principal at any time prior to the maturity date.
6. Bank indebtedness:
The Trust has entered into credit arrangements of which
$5,005,825 as at December 31, 2010 (2009 - $NIL) has been drawn.
Interest on bank indebtedness is predominately charged at a formula
rate that varies with bank prime and may have a component with a
fixed interest rate established based on a formula linked to
Bankers Acceptance rates. The credit arrangement comprises a
revolving operating facility, a component of which is a demand
facility and a component of which has a committed term to September
30, 2011. Bank indebtedness is secured by a general security
agreement. The credit agreement contains certain financial
covenants that must be maintained. As at December 31, 2010 and
2009, the Trust was in compliance with all financial covenants.
7. Loans payable:
First priority charges on specific mortgage investments have
been granted as security for the loans payable. The loans mature on
dates consistent with those of the underlying mortgages. The loans
are on a non-recourse basis and bear interest at rates ranging from
3.50% to 6.45% as at December 31, 2010 (2009 - 2.50% to 7.55%). The
Trust's principal balance outstanding under the mortgages for which
a first priority charge has been granted is $5,392,156 as at
December 31, 2010 (2009 - $14,224,566).
The loans are repayable at the earlier of the contractual expiry
date of the underlying mortgage investment and the date the
underlying mortgage is repaid. Repayments based on contractual
maturity dates are as follows:
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2011 $ 2,092,123
2014 2,040,968
2015 156,158
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$ 4,289,249
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8. Convertible debentures:
On April 24, 2006, the Trust completed a public offering of
25,000 6% convertible unsecured subordinated debentures at a price
of $1,000 per debenture for gross proceeds of $25,000,000. The
debentures mature on June 30, 2013 and interest is paid
semi-annually on June 30 and December 31. The debentures are
convertible at the option of the holder at any time prior to the
maturity date at a conversion price of $11.75. The debentures may
not be redeemed by the Trust prior to June 30, 2009. On and after
June 30, 2009, but prior to June 30, 2010, the debentures were
redeemable at a price equal to the principal, plus accrued
interest, at the Trust's option on not more than 60 days and not
less than 30 days notice, provided that the weighted average
trading price of the units on the Toronto Stock Exchange for the 20
consecutive trading days ending five trading days preceding the
date on which the notice of redemption is given is not less than
125% of the conversion price. On and after June 30, 2010 and prior
to the maturity date, the debentures are redeemable at a price
equal to the principal amount plus accrued interest, at the Trust's
option on not more than 60 days and not less than 30 days prior
notice. On redemption or at maturity, the Trust may, at its option,
elect to satisfy its obligation to pay all or a portion of the
principal amount of the debenture by issuing that number of units
of the Trust obtained by dividing the principal amount being repaid
by 95% of the weighted average trading price of the units for the
20 consecutive trading days ending on the fifth trading day
preceding the redemption or maturity date.
The convertible debentures were allocated into liability and
equity components on the date of issuance as follows:
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Liability $ 24,619,518
Equity 380,482
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Principal $ 25,000,000
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On January 6, 2009, $536,000 of debentures were converted by the
debenture holders to 45,617 units of the Trust. On July 9, 2010,
$20,000 of debentures were converted by the debenture holders to
1,702 units of the Trust.
In the fourth quarter of 2010, the Trust completed a public
offering of 31,443 5.75% convertible unsecured subordinated
debentures at a price of $1,000 per debenture for gross proceeds of
$31,443,000. The debentures mature on October 31, 2017 and interest
is paid semi-annually on April 30 and October 31. The debentures
are convertible at the option of the holder at any time prior to
the maturity date at a conversion price of $15.90. The debentures
may not be redeemed by the Trust prior to October 31, 2013. On and
after October 31, 2013, but prior to October 31, 2014, the
debentures are redeemable at a price equal to the principal, plus
accrued interest, at the Trust's option on not more than 60 days
and not less than 30 days notice, provided that the weighted
average trading price of the units on the Toronto Stock Exchange
for the 20 consecutive trading days ending five trading days
preceding the date on which the notice of redemption is given is
not less than 125% of the conversion price. On and after October
31, 2014 and prior to the maturity date, the debentures are
redeemable at a price equal to the principal amount plus accrued
interest, at the Trust's option on not more than 60 days and not
less than 30 days prior notice. On redemption or at maturity, the
Trust may, at its option, elect to satisfy its obligation to pay
all or a portion of the principal amount of the debenture by
issuing that number of units of the Trust obtained by dividing the
principal amount being repaid by 95% of the weighted average
trading price of the units for the 20 consecutive trading days
ending on the fifth trading day preceding the redemption or
maturity date.
The convertible debentures were allocated into liability and
equity components on the date of issuance as follows:
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Liability $ 31,213,000
Equity 230,000
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Principal $ 31,443,000
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The accretion of the liability component of the convertible
debentures, which increases the liability component from the
initial allocation on the date of issuance, is included in interest
expense.
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----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liability, beginning of year $ 23,681,244 $ 23,973,019
Issuance of new debentures, net of deferred
financing costs 29,680,929
Conversion of debentures to equity (20,000) (513,982)
Implicit interest rate in excess of coupon
rate 57,689 51,218
Amortization of debenture financing costs 228,941 170,989
----------------------------------------------------------------------------
Liability, end of period $ 53,628,803 $ 23,681,244
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred financing costs relating to the issuance of convertible
debentures are not presented as a separate asset on the balance
sheet and are netted against the carrying value of the convertible
debenture.
Notwithstanding the carrying value of the convertible
debentures, the principal balance outstanding to the debenture
holders is $55,887,000 (2009 - $24,464,000).
9. Unitholders' equity:
The beneficial interests in the Trust are represented by a
single class of units which are unlimited in number. Each unit
carries a single vote at any meeting of unitholders and carries the
right to participate pro rata in any distributions.
(a) The following units are issued and outstanding:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Balance, beginning of year 13,896,829 13,832,219
New units from conversion of debentures (note 8) 1,702 45,617
New units from exercise of options 427,500 -
New units issued during the year under
Distribution Reinvestment Plan 51,302 18,993
----------------------------------------------------------------------------
Balance, end of year 14,377,333 13,896,829
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Incentive option plan:
In 2005, 415,000 options were issued to trustees, directors,
officers and employees of the Trust Manager and Mortgage Banker,
with an exercise price of $9.90 per unit. The options were
exercisable any time up to November 17, 2010. The options vested on
the grant date. At December 31, 2010, 415,000 unit options have
been exercised.
In 2008, 35,000 options were issued to trustees with an exercise
price of $9.94. The options were exercisable any time up to October
7, 2013. The fair value of those unit options, given the small
number of options issued and given the low volatility in the
Trust's unit trading price, is not material and therefore no
related compensation expense has been recorded by the Trust. At
December 31, 2010, 35,000 options have been exercised.
As at December 31, 2010, no options remained outstanding (2009 -
427,500)
(c) Distribution reinvestment plan and direct unit purchase
plan:
The Trust has a distribution reinvestment plan and direct unit
purchase plan for its unitholders which allows participants to
reinvest their monthly cash distributions in additional trust units
at a unit price equivalent to the weighted average price of units
for the preceding five day period.
10. Per unit amounts:
The following table reconciles the numerators and denominators
of the basic and diluted earnings per unit.
Basic earnings per unit calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Numerator for basic earnings per unit:
Net earnings $ 14,235,843 $ 14,453,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for basic earnings per unit:
Weighted average units 14,119,651 13,880,979
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per unit $ 1.008 $ 1.041
----------------------------------------------------------------------------
Diluted earnings per unit calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Numerator for diluted earnings per unit:
Net earnings $ 14,235,843 $ 14,453,196
Interest on convertible debentures (note 14) 2,135,889 1,690,488
----------------------------------------------------------------------------
Net earnings for diluted earnings per unit $ 16,371,732 $ 16,143,684
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted earnings per unit:
Weighted average units 14,119,651 13,880,979
Net units that would be issued:
Assuming the proceeds from options are used
to repurchase units at the average unit
price - -
Assuming convertible debentures are
converted 2,513,775 2,082,043
----------------------------------------------------------------------------
Diluted weighted average units 16,633,426 15,963,022
----------------------------------------------------------------------------
Diluted earnings per unit $ 0.984 $ 1.011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Distributions:
The Trust makes distributions to the unitholders on a monthly
basis on or about the 15th day of each month. The Declaration of
Trust provides that the Trust intends to distribute to unitholders
by year end at least 100% of the net income of the Trust determined
in accordance with the Income Tax Act (Canada), subject to certain
adjustments. The net income of the Trust determined in accordance
with the Income Tax Act (Canada), for the year ended December 31,
2010 was $14,212,874 (2009 - $13,912,108).
For the year ended December 31, 2010, the Trust recorded
distributions of $14,235,843 (2009 - $14,453,196) to its
unitholders. Distributions were $1.006 (2009 - $1.041) per
unit.
12. Income taxes:
The Trust is taxed as a mutual fund trust for income tax
purposes. Pursuant to the Declaration of Trust, the Trust intends
to distribute its income for income tax purposes each year to such
an extent that it will not be liable for income tax under Part 1 of
the Income Tax Act (Canada). For financial statement reporting
purposes, the tax deductibility of the Trust's distributions is
treated as an exemption from taxation as the Trust expects to
distribute all of its income to unitholders.
On June 22, 2007, Bill C-52, which significantly modifies the
income tax rules applicable to certain publicly traded or listed
trusts and partnerships, received Royal Assent. In particular,
certain income of (and distributions made by) these entities will
be taxed in a manner similar to income earned by (and distributions
made by) a corporation. These rules will be effective for the 2007
taxation year with respect to trusts which commence public trading
after October 31, 2006. For trusts which were publicly traded or
listed prior to November 1, 2006, the application of the rules will
be delayed to the earlier of (i) the trust's 2011 taxation year,
and (ii) a taxation year of the trust in which the trust exceeds
normal growth as determined by reference to the normal growth
guidelines, as amended from time to time, unless that excess arose
as a result of a prescribed transaction. As currently structured,
the Trust will be subject to these new rules, once applicable.
On December 15, 2006, the Department of Finance (Canada)
released the normal growth guidelines for income trusts and other
flow-through entities that qualify for the four-year transitional
relief. The guidance, as amended from time to time, establish
objective tests with respect to how much an income trust is
permitted to grow without jeopardizing its transitional relief. If
the limits described in the normal growth guidelines are exceeded,
the Trust may lose its transitional relief and thereby become
immediately subject to the new rules. The Trust has not exceeded
these limits.
The Trust has determined that the new rules adversely affect the
marketability of the Trust's units, and the Trust's distributable
cash. As such on January 1, 2011, the Trust completed its
conversion to a corporation and subsequent to December 31, 2010
operates as a dividend paying Mortgage Investment Corporation under
the Income Tax Act (Canada) to maintain its flow through status.
The costs for the conversion of the Trust to a Corporation
($387,622) were expensed by the Trust in the fourth quarter of
2010.
13. Related party transactions and balances:
Transactions with related parties are in the normal course of
business and are recorded at the exchange amount, which is the
amount of consideration established and agreed to by the related
parties, and in management's view represents fair market value.
The Trust Manager (a company controlled by some of the
trustees), pursuant to the Trust Management Agreement and
Declaration of Trust, receives an allocation of mortgage interest
referred to as Trust Manager spread interest, calculated as 0.75%
per annum of the Trust's daily outstanding performing mortgage
investment balances. For the year ended December 31, 2010 this
amount was $1,394,583 (2009 - $1,442,176), and was deducted from
interest and fees earned.
The Mortgage Banker (a company controlled by a Trustee),
pursuant to the Mortgage Banking Agreement and Declaration of
Trust, receives certain fees from the borrowers as follows: loan
servicing fees equal to 0.10% per annum on the principal amount of
each of the Trust's mortgage investments; 75% of all the commitment
and renewal fees generated from the Trust's mortgage investments
and 25% of all the special profit income generated from the
non-conventional mortgage investments after the Trust has yielded a
10% per annum return on its investments. Interest and fee income is
net of the loan servicing fees paid to the Mortgage Banker of
approximately $186,000 for the year ended December 31, 2010 (2009 -
$192,000). The Mortgage Banker also retains all overnight float
interest and incidental fees and charges payable by borrowers on
the Trust's mortgage investments. The Trust's share of commitment
and renewal fees recorded in income for the year ended December 31,
2010 was $825,427 (2009 - $833,226) and applicable special profit
income for the year ended December 31, 2010 was $1,892,342 (2009 -
$463,890).
The Trust Management Agreement and Mortgage Banking Agreement
contains provisions for the payment of termination fees to the
Trust Manager and Mortgage Banker in the event that the respective
agreements are either terminated or not renewed.
Several of the Trust's mortgages are shared with other investors
of the Mortgage Banker, which may include members of management of
the Mortgage Banker and/or Officers or Trustees of the Trust. The
Trust ranks equally with other members of the syndicate as to
receipt of principal and income.
Mortgages totalling $8,760,000 (2009 - $1,760,000) were issued
to borrowers controlled by certain Trustees of the Trust. Each
mortgage is dealt with in accordance with the Trust's existing
investment and operating policies and is personally guaranteed by
the related Trustee.
14. Interest expense:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Bank interest expense $ 483,907 $ 333,285
Loans payable interest expense 257,282 796,787
Debenture interest expense 2,135,889 1,690,488
----------------------------------------------------------------------------
Interest expense $ 2,877,078 $ 2,820,560
Deferred finance cost amortization -
convertible Debenture (228,941) (170,989)
Implicit interest rate in excess of coupon
rate - Convertible debentures (57,689) (51,218)
Change in accrued interest (359,786) 120,742
----------------------------------------------------------------------------
Cash interest paid $ 2,230,662 $ 2,719,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Contingent liabilities:
The Trust is involved in certain litigation arising out of the
ordinary course of investing in mortgages. Although such matters
cannot be predicted with certainty, management believes the claims
are without merit and does not consider the Trust's exposure to
such litigation to have an impact on these financial
statements.
16. Fair value of financial instruments:
The fair value of amounts receivable, bank indebtedness,
accounts payable and accrued liabilities and unitholder
distribution payable, approximate their carry values due to their
short-term maturities.
The fair value of loans payable approximate their carrying
values due to the fact that the majority of the loans are (i) are
short-term in nature with terms of 12 months or less, (ii)
repayable in full, at any time upon the borrower under the
underlying mortgage that secures the loan payable repaying their
mortgage without penalty, and (iii) have floating interest rates
linked to bank prime.
The fair value of the convertible debentures has been determined
based on the December 31, 2010 closing price of units of the Trust
on the TSX. The fair value has been estimated at December 31, 2010
to be $56,305,890 (2009 - $24,708,640).
17. Risk management:
(a) Interest rate risk:
The Trust's operations are subject to interest rate
fluctuations. The interest rate on the majority of mortgage
investments is set at the greater of a floor rate and a formula
linked to bank prime. The floor interest rate mitigates the effect
of a drop in short term market interest rates while the floating
component linked to bank prime allows for increased interest
earnings where short term market rates increase.
The Trust's debt comprises bank indebtedness and loans payable,
with the majority of such debt bearing interest based on bank prime
and/or based on short term Bankers Acceptance interest rates as a
benchmark.
At December 31, 2010 and December 31, 2009 if interest rates at
that date had been 100 basis points lower or higher, with all other
variables held constant, net income for the period would be
affected as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Carrying Interest Rate Risk Carrying Interest Rate Risk
Value -1% +1% Value -1% +1%
Financial
assets
Mortgage
invest-
ments $202,330,929 ($20,800) $126,487 $167,128,297 ($54,725) $60,164
Financial
liabili-
ties
Loans
payable 4,289,249 20,921 (20,921) 10,714,637 74,409 (74,409)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
increase
(decrease) $121 ($105,566) $19,684 ($14,245)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Credit and operational risks:
Any instability in the real estate sector and an adverse change
in economic conditions in Canada could result in declines in the
value of real property securing the Trust's mortgage investments.
The Trust mitigates this risk by adhering to the investment and
operating policies set out in its Declaration of Trust.
The Trust's maximum exposure to credit risk is represented by
the fair values of amounts receivable and mortgage investments.
(c) Liquidity risk:
The Trust's liquidity requirements relate to its obligations
under its bank indebtedness, loans payable, convertible debentures
and its obligations to make future advances under its existing
mortgage portfolio. Liquidity risk is managed by ensuring that the
sum of (i) availability under the Trust's bank borrowing line, (ii)
the sourcing of other borrowing facilities, and (iii) projected
repayments under the existing mortgage portfolio, exceeds projected
needs (including funding of further advances under existing and new
mortgage investments).
As at December 31, 2010, the Trust had not utilized its full
leverage availability, being a maximum of 60% of its first mortgage
investments. Un-advanced committed funds under the existing
mortgage portfolio amounted to $18,406,862 as at December 31, 2010
(2009 - $12,709,686). These commitments are anticipated to be
funded from the Trust's credit facility and borrower repayments.
The Trust has a revolving line of credit with its principal banker
to fund the timing differences between mortgage advances and
mortgage repayments. The bank borrowing line is a committed
facility with a maturity date of September 30, 2011. If the loan is
not renewed on September 30, 2011, the terms of the facility allow
for the Trust to repay the balance owed on September 30, 2011
within twelve months. In the current economic climate and capital
market conditions, there are no assurances that the bank borrowing
line will be renewed or that it could be replaced with another
lender if not renewed. If it is not extended at maturity,
repayments under the Trust's mortgage portfolio would be utilized
to repay the bank indebtedness. There are limitations in the
availability of funds under the revolving line of credit. The
Trust's mortgages are predominantly short-term in nature, and as
such, the continual repayment by borrowers of existing mortgage
investments creates liquidity for ongoing mortgage investments and
funding commitments. Loans payable relate to borrowings on specific
mortgages within the Trust's portfolio and only have to be repaid
once the specific loan is paid out by the Borrower.
If the Trust is unable to continue to have access to its bank
borrowing line and loans payables, the size of the Trust's mortgage
portfolio will decrease and the income historically generated
through holding a larger portfolio by utilizing leverage will not
be earned.
Contractual obligations as at December 31, 2010 are due as
follows:
Less than 1
Total year 1 - 3 years 4 - 6 years
--------------------------------------------------------
Bank indebtedness $ 5,005,825 $ 5,005,825
Loans payable 4,289,249 2,092,123 2,197,126
Convertible
debenture 55,887,000 24,444,000 31,443,000
--------------------------------------------------------
Subtotal -
Liabilities $ 65,182,074 $ 7,097,948 $ 24,444,000 $ 33,640,126
Future advances
under mortgages 18,406,862 18,406,862
--------------------------------------------------------
Liabilities and
contractual
obligations $ 83,588,936 $ 25,504,810 $ 24,444,000 $ 33,640,126
--------------------------------------------------------
--------------------------------------------------------
The bank indebtedness and loans payable are liabilities
resulting from the funding of the Trust's mortgage investments.
Repayment of mortgage investments results in a direct and
corresponding pay down of the bank indebtedness and/or loans
payable. The obligations for future mortgage advances under the
Trust's mortgage portfolio are anticipated to be funded from the
Trust's credit facility and borrower mortgage repayments. Upon
funding of same, the funded amount forms part of the Trust's
mortgage investments.
(d) Capital risk management:
The Trust defines capital as being the funds raised through the
issuance of publicly traded securities of the Trust. The Trust's
objectives when managing capital/equity are:
-- to safeguard the Trust's ability to continue as a going concern, so that
it can continue to provide returns for unitholders, and
-- to provide an adequate return to unitholders by obtaining an appropriate
amount of debt, commensurate with the level of risk.
The Trust manages the capital/equity structure and makes
adjustments to it in light of changes in economic conditions. In
order to maintain or adjust the capital structure, the Trust may
issue new units or repay bank indebtedness (if any) and loans
payable.
The Trust's Declaration of Trust incorporates various mortgage
investing restrictions and investment operating policies. The Trust
cannot invest more than 5% of the amount of its capital in any
single conventional first mortgage and cannot invest more than 2.5%
of the amount of its capital in any single non-conventional
mortgage or conventional mortgage that is not a first mortgage. The
Trust may only borrow funds in order to acquire or invest in
mortgage investments in amounts up to 60% of the book value of the
Trust's portfolio of conventional first mortgages. The Trust has
complied with all such restrictions in its Declaration of
Trust.
The Trust is required by its Bank lender to maintain various
covenants, including minimum equity amount, interest coverage
ratios, indebtedness as a percentage of the performing first
mortgage portfolio size, and indebtedness to total assets. The
Trust has complied with all such Bank covenants.
19. Comparative figures:
Certain 2009 comparative figures have been reclassified to
conform with the financial statement presentation adopted in
2010.
20. Subsequent events:
On January 1, 2011, the Trust completed an approved plan of
arrangement pursuant to which the Trust was reorganized into Firm
Capital Mortgage Investment Corporation, which will operate as a
Mortgage Investment Corporation under the Income Tax Act (Canada)
(refer to note 12).
Contacts: Firm Capital Mortgage Investment Corporation Eli
Dadouch President & Chief Executive Officer (416) 635-0221
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