Club Link Annual Report - 2010

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  • 1. Your Passport to ANNUAL REPORT 2010 C LU B L I N K ENTERPRISES LIMITED 15675 Dufferin Street, King City, Ontario, Canada L7B 1K5 Tel 905 841 3730 Fax 905 841 1134 Clubhouse at Club RenaissancePhoto courtesy of The Greg Wilson Group more !
  • 2. BOARD OF DIRECTORS SENIOR OFFICERS PATRICK S. BRIGHAM (b, c) ClubLink Enterprises Limited PAUL CAMPBELL (b, c) K. (RAI) SAHI Chairman and Chief Executive Officer DAVID A. KING (a) ROBERT VISENTIN JOHN LOKKER (a) Chief Financial Officer SAMUEL J.B. POLLOCK (a, b) EUGENE N. HRETZAY Vice President, General Counsel and Secretary K. (RAI) SAHI President, White Pass and Yukon Route DONALD W. TURPLE (c) ROBERT WRIGHT Vice President JACK D. WINBERG (b, c) (a) Audit Committee ClubLink Enterprises Limited has a strategic objective to (b) Corporate Governance and Compensation Committee Golf Club and Resort Operations EDGE M. CARAVAGGIO (c) Environmental, Health and Safety Committee maximize shareholder value over a five to ten year horizon, though the Company may monetize an investment when business Vice President, Operations SCOTT DAVIDSON conditions present a suitable opportunity. ClubLink is engaged in golf club and resort operations under CORPORATE INFORMATION Vice President, Corporate Operations CHARLES F. LORIMER the trademark “ClubLink One Membership More Golf”. ClubLink Executive Office Vice President, Sales & Marketing is Canada’s largest owner and operator of golf clubs with 48½, 73 18-hole equivalent championship and six 18-hole equivalent 15675 Dufferin Street academy courses at 41 locations, primarily in Ontario, Quebec King City, Ontario L7B 1K5 NEIL E. OSBORNE and Florida. Tel: (905) 841-3730 Vice President, Clubhouse Operations ClubLink is also engaged in rail, tourism and port operations Fax: (905) 841-1134 Websites: based in Skagway, Alaska, which operates under the trade name “White Pass & Yukon Route.” The railway stretches approximately Rail, Tourism and Port Operations clublinkenterprises.ca/com clublink.ca/com MICHAEL D. BRANDT 177 kilometres (110 miles) from Skagway, Alaska, through British wpyr.com Senior Vice President, Planning & Administration Columbia to Whitehorse, Yukon. In addition, ClubLink operates three docks primarily for cruise ships. Investor Relations ED C. HANOUSEK Contact: Robert Visentin Superintendent, Rail Operations Tel: 905-841-5360 Fax: 905-841-1134 Email: rvisentin@clublink.ca CONTENTS 1 Financial Highlights 2 Chairman’s Message Bankers 4 ClubLink Establishes a Florida Region HSBC Bank Canada 5 Heron Bay Golf Club – Florida 6 ClubLink in Sun City Center – Florida 8 Glendale Joins ClubLink Wells Fargo Bank Alaska Annual Meeting of Shareholders10 Your Passport to More Excitement at White Pass Auditors12 Map of Canadian Golf Club and Resort Locations13 Golf Club and Resort Property Listing Annual Meeting of Shareholders of ClubLink Enterprises14 Management’s Discussion and Analysis of Financial Condition and Results of Operations Deloitte & Touche LLP Limited will be held at 11 a.m. on May 19, 2011 at King Valley Golf Club, 15675 Dufferin Street, King City, Ontario, L7B 1K5.47 Management’s Responsibility for Financial Reporting Stock Exchange Listings47 Independent Auditor’s Report48 Consolidated Balance Sheets4949 Consolidated Statements of Earnings and Comprehensive Earnings Consolidated Statements of Retained Earnings and Accumulated Other Comprehensive Loss Common shares: TSX: CLK Transfer Agent50 Consolidated Statements of Cash Flows51 Notes to Consolidated Financial Statements Canadian Stock Transfer Company, Inc.73 Board of Directors, Senior Officers, Corporate Information and Location of Annual Meeting of Shareholders CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 3. FINANCIAL HIGHLIGHTSThe following table summarizes the consolidated financial results of the Company:For the Years Ended December 31 2010 2009 2008 2007 (4) 2006 (4)OPERATIONSOperating revenue ($000) 189,903 190,212 196,532 160,710 40,506Net operating income ($000) (1) 49,858 51,437 55,035 50,595 18,589Operating margin (%) (1) 26.3 27.0 28.0 31.5 45.9Net membership fee income ($000) (1) 13,781 12,829 12,327 6,724 –Earnings before other items, income taxes and non-controlling interest ($000) (1) 63,639 64,266 67,362 57,319 18,589Net earnings ($000) 11,842 11,155 6,125 8,869 18,071Cash flow from operations ($000) (1) 36,299 27,912 35,516 40,873 25,332OPERATING DATAClubLink One Membership More GolfChampionship rounds – Canada (2) 1,064,000 1,020,000 975,000 1,004,000 886,00018-hole equivalent championship golf courses – Canada (2, 3) 40.5 40.5 38.5 38.5 35.0Average number of championship rounds per 18-hole golf course – Canada (2, 3) 26,272 25,185 25,325 26,078 25,314Championship rounds – U.S. (2) 58,000 11,000 13,000 14,000 13,00018-hole equivalent championship golf courses – U.S. (2, 3) 7.0 1.0 1.0 1.0 1.0White Pass & Yukon RouteRail passengers 368,000 396,000 438,000 461,000 431,000Port passengers from cruise ships 697,000 781,000 779,000 820,000 760,000MEMBERSHIP DATASales and transfer fees ($000) 9,752 15,214 15,225 23,399 18,182 1Sales (Members) 1,456 1,477 1,194 2,230 1,001Resignations and terminations ($000) 4,726 4,595 3,685 2,893 2,624Resignations and terminations (Members) 1,100 1,075 766 513 599Golf Members at year end (Members) 18,917 17,049 16,647 16,219 14,502Cash collected, net of origination costs ($000) 11,803 11,951 15,514 12,248 –Deferred membership fees at year end ($000) 57,356 59,334 60,212 57,025 –FINANCIAL POSITIONTotal assets ($000) 611,412 627,753 641,300 626,765 154,378Total debt ($000) 359,813 375,702 388,692 380,371 21,706Shareholders’ equity ($000) 155,797 154,560 109,625 104,188 112,407Total debt to shareholders’ equity ratio 2.31 2.43 3.55 3.65 0.19PER COMMON SHARE DATA ($)Basic and diluted earnings 0.42 0.44 0.27 0.39 0.79Basic and diluted cash flow from operations (1) 1.30 1.11 1.55 1.79 1.10Eligible cash dividends 0.30 0.27 0.24 0.24 0.24COMMON SHARE DATA (000)Shares outstanding 27,903 28,057 22,909 22,739 22,939Weighted average shares outstanding 27,976 25,113 22,887 22,784 22,933(1) Net operating income, operating margin, net membership fee income, earnings before other items, income taxes and non-controlling interest, cash flow from operations, and basic and diluted cash flow from operations per share are not recognized measures under Canadian generally accepted accounting principles (GAAP). Management believes that these measures are useful supplemental information. Investors should be cautioned, however, that these measures should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of the Company’s performance or to cash flows from operating, investing and financing activities, as a measure of liquidity and cash flows. ClubLink’s method of calculating these measures is consistent from year to year, but may be different than those used by other companies (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).(2) Excluding academy courses.(3) 18-hole equivalent championship golf courses operating during the year ended December 31, excluding Glendale Golf and Country Club (acquired December 2010).(4) The 2007 results include the consolidation of ClubLink Corporation’s results for seven months. During 2006, the investment in ClubLink Corporation was accounted for as an equity investment. Operating and Membership data for ClubLink Corporation display 100% of the operating results, consolidation commenced in 2007. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 4. Your Passport to K. (Rai) Sahi Chairman & Chief Executive Officer CHAIRMAN’S MESSAGE more!2 2010 represented a year of opportunity. On September 3rd, ClubLink announced that it had entered the Florida marketplace by purchasing eight 18-hole equivalent golf courses in Sun City Center, Florida. This acquisition was supplemented by the acquisition of Heron Bay Golf Club near Fort Lauderdale on October 21st. These acquisitions created ClubLink’s first region outside of Canada. Driven by a depressed Florida real estate market with plenty of opportunities and our desire to continually add value to our Canadian golf memberships, these acquisitions represent the beginning of ClubLink’s presence and operating model in Florida. We believe that the Florida golf market is a logical extension to our current Ontario/Quebec focus. Based on our members surveys, many of our Canadian members travel to Florida on golf vacations, have winter homes in the state or will be purchasing a vacation home in the near future. This will allow them to receive additional value from their current ClubLink membership. Late in 2010, ClubLink acquired Glendale Golf and Country Club in Hamilton, Ontario. Glendale was founded in 1919 and was one of the first private golf clubs in the Hamilton area. Glendale will provide a natural complement to nearby Heron Point Golf Links in Ancaster. ClubLink’s strong financial position has allowed this expansion. After spending $13 million on these acquisitions, we closed the year with liquidity of $41 million, virtually unchanged from the end of 2009. Our debt to equity ratio also declined from 2.43 in 2009 to 2.31 in 2010. We believe that our balance sheet has allowed us to continue to expand in a prudent manner. ClubLink was able to realize strong growth in its golf club and resort operations segment during 2010. Net operating income increased 8.2% to $35.2 million from $32.6 million in 2009. Even with the loss of a strong contribution from the 2009 RBC Canadian Open, hosted by Glen Abbey Golf Club, we were able to capitalize on the modest economic recovery from the 2009 recession which provided increases in most operational metrics. ClubLink ended the year at 18,917 golf members – up 1,868 golf members or 11% from 17,049 golf members at the end of 2009. Our golf membership has grown by almost five thousand members (or 34%) over the last five years.CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 5. Other operational highlights for thegolf club and resort operations in2010 included: • The opening of a new $5 million Effective strategy and prudent clubhouse at the 36 hole GreyHawk management has resulted in a number Golf Club at the beginning of the of positive metrics over the last three 2010 golf season. This investment Helping to offset these factors was an improved capture rate and lower years. The business combination in has enhanced the value of an 2009 which privatized ClubLink Ottawa area membership; operating costs. The capture rate of cruise passengers to rail passengers Corporation has been a major • The inaugural 2010 Montreal increased to 43.2% from 40.8% in contributor to improving our Championship (Champions Tour 2009. A decline of 5.1% in US dollar results since the end of 2007: K. (Rai) Sahi Event) was successfully hosted at operating costs helped to offset the • Net earnings increased 93%; Chairman & Chief our Club de Golf Le Fontainebleau. operating revenue decrease in 2010. Executive Officer Plans are already in place for the • EPS increased 56%; return of this event in 2011; and Two repowered locomotives were added to the fleet in 2010 with an • Cash dividends per share • The conversion of the 18-hole additional two being added in the increased 25%; and championship daily fee golf course Spring of 2011 bringing the total • Debt to equity ratio declined 37%. at Rolling Hills Golf Club into a repowered locomotives in our fleet Hybrid-Silver Golf Club named to six. Repowered locomotives reduce Overall, 2010 was a year in which “Bethesda Grange”. fuel emissions by 90% and are also we were able to capitalize on significantly more efficient – two certain opportunities in the FloridaRail, tourism and port operations net marketplace to add value to our golf repowered locomotives do the sameoperating income decreased to $17.3 members and to you, our shareholders. work as three older locomotives, withmillion in 2010 from $20.6 million As we expand in this marketplace and significant savings in fuel and repairsin 2009. our strategy takes hold, we expect to and maintenance costs.The rail, tourism and port operation see the results of this strategy help Consolidated EBITDA for 2010 drive the above metrics even more.results were impacted by two factors. 3 declined 1.0% to $63.6 million fromSignificantly fewer cruise ship visits to In closing, I would like to thank all $64.3 million in 2009 due to theAlaska resulted in a decline in port our employees for their dedication decline in the net operating incomepassengers to our docks in Skagway, including a special thank you to those from rail, tourism and port operationsAlaska and therefore a decline in our involved with the integration of our in US dollars and a stronger Canadianrail passengers. Secondly, a stronger Florida acquisitions and our directors dollar. These declines were offset byCanadian dollar resulted in a decline for their counsel and experience during improved operating results from theof $1.3 million in the segment’s these exciting times. golf club and resort operations.Canadian dollar net operating income. Decreases in other categories suchThe decline in cruise ship visits was a as amortization, interest and otherreaction to the State of Alaska Head expense helped to improve netTax imposed on each cruise ship tourist. earnings to $11.8 million in 2010With the partial repeal of this tax in from $11.2 million in 2009. Earnings2010, we expect to see modest per share declined to 42 cents fromincreases in cruise ship visits starting 44 cents in 2010.in 2011. The arrival of Disney, Crystaland Oceania cruise lines to Alaska in2011 are exciting new additions to theAlaskan tourism market. These new2011 additions will offset previouslyannounced reductions of 6% over2010 sailings. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 6. Your Passport to 5 6 more golf ! 7 1 3 4 2 OR L AN D O CLUBLINK ESTABLISHES A FLORIDA REGION TAM PA In the fall of 2010, ClubLink established its Florida Region with the acquisition of five operating 18-hole equivalent championship golf clubs and two academy golf clubs in Sun F L OR I DA City Center, south of Tampa, and the 18-hole Heron Bay Golf Club in Coral Springs, adjacent to Fort Lauderdale. S AR AS OTA4 The Florida Region represents an opportunity to establish a membership base underpinned by ClubLink’s unique “one membership, more golf” business model which offers members reciprocal access to all of its golf clubs, as well as capitalizing on the increasing number of Canadians travelling to and buying second homes in Southern Florida. F OR T L AU DERDALE To maximize this opportunity, our TravelLink HYBRID-PLATINUM CLUB program was launched, which provides Ontario/Quebec Region members with reciprocal M I AMI access to ClubLink golf clubs in the Florida Region, GOLD MEMBER CLUB and vice versa. The program offers a variety of options, including one whereby members can SILVER MEMBER CLUB join a “second home club” in another region, an attractive choice for Canadian snowbirds. ACADEMY CLUB Championship Academy Flag # Golf Holes Golf Holes FLORIDA GOLF CLUBS Hybrid-Platinum 1 Club Renaissance, Sun City Center 18 – 2 Heron Bay Golf Club, Coral Springs 18 – Gold 3 Scepter Golf Club, Sun City Center 18 – Silver 4 Falcon Watch Golf Club, Sun City Center 27 – 5 Sandpiper Golf Club, Sun City Center 27 – Academy 6 Caloosa Greens Golf Club, Sun City Center – 18 7 Kings Point Golf Club, Sun City Center – 18CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 7. 2HERON BAY GOLF CLUBFor six years (1997–2002), the PGA Tour’s Honda Classic called Heron Bay home, crowning champions StuartAppleby, Mark Calcavecchia, Vijay Singh, Dudley Hart, Jesper Parnevik and Matt Kuchar.When the 7,268-yard course opened in 1996 as the TPC at Heron Bay, it was named one of America’s 10 best newpublic golf courses by Golf Digest. Golf Magazine ranks it one of the top 10 daily-fee courses in Florida. Designed by10-time PGA Tour winner Mark McCumber, it is home to the Heron Bay Golf Academy, an outstanding 40-acre practicefacility, and is the home course of the NHL’s Florida Panthers. Heron Bay also plays host to one of America’s oldest andmost prestigious amateur tournaments, the Dixie Amateur, whose fields have featured stars such as Tiger Woods and 5Sergio Garcia.Heron Bay Golf Club is adjacent to the Fort Lauderdale Marriott Coral Springs Hotel and Convention Center, providingan ideal venue for visiting golfers taking advantage of stay-and-play packages. ClubLink members receive preferredpricing when staying at the hotel. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 8. CLUBLINK IN SUN CITY CENTER ClubLink’s initial foray into Florida was the acquisition Scepter Golf Club, a Chip Powell design that opened in September 2010 of the courses in Sun City Center, in 2005, is 6,717 yards in length. It features numerous Florida approximately 50 kilometres (30 miles) south water hazards, strong bunkering and pushed-up green of Tampa. The operating championship golf clubs are sites with roll-off collars and swales that demand Club Renaissance (18 holes), Sandpiper Golf Club (27 accurate approach shots. Scepter is a Gold-level holes), Scepter Golf Club (18 holes), and Falcon Watch member club. Golf Club (27 holes). Two 18-hole academy (executive- Sandpiper Golf Club is comprised of three nine-hole length) clubs were also included: Kings Point Golf Club courses, each with a par of 36: The Lakes (3,258 and Caloosa Greens Golf Club. North Lakes Golf Club, yards), the Oaks (3,154 yards) and the Palms (3,170 which was closed in 2009, was also part of the yards). The original 18 holes, designed by Mark portfolio, as was an undeveloped two-acre parcel Mahanna, were built in 1968. Renowned Florida of commercially zoned land. architect Ron Garl designed the third nine in 1985. 1 The jewel in the Sun City Center crown is Club Garl designed all three nines at Falcon Watch: Sands Renaissance. The excellent 6,700-yard golf course, (par 36, 3,210 yards), Cypress (par 36, 3,265 yards), designed by Chip Powell in 2002, is complemented by and Challenge (par 36, 3,280 yards). They opened in a stunning 43,000 square-foot Mediterranean-inspired 1981, 1984, and 1988, respectively. clubhouse. Clubhouse amenities include a large swimming pool and hot tub, full-service spa with five Both Sandpiper and Falcon Watch are ClubLink service rooms, and a two-room wellness centre with Silver-level clubs. the latest in fitness equipment, personal training and ClubLink members visiting Sun City Center receive exercise classes. There are two dining rooms, each of preferred pricing on accommodations at the nearby6 2,700 square feet, an 800 square-foot golf shop, and Resort and Club at Little Harbor. covered patio. Within the ClubLink family, Club Renaissance is a hybrid golf club, combining Platinum-level membership with premium daily-fee golf. Photos courtesy of The Greg Wilson GroupCLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 9. 35 4 7 Photos courtesy of The Greg Wilson Group CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 10. GLENDALE JOINS CLUBLINK On December 15th, ClubLink announced it had acquired Glendale Golf and Country Club in Hamilton, Ontario. Glendale became ClubLink’s 23rd golf club in the Greater Toronto Area, and brought the Company’s total golf club portfolio to 48.5 18-hole equivalent championship courses and six 18-hole equivalent academy courses. Glendale, founded in 1919, was one of the first private clubs in the Hamilton area. More than 500 of the club’s original members volunteered over several months to build the course, which has had a vigorous and entertaining history. For example, found on the property is Smugglers Cave, a At 6,321 yards, the par-72 Glendale course brick-lined cavern purported to be used by rumrunners is not overly long by modern standards but the during Prohibition. tree-lined fairways and elevation changes make it a challenging experience for golfers of all Glendale has been the site of many important amateur and abilities. Several holes on the front nine were professional tournaments, including the 2001 Canadian PGA redesigned in 2005 by well-known Canadian Women’s Championship won by Lorie Kane in brilliant architect Ian Andrew. fashion, as she shot a final-round 63, a competitive course record that still stands today. The classic clubhouse is home to a 300-seat banquet facility in addition to the usual amenities and a six-sheet curling rink built in 1960.8 Within the ClubLink family, Glendale is categorized as a Gold-level Member Club. Photos courtesy of Brent LongCLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 11. 9 Photos courtesy of Brent LongCLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 12. YOUR PASSPORT TO MORE EXCITEMENT AT WHITE PASS Three new high-end luxury cruise lines — Disney, Crystal and Oceania — will be coming to Alaska and Skagway in 2011, adding nearly 54,000 passengers, offsetting previously announced reductions by Holland America and Princess. Disney will dramatically change the demographics of the market by bringing over 40,000 passengers — many of them children — to Skagway aboard the Disney Wonder. As a result, White Pass will develop new product offerings10 and marketing materials that are family-centric, interactive and educational. One of the key programs will be the exclusive youth activity car available as an upgrade for families. This is an enhanced round trip Summit Excursion. Once arrived at the Summit, kids will be escorted to their exclusive activity car for the southbound journey of sing alongs, I-Spy, activities and stories of the Klondike Gold Rush. On their private car, they’ll be joined by an exclusive Railroader Guide. Meanwhile, the rest of the family will enjoy a champagne toast and receive a souvenir medallion, to welcome them into the “White Pass Summit Club”.CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 13. 11During the last week of April 2011, White Pass will hosta historic event: the clearing of the line with our historicrail equipment. Rotary Snowplow No. 1 built for WhitePass in 1898, by the Cooke Locomotive and MachineryCompany of Paterson, New Jersey, will head the RotaryFleet. Behind Rotary Snowplow No. 1 will be SteamEngine No. 73, a fully restored 1947 Baldwin 2-8-2Mikado Class steam locomotive joined by No. 69,a Baldwin 2-8-0 built for White Pass in 1907.Media, railfans, and other guests will travel behindthe Rotary Fleet on a chase train consisting of diesellocomotives and comfortable, vintage passengercoaches. Throughout the adventure, passengers willhave the opportunity to disembark their train, wheresafety allows, to capture the Rotary Snowplow hard atwork, a view rarely seen by anyone but our locomotiveengineers and our maintenance-of-way workers. TheRotary Snowplow with its 10 huge blades pushes andclears heavy winter snow accumulations of up to 12 feetsending the snow flying out to the side of the tracks bycentrifugal force in spectacular fashion. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 14. 14 23 22 6 5 8 13 11 27 16 36 38 34 37 39 17 28 18 QUEBEC 31 33 21 2 9 15 MON T T R EM BL AN T 20 7 35 32 19 30 24 29 10 3 O N TA R I O 1 4 HUNT SVILLE MON TR EAL Map of Canadian Golf Club and Resort Locations 12 OTTAWA 26 25 GEORGIAN BAY PICKERING12 TORON TO LAKE ONTARI O L OND ON PRESTIGE MEMBER OR HYBRID CLUB PLATINUM MEMBER CLUB GOLD MEMBER OR HYBRID CLUB LAKE ER I E SILVER MEMBER OR HYBRID CLUB DAILY FEE CLUB RESORTCLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 15. GOLF CLUB AND RESORT PROPERTY LISTING Championship Academy Future Current Surplus Golf Holes Golf Holes Golf Holes Rooms Land in AcresONTARIO/QUEBEC REGION (see map on page 12)Prestige 1 Greystone Golf Club, Milton, Ontario 18 – – – – 2 King Valley Golf Club, The Township of King, Ontario 18 – – – – 3 RattleSnake Point Golf Club, Milton, Ontario 36 9 – – –Hybrid – Prestige 4 Glen Abbey Golf Club, Oakville 18 – – – –Platinum 5 Club de Golf Islesmere, Laval, Quebec (a) 27 – – – – 6 Club de Golf Le Fontainebleau, Blainville, Quebec 18 – – – – 7 DiamondBack Golf Club, Richmond Hill, Ontario 18 – – – – 8 Eagle Creek Golf Club, Dunrobin, Ontario 18 – – – – 9 Emerald Hills Golf Club, Whitchurch-Stouffville, Ontario 27 – – – – 10 Glencairn Golf Club, Milton, Ontario 27 – – – – 11 Grandview Golf Club, Huntsville, Ontario 18 – 18 – – 12 Heron Point Golf Links, Ancaster, Ontario 18 – – – – 13 Kanata Golf & Country Club, Kanata, Ontario 18 – – – – 14 Le Maitre de Mont-Tremblant, Mont-Tremblant, Quebec 18 – – – – 15 King’s Riding Golf Club, The Township of King, Ontario 18 – – – – 16 Rocky Crest Golf Club, Mactier, Ontario 18 – 18 – – 17 The Lake Joseph Club, Port Carling, Ontario 18 9 – – – 18 Wyndance Golf Club, Uxbridge, Ontario 18 9 – – –Gold 19 Blue Springs Golf Club, Acton, Ontario 18 9 – – – 20 Caledon Woods Golf Club, Bolton, Ontario 18 – – – – 21 Cherry Downs Golf & Country Club, Pickering, Ontario 18 9 18 – – 22 Club de Golf Hautes Plaines, Gatineau, Quebec 18 – – – – 23 Club de Golf Val des Lacs, Ste. Sophie, Quebec 18 – – – – 24 Eagle Ridge Golf Club, Georgetown, Ontario 18 – – – – 25 Glendale Golf and Country Club, Hamilton, Ontario 18 – – – – 26 Greenhills Golf Club, London, Ontario (a) 18 9 – – – 13 27 GreyHawk Golf Club, Ottawa, Ontario 36 – – – – 28 National Pines, Innisfil, Ontario (a) 18 – – – – 29 Station Creek Golf Club, Whitchurch-Stouffville, Ontario 36 – – – – 30 The Country Club, Woodbridge, Ontario (a) 36 9 – – –Hybrid – Gold 31 The Club at Bond Head (a) 36 – – – –Hybrid – Silver 32 Bethesda Grange, Whitchurch-Stouffville, Ontario 18 – – – – 33 Highland Gate Golf Club, Aurora, Ontario 18 – – – –Daily Fee 34 Grandview Inn Course, Huntsville, Ontario – 9 – – – 35 Rolling Hills Golf Club, Whitchurch-Stouffville, Ontario 36 – – – –MUSKOKA, ONTARIO RESORTS 36 Delta Grandview Resort, Huntsville, Ontario – – – 151 – 37 The Lake Joseph Club, Port Carling, Ontario – – – 251 – 38 Delta Rocky Crest Resort/Lakeside at Rocky Crest, Mactier (b) – – – 84 – 39 Delta Sherwood Inn, Port Carling, Ontario – – – 49 –OTHER Lake Chesdin Golf Club, Richmond, Virginia 18 – 18 – – King Haven, The Township of King – – – – 278 Harwood, Montreal – – 36 – –FLORIDA REGION (see map on page 4)Hybrid – Platinum 1 Club Renaissance, Sun City Center, Florida 18 – – – – 2 Heron Bay Golf Club, Coral Springs, Florida 18 – – – –Gold 3 Scepter Golf Club, Sun City Center, Florida 18 – – – –Silver 4 Falcon Watch Golf Club, Sun City Center, Florida 27 – – – – 5 Sandpiper Golf Club, Sun City Center, Florida 27 – – – –Other 6 Caloosa Greens Golf Club, Sun City Center, Florida – 18 – – 2 7 Kings Point Golf Club, Sun City Center, Florida – 18 – – – North Lakes Golf Club, Sun City Center, Florida (c) – – 18 – –Total 18-hole Equivalent Courses, Rooms, Acres 48.5 6.0 7.0 309 280Notes:(a) Operated by ClubLink under long-term leases.(b) Delta Rocky Crest Resort consists of 65 units and Lakeside at Rocky Crest consists of 19 units.(c) North Lakes Golf Club was closed by the previous owner. Management is reviewing alternatives for this facility. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 16. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 14 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with ClubLink Enterprises Limited’s (“ClubLink” or the “Company”) audited consolidated financial statements and accompanying notes for the year ended December 31, 2010. This MD&A has been prepared as at March 1, 2011 and all amounts are in Canadian dollars unless otherwise indicated. In this document, unless otherwise indicated, all financial data are prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). Forward-Looking Statements This annual report contains certain forward-looking information and statements relating but not limited to, operations, anticipated or prospective financial performance, results of operations, business prospects and strategies of ClubLink. Forward-looking information typically contains statements with words such as “consider”, “anticipate”, “believe”, “expect”, “plan”, “intend”, “may”, “likely”, or similar words suggesting future outcomes or statements regarding an outlook, or other expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance. Readers should be aware that these statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements of ClubLink to differ materially from those suggested by the forward-looking statements, some of which may be beyond the control of management. Although ClubLink believes it has a reasonable basis for making the forecasts or projections included in this MD&A, readers are cautioned not to place undue reliance on such forward-looking information. By its nature, ClubLink’s forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts and other forward-looking statements will not occur. These factors include, but are not limited to, availability of credit, weather conditions, the economic environment, environmental regulation and competition. The above list of important factors affecting forward-looking information is not exhaustive, and reference should be made to the other risks discussed in ClubLink’s filings with Canadian securities regulatory authorities. ClubLink undertakes no obligation, except as required by law, to update publicly or otherwise any forward-looking information, whether as a result of new information, future events or otherwise, or the above list of factors affecting this information. 14 Business Strategy and Corporate Overview The Company has a strategic objective to maximize shareholder value over a five to ten year horizon, though the Company may monetize an investment when business conditions present a suitable opportunity. The Company acquired its increasing share interest in ClubLink Corporation from 2001 through July 2009 – with control being acquired and full consolidation commencing on June 1, 2007. ClubLink Corporation became a wholly-owned subsidiary on July 28, 2009. The privatization of ClubLink Corporation on July 28, 2009 has provided a stable environment to allow for continued growth and enhanced profitability from golf club and resort operations. An experienced management team and a strategic focus which offers customers a wide variety of high quality facilities and flexible membership programs has resulted in ClubLink Corporation establishing itself as the golf industry leader in Canada. Operating synergies and continued cost reduction through economies of scale will improve operating performance and financial returns. Management has been actively looking at acquisition opportunities in southern Florida. The Company made two acquisitions in late 2010. The first acquisition involved a portfolio of six 18-hole equivalent championship and two 18-hole academy golf courses in Sun City Center, Florida. The second investment was the purchase of Heron Bay Golf Club in the Fort Lauderdale area. These investments created ClubLink’s first region outside of Ontario and Quebec. ClubLink’s continued investment in programs to build the core operating business at White Pass & Yukon Route (“White Pass”) has historically been the Company’s key to profitability. As a standalone entity, White Pass has an experienced on-site management team and has been able to generate growth in the passenger traffic and corresponding U.S. dollar revenue since acquisition in 1997. Significant initiatives in this business segment have included capitalizing on historical relationships with cruise lines, supporting investments to create one of the leading port facilities in southeast Alaska, investing to repower our locomotive fleet to reduce environmental emissions and ongoing operating costs and continuing to offer Alaska’s premier shore excursion experience to the travelling public. Overview of Business Segments ClubLink operates in two distinct business segments: (a) golf club and resort operations and (b) rail, tourism and port operations. In addition, the corporate operations segment oversees the two business segments. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 17. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 15 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of Business Segments (cont’d) The quarterly earnings performance of the Company reflects the highly seasonal nature of both business segments. The majority of operating revenue and net operating income from these businesses occur during the second and third quarters of the year. Accordingly, the quarterly reported net earnings of the Company will fluctuate with those of the underlying business segments. This seasonality will be mitigated somewhat by ClubLink’s recent expansion into the Florida marketplace, as the primary golf season in Florida is from November to April. Golf Club and Resort Operations Segment ClubLink is engaged in golf club and resort operations under the trademark “ClubLink One Membership More Golf ”. ClubLink is Canada’s largest owner and operator of golf clubs with 48.5, 18-hole equivalent championship and six 18-hole equivalent academy courses, at 41 locations primarily in Ontario, Quebec and Florida. ClubLink’s golf clubs are strategically organized in clusters that are located in densely populated metropolitan areas and resort destinations frequented by those who live and work in these areas. By operating in these areas, ClubLink is able to offer golfers a wide variety of unique membership, corporate event and resort opportunities. ClubLink is also able to obtain the benefit of operating synergies to maximize revenue and achieve economies of scale to reduce costs. Revenue at all golf club and resort properties is enhanced by cross-marketing, as the demographics of target markets for each are substantially similar. Revenue is further improved by corporate golf events, business meetings and social events that utilize golf capacity and related facilities at times that are not in high demand by ClubLink’s members. Member and Hybrid Golf Club revenue is maximized by the sale of flexible personal and corporate memberships that offer reciprocal playing privileges at ClubLink golf clubs and, on payment of an additional fee, inter-regional play within ClubLink and ClubCorp of America golf clubs. Daily fee golf club revenue is maximized through unique and innovative marketing programs. Resort revenue is maximized by the integration of high quality golf facilities, which are recognized throughout the leisure industry as the key amenity for successfully attracting corporate groups and leisure guests. 15 (a) Canada ClubLink’s Ontario/Quebec Region is organized into two clusters: the major metropolitan areas of Southern Ontario and Muskoka, Ontario’s premier resort area, extending from London to Huntsville to Pickering, with a particularly strong presence in the Greater Toronto Area; and Quebec/Eastern Ontario, extending from the National Capital Region to Montreal, including Mont-Tremblant, Quebec’s premier resort area. In 2011, ClubLink will operate 29 Ontario/Quebec Region Member Golf Clubs in three categories as follows: Prestige: Greystone, King Valley, RattleSnake Point Platinum: DiamondBack, Eagle Creek, Emerald Hills, Fontainebleau, Glencairn, Grandview, Heron Point, Islesmere, Kanata, King’s Riding, Lake Joseph, Le Maitre, Rocky Crest, Wyndance Gold: Blue Springs, Caledon Woods, Cherry Downs, Country Club, Eagle Ridge, Glendale, Greenhills, GreyHawk, Hautes Plaines, National Pines, Station Creek, Val des Lacs On December 15, 2010, ClubLink announced the acquisition of Glendale Golf and Country Club in Hamilton, Ontario. Glendale is the 23rd golf club in the Greater Toronto Area. It was founded in 1919 and was one of the first private golf clubs in the Hamilton area. Glendale will operate as a Gold Member Golf Club. ClubLink has committed to $1,500,000 in capital upgrades over three years for cart paths, bunkers, a practice facility and clubhouse improvements. In 2011, ClubLink will operate four Ontario/Quebec Region Hybrid Golf Clubs in three categories as follows: Hybrid – Prestige: Glen Abbey Hybrid – Gold: The Club at Bond Head Hybrid – Silver: Bethesda Grange, Highland Gate Hybrid Golf Clubs are available for daily fee (public) play, reciprocal access by Members and provide a home club for Members with reciprocal access to the ClubLink system. On June 10, 2010, ClubLink announced the conversion of the 18-hole championship daily fee golf course at Rolling Hills into a Hybrid – Silver Golf Club named Bethesda Grange. Golf course upgrades commenced in 2010, as part of this conversion, are expected to be completed by the end of 2011. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 18. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 16 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview of Business Segments (cont’d) Golf Club and Resort Operations Segment (cont’d) (a) Canada (cont’d) In 2011, ClubLink will operate two Ontario/Quebec Region Daily Fee Golf Clubs as follows: Daily Fee: Grandview Inn, Rolling Hills ClubLink owns sufficient land to develop an additional 18 holes at Cherry Downs Golf Club in Pickering, Grandview Golf Club in Muskoka and Rocky Crest Golf Club in Muskoka and sufficient land in the Greater Montreal Area to develop a 36-hole golf club. In 2011, ClubLink will operate The Lake Joseph Club while Delta Hotels and Resort (“Delta”) will manage Delta Grandview Resort, Delta Rocky Crest Resort and Delta Sherwood Inn on ClubLink’s behalf. The Lake Joseph Club and Delta Rocky Crest Resort operate seasonally from May to October. Delta Sherwood Inn has undergone renovations after the resort was damaged by a fire and closed in September 2009 and was reopened in June 2010. Delta Grandview Resort operates year round. Delta’s responsibilities include management of rooms, recreation programs and food and beverage outlets. This includes the management of food and beverage operations at Rocky Crest and Grandview Golf Clubs, while ClubLink remains responsible for management of the golf operations at these properties. Delta’s sales and marketing efforts for ClubLink’s Muskoka Resorts are focused on increasing corporate clientele through direct mail programs, telemarketing campaigns, e-commerce promotions and cross promotions to all ClubLink, ClubCorp, Toronto Board of Trade and Delta Privilege Members. ClubLink’s remaining Muskoka land holdings, excluding golf course development sites, include zoned and serviced land that are capable of supporting a substantial number of resort rooms/villas, conference facilities and residential homes. (b) United States 16 ClubLink’s golf clubs in the United States consist of a Florida Region and the Lake Chesdin Golf Club, located near Richmond, Virginia. The Florida Region includes six 18-hole equivalent championship and two 18-hole equivalent academy golf courses. On September 3, 2010, ClubLink acquired eight 18-hole golf courses in Sun City Center, Florida for US $8,700,000. The operating championship golf courses are Club Renaissance (18 holes), Sandpiper Golf Course (27 holes), Scepter Golf Club (18 holes), and Falcon Watch Golf Club (27 holes). Two 18-hole academy courses are also included: Kings Point Golf Club and Caloosa Greens Golf Club. North Lakes Golf Club, which was closed in 2009 and remains closed, is also part of the portfolio, as is an undeveloped two-acre parcel of commercially zoned land. The golf courses, about 50 kilometres (30 miles) south of Tampa, range from a full-service country club to academy courses. On October 21, 2010, ClubLink acquired Heron Bay Golf Club in Coral Springs, Florida, 30 minutes from downtown Fort Lauderdale, for US $2,900,000. From 1997 to 2002, Heron Bay hosted the PGA Tour’s Honda Classic, crowning champions Stuart Appleby, Mark Calcavecchia, Vijay Singh, Dudley Hart, Jesper Parnevik and Matt Kuchar. For the 2011 operating season, ClubLink will operate five Florida Region Golf Clubs in three categories as follows: Hybrid – Platinum: Club Renaissance, Heron Bay Gold: Scepter Silver: Falcon Watch, Sandpiper These investments created ClubLink’s first region outside of Ontario and Quebec. Under GAAP the results of the United States golf clubs are considered integrated and their monetary assets/liabilities and earnings are translated into Canadian currency using average exchange rates during the period. Non-monetary assets/liabilities are translated using historical exchange rates. Changes in average exchange rates will impact the net earnings of the Company. (c) TravelLink The TravelLink program offers three levels that allow ClubLink members inter-regional access. The first level provides all ClubLink members inter-regional access with preferred pricing. Levels 2 and 3 are optional and provide ClubLink members greater inter-regional access for fixed annual fees. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 19. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSOverview of Business Segments (cont’d)Rail, Tourism and Port Operations SegmentClubLink is also engaged in rail, tourism and port operations based in Skagway, Alaska which operate under the trade name of “White Pass& Yukon Route”. This includes a tourist railway stretching approximately 177 kilometres (110 miles) from Skagway, Alaska through BritishColumbia to Whitehorse, Yukon. Presently, approximately 110 kilometres (67.5 miles) of the railway is in active service.The railway was constructed by White Pass during the Klondike Gold Rush of 1898/1899 and completed in 1900. From 1900 until 1982,it was used for the carriage of general freight, ore concentrates, petroleum products and passengers. Railway operations were suspended in1982 when a major ore concentrate customer shut down its mine. The South Klondike Highway between Whitehorse and Skagway,subsequently constructed in 1985, transferred the transportation of ore concentrates from rail to road service. The railway reopened in 1988and has since been operating as a seasonal passenger tourism railway. ClubLink acquired White Pass in 1997.White Pass operates three docks in Skagway, which provide four berths for cruise ships operating west coast schedules throughout the Mayto September tourist season. The largest of the three docks, with two berths, is owned while the two remaining docks are situated on stateand city property and operate under long-term tideland leases.The primary market is the cruise industry, which recognizes Skagway as a marquee port for its Alaskan cruises. White Pass maintains asymbiotic relationship with the cruise lines – carrying almost half of all cruise passengers – making it Alaska’s premier shore excursion anda high volume, highly rated and profitable shore excursion for the cruise lines. The relationship is supported with an existing incentiveprogram and extensive cooperative pre-cruise and on-board promotion. White Pass also markets to motorcoach tour companies andindependent travellers who arrive via ferry and the South Klondike Highway.Under GAAP, the results of White Pass are self-sustaining and its US operations are translated into Canadian currency using averageexchange rates during the period. Changes in average exchange rates will impact the net earnings of the Company.Corporate Operations Segment 17ClubLink’s objective at the corporate level is to identify opportunities to generate incremental returns and cash flow. Historically, the natureof these investments included debt and equity instruments in both public and private organizations. Currently, management is focused onimproving the returns of both operating business segments.Business CombinationOn July 28, 2009, the Company acquired the remaining 28.1% common share interest in ClubLink Corporation that it did not already own.ClubLink issued 1.1 common shares for each common share of ClubLink Corporation acquired, resulting in the issuance of 5,164,015common shares of the Company. The ClubLink common shares issued were valued at $44,669,000, based on an independent third partyvaluation. In addition, the Company incurred $951,000 of transaction costs which have been included in the cost of the purchase. Theacquisition has been accounted for under the purchase method of accounting. Accordingly, the Company allocated the purchase price to theidentifiable assets and liabilities acquired based on their estimated fair values at the time of acquisition. The operations of ClubLinkCorporation have been included in the consolidated statements of earnings and comprehensive earnings and cash flows on a 100% basis sinceJuly 28, 2009.As part of the accounting treatment for this transaction, the Company allocated the purchase price to the identifiable assets and liabilitiesof the acquisition which resulted in an increase to intangible assets of $14,857,000 and a decrease to capital assets in the amount of$14,700,000. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 20. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 18 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selected Financial Information The table below sets forth selected financial data relating to the Company’s fiscal years ended December 31, 2010, December 31, 2009 and December 31, 2008. This financial data is derived from the Company’s audited consolidated financial statements, which are prepared in accordance with GAAP. For the Years Ended December 31, % Change % Change (thousands of dollars, except per share amounts) 2010 2009 2008 2010/2009 2009/2008 CHAMPIONSHIP GOLF ROUNDS 1,122,000 1,031,000 988,000 8.8% 4.4% RAIL PASSENGERS 368,000 396,000 438,000 -7.1% -9.6% PORT PASSENGERS 697,000 781,000 779,000 -10.8% 0.3% OPERATING REVENUE $ 189,903 $ 190,212 $ 196,532 -0.2% -3.2% COST OF SALES AND OPERATING EXPENSES 140,045 138,775 141,497 0.9% -1.9% NET OPERATING INCOME 49,858 51,437 55,035 -3.1% -6.5% Operating margin (%) 26.3% 27.0% 28.0% -2.6% -3.6% Amortization of membership fees 15,292 14,784 13,965 3.4% 5.9% Direct costs of originating membership fees 1,511 1,955 1,638 -22.7% 19.4% NET MEMBERSHIP FEE INCOME 13,781 12,829 12,327 7.4% 4.1% Earnings before other items, income taxes and non-controlling interest (EBITDA) 63,639 64,266 67,362 -1.0% -4.6% Amortization of capital and intangible assets (20,789) (21,533) (20,774) -3.5% 3.7% Land lease rent (5,285) (5,024) (4,182) 5.2% 20.1% Interest, net (22,108) (23,397) (25,283) -5.5% -7.5% 18 Other income (expense) 344 (1,807) (292) N/A N/A Current income taxes recovery (provision) 1,811 (5,313) (6,432) N/A N/A Future income taxes recovery (provision) (5,770) 3,311 (3,276) N/A N/A Non-controlling interest – 652 (998) N/A N/A NET EARNINGS $ 11,842 $ 11,155 $ 6,125 6.2% 82.1% WEIGHTED AVERAGE SHARES OUTSTANDING (000) 27,976 25,113 22,887 11.4% 9.7% BASIC AND DILUTED EARNINGS PER SHARE $ 0.42 $ 0.44 $ 0.27 -4.5% 63.0% CASH FLOW FROM OPERATIONS $ 36,299 $ 27,912 $ 35,516 30.0% -21.4% BASIC AND DILUTED CASH FLOW FROM OPERATIONS PER SHARE $ 1.30 $ 1.11 $ 1.55 17.1% -28.4% TOTAL ASSETS $ 611,412 $ 627,753 $ 641,300 -2.6% -2.1% TOTAL LIABILITIES $ 455,615 $ 473,193 $ 484,729 -3.7% -2.4% ELIGIBLE CASH DIVIDENDS PER SHARE $ 0.30 $ 0.27 $ 0.24 11.1% 12.5% Summary of Canadian/U.S. Exchange Rates Used for Translation Purposes The following exchange rates translate one U.S. dollar into the Canadian dollar equivalent. 2010 2009 2008 Balance Sheet, at December 31 0.9946 1.0510 1.2217 Statement of Earnings, average for the years ended December 31 1.0299 1.1326 1.0678 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 21. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 19 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2010 Consolidated Operating Highlights Consolidated operating revenue decreased 0.2% to $189,903,000 for the year ended December 31, 2010 from $190,212,000 in 2009 primarily due to a decline in the rail, tourism and port operations revenue. The operating revenue from this segment has declined due to: (i) a 10.8% decline in port passengers; (ii) a 7.1% decline in rail passengers and (iii) a stronger Canadian dollar per US dollar (1.0299 compared to 1.1326 in 2009). This decrease was offset by revenue generated by ClubLink’s expansion into the Florida golf marketplace and improved Canadian golf club and resort operations. Consolidated operating revenue decreased 3.2% to $190,212,000 in 2009 from $196,532,000 in 2008 due to a decline in golf club and resort operations revenue resulting from reduced discretionary spending during the 2009 recession. Championship golf rounds increased 8.8% to 1,122,000 championship rounds from 1,031,000 championship rounds in 2009, including 58,000 rounds from our US golf clubs, including the Florida golf clubs acquired late in 2010. This compares to 988,000 championship rounds in 2008. Port passengers from cruise ships decreased 10.8% to 697,000 from 781,000 in 2009. The decline in cruise ship visits was a reaction to the head tax imposed by the State of Alaska. Port passengers in 2008 amounted to 779,000. Rail passengers declined 7.1% to 368,000 in 2010 from 396,000 in 2009. The number of rail passengers decreased 9.6% to 396,000 in 2009 from 438,000 in 2008 due primarily to two separate interruptions in rail service. Consolidated cost of sales and operating expenses increased 0.9% to $140,045,000 in 2010 from $138,775,000 in 2009 due to additional operating costs incurred relating to the Company’s expansion into Florida offset by a stronger Canadian dollar used to convert costs from rail, tourism and port operations. The cost of sales and operating expenses in 2008 amounted to $141,497,000. Net membership fee income increased 7.4% to $13,781,000 from $12,829,000 in 2009 primarily due to a 2.1% increase in Canadian members and a 22.7% decrease in direct costs of originating membership fees. This compares to $12,327,000 in 2008. Consolidated EBITDA decreased 1.0% for the year ended December 31, 2010 to $63,639,000 from $64,266,000 in 2009. This decrease is due primarily to the decline in rail, tourism and port operations EBITDA and a stronger Canadian dollar. Consolidated EBITDA declined from $67,362,000 in 2008 due to the decline in discretionary spending in golf club and resort operations during the 2009 recession. 19 Amortization of capital and intangible assets decreased 3.5% to $20,789,000 for the year ended December 31, 2010 from $21,533,000 in 2009 and compares to $20,774,000 in 2008. Land lease rent increased 5.2% to $5,285,000 for the year ended December 31, 2010 from $5,024,000 in 2009 due to a full year of rent for The Club at Bond Head, which became a ClubLink property on April 7, 2009. Land lease rent for 2008 was $4,182,000. Interest, net decreased 5.5% to $22,108,000 for the year ended December 31, 2010 from $23,397,000 in 2009. This reduction was caused by a 4.2% decline in debt levels, a stronger Canadian dollar and a lower average borrowing rate in 2010. Interest, net has decreased from $25,283,000 in 2008. Other expense changed to income of $344,000 in 2010 from an expense of $1,807,000 in 2009 primarily due to costs incurred in 2009 relating to the golf club and resort operations property tax appeal process. A total of $873,000 (2009 – nil) in business combination transaction costs have been charged to other expense during the year in conjunction with the change in GAAP requiring business combination transaction costs to be expensed. The overall effective tax rate for 2010 was 25.1% as compared to 16.0% in 2009. This increase was due to a future income tax recovery of $3,483,000 from previous unrecognized operating losses in 2009. This compares to an effective tax rate of 57.7% in 2008 which was higher than the statutory tax rate due to unrecognized operating losses in that year. Consolidated net earnings increased to $11,842,000 for the year ended December 31, 2010 from $11,155,000 in 2009 primarily due to the decline in interest, net and other expense and compares to $6,125,000 in 2008. Weighted average shares for the year ending December 31, 2010 increased to 27,976,000 as compared to 25,113,000 in 2009 primarily due to the 5,164,015 common shares issued by the Company on July 28, 2009 as part of the business combination with ClubLink Corporation. Weighted average shares for the year ending December 31, 2008 was 22,887,000. Earnings per share decreased to 42 cents per share in 2010, compared to 44 cents per share in 2009 and 27 cents per share in 2008. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 22. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 20 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations by Business Segment The review of operations by business segment should be read in conjunction with the segmented information contained in note 17 of the audited consolidated financial statements for the year ended December 31, 2010. The following is a summary of the results of operations. For the Years Ended December 31, December 31, % (thousands of dollars) 2010 2009 Change Operating revenue by segment Golf club and resort operations $ 153,366 $ 147,414 4.0% Rail, tourism and port operations 36,537 42,798 -14.6% $ 189,903 $ 190,212 -0.2% Net operating income by segment Golf club and resort operations $ 35,247 $ 32,586 8.2% Rail, tourism and port operations 17,270 20,577 -16.1% Corporate operations (2,659) (1,726) -54.1% 49,858 51,437 -3.1% Net membership fee income Golf club and resort operations 13,781 12,829 7.4% EBITDA $ 63,639 $ 64,266 -1.0% Review of Golf Club and Resort Operations for the Year Ended December 31, 2010 On April 7, 2009, ClubLink entered into a long-term 21 golf-season lease for The Club at Bond Head. Bond Head, just west of Highway 20 400, north of Toronto, consists of two superb 18-hole championship courses designed by the renowned architectural firm of Hurdzan Fry. Bond Head operated as a Premium Daily Fee facility in 2009. In June 2009, ClubLink announced that it was selling Gold Level Memberships to Bond Head commencing in 2010 with interim playing privileges in 2009. In 2010, Bond Head operated as a Hybrid – Gold Golf Club available for daily fee (public) play, reciprocal access by members and provided a home club for Bond Head members with reciprocal access. ClubLink announced on September 3, 2010 that it had acquired eight 18-hole golf courses in Sun City Center, Florida for US $8,700,000. The operating championship golf courses are Club Renaissance (18 holes), Sandpiper Golf Course (27 holes), Scepter Golf Club (18 holes), and Falcon Watch Golf Club (27 holes). Two 18-hole academy courses are also included: Kings Point Golf Club and Caloosa Greens Golf Club. North Lakes Golf Club, which was closed in 2009 and remains closed, is also part of the portfolio, as is an undeveloped two-acre parcel of commercially zoned land. The courses, about 50 kilometres (30 miles) south of Tampa, range from a full-service country club to academy courses. ClubLink announced on October 21, 2010 that it had acquired Heron Bay Golf Club in Coral Springs, Florida, 30 minutes from downtown Fort Lauderdale, for US $2,900,000. From 1997 to 2002, Heron Bay hosted the PGA Tour’s Honda Classic, crowning champions Stuart Appleby, Mark Calcavecchia, Vijay Singh, Dudley Hart, Jesper Parnevik and Matt Kuchar. The Sun City and Heron Bay acquisitions created ClubLink’s first region outside of Ontario and Quebec. On December 15, 2010, ClubLink announced the acquisition of Glendale Golf and Country Club in Hamilton, Ontario. Glendale is the 23rd golf club in the Greater Toronto Area. It was founded in 1919 and was one of the first private golf clubs in the Hamilton area. Glendale will operate as a Gold Member Golf Club. ClubLink has committed to $1,500,000 in capital upgrades over 3 years for cart paths, bunkers, a practice facility and clubhouse improvements. Summary of Golf Club and Resort Operations For the Years Ended December 31, December 31, % (thousands of dollars) 2010 2009 Change Operating revenue $ 153,366 $ 147,414 4.0% Operating costs (118,119) (114,828) 2.9% Net operating income 35,247 32,586 8.2% Operating margin % 23.0% 22.1% 4.1% Amortization of membership fees 15,292 14,784 3.4% Direct costs of originating membership fees (1,511) (1,955) -22.7% Net membership fee income 13,781 12,829 7.4% EBITDA $ 49,028 $ 45,415 8.0% CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 23. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations by Business Segment (cont’d) Review of Golf Club and Resort Operations for the Year Ended December 31, 2010 (cont’d) Golf Club and Resort Operating Revenue Golf club and resort operating revenue is recorded as follows: For the Years Ended December 31, December 31, % (thousands of dollars) 2010 2009 Change Annual dues $ 60,678 $ 57,710 5.1% Corporate events, guest fees and cart rentals 36,050 35,262 2.2% Food and beverage 42,370 40,167 5.5% Resort rooms 3,260 3,361 -3.0% Merchandise and other 11,008 10,914 0.9% Total operating revenue $ 153,366 $ 147,414 4.0% Championship golf rounds increased 8.8% to 1,122,000 championship rounds from 1,031,000 championship rounds in 2009, including 58,000 championship rounds from our US golf clubs, including the Florida golf clubs acquired late in 2010. Total operating revenue increased 4.0% to $153,366,000 from $147,414,000 in 2009 primarily due to operating revenue from the Florida golf clubs acquired late in 2010. This resulted in increases in all areas with the exception of resort rooms. Resort occupancy levels were 45.1% in 2010 compared to 44.2% in 2009 and operating revenue per available room increased to $159 from $142 in 2009. Resort room revenue declined 3.0% due to the closure of Delta Sherwood Inn from September 2009 to June 2010 as a result of a fire. 21 Golf Club and Resort Operating Costs Golf club and resort operating costs are recorded as follows: For the Years Ended December 31, December 31, % (thousands of dollars) 2010 2009 Change Cost of sales $ 20,363 $ 20,266 0.5% Labour 54,526 52,118 4.6% Direct operating costs 20,555 19,312 6.4% Insurance 1,859 1,331 39.7% Utilities 7,367 6,908 6.6% Property taxes 5,186 5,017 3.4% Sales and marketing 2,361 2,075 13.8% Administration and provincial capital taxes 5,902 7,801 -24.3% Total operating costs $ 118,119 $ 114,828 2.9% Gross margin on food and beverage sales was 68.1% in 2010 compared to 68.3% in 2009. Gross margin on merchandise sales was 26.0% in 2010 compared to 22.3% in 2009. This increase is due to a change in mix of sales, focusing on higher margin items. Increases in all operating cost categories are primarily due to the addition of the Florida golf clubs late in 2010. Administration and provincial capital taxes have decreased 24.3% to $5,902,000 in 2010 from $7,801,000 in 2009 due to (a) a decline in administrative costs from the business combination and privatization of ClubLink Corporation, (b) a decline in both Ontario and Quebec capital tax rates and (c) the transfer of certain head office costs from golf club and resort operations to corporate operations. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 24. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations by Business Segment (cont’d) Review of Golf Club and Resort Operations for the Year Ended December 31, 2010 (cont’d) Membership Fees Total golf members increased 11.0% to 18,917 on December 31, 2010 from 17,049 on December 31, 2009 primarily due to the acquisition of 1,512 Sun City Center, Florida members. New membership sales for the year ended December 31, 2010 decreased 34.3% to $8,278,000 (1,456 members) from $12,602,000 (1,477 members) during the year ended December 31, 2009. Transfer and upgrade fees during 2010 decreased to $1,474,000 from $2,612,000 in 2009. Resignations and terminations increased to $4,726,000 (1,100 members or 6.5% of golf members at December 31, 2009) in 2010 from $4,595,000 (1,075 members or 6.5% of golf members at December 31, 2008) in 2009. Membership fee instalments received in cash decreased 4.3% to $13,314,000 from $13,906,000 in 2009 as a number of membership contracts have been paid in full. In recent years, ClubLink’s membership growth has been driven, in part, by: (a) long-term lease arrangements, (b) the addition of new product through the conversion of daily fee golf clubs into member or hybrid golf clubs, (c) the acquisition of operating golf course properties and (d) the development of greenfield sites into member golf clubs. The opportunity to add new product through the conversion of daily fee golf clubs has diminished because ClubLink has only two remaining daily fee golf clubs (Glen Abbey and Rolling Hills Golf Clubs) which may be converted if market demand warrants. ClubLink has six additional greenfield sites on which seven 18-championship hole equivalent golf courses could be built if demand warrants. The development of a greenfield site requires an investment of approximately $15 to $18 million to open, on a turn-key basis, an 18-championship hole golf club for play including a clubhouse and furniture, fixtures and equipment where required. Management currently has no plans to proceed with development at any of the properties within its budgeting horizons. Acquisitions, including long-term leasing opportunities, will be considered if the opportunity arises on terms acceptable to ClubLink. In the absence of new product, management anticipates that membership sales will stabilize at between $9.5 and $12 million per year, comprised of sales to new members of between $8 and $9 million and transfer fees from existing members between $1.5 and $3 million. 22 Membership fees are amortized over the estimated weighted average remaining life of memberships purchased each year. This is determined by subtracting the average age of members that joined in that year from 70 and dividing the result by 2. The amortization period is reviewed annually and any adjustments are made prospectively. Membership fee revenue recognized in 2010 increased 3.4% to $15,292,000 from $14,784,000 in 2009. Details on amortization period in years, member resignations and amortization of membership fee revenue is broken down by member join year as follows: Amortization Amortization of of Amortization Amortization Resignations Resignations Membership Membership Period (yrs) Period (yrs) (Members) (Members) Fees ($000) Fees ($000) % Member Join Year 2010 2009 2010 2009 2010 2009 change 1994–2001 4 5 258 305 $ 3,988 $ 3,884 2.7% 2002 5 6 94 78 2,609 2,595 0.5% 2003 7 8 56 70 1,222 1,215 0.6% 2004 8 9 48 67 1,162 1,166 -0.3% 2005 7 8 132 158 2,073 2,102 -1.4% 2006 10 11 49 52 883 887 -0.5% 2007 10 11 161 202 1,281 1,336 -4.1% 2008 12 13 99 143 723 770 -6.1% 2009 13 14 203 – 766 829 -7.6% 2010 13 – – – 585 – N/A 1,100 1,075 $ 15,292 $ 14,784 3.4% CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 25. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations by Business Segment (cont’d) Review of Golf Club and Resort Operations for the Year Ended December 31, 2010 (cont’d) Membership Fees (cont’d) The following is an age analysis of ClubLink’s golf members: 2010 2009 % Change Under 30 years 1,274 1,199 6.3% 31 – 40 years 1,534 1,706 -10.1% 41 – 50 years 4,858 5,099 -4.7% 51 – 60 years 5,629 5,386 4.5% 61 – 70 years 2,920 2,638 10.7% 71 and over 612 498 22.9% Not available 578 523 10.5% Canadian golf members 17,405 17,049 2.1% Florida golf members 1,512 – n/a Total golf members 18,917 17,049 11.0% The average age of a Canadian golf member as at December 31, 2010 is 50.8 years as compared to 50.2 years as at December 31, 2009. Direct Costs of Originating Membership Fees Direct costs of originating membership fees decreased 22.7% to $1,511,000 from $1,955,000 in 2009 primarily due to no new major membership marketing campaigns undertaken in 2010 and the completion of the successful Bond Head marketing campaign in 2009. Review of Rail, Tourism and Port Operations for the Year Ended December 31, 2010 23 Summary of Rail, Tourism and Port Operations For the Years Ended December 31, December 31, % 2010 2009 Change Operating revenue $ 35,313 $ 38,131 -7.4% Operating costs 18,672 19,668 -5.1% Net operating income (US dollars) 16,641 18,463 -9.9% Exchange 629 2,114 -70.2% Net operating income (Cdn dollars) $ 17,270 $ 20,577 -16.1% Net operating income decreased to US $16,641,000 in 2010 from US $18,463,000 in 2009 due to the decline in rail and port passengers. Rail, Tourism and Port Operating Revenue Rail, tourism and port operating revenue is recorded as follows: For the Years Ended December 31, December 31, % (thousands of dollars) 2010 2009 Change Railroad $ 26,042 $ 27,981 -6.9% Port 6,966 7,858 -11.4% Gift shop and other 2,305 2,292 0.6% Subtotal (US dollars) 35,313 38,131 -7.4% Exchange 1,224 4,667 -73.8% Total (Cdn dollars) $ 36,537 $ 42,798 -14.6% The number of rail passengers has decreased 7.1% to 368,000 in 2010 as compared to 396,000 in 2009. The decline in rail passengers was less than expected due to an improved port passenger capture rate and the loss of rail passengers in 2009 relating to two separate interruptions in rail service. The number of port passengers has decreased 10.8% to 697,000 in 2010 as compared to 781,000 in 2009. A 12% decline in each category was expected as a reaction by the cruise industry to the head tax imposed by the State of Alaska. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 26. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations by Business Segment (cont’d) Review of Rail, Tourism and Port Operations for the Year Ended December 31, 2010 (cont’d) Rail, Tourism and Port Operating Costs Rail, tourism and port operating costs are recorded as follows: For the Years Ended December 31, December 31, % (thousands of dollars) 2010 2009 Change Rail shop and train maintenance $ 6,214 $ 6,616 -6.1% Maintenance of way 2,570 2,548 0.9% Passenger operations 1,519 1,623 -6.4% Marketing 655 703 -6.8% Property taxes 629 867 -27.5% Administration 2,615 2,825 -7.4% Insurance 1,624 1,628 -0.2% Gift shop, port operations and other 2,846 2,858 -0.4% Subtotal (US dollars) 18,672 19,668 -5.1% Exchange 595 2,553 -76.7% Total (Cdn dollars) $ 19,267 $ 22,221 -13.3% Measures to contain operating costs and labour given the expected decline in port and rail passengers have resulted in a 5.1% decrease in US dollar expenses. The locomotive repower program has also contributed to lower operating and maintenance costs. Review of Corporate Operations and Unallocated Amounts for the Year Ended December 31, 2010 24 For the year ended December 31, 2010, the corporate operations incurred costs of $2,659,000 as compared to $1,726,000 in 2009. This increase is primarily due to the transfer of certain head office costs to this segment from the golf club and resort operations segment. Interest, net decreased 5.5% to $22,108,000 in 2010 from $23,397,000 in 2009 primarily due to a 4.2% decline in debt levels, a stronger Canadian dollar and a lower average borrowing rate in 2010. Other expense changed to income of $344,000 in 2010 from an expense of $1,807,000 in 2009 primarily due to costs incurred in 2009 relating to the golf club and resort operations property tax appeals process. A total of $873,000 (2009 – nil) in business combination transaction costs have been charged to other expense during the year in conjunction with the change in GAAP requiring the Company to expense these costs. The overall effective tax rate in 2010 was 25.1% compared to 16.0% in 2009 primarily due to the recognition of previous year’s operating losses in 2009. Critical Accounting Estimates The preparation of financial statements that conform with GAAP requires management to make estimates and assumptions that affect the amounts reported in the audited consolidated financial statements and accompanying notes. Actual results could differ substantially from management’s estimates. The most critical accounting estimate used by ClubLink is the weighted average remaining life of memberships sold by join year, which is used to recognize membership fee revenue. In conjunction with this calculation, for the year ended December 31, 2010, the estimated weighted average remaining life of memberships purchased is as follows: between 1994 and 2001 – 4 years; 2002 – 5 years; 2003 – 7 years; 2004 – 8 years; 2005 – 7 years; 2006 – 10 years; 2007 – 10 years; and 2008 – 12 years, 2009 – 13 years and 2010 – 13 years. These amortization periods should decline each year by one year as each group gets one year older, producing a relatively uniform revenue stream from membership fees over the average remaining life of memberships sold by join year. However, these average ages may not decline on a consistent basis if a disproportionate amount of older or younger members decide to resign at any particular time. This could result in a deferral or acceleration of membership fee revenue, the amount of which would be dependant on the variability of the change in average ages. To date there have been no significant variances in the average ages. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 27. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Estimates (cont’d) Amortizable intangible assets consist of amounts expended on below market rent terms, brand and membership base. These assets are amortized based on estimates of their useful lives. Operating capital assets are amortized over their useful lives on a straight-line basis. The Company assesses on an annual basis the useful life of all capital assets which is used in the calculation of amortization expense. The useful lives assigned by type of capital asset are disclosed in note 2 to the audited consolidated financial statements. Due to the relatively large proportion of these assets to total assets, the selection of the method of amortization and length of amortization period could have a material impact on amortization expense and net book value of capital assets. Capital assets, intangible assets and goodwill are reviewed for impairment whenever events or changes in the circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill is also tested on an annual basis at the end of each fiscal year. Recoverability of assets to be held and used is measured by comparing the carrying amount of the assets to the anticipated future net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the asset exceeds the fair value of the asset. ClubLink records income taxes using the liability method of accounting. Under this method, future income tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of the assets and liabilities. Management uses judgment and estimates in determining the appropriate rates and amounts to record for future taxes, giving consideration to timing and probability. Previously recorded tax assets and liabilities are remeasured using tax rates in effect when these differences are expected to reverse in accordance with enacted laws or those substantively enacted as at the date of the financial statements. Financial Condition Assets Consolidated assets at December 31, 2010 totalled $611,412,000 compared with $627,753,000 at December 31, 2009. 25 Capital assets employed in golf club and resort operations and rail, tourism and port operations account for all of the Company’s capital assets. The book value of these capital assets was $468,771,000 and $72,264,000, respectively, at December 31, 2010 ($464,717,000 and $72,007,000, respectively, at December 31, 2009). The increase in the golf club and resort capital assets is due to the three acquisitions in this segment during the year. Liabilities Total liabilities decreased to $455,615,000 at December 31, 2010 from $473,193,000 at December 31, 2009 primarily due to the amortization payments decreasing the Company’s secured debt. Shareholders’ Equity Consolidated shareholders’ equity at December 31, 2010 totalled $155,797,000 or $5.58 per share, compared to $154,560,000 or $5.51 per share at December 31, 2009. The number of common shares outstanding decreased to 27,902,618 shares as at December 31, 2010 from 28,057,479 as at December 31, 2009 primarily due to shares repurchased and cancelled. The following is a summary of the common share activity: For the Years Ended December 31, December 31, (number of shares) 2010 2009 Balance, beginning of year 28,057,479 22,909,437 Shares issued pursuant to dividend reinvestment plan 3,389 5,567 Shares issued as consideration for business combination with ClubLink Corporation – 5,164,015 Exercise of stock options – 3,000 Shares purchased and cancelled through normal course issuer bid program (64,200) (24,540) Shares repurchased and cancelled (94,050) – Balance, end of year 27,902,618 28,057,479 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 28. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition (cont’d) Shareholders’ Equity (cont’d) During 2010, the Company continued its dividend program and paid a quarterly payment of 7.5 cents per share on March 31, June 30, September 15 and December 15, 2010. The Company has recorded a loss in its accumulated other comprehensive loss account of $1,185,000 due to a change in the Canadian/U.S. exchange rate to 0.9946 at December 31, 2010 from 1.0510 at December 31, 2009. This exchange rate change reduces the Canadian dollar equivalent for each of the assets and liabilities within rail, tourism and port operations. Liquidity and Capital Resources ClubLink’s objective is to ensure that capital resources are readily available to meet obligations as they become due, to complete its approved capital expenditure program and to take advantage of attractive acquisitions as they arise. ClubLink’s capital availability and demonstrated ability to execute transactions give it a competitive advantage in corporate development opportunities. The analysis of ClubLink’s liquidity is as follows: As at December 31, 2010 As at December 31, 2009 (thousands of dollars) Maximum Available Maximum Available Cash $ 1,447 $ 1,447 $ 10,670 $ 10,670 Revolving secured debt (rail) 9,946 4,388 7,883 – Revolving secured debt (corporate) 50,000 5,217 49,800 27,791 Related party debt facility 30,000 30,000 30,000 1,600 $ 91,393 $ 41,052 $ 98,353 $ 40,061 Funds will be used during 2011 for operating capital expenditures in both business segments, to fund development capital expenditures, 26 including the locomotive repower program, to purchase additional securities pursuant to ClubLink’s normal course issuer bid program and to pay debt obligations as they become due. Liquidity risk arises from general funding needs and in the management of assets, liabilities and optimal capital structure. ClubLink manages liquidity risk to maintain sufficient liquid financial resources to meet its commitments and obligations in the most cost-effective manner possible. Based on ClubLink’s financial position at December 31, 2010, and projected future earnings, management expects to be able to fund its working capital requirements, and meet its other obligations including debt repayments. Free cash flow from operating activities after operating capital asset expenditures, amortization payments of non-revolving secured debt, capital leases, net and dividends is calculated as follows: For the Years Ended December 31, December 31, (thousands of dollars) 2010 2009 Cash flow from operations $ 36,299 $ 27,912 Net change in working capital accounts (2,210) 3,329 Cash flow from operating activities 34,089 31,241 Operating capital asset expenditures (6,734) (5,333) Principal amortization of non-revolving secured debt (14,581) (15,211) Capital leases, net (3,187) 918 Free cash flow from operating activities before dividends 9,587 11,615 Common share dividends (8,394) (6,954) Free cash flow from operating activities $ 1,193 $ 4,661 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 29. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (cont’d) The following is an analysis of the Company’s net indebtedness and its characteristics on December 31, 2010 compared to December 31, 2009: Average Average Average Average Interest Interest Total Total Term to Term to Rate Rate Indebtedness Indebtedness Maturity Maturity (thousands of dollars) 2010 2009 2010 2009 (yrs) 2010 (yrs) 2009 Revolving secured debt (rail) 2.41% 5.00% $ 5,558 $ 7,883 0.50 0.50 Revolving secured debt (corporate) 3.34% 2.60% 42,942 19,054 1.42 1.42 Non-revolving secured debt 7.20% 7.24% 265,398 275,525 14.03 15.09 Term loan 3.26% 5.00% 36,090 31,828 9.67 4.17 Notes payable N/A 4.23% – 28,400 N/A N/A Capital lease obligations 5.92% 5.82% 9,825 13,012 2.01 1.62 Total indebtedness 6.24% 6.49% 359,813 375,702 Cash (1,447) (10,670) Note receivable from affiliated company – (5,000) Net indebtedness $ 358,366 $ 360,032 ClubLink’s consolidated debt obligations include secured debt, term loan, notes payable, and capital lease obligations. The following table illustrates future maturities and amortization payments of consolidated debt obligations for the next five years and thereafter as at December 31, 2010: Mortgage Mortgage and and Total Revolving Term Loan Term Loan Total Capital Total 27 (thousands of dollars) Maturities Amortization Maturities Debt Leases Obligations 2011 $ 5,558 $ 15,082 $ – $ 20,640 $ 4,199 $ 24,839 2012 42,942 15,989 547 59,478 2,775 62,253 2013 – 16,964 960 17,924 1,839 19,763 2014 – 18,011 520 18,531 627 19,158 2015 – 19,137 – 19,137 354 19,491 2016 and thereafter – 205,491 8,787 214,278 31 214,309 $ 48,500 $ 290,674 $ 10,814 $ 349,988 $ 9,825 $ 359,813 ClubLink expects to meet its 2011 debt obligations by way of cash flow from operations, renewing facilities at maturity and using unutilized lines of credit if necessary. Golf and Resort Rail, Tourism and (thousands of dollars) Operations (Cdn) Port Operations (US) 2011 $ 4,678 $ 250 2012 4,760 218 2013 4,850 200 2014 4,943 192 2015 5,039 188 2016 and thereafter 63,155 2,943 $ 87,425 $ 3,991 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 30. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (cont’d) A summarized statement of cash flows is as follows: For the Years Ended December 31, December 31, (thousands of dollars) 2010 2009 Cash flow from operations $ 36,299 $ 27,912 Net change in working capital accounts (2,210) 3,329 Cash provided by operating activities 34,089 31,241 Capital asset expenditures (13,913) (16,895) Business combinations (13,024) (951) Mortgages and loans receivable 5,943 (3,228) Revolving secured debt 21,563 (19,404) Non-revolving secured debt advances, net of maturities 9,424 (1,654) Non-revolving secured debt amortization payments (14,581) (15,211) Notes payable (28,400) 28,400 Shares purchased for cancellation, net of issues (1,026) (102) Dividends paid (8,394) (6,954) Other (904) 1,876 Net decrease in cash during the year (9,223) (2,882) Cash, beginning of year 10,670 13,552 Cash, end of year $ 1,447 $ 10,670 28 Operating Activities Cash flow from operations increased 30.0% to $36,299,000 from $27,912,000 in 2009 due to a $7,124,000 decrease in current income tax expense. Cash provided by operating activities has increased to $34,089,000 in 2010 from $31,241,000 in 2009. Investing Activities Cash used in investing activities increased to $21,258,000 from $18,737,000 in 2009 due to the business combination activity in 2011. Capital asset expenditures are broken down as follows: For the Years Ended December 31, December 31, (thousands of dollars) 2010 2009 Golf club and resort operations $ 3,711 $ 2,980 Rail, tourism and port operations (US dollars) 2,948 2,114 Exchange 75 239 Operating capital expenditures 6,734 5,333 Golf club and resort operations 1,461 8,190 Golf club and resort operations (US dollars) 660 – Rail, tourism and port operations (US dollars) 4,953 3,028 Exchange 105 344 Development capital expenditures 7,179 11,562 Total capital asset expenditures $ 13,913 $ 16,895 Development capital for the rail, tourism and port operations represents the locomotive repower program. This involves the upgrade of various locomotives to enable them to be compliant with environmental regulations and allow greater operating cost efficiencies. ClubLink is committed to expenditures of US $557,000 (2009 – US $5,024,000) relating to the locomotive repower program which is expected to be paid in 2011. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 31. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources (cont’d) Investing Activities (cont’d) During 2010, ClubLink completed the acquisition of three new golf course properties for a total cost of $13,024,000. On September 3, 2010 ClubLink acquired eight 18-hole golf courses located in Sun City Center, Florida for consideration of US $8,700,000 ($9,070,000 Cdn). On October 21, 2010, ClubLink acquired Heron Bay Golf Club in Coral Springs, Florida for cash consideration of US $2,900,000 (Cdn $2,983,000). On December 15, 2010, ClubLink acquired Glendale Golf and Country Club for $3,154,000 less mortgages assumed of $2,183,000 for a net cash outlay of $971,000. The net collection of mortgages and loans receivable has generated proceeds of $5,943,000 in 2010 from an outflow of $3,228,000 in 2009 due to the collection of $5,000,000 outstanding from Paros Enterprises Limited. Paros Enterprises Limited (“Paros”) is a privately owned company whose sole shareholder is the Chairman and Chief Executive Officer of the Company and is also the controlling shareholder of the Company. Financing Activities Cash used in financing activities was $21,999,000 in 2010 compared to $14,986,000 in 2009. On March 9, 2010, the $50,000,000 secured revolving operating line of credit of ClubLink Corporation ULC due June 9, 2011 was amended to include the Company as a co-borrower. This facility is a revolving operating line of credit with a two year term and provisions for annual one year extensions. This facility was renewed to June 8, 2012. During the first quarter of 2010, the Company repaid $28,400,000 in notes payable to Morguard Corporation (“Morguard”). The Chairman and Chief Executive Officer of the Company is a significant shareholder of Morguard. The rail, tourism and port operations US $7,500,000 secured revolving operating line of credit with a U.S. financial institution has been renewed to July 1, 2011 and increased to US $10,000,000. Effective July 1, 2010, the interest rate changed to LIBOR plus two hundred and fifteen basis points and the 5% interest rate floor was eliminated. 29 The rail, tourism and port operations term loan with a U.S. financial institution was refinanced during the year as follows: New Term Loan Previous Term Loan Amount Outstanding US $37,000,000 US $27,932,000 Maturity Date September 1, 2020 March 1, 2014 Interest Rate LIBOR plus 300 basis points. LIBOR plus 345 basis points subject to a 5.0% minimum floor. Annual Principal Amortization US $2,856,000 US $3,528,000 The Company was approved by the Toronto Stock Exchange for a normal course issuer bid to purchase up to 1,402,752 of its common shares which expired on September 19, 2010. During the year ending December 31, 2010, the Company purchased for cancellation 55,500 common shares for a total purchase price of $373,000 or $6.72 per common share, including commissions. The Company was approved by the Toronto Stock Exchange for a normal course issuer bid to purchase up to 1,395,000 of its common shares which will expire on September 19, 2011. During the year ending December 31, 2010, the Company purchased for cancellation 8,700 common shares for a total purchase price of $59,000 or $6.78 per common share, including commissions. During the year, the Company continued with its dividend program, paying 7.5 cents per share on March 31, June 30, September 15 and December 15, 2010. Dividends paid during 2010 totaled $8,394,000 (2009 – $6,954,000). ClubLink finances its operations and expansion through a combination of operating cash flows, revolving and non-revolving secured debt, notes payable and capital lease obligations. In the past, ClubLink has issued debt and shares to facilitate acquisitions and to provide working capital. Wherever possible, expansion activities are financed through secured debt with repayment obligations corresponding to the expected cash flows. The Company primarily uses credit facilities, along with funds generated from operating activities, to fund operational expenses, expansion and development capital spending, dividends and principal and interest payments on non-revolving secured debt. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 32. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Off-Balance Sheet Financing and Guarantees ClubLink and its subsidiaries do not engage in off-balance sheet financing, except for the existence of operating leases, which are primarily for golf course leases and for the rental of tidelands in Skagway, Alaska. From time to time, ClubLink enters into agreements to provide financial or performance assurances to third parties of which letters of credit of $1,841,000 (2009 – $2,955,000) and unsecured surety bonds of $1,601,000 (2009 – $1,632,000) were outstanding as at December 31, 2010. In the normal course of operations, the Company executes agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets, sales of services, securitization agreements and underwriting and agency agreements. The Company has also agreed to indemnify its officers and directors and certain of its employees. The nature of substantially all of the indemnification undertakings prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made significant payments nor does it expect to make any significant payments under such indemnification agreements. Related Party Transactions Refer to Note 16 in the audited consolidated financial statements for the year ending December 31, 2010 for a complete description of all related party transactions. Environmental and Health and Safety Obligations The Company’s operations and properties are subject to extensive federal, provincial, territorial, state, municipal and local environmental laws and requirements in both Canada and the United States, relating to, among other things, air emissions, the management of contaminants including hazardous materials and waste, discharges to waters and the remediation of environmental impacts. The Company believes it has 30 identified and provided for expenditures relating to known environmental matters, including compliance issues and the assessment and remediation of the environmental condition of its properties, whether currently or previously owned, or other properties where it may have environmental matters. The Company’s total costs and liabilities cannot be predicted with certainty due to, among other things, the various issues described above, changing environmental laws, requirements and the potential necessity to conduct additional investigations. ClubLink continually demonstrates its commitment to ensuring the health and safety of anyone affected by its operations and to responsibly manage the impact of its operations on the environment. In implementing its policies, ClubLink provides the benefits of strong environment, health and safety (EH&S) management systems to a wide range of stakeholders in Canada and the United States. Stakeholders include all employees and the communities where ClubLink operates, along with customers, investors, partners, and service providers. This commitment extends throughout the entire Company at every level, starting with the Board of Directors. The EH&S committee of the Corporation’s Board of Directors meets on a regular basis to review and oversee ClubLink’s policies and programs as well as to review the EH&S performance of each business unit. The committee also oversees the Company’s compliance with applicable EH&S laws and regulations and monitors trends, issues and events which could have a significant impact on the Company. ClubLink continually monitors changes in both EH&S technologies and regulations both directly and through its involvement with various industry associations. ClubLink believes that safe operations are essential for a productive and engaged workforce. ClubLink is committed to workplace incident prevention and makes expenditures towards the necessary human and financial resources and site-specific systems to ensure compliance with its health and safety policies. Any injuries that may occur are investigated to determine root cause and to establish and put in place necessary controls, with the goal of preventing recurrence. Financial Instruments ClubLink has a number of financial instruments which are described in note 20 to the audited consolidated financial statements for the year ending December 31, 2010. These financial instruments do not include any hedging or complicated derivatives. Risks associated with these financial instruments and information on their fair values are also disclosed in note 20. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 33. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary of Financial Results by Quarter The table below sets forth selected financial data for the most recent eight quarters ending December 31, 2010. The financial data is derived from the Company’s unaudited interim financial statements, which are prepared in accordance with GAAP as follows: (thousands of dollars, 2010 2009 except per share amounts) Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Total assets $ 611,412 $ 644,339 $ 648,042 $ 632,117 $ 627,753 $ 648,881 $ 655,073 $ 659,101 Operating revenue 29,687 86,727 57,321 16,168 24,681 90,378 59,024 16,129 Net operating income (loss) 1,230 33,030 14,537 1,061 850 36,604 14,180 (197) Operating margin % 4.1% 38.1% 25.4% 6.6% 3.4% 40.5% 24.0% (1.2%) Net membership fee income 3,631 3,354 3,287 3,509 3,652 3,085 2,841 3,251 EBITDA 4,861 36,384 17,824 4,570 4,502 39,689 17,021 3,054 Net earnings (loss) (3,662) 16,745 2,991 (4,232) (2,212) 17,001 1,951 (5,585) Basic earnings (loss) per share (0.13) 0.59 0.11 (0.15) (0.08) 0.63 0.08 (0.24) Cash flow from operations 4,528 23,807 9,310 (1,346) (1,827) 24,880 7,534 (2,675) Cash flow from operations per share 0.17 0.85 0.33 (0.05) (0.07) 0.93 0.33 (0.12) Eligible cash dividends per share 0.075 0.075 0.075 0.075 0.075 0.075 0.06 0.06 Selected Financial Information – Fourth Quarter 2010 For the Fourth Quarter Ended December 31, December 31, % (thousands of dollars except per share amounts) 2010 2009 Change OPERATING REVENUE $ 29,687 $ 24,681 20.3% 31 COST OF SALES AND OPERATING EXPENSES 28,457 23,831 19.4% NET OPERATING INCOME 1,230 850 44.7% OPERATING MARGIN (%) 4.1% 3.4% 20.6% AMORTIZATION OF MEMBERSHIP FEES 3,770 3,719 1.4% DIRECT COSTS OF ORIGINATING MEMBERSHIP FEES 139 67 107.5% NET MEMBERSHIP FEE INCOME 3,631 3,652 -0.6% EARNINGS BEFORE OTHER ITEMS, INCOME TAXES AND NON-CONTROLLING INTEREST (EBITDA) 4,861 4,502 8.0% AMORTIZATION OF CAPITAL AND INTANGIBLE ASSETS (5,144) (5,633) -8.7% LAND LEASE RENT (1,318) (1,327) -0.7% INTEREST, NET (5,563) (5,857) -5.0% OTHER INCOME (EXPENSE) 363 (1,513) N/A CURRENT INCOME TAX RECOVERY 8,421 3,885 116.8% FUTURE INCOME TAX RECOVERY (PROVISION) (5,282) 248 N/A FUTURE INCOME TAX RECOVERY ON PRIOR YEAR OPERATING LOSSES – 3,483 – NET LOSS $ (3,662) $ (2,212) 65.6% WEIGHTED AVERAGE SHARES OUTSTANDING (000) 27,976 28,056 -0.3% BASIC AND DILUTED LOSS PER SHARE $ (0.13) $ (0.08) 62.5% CASH FLOW FROM OPERATIONS $ 4,528 $ (1,827) 347.8% BASIC AND DILUTED CASH FLOW FROM OPERATIONS PER SHARE $ 0.17 $ (0.07) 342.9% ELIGIBLE CASH DIVIDENDS PER SHARE $ 0.075 $ 0.075 0.0% The following exchange rates translate one US dollar into the Canadian dollar equivalent. 2010 2009 Statement of earnings, average for the fourth quarter 1.0128 1.0563 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 34. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fourth Quarter 2010 Results (cont’d) The majority of the revenue and EBITDA earned in the quarter ended December 31, 2010 relate to the golf club and resort operations as certain golf courses remain open in the fall and annual dues revenue is recognized on a calendar year basis. Costs for the end of season maintenance and operating expenses in all business areas also negatively impact EBITDA in the fourth quarter. Net loss for the fourth quarter of 2010 was $3,662,000 as compared to a loss of $2,212,000 in 2009. This change was primarily due to the recognition of a future tax recovery on prior year operating losses in the amount of $3,483,000 in 2009. Seasonality The quarterly earnings performance of the Company reflects the highly seasonal nature of both business segments. The majority of revenue and earnings from these businesses occur during the second and third quarters of the year. Accordingly, the quarterly reported net earnings of the Company will fluctuate with those of the underlying business segments. This seasonality will be mitigated somewhat by the Florida acquisitions in late 2010. Risks and Uncertainties ClubLink manages a number of risks in each of its business segments in order to achieve an acceptable level of risk without hindering its ability to maximize returns. Management has procedures to identify and manage significant operational and financial risks. In addition to the risks described elsewhere in this MD&A, this section describes the principal risks that could have a material and adverse effect on the Company’s financial condition, results of operations and cash flows, as well as cause actual results to differ materially from expectations expressed in or implied by forward-looking statements. The risks described below are not the only risks that could affect the Company. Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also materially and adversely affect ClubLink’s financial condition, results of operations and cash flows. 32 Economic & Business Risk A decline in the economic environment and its impact on disposable income in areas where ClubLink operates may have an adverse effect on operating revenue. The Company’s business segments are dependent upon discretionary spending by consumers and corporations which in turn is impacted by general economic conditions. An extended recession could materially affect both business segments’ revenue and financial performance as discretionary spending declines. The ability to attract and retain golf members and the number of rounds played at member, hybrid and daily fee golf clubs have historically been dependent upon (i) discretionary spending by consumers and corporations, which may be affected by general economic conditions in the markets that the Company operates, and (ii) the popularity of golf as a leisure activity. There is no certainty that current levels of participation will be sustained or increase in the future. A decrease in the overall number of golfers, their rates of participation and consumer or corporate spending on golf, individually or collectively, could have a material adverse effect on the Company’s business, financial condition and results of operations. Given that a substantial portion of the Company’s golf activities are carried out in southern Ontario, the results of operations will depend heavily on the financial condition of this market. A decline in the economic environment and its impact on disposable income in areas where ClubLink’s clusters are located may have an adverse effect on the Company’s golf club and resort operations revenue. The Company believes that revenue from member clubs would remain relatively constant since a member is committed to pay annual dues and consume a food and beverage minimum to maintain their membership. The Company believes that it would be unlikely that a significant number of members would forfeit their memberships after the payment of all or a substantial portion of a non-refundable membership fee. While the sale of new memberships may decline in such circumstances, almost all member golf clubs have a membership base that generates sufficient operating revenue to sustain profitable operations at that property. Corporate event bookings, which represent a material portion of the Company’s golf revenue, are susceptible to major changes in the economic environment. The success of the rail, tourism and port operations are largely dependent upon the continued flow of cruise ship traffic along the west coast of North America to Alaska. As experienced during 2010, these operations can be disrupted for reasons beyond the control of management, including new taxes, commercial and weather-related changes to cruise ship scheduling. Economic Dependency Rail, tourism and port operations are economically dependent upon the Alaska cruise line industry. For the year ended December 31, 2010, Carnival Cruises and its subsidiaries, Princess Cruises and Holland America Cruises, made up approximately 56.3% of operating revenue (2009 – 53.9%). The loss of this customer could have a material impact on the operations of the Company. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 35. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Risks and Uncertainties (cont’d) Foreign Currency Risk ClubLink operates both in Canada and the United States and reports its earnings in Canadian dollars. Fluctuations in exchange rates could affect the cost of capital or the contribution from operations in the United States, and the value of the Company’s investments in the United States. Availability of Credit/Liquidity No assurance can be given that borrowings will be available to the Company or its subsidiaries to replace existing debt facilities on terms acceptable to the Company, if at all. Failure to renew or replace credit facilities as they mature would require ClubLink to obtain alternative sources of capital, which may include the sale of assets or the issuance of equity at prices that may be dilutive to current shareholders. Renewal Risk ClubLink is exposed to renewal risk on its maturing debt. A total of 83% of ClubLink’s consolidated debt is fully amortizing over the remaining term to maturity and 17% (December 31, 2009 – 11%) of ClubLink’s debt is subject to this risk. Interest Rate Risk ClubLink is exposed to market risk related to interest rate fluctuations. The majority of ClubLink’s consolidated debt has fixed interest rates over its remaining term to maturity, and less than 24% (December 31, 2009 – 23%) of its debt is subject to this risk. Risks Associated with Information Systems Golf club and resort operations rely on information systems to obtain, rapidly process and analyze data to manage: • its tee sheet and reservation system; • its member database; • the accurate billing of and collections from members; 33 • the accurate accounting for and payment to vendors; and • the processing of financial data. Rail, tourism and port operations rely on information systems to manage train scheduling, cruise ship booking, communications and accounting data. Results of operations from both business segments could be adversely affected if these systems are interrupted, damaged by unforeseen events or fail for any extended period of time, including due to the action of third parties. Competition The competitive environment in both business segments is evolving. There have been significant additions to alternative products in the golf club, resort and tourism sectors in Ontario. While the Company has certain competitive advantages which management believes will offset, in part, the impact of this increased competition, it has been affected by these developments. Key Management The Company’s success depends upon the continued contribution of key management, some of whom have unique talents and experience and would be difficult to replace quickly. The loss or interruption of the services of a key executive could have a material adverse effect on our business during the transitional period that would be required to restructure the organization or for a successor to assume the responsibilities of the key management position. Litigation The Company and certain of its subsidiaries are defendants in a number of legal actions. Although the outcome of these claims cannot be determined, in the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company’s financial position or results of operations. Regulatory Environment ClubLink and its subsidiaries are subject to regulation by numerous agencies involving the serving of alcohol, operation of a golf course, operation of a railroad and adherence to environmental constraints. Changes in these regulations, and their application, can impact the cost and efficiency of the affected business segment. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 36. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Risks and Uncertainties (cont’d) Loss of Reputation “ClubLink One Membership More Golf ” and “White Pass & Yukon Route” both currently enjoy recognizable brand names in their operating markets. Damage to these brands could have a negative impact on the affairs of the Company. If the Company does not meet or exceed customer expectations, these brands could suffer. The Company endeavours to mitigate this risk, mainly by ongoing employee training and a company-wide focus on customer service excellence. Environment ClubLink’s golf courses are constructed and managed with a high level of environmental awareness. In addition, ClubLink’s turf management team is highly knowledgeable and receives extensive training regarding the proper use of pesticides and chemicals required to promote healthy golf course conditions and compliance with applicable regulations. However, certain risks are associated with the use of these materials and the overall effect a golf course has on the surrounding habitat, including nearby waterways. Rail, tourism and port operations are subject to extensive federal, provincial, territorial, state, municipal and local environmental laws and requirements in both Canada and the U.S. relating to, among other things, air emissions, management of contaminants including hazardous materials and waste, discharges to waters and the remediation of environmental impacts (such as the contamination of soil and water, including groundwater). A risk of environmental liabilities is inherent in transportation operations, historic activities associated with such operations and the ownership, management or control of real estate. The Company believes that it has adopted appropriate practices and procedures and maintains adequate insurance to address environmental contingencies. As part of our environmental policies, ClubLink monitors, controls and manages environmental issues by way of measures for waste prevention, minimization and recycling of any waste products. A committee of the Board of Directors has been established to ensure appropriate policies and standards are maintained for environmental stewardship. Terrain The rail, tourism and port operation segment operates in remote, rocky and mountainous terrain. While the Company maintains safeguards, 34 operations may be adversely affected in the event of a rockslide, washout or accident. Weather Extraordinary weather conditions involving extended dry or wet periods or exceptional hot or cold temperatures could impact the condition of golf courses and the demand for golf. Management believes that its geographically diverse operations may serve to reduce the impact of severe weather conditions. The rail, tourism and port operations segment is dependant on its ability to operate its port and railroad. Severe weather and natural disasters, such as extreme cold or heat, flooding, snow, unusual high winds, stormy seas and earthquakes, can disrupt operations and service for the port and railroad and damage its infrastructure or properties. Real Estate ClubLink is subject to risks inherent in the acquisition, development, ownership and financing of real estate in general and the operations, rehabilitation and development of golf courses and recreational real estate in particular, such as the risk of depreciation in the value of land and federal, provincial and municipal governmental regulations, including environmental, sewer, water, zoning and similar regulations. It is possible that enactment of new laws, changes in the interpretation or enforcement of applicable laws, rules and regulations or the decision of any authority to change or refuse a change to current zoning classification may have an adverse effect on the value of these golf facilities and related real estate. Unions and Collective Bargaining During 2011, the Company anticipates collective bargaining sessions with all three unions representing the unionized employees of the rail, tourism and port operations segment. In any set of labour negotiations, there can be no assurance that the negotiated compensation expenses or changes to operating efficiency will be as planned and may result in unanticipated increased costs and/or reduced productivity. In addition, there can be no assurance that reduced productivity and work disruptions will not occur during the course of collective bargaining prior to settlement. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 37. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Risks and Uncertainties (cont’d) Exchange of Confidential Information This risk involves the utilization of members’ confidential information, particularly in direct marketing. The potential dissemination of such information to the wrong individuals could cause significant damage to our relationship with our members and customers and could result in legal action. Various initiatives have been implemented which seek to minimize the possibility that this may occur. ClubLink is also involved in payment card industry (PCI) compliance, a rigorous set of standards leveraging the latest security technology, such as encryption, to ensure the protection of customer credit card information. These capabilities are being introduced and implemented by ClubLink. Income and Commodity Tax Amounts The operations of ClubLink are relatively complex and related tax interpretations, regulations and legislation that pertain to ClubLink’s activities are subject to continual change. The Company collects and pays income and commodity taxes to various taxation authorities. The audit and review activities of the Internal Revenue Service and Canada Revenue Agency and other jurisdictions’ tax authorities affect the ultimate determination of the actual amounts of commodity taxes payable or receivable, future income tax liabilities and income tax expense. Therefore, there can be no assurance that taxes will be payable as anticipated and/or that the amount and timing of receipt of use of the tax-related assets will be as currently expected. Integration of Acquisitions Integration activities include the review and alignment of accounting policies, employee transfers and moves, information systems, optimization of service offerings and establishment of control over new operations. Such activities may not be conducted efficiently and effectively, negatively impacting service levels, competitive position and expected financial results. ClubLink has a team that performs the integration function. This team applies an integration model, based on experiences from numerous previous integrations, which enhances and accelerates the standardization of ClubLink’s business processes and strives to preserve the unique 35 qualities of acquired operations. The integration process begins with strategic, pre-closing analysis and planning, and continues after closing with the execution of a plan. Integrated operations are re-evaluated and assessed regularly, based on timely feedback received from the integration team. Emerging Accounting Pronouncements International Financial Reporting Standards In 2005, Canada’s Accounting Standards Board announced that Canadian GAAP, as used by publicly accountable enterprises, would be fully converged with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board to be complete by January 1, 2011. This section discusses the Company’s expectations regarding the changeover to IFRSs. There can be no guarantee that the International Accounting Standards Board will not make further pronouncements, and that the Canadian Accounting Standards Board will also not adopt further pronouncements, before the consolidated financial statements as at December 31, 2011, are prepared. Consequently, there can be no guarantee that the standards used to prepare information in this section will not differ from those used to prepare the consolidated financial statements for the year ended December 31, 2011, and that the effects described and quantified below will not change. Key IFRS dates: January 1, 2010 (transition date): An opening consolidated balance sheet as of January 1, 2010 according to IFRSs has been prepared to facilitate the changeover to IFRSs reporting in 2011. ClubLink reported its fiscal 2010 and comparative 2009 results according to Canadian GAAP. January 1, 2011 (changeover date): The date after which ClubLink will prepare and report interim and annual 2011 financial statements with 2010 comparatives according to IFRSs. (a) Description of Phases and Plan At this point in the IFRS conversion, management has completed the scoping and diagnostic and the impact analysis, evaluation and design phases (Phases 1 and 2, respectively). The Company is now at the implementation and review phase (Phase 3). CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 38. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 36 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (a) Description of Phases and Plan (cont’d) PHASE DESCRIPTION AND STATUS Scoping and diagnostic This phase involves performing a high-level impact assessment to identify key areas that may be (Phase 1) impacted by the transition to IFRSs. As a result of these procedures, the potentially affected areas are ranked as high, medium or low priority. Based on the current state of IFRSs, this phase has been completed and management has identified certain differences between GAAP and IFRSs that impact ClubLink’s financial results and/or the Company’s efforts necessary to change over to IFRSs. The main differences identified to date can be found under section (d) accounting policy differences. The International accounting Standards Board (“IASB”) has activities currently underway which may change IFRSs. The Company will assess any such changes as they occur to determine their impact. Impact analysis, In this phase, each impact area identified from the scoping and diagnostic phase was addressed. evaluation and design This phase involves the specification of changes required to existing accounting policies, information (Phase 2) systems, internal controls over financial reporting, disclosure controls and procedures, financial reporting and business processes together with an analysis of policy alternatives allowed under IFRSs and development of draft IFRS financial statement content. This phase has been completed. Implementation and review This phase includes execution of changes identified in the impact analysis, evaluation and design (Phase 3) phase. This also includes completing a formal authorization process to approve recommended accounting policy changes and training programs across the Company’s finance and other staff, as 36 necessary. It will culminate in the collection of financial information necessary to compile IFRS- compliant financial statements, embedding IFRSs in business processes, audit committee review and recommendation for Board approval of IFRS financial statements. Technical papers for the changeover to IFRSs have been prepared by management and are being reviewed by the auditors. IFRS 1 exemptions have been chosen. IFRS accounting policy choices have been prepared and are being reviewed by the auditors and the audit committee. Transition and Changeover Date balance sheets have been prepared and disclosed in section (e). IFRS note disclosure is being considered and any additional data sources needed are being organized. This phase is substantially complete. The Ontario Securities Commission has extended the quarterly filing deadline for Q1 2011 only to 75 days from 45 days. ClubLink plans on filing its March 31, 2011 reports within 45 days. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 39. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 37 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (b) Status Update As the conversion process is implemented, the Company will outline the milestones of the transition to IFRSs in its financial disclosures. The following table indicates the status of the conversion to IFRSs as at March 1, 2011: MAIN ACTIVITIES SCHEDULE STATUS Financial Information Identify and analyze the Completed – see section (d) Done differences between IFRSs and the Company’s accounting policies. Select from among the IFRS Completed – see section (c) Done exemptions permitted in accordance with IFRS 1. Select from the IFRS accounting Completed – see section (d) Done policy choices. Prepare the transition date Completed – see section (e) Done balance sheet for January 1, 2010 using IFRSs. Develop a model for IFRS Draft completed. In progress: draft statement financial statements, including format and note disclosure are notes. being prepared. 37 Information Systems Evaluate the impact of the Completed, no significant IT Done and Processes changes to financial systems and changes required. processes for communicating information and implement the changes required. Internal Controls Evaluate the impact of the Evaluation completed and no Done changes to internal controls changes were required to current on financial information and internal controls or financial controls and procedures for information and controls and communicating information and procedures. implement the changes required. Training and Identify training needs and Training sessions have been Training given to primary staff Communication provide training. held with more scheduled in members involved in the 2011 as required. conversion process. Communicate the progress of the Detailed information provided Detailed information updated conversion plan to shareholders. quarterly. each quarter. Business Evaluate impact on the Completed – no material Done Company’s contractual changes noted. undertakings and key performance indicators (KPI’s) (compliance with restrictive financial clauses, compensation plans, etc.). Make changes required to Completed – no material Done contractual agreements and changes noted. KPI’s as per evaluation. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 40. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (c) IFRS 1 Exemptions Generally under IFRSs all standards are to be applied retrospectively upon transition. However there is some relief given to first-time adopters and below is a list of significant IFRS 1 exemptions that the Company has taken on the transition date (January 1, 2010). EXPECTED IMPACT ON FINANCIAL STATEMENTS AT THE TRANSITION EXEMPTION DESCRIPTION DESCRIPTION AND DECISION DATE AND FUTURE ANNUAL IMPACT Business Combinations The Company may elect to either restate all No impact at transition date or in the future. past business combinations in accordance with IFRSs or to apply an elective exemption from applying IFRSs to past business combinations. The Company will use the IFRS 1 exemption in order to not apply IFRSs to past business combinations. Revaluation or Fair Value as The Company may elect to report property, Transition Date Impact: Deemed Cost for Property, plant and equipment in its transition date balance We expect property, plant and equipment Plant and Equipment and sheet at a deemed cost instead of the actual cost and investment property values for the rail, Investment Property that would be determined under IFRSs. The tourism and port operations to be increased deemed cost of an item may be either its fair by $48,342,000 on the transition date with value at the date of transition to IFRSs or an a corresponding increase of $19,086,000 to amount determined by a previous revaluation deferred tax liabilities. under Canadian GAAP. The exemption can be applied on an asset-by-asset basis. Future Annual Impact: 38 Amortization expense is expected to be The Company will use fair value as deemed approximately $2,146,000 higher in future cost for the land, buildings, docks, and investment years due to this increase (based on average property of the rail, tourism and port operations. 2010 exchange rates), with a corresponding All other components of property, plant and decrease of $862,000 to deferred tax liabilities. equipment will be reported using historical cost. Cumulative Translation On transition, cumulative translation gains or The value of the CTA account as at December 31, Account (CTA) losses in accumulated other comprehensive 2009 in the amount of $23,891,000 will be income can be reclassified to retained earnings charged to retained earnings at the transition date. at the Company’s election. If not elected, all cumulative translation differences must be recalculated under IFRSs from inception. The Company will reset the current CTA balance to zero as at January 1, 2010 and move the balance to retained earnings as per the election. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 41. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 39 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (d) Accounting Policy Differences The table below outlines the key IFRS accounting policies that are different from the current GAAP accounting policies and their expected impact on the transition date balance sheet and on the financial statements subsequent to January 1, 2010. The note disclosure associated with the items listed is not discussed in detail in this chart. EXPECTED IMPACT ON FINANCIAL STATEMENTS AT THE TRANSITION ACCOUNTING POLICY KEY DIFFERENCE IN ACCOUNTING TREATMENT DATE AND FUTURE ANNUAL IMPACT Business Combinations There are several differences in business Transition Date Balance Sheet: combinations under IFRSs vs. current GAAP. No impact expected as the Company is However, the new GAAP HB Section 1582 for taking IFRS 1 exemption above. business combinations effective for 2011 is converged with IFRSs and ClubLink has adopted Future annual impact: this section prospectively starting in 2010. The Company will apply IFRS 3 to all future business combinations. Key differences include • Transaction costs must be expensed • Non-controlling interest is to be measured at fair value at date of acquisition. Property Plant and IFRSs allows PP&E to be carried at amortized Transition Date Balance Sheet: Equipment (PP&E) cost or revalued cost. GAAP requires PP&E We expect a retrospective adjustment of to be carried at amortized cost. The Company $621,000 for additional prior year amortization will use amortized cost under IFRSs. taken on the new depreciable asset classes that resulted from componentization. The IFRSs requires componentization for PP&E. corresponding decrease to deferred income 39 Asset componentization involves breaking down tax liabilities was $159,000. an asset by identifying significant individual components and separately depreciating those individual components over their useful lives. Future annual impact: ClubLink plans to have two additional Amortization expense in future years is expected amortization categories due to componentization. to be higher by approximately $584,000 due to componentization. The corresponding decrease The new depreciable asset classes identified by to deferred income tax expense is expected management are (i) golf course bunkers to be $150,000. and (ii) thermal control for buildings. Investment Property IFRSs defines investment property as property Transition Date Balance Sheet: (new financial statement held by the owner to earn rental income, capital No material impact expected. category under IFRSs) appreciation or both. Future Annual Impact: IFRSs allows investment property to be accounted No material impact expected. for using amortized cost or fair value. GAAP requires investment property to be carried at amortized cost. The Company will use amortized cost under IFRS. Impairment of Assets Impairment testing of assets under IFRSs is more Transition Date Balance Sheet: granular than GAAP. The concept of a “cash No impact expected. generating unit (CGU)” is a lower level of aggregation than an “operating segment” under Management has identified breakdown GAAP. Goodwill is allocated to each CGU and of CGU’s. then tested for impairment. Future Annual Impact: Main differences: Impact undeterminable at this point in time. a) test at each reporting period for indications of impairment and then if indications exist full testing is done b) intangible assets must be tested for impairment annually c) discounted cash flows are used to determine value in use d) impairment loss (other than for goodwill) may be reversed in future periods if economic conditions and future values support the change CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 42. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (d) Accounting Policy Differences (cont’d) EXPECTED IMPACT ON FINANCIAL STATEMENTS AT THE TRANSITION ACCOUNTING POLICY KEY DIFFERENCE IN ACCOUNTING TREATMENT DATE AND FUTURE ANNUAL IMPACT Provisions and Contingent A provision is recognized when it is probable Transition Date Balance Sheet: Liabilities (more likely than not) that an outflow of resources No impact expected will be required to settle the obligation. GAAP uses a higher threshold to recognize a provision. Future Annual Impact: Impact undeterminable at this point in time. Foreign Currency Translation Under IFRSs, the concept of an integrated or Transition Date Balance Sheet: self-sustaining foreign operation does not exist No impact expected. as it does under GAAP. Under GAAP, ClubLink’s United States golf club and resort operations are Future Annual Impact: considered to be integrated foreign operations An adjustment of $619,000 is expected to be made resulting in historical foreign exchange rates used in 2010 as a result of a lower exchange rate to translate non-monetary assets and liabilities. at December 31, 2010 as compared to the Under IFRSs, these operations will be translated exchange rates used for GAAP translation using period-end exchange rates and any exchange during 2010. Future impact beyond 2011 is gains or losses will be included with other undeterminable at this point in time. comprehensive loss. Income Taxes There are a number of minor differences in Transition Date Balance Sheet: the presentation and calculation of income taxes No impact expected other than the tax effect under IFRSs. of other IFRS adjustments. 40 Future Annual Impact: Impact undeterminable at this time. The above list and related comments should not be regarded as a complete list of changes that will result from conversion to IFRSs. It is intended to highlight those areas we believe to be most significant. Until we have prepared a full set of annual financial statements under IFRSs, management will not be able to determine or precisely quantify all of the impacts that will result from the conversion to IFRSs. International Financial Reporting Standards that are mandatory at the transition and changeover date have been finalized, however, the IASB’s work plan currently has projects underway that are expected to result in new pronouncements that continue to evolve IFRSs. The IASB is reviewing the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, with the intention of replacing it with a new standard in 2011. The IASB is also expected to review the IAS 12 standard for income taxes and develop proposals for changes. The existing IAS 12 standard is applicable to the Company’s conversion to IFRSs. In June 2010, the IASB issued an exposure draft pertaining to revenue recognition as part of the joint revenue project with the US Financial Accounting Standards Board (FASB). In August 2010, the IASB issued an exposure draft pertaining to leases as part of the joint leasing project with FASB. The leasing exposure draft proposes the elimination of the distinction between operating leases and finance leases and would introduce a new model for lessees and lessors. If this exposure draft is introduced it will have a material impact on the Company’s balance sheet. The Company continues to evaluate the possible effects of new standards and exposure drafts, and will monitor the near-term projects that the IASB initiates for income taxes and leases. The ultimate impacts cannot be determined at this time. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 43. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 41 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (e) Expected Adjustments to Consolidated Financial Statements While the adoption of IFRSs will not have an impact on our reported net cash flows, it will have an impact on the Company’s consolidated balance sheets, statements of earnings and comprehensive earnings. The following tables show the adjustments that we expect to make to our consolidated balance sheet, statement of earnings and statement of equity. These adjustments are unaudited. The opening IFRS balance sheet reflects the revaluation of certain rail, tourism and port operations capital assets and the adjustment to accumulated depreciation as a result of componentization within capital assets. Expected Adjustments to Consolidated Balance Sheet as of January 1, 2010 (transition date) Compo- Cumulative Fair Value nentization Translation GAAP Adjustments Adjustments Loss Reset IFRS (thousands of dollars) (Audited) (Note 1) (Note 2) (Note 3) (Unaudited) Assets Current assets $ 28,516 $ – $ – $ – $ 28,516 Property, plant and equipment 523,770 46,650 (621) – 569,799 Investment property 12,954 1,692 – – 14,646 Other non-current assets 62,513 – – – 62,513 Total assets $ 627,753 $ 48,342 $ (621) $ – $ 675,474 Liabilities 41 Current liabilities $ 80,276 $ – $ – $ – $ 80,276 Non-current liabilities – other 375,550 – – – 375,550 Deferred tax liabilities 17,367 19,086 (159) – 36,294 Total liabilities 473,193 19,086 (159) – 492,120 Shareholders’ Equity Share capital 106,191 – – – 106,191 Contributed surplus 188 – – – 188 Retained earnings 72,072 29,256 (462) (23,891) 76,975 Accumulated other comprehensive loss (23,891) – – 23,891 – Total shareholders’ equity 154,560 29,256 (462) – 183,354 Total liabilities and equity $ 627,753 $ 48,342 $ (621) $ – $ 675,474 NOTE 1 Fair value adjustments of rail, tourism and port operations land, buildings, docks and investment property, adjusted for amortization differences, if applicable. These assets are being reflected at fair value as their deemed cost at transition date. NOTE 2 Additional depreciation as a result of componentization of golf course bunkers and thermal control for buildings NOTE 3 Reset of cumulative translation loss as allowed under IFRS 1 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 44. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 42 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (e) Expected Adjustments to Consolidated Financial Statements (cont’d) Expected Adjustments to Consolidated Balance Sheet as of December 31, 2010 (changeover date) Foreign Exchange Compo- Cumulative Adjustment Fair Value nentization Translation on Integrated GAAP Adjustments Adjustments Loss Reset Operations IFRS (thousands of dollars) (Audited) (Note 1) (Note 2) (Note 3) (Note 4) (Unaudited) Assets Current assets $ 11,731 $ – $ – $ – $ – $ 11,731 Property, plant and equipment 528,015 42,074 (1,205) – (576) 568,308 Investment property 13,020 1,585 – – – 14,605 Other non-current assets 58,646 – – – (43) 58,603 Total assets $ 611,412 $ 43,659 $ (1,205) $ – $ (619) $ 653,247 Liabilities Current liabilities $ 48,631 $ – $ – $ – $ – $ 48,631 Non-current liabilities – other 389,273 – – – – 389,273 Deferred tax liabilities 17,711 17,230 (309) – – 34,632 Total liabilities 455,615 17,230 (309) – – 472,536 Shareholders’ Equity Share capital 105,613 – – – – 105,613 42 Retained earnings 75,260 27,972 (896) (23,891) – 78,445 Accumulated other comprehensive loss (25,076) (1,543) – 23,891 (619) (3,347) Total shareholders’ equity 155,797 26,429 (896) – (619) 180,711 Total liabilities and equity $ 611,412 $ 43,659 $ (1,205) $ – $ (619) $ 653,247 NOTE 1 Fair value adjustments of rail, tourism and port operations land, buildings, docks and investment property, adjusted for amortization differences and foreign exchange, if applicable. These assets are being reflected at fair value as their deemed cost at transition date. NOTE 2 Additional depreciation as a result of componentization of golf course bunkers and thermal control for buildings. NOTE 3 Reset of cumulative translation loss as allowed under IFRS 1. NOTE 4 Adjust foreign exchange on integrated non-monetary US assets of golf club and resort operations (Lake Chesdin and Florida properties). CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 45. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 43 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (e) Expected Adjustments to Consolidated Financial Statements (cont’d) Reconcilation of shareholders’ equity as reported under GAAP and IFRS Accumulated Other Compre- Total Note Share Contributed Retained hensive Shareholders’ (thousands of dollars) Ref Capital Surplus Earnings Loss Equity As reported under GAAP – Dec. 31, 2009 $ 106,191 $ 188 $ 72,072 $ (23,891) $ 154,560 IFRS differences increasing (decreasing) reported amount under GAAP: Fair value adjustments rail, tourism and port operations 1 – – 48,342 – 48,342 Componentization adjustments 2 – – (621) – (621) Cumulative translation account reset 3 – – (23,891) 23,891 – Deferred income taxes on above adjustments 1, 2 – – (18,927) – (18,927) As reported under IFRS January 1, 2010 (unaudited) 106,191 188 76,975 – 183,354 As reported GAAP amounts: Purchase and cancellation of shares, net (578) (188) (260) – (1,026) Dividends – – (8,394) – (8,394) Earnings for the year under GAAP – – 11,842 – 11,842 Unrealized foreign exchange translation loss as 43 reported under GAAP – – – (1,185) (1,185) IFRS differences increasing (decreasing) reported amount under GAAP: Amortization on fair value adjustments 1 – – (2,146) – (2,146) Amortization on componentization adjustments 2 – – (584) – (584) Unrealized foreign exchange translation loss on fair value adjustments 1 – – – (1,543) (1,543) Unrealized foreign exchange translation loss on integrated golf club and resort operations 4 – – – (619) (619) Deferred income taxes on above adjustments 1, 2 – – 1,012 – 1,012 Under IFRS December 31, 2010 (unaudited) $ 105,613 $ – $ 78,445 $ (3,347) $ 180,711 NOTE 1 Fair value adjustments of rail, tourism and port operations land, buildings, docks and investment property, adjusted for amortization differences, and foreign exchange, if applicable. These assets are being reflected at fair value as their deemed cost at transition date. NOTE 2 Additional depreciation as a result of componentization of golf course bunkers and thermal control for buildings. NOTE 3 Reset of cumulative translation loss as allowed under IFRS 1. NOTE 4 Adjust foreign exchange on integrated non-monetary US assets of golf club and resort operations (Lake Chesdin and Florida properties). CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 46. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (e) Expected Adjustments to Consolidated Financial Statements (cont’d) Expected Adjustments to Consolidated Statement of Earnings and Comprehensive Earnings for the Year Ended December 31, 2010 Foreign Amortization Exchange Amortization on Compo- Adjustment on Fair Value nentization on Integrated GAAP Adjustments Adjustments Operations IFRS (thousands of dollars, except per share amounts) (Audited) (Note 1) (Note 2) (Note 3) (Unaudited) REVENUE Operating revenue $ 189,903 $ – $ – $ – $ 189,903 Amortization of membership fees 15,292 – – – 15,292 205,195 – – – 205,195 EXPENSES Cost of sales 21,323 – – – 21,323 Operating expenses 118,722 – – – 118,722 Direct costs of originating membership fees 1,511 – – – 1,511 141,556 – – – 141,556 Earnings before other items and income taxes 63,639 – – – 63,639 OTHER ITEMS 44 Amortization of capital assets 19,807 2,146 584 – 22,537 Amortization of intangible assets 982 – – – 982 Land lease rent 5,285 – – – 5,285 Interest, net 22,108 – – – 22,108 Other income (344) – – – (344) 47,838 2,146 584 – 50,568 Earnings before income taxes 15,801 (2,146) (584) – 13,071 PROVISION FOR INCOME TAXES Current (1,811) – – – (1,811) Deferred 5,770 (862) (150) – 4,758 3,959 (862) (150) – 2,947 Net earnings 11,842 (1,284) (434) – 10,124 Unrealized foreign currency translation loss (1,185) (1,543) – (619) (3,347) Total comprehensive earnings $ 10,657 $ (2,827) $ (434) $ (619) $ 6,777 Weighted averages shares outstanding 27,976,000 27,976,000 Earnings per share basic and diluted $ 0.42 $ (0.04) $ (0.02) $ – $ 0.36 NOTE 1 Fair value adjustments of rail, tourism and port operations land, buildings, docks and investment property, adjusted for amortization differences, and foreign exchange, if applicable. These assets are being reflected at fair value as their deemed cost at transition date. NOTE 2 Additional depreciation as a result of componentization of golf course bunkers and thermal control for buildings. NOTE 3 Adjust foreign exchange on integrated non-monetary US assets of golf club and resort operations (Lake Chesdin and Florida properties). CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 47. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 45 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Emerging Accounting Pronouncements (cont’d) International Financial Reporting Standards (cont’d) (f) Internal Controls over financial reporting The conversion to IFRSs from GAAP impacts the way we present our financial results and the accompanying disclosures. We have evaluated the impact of the conversion on our financial reporting systems, processes and controls. No material changes have been made to our financial reporting systems, processes or internal controls. Business Combinations and Consolidated Financial Statements Effective January 1, 2010, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests. These Sections establish principles and requirements of the acquisition method for business combinations and related disclosures and accounting for a non-controlling interest in a subsidiary in consolidated financial statements to a business combination. This includes the requirement for business combination costs to be expensed as incurred, rather than being capitalized. These Sections were applied prospectively from January 1, 2010. Non-GAAP Measures The Company has prepared the financial information contained in this management discussion and analysis in accordance with GAAP. Reference is also made to net operating income, operating margin, net membership fee income, EBITDA, cash flow from operations, cash flow from operations per share and free cash flow. The calculations of these measures can be found embedded in the MD&A. ClubLink uses these non-GAAP measures as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. The Company considers these non-GAAP measures to be a meaningful supplement to GAAP measures. The Company also believes these non-GAAP measures are commonly used by securities analysts, investors and other interested parties to evaluate our financial performance. While these non-GAAP measures have been disclosed herein to permit a more complete comparative analysis of the Company’s 45 operating performance and debt servicing ability relative to other companies, readers are cautioned that these non-GAAP measures as reported by ClubLink may not be comparable in all instances to non-GAAP measures as reported by other companies. EBITDA does not represent cash generated from operations as defined by GAAP and it is not necessarily indicative of cash available to fund cash needs. Furthermore, EBITDA does not reflect the impact of a number of items that affect our net earnings. EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to measures of performance under GAAP. Disclosure Controls and Procedures ClubLink’s Chairman and Chief Executive Officer and its Chief Financial Officer are responsible for establishing and maintaining the Company’s disclosure controls and procedures. Our disclosure controls are designed to provide reasonable assurance that information required to be disclosed by ClubLink is recorded, processed, summarized and reported within the time periods specified under Canadian securities laws, and include controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. The Chairman and Chief Executive Officer and the Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures as at December 31, 2010, have concluded that the Company’s disclosure controls are adequate and effective to ensure that material information relating to the Company and its subsidiaries would have been known to them. Management’s Report on Internal Controls Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of ClubLink’s assets; (ii) provide reasonable assurance that transactions are recorded appropriately to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. There were no changes in internal control over financial reporting that occurred during the Company’s most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 48. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 46 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Outlook Golf Club and Resort Operations On September 3, 2010, ClubLink announced that it had entered the Florida marketplace by purchasing eight 18-hole equivalent golf courses in Sun City Center, Florida. This acquisition was supplemented by the Heron Bay acquisition on October 21, 2010 in Coral Springs, near Fort Lauderdale. ClubLink is pursuing other opportunities in the Southern Florida marketplace to supplement its initial acquisitions. ClubLink entered the Florida market for the following reasons: (a) The depressed golf market in Florida provides opportunities to implement ClubLink’s model of Regional reciprocal play to enhance individual club performance. (b) Our member survey indicates Ontario and Quebec members through secondary home purchases and golf/sun vacations would be accretive to the Florida Region’s performance. (c) Management believes that establishing a Florida Region will be perceived as an added value, enhancing demand for new membership sales in both the Ontario/Quebec and Florida Regions. Rail, Tourism and Port Operations The cruise industry announced capacity reductions to the Alaska market in response to a head tax imposed by the State of Alaska on cruise ship passengers. At the beginning of 2010, the expected result was a 12% reduction in passengers to Skagway, Alaska in 2010 and a further 6% in 2011. White Pass and other key Alaskan tourism businesses responded to this challenge by founding the Alaska Alliance for Cruise Travel (“AlaskaACT”), an Alaskan state-wide non-profit membership now comprising over 700 businesses and individuals that recognize the benefit of cruise travel. AlaskaACT’s mandate is to create a positive business environment in Alaska for the cruise and tourism industries by working with the Governor of Alaska and the cruise industry to reduce the cruise ship head tax and make the Alaskan cruise market competitive again. The Governor joined AlaskaACT’s trade mission to Cruise Shipping Miami in March 2010 and made a commitment to address the cruise 46 industry issues. Significant progress was made in April, 2010 when the state Legislature passed the head tax reduction (from US$46.00 to US$34.50 effective in October 2010) into law as well as allocating US$7,000,000 in additional funds to market cruising in Alaska. These moves were hailed as a positive step by cruise industry executives which is expected to increase the number of cruise ships starting in 2012. On October 14, 2010, Princess Cruises announced that they were adding a fourth ship to the Voyage of the Glaciers itinerary. It’s estimated that this ship will bring approximately 45,000 additional passengers to Skagway, Alaska during the 2012 season. For 2011, three new high-end luxury cruise lines – Disney, Crystal and Oceania – are coming to Alaska, offsetting the previously announced 6% reduction, creating a modest 0.8% expected increase in port passengers to Skagway, Alaska over 2010. Corporate Operations For 2011 and beyond, the Company believes it is well positioned to capitalize on its unique assets and their competitive strengths. The Company anticipates that opportunities will arise to add quality assets in this environment. With the strength of the existing brands, experienced management, and a focus on cost control, stable returns are expected. Both business segments are diligently controlling discretionary spending. Currency fluctuations may continue to impact reported results. Additional Information Additional information concerning the Company, as well as the Company’s Annual Information Form is available on SEDAR (www.sedar.com) and the investor relations section of the Company’s website (www.clublinkenterprises.ca). CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 49. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 47 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING AND INDEPENDENT AUDITOR’S REPORT Management’s Responsibility for Financial Reporting The consolidated financial statements and management’s discussion and analysis of operations contained in this annual report are the responsibility of the Company’s management. To fulfill this responsibility, the Company maintains a system of internal controls to ensure that its reporting practices and accounting and administrative procedures are appropriate and provide assurance that relevant and reliable financial information is produced. The consolidated financial statements have been prepared in conformity with Canadian generally accepted accounting principles and, where appropriate, reflect estimates based on management’s best judgment in the circumstances. The financial information presented throughout this annual report is consistent with the information contained in the consolidated financial statements. Deloitte & Touche LLP, the independent auditors appointed by the shareholders in 2010, have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated financial statements. Their auditors’ report is set out below. The consolidated financial statements have been further examined by the Board of Directors and by its Audit Committee, which meets regularly with the auditors and management to review the activities of each. The Audit Committee, which is comprised of three independent directors, who are not officers of the Company, reports to the Board of Directors. K. (Rai) Sahi Robert Visentin Chairman and Chief Executive Officer Chief Financial Officer March 1, 2011 Independent Auditor’s Report to the Shareholders of ClubLink Enterprises Limited We have audited the accompanying consolidated financial statements of ClubLink Enterprises Limited, which comprise the consolidated 47 balance sheets as at December 31, 2010 and December 31, 2009, and the consolidated statements of earnings and comprehensive earnings, retained earnings and accumulated other comprehensive loss and cash flows for the years then ended, and a summary of significant accounting policies 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 Canadian generally accepted accounting principles, 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 ClubLink Enterprises Limited as of December 31, 2010 and December 31, 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Deloitte & Touche LLP Chartered Accountants Licensed Public Accountants Toronto, Ontario March 1, 2011 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 50. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 48 CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, (in thousands of dollars) Notes 2010 2009 ASSETS Current Cash $ 1,447 $ 10,670 Accounts receivable 20 3,238 2,423 Income taxes receivable 176 – Mortgages and loans receivable 4, 20 61 5,889 Inventories and prepaid expenses 6,809 6,427 Other assets – 3,107 11,731 28,516 Mortgages and loans receivable 4, 20 5,744 5,859 Other assets 1,517 1,252 Capital assets 5 541,035 536,724 Intangible assets 6 24,696 24,189 Future income tax assets 11 – 4,524 Goodwill 26,689 26,689 Total assets $ 611,412 $ 627,753 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payable and accrued liabilities 7 $ 17,755 $ 17,816 Income taxes payable – 1,425 Secured debt 8 20,640 23,008 Capital lease obligations 9 4,199 4,745 48 Notes payable 16 – 28,400 Prepaid annual dues and deposits 6,037 4,882 48,631 80,276 Secured debt 8 326,291 307,949 Capital lease obligations 9 5,626 8,267 Deferred membership fees 10 57,356 59,334 Future income tax liabilities 11 17,711 17,367 455,615 473,193 Shareholders’ equity Share capital 12 105,613 106,191 Contributed surplus 12 – 188 Retained earnings and accumulated other comprehensive loss 50,184 48,181 Total shareholders’ equity 155,797 154,560 Total liabilities and shareholders’ equity $ 611,412 $ 627,753 See Accompanying Notes On behalf of the Board of Directors K. (Rai) Sahi John Lokker Chairman and Chief Executive Officer Director CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 51. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 49 CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars, except per share amounts) Notes 2010 2009 REVENUE Operating revenue $ 189,903 $ 190,212 Amortization of membership fees 10 15,292 14,784 205,195 204,996 EXPENSES Cost of sales 21,323 21,258 Operating expenses 118,722 117,517 Direct costs of originating membership fees 1,511 1,955 141,556 140,730 Earnings before other items, income taxes and non-controlling interest 63,639 64,266 OTHER ITEMS Amortization of capital assets 19,807 20,852 Amortization of intangible assets 982 681 Land lease rent 5,285 5,024 Interest, net 14 22,108 23,397 Other expense (income) (344) 1,807 47,838 51,761 Earnings before income taxes and non-controlling interest 15,801 12,505 PROVISION FOR INCOME TAXES 11 Current (1,811) 5,313 Future 5,770 (3,311) 49 3,959 2,002 Earnings before non-controlling interest 11,842 10,503 Non-controlling interest – (652) Net earnings 11,842 11,155 Unrealized foreign currency translation loss (1,185) (3,834) Total comprehensive earnings $ 10,657 $ 7,321 Weighted average shares outstanding 27,976,000 25,113,000 Earnings per share basic and diluted $ 0.42 $ 0.44 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars) Notes 2010 2009 RETAINED EARNINGS Balance, beginning of year $ 72,072 $ 67,871 Net earnings 11,842 11,155 Shares repurchased and cancelled 12 (260) – Dividends (8,394) (6,954) Balance, end of year 75,260 72,072 ACCUMULATED OTHER COMPREHENSIVE LOSS Balance, beginning of year (23,891) (20,057) Unrealized foreign currency translation loss (1,185) (3,834) Balance, end of year (25,076) (23,891) Total retained earnings and accumulated other comprehensive loss $ 50,184 $ 48,181 See Accompanying Notes CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 52. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 50 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (in thousands of dollars) Notes 2010 2009 OPERATING ACTIVITIES Net earnings $ 11,842 $ 11,155 Items not affecting cash: Amortization of capital assets 19,807 20,852 Amortization of intangible assets 982 681 Amortization of deferred financing costs 14 762 496 Future income taxes 5,770 (3,311) Amortization of membership fees 10 (15,292) (14,784) Discount on mortgage repayment – (205) Loss on sale of assets – 166 Unrealized foreign exchange gain (886) (392) Non-controlling interest – (652) Collection of membership fee installments 10 13,314 13,906 Cash flow from operations 36,299 27,912 Net change in working capital accounts (2,210) 3,329 Cash provided by operating activities 34,089 31,241 INVESTING ACTIVITIES Operating capital asset expenditures (6,734) (5,333) Development capital asset expenditures (7,179) (11,562) Business combinations 3 (13,024) (951) Other long-term assets (264) 2,621 Mortgages and loans receivable 5,943 (3,228) 50 Acquisition of non-controlling interest – (284) Cash used in investing activities (21,258) (18,737) FINANCING ACTIVITIES Income tax appeal payment refund 3,107 – Deferred financing costs (505) (425) Revolving secured debt 21,563 (19,404) Non-revolving secured debt – advances 38,447 17,500 Non-revolving secured debt – maturities (29,023) (19,154) Non-revolving secured debt – amortization payments (14,581) (15,211) Capital lease obligations (3,187) 918 Notes payable (28,400) 28,400 Proceeds on issue of common shares 21 45 Shares purchased for cancellation (1,047) (147) Dividends paid (8,394) (6,954) Dividends paid – non-controlling interest – (554) Cash used in financing activities (21,999) (14,986) Net effect of currency translation adjustment on cash (55) (400) Net decrease in cash during the year (9,223) (2,882) Cash, beginning of year 10,670 13,552 Cash, end of year $ 1,447 $ 10,670 See Accompanying Notes CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 53. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 1. Nature of Operations ClubLink Enterprises Limited (the “Company” or “ClubLink”) was formed under the laws of Canada. ClubLink is engaged in golf club and resort operations under the trademark “ClubLink One Membership More Golf ”. ClubLink is Canada’s largest owner and operator of golf clubs with 48½, eighteen-hole championship and six eighteen-hole academy courses at 41 locations, primarily in Ontario, Quebec and Florida. ClubLink is also engaged in rail, tourism and port operations based in Skagway, Alaska which operate under the trade name White Pass & Yukon Route (“White Pass”). The railway stretches approximately 177 kilometres (110 miles) from Skagway, Alaska to Whitehorse, Yukon. In addition, White Pass operates three docks, primarily for cruise ships. White Pass reports in U.S. dollars. 2. Significant Accounting Policies (a) Summary of Significant Accounting Policies The consolidated financial statements of ClubLink have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The significant accounting policies are summarized as follows: Principles of consolidation These consolidated financial statements include the accounts of ClubLink and its subsidiaries. All inter-company balances and transactions have been eliminated. Use of estimates The preparation of these consolidated financial statements that conform with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates include the weighted average remaining life of memberships sold each year which is used to amortize membership fee revenue, the allowance for future resignations and terminations, the useful lives and valuation of capital assets, intangible assets and goodwill and 51 the recoverability of mortgages and loans receivable. Actual results could differ substantially from these estimates. Inventories Inventories are stated at the lower of cost and net realizable value and consist of food, beverages and merchandise. Cost of sales in the golf club and resort operations segment are determined on a weighted average basis whereas cost of sales in the rail, tourism and port operations segment are determined on a first-in, first-out basis. Cost of sales represents the amount of inventories expensed during the year. Capital assets Golf club and resort operations Capital assets include land and improvements thereto, buildings and related equipment. Operating capital assets are recorded at cost. Operating capital assets, including assets under capital lease, are amortized on a straight-line basis over their estimated useful lives as follows: Buildings – 40 years Roads, cart paths and irrigation – 20 years Equipment – 5 to 10 years Leased golf course land is amortized on a straight-line basis over the term of the lease. Development capital assets include properties under construction or held for future development. ClubLink capitalizes all direct costs relating to the development and construction of these properties. ClubLink also capitalizes interest and direct project development and management costs to properties under construction. Rail, tourism and port operations Capital assets are amortized on a straight-line basis over their useful lives as follows: Buildings, structures and land improvements – 30 to 60 years Docks – 40 years Equipment – 5 to 30 years Materials and supplies related to the rail operations are recorded at cost, determined on a first-in, first-out basis, and are charged to expense or added to the cost of property and equipment when used. ClubLink reviews long-lived assets such as operating capital assets and development capital assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When indicators of impairment exist, and the carrying value is greater than the net recoverable value, an impairment loss is recognized to the extent that the fair value is below the carrying value. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 54. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 2. Significant Accounting Policies (cont’d) (a) Summary of Significant Accounting Policies (cont’d) Intangible assets Intangible assets are accounted for at cost. They consist of ClubLink’s membership base, brand and below market rent terms and are amortized on a straight-line basis over periods of 15 to 40 years. Goodwill Goodwill represents the cost of acquired operating businesses in excess of the fair value of net identifiable assets acquired. Goodwill is tested for impairment annually or when indicated by events or changes in circumstances by comparing the fair value of a particular reporting unit to its carrying value. When the carrying value exceeds its fair value, the fair value of the reporting unit’s goodwill is compared with its carrying value to measure any impairment loss. Future income taxes The Company uses the liability method of accounting for future income taxes. Temporary differences arising from the difference between the tax base of an asset or liability and its carrying amount on the consolidated balance sheets are used to calculate future income tax liabilities or assets. Future income tax liabilities and assets are calculated using the substantively enacted tax rates and laws that are expected to be in effect in the periods that the temporary differences are expected to reverse. The effect of changes in tax rates is included in earnings in the year which includes the substantive enactment. Foreign currency translation The operations of White Pass are self-sustaining. The accounts of White Pass are translated into Canadian dollars at the exchange rate in effect as at the balance sheet dates. Revenue and expenses are translated at the average rates of exchange during the year. The resulting gains and losses are recorded as unrealized foreign currency translation gain (loss) in accumulated other comprehensive earnings in shareholders’ equity. 52 The golf club operations located in the United States are integrated. Monetary items are translated into Canadian dollars at the exchange rate in effect as at the balance sheet date. Non-monetary items are translated using their historical exchange rates. Revenue and expenses are translated at the average rates of exchange during the year. Financial instruments All financial instruments are classified into one of the following five categories: held-for-trading, held to maturity, loans and receivables, available for sale financial assets, or other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depend on their initial classification. (a) Held to maturity investments, loans and receivables, and other financial liabilities are initially measured at fair value and subsequently measured at amortized cost. Amortization of premiums or discounts and transaction costs are amortized into net earnings, using the effective interest method. (b) Available for sale financial assets are measured at fair value, with unrealized gains and losses recorded in accumulated other comprehensive earnings until the asset is realized, at which time they will be recorded in net earnings. (c) Held-for-trading financial instruments are measured at fair value. All gains and losses resulting from changes in fair value are included in net earnings in the period in which they arise. The following is a summary of the accounting model the Company applies to each of its significant categories of financial instruments: Balance Sheet Classification Financial Instrument Designation Cash Held-for-trading Accounts receivable Loans and receivables Mortgages and loans receivable Loans and receivables Long-term investments Available for sale Notes payable Other financial liabilities Accounts payable and accrued liabilities Other financial liabilities Secured debt Other financial liabilities CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 55. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 2. Significant Accounting Policies (cont’d) (a) Summary of Significant Accounting Policies (cont’d) Financial instruments (cont’d) Transaction costs related to the Company’s financial liabilities are netted against the related liability and are expensed using the effective interest method. Stock-based compensation The fair value of stock options granted are recognized over the applicable stock option vesting period as compensation expense in the statement of earnings. On exercise of stock options, the consideration received and the related accumulated contributed surplus amounts are credited to share capital. Revenue recognition Golf club and resort operations revenue includes annual dues (recognized on a calendar year basis as earned) and sales to members and customers of green fees, cart rentals, food and beverage, merchandise and room rentals which are all recognized when the service is provided. Membership fee revenue is amortized on a straight-line basis over the estimated weighted average remaining life of a membership by year joined. Rail, tourism and port operations revenue is recognized as earned when these services are provided. Non-monetary transactions The Company records non-monetary transactions at the fair value of the assets or services exchanged. Earnings per share Basic earnings per share is calculated by dividing earnings by the weighted average number of common shares outstanding during the 53 reporting period. Diluted earnings per share is calculated using the treasury stock method. Under this method, proceeds that could be obtained upon exercise of options, if dilutive, are assumed to be used to purchase common shares at the average market price during the period. Multi-employer pension plan The rail, tourism and port operations participate in various multi-employer benefit plans, on a contributory and non-contributory basis, depending on the plan. Benefit costs are expensed based on an employee’s hours worked. (b) Changes in Accounting Policy Effective January 1, 2010, the Company adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1582, Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602, Non-controlling Interests. These Sections establish principles and requirements of the acquisition method for business combinations and related disclosures and accounting for a non-controlling interest in a subsidiary in consolidated financial statements to a business combination. This includes the requirement for business combination costs to be expensed as incurred, rather than being capitalized. These Sections were applied prospectively from January 1, 2010. International Financial Reporting Standards (“IFRS”) In 2005, Canada’s Accounting Standards Board announced that Canadian GAAP, as used by publicly accountable enterprises, would be fully converged with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board to be complete by January 1, 2011. For ClubLink, the conversion to IFRS will be required for interim and annual financial statements for the year ending December 31, 2011. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. Please refer to the Emerging Accounting Pronouncements section in the 2010 MD&A for an analysis of this topic. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 56. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 3. Business Combinations 2010 Acquisitions On September 3, 2010, ClubLink acquired certain assets and specified liabilities of eight 18-hole golf courses located in Sun City Center, Florida for cash consideration of US$8,700,000. On October 21, 2010, ClubLink acquired Heron Bay Golf Club (an 18-hole facility) in Coral Springs, Florida for cash consideration of US$2,900,000. These acquisitions are part of a strategy to extend the ClubLink model to the Florida marketplace and management believes it will add value to our existing membership base. On December 15, 2010, ClubLink announced the acquisition of Glendale Golf and Country Club in Hamilton, Ontario for $3,154,000 less mortgages assumed of $2,183,000 for a net cash outlay of $971,000. This acquisition will complement ClubLink’s existing properties in the Greater Toronto Area cluster. The operations of the acquisitions have been included in the Statement of Earnings from the date of acquisition and are summarized below: (thousands of dollars) Revenue $ 3,074 Operating expenses 3,282 Net operating loss (208) Depreciation (142) Business combination transaction costs (873) Future income tax recovery 411 Net loss $ (812) It is impractical to estimate the revenue and net earnings of the combined entity for the year as though the acquisition date for the acquisitions was January 1, 2010 as ClubLink does not have access to reliable historical information for the properties and such historical 54 information would not reflect the planned integration and management’s operational changes. The following table summarizes the estimated fair value of the assets and liabilities acquired at the date of acquisition. Sun Heron (thousands of dollars) City Bay Glendale Total Land $ 3,663 $ 1,096 $ 1,640 $ 6,399 Buildings 2,110 654 500 3,264 Roads, cart paths and irrigation 1,500 1,050 100 2,650 Equipment 895 100 444 1,439 Membership base (intangible asset) 981 – 470 1,451 Liabilities assumed (449) – – (449) Purchase price – base currency 8,700 2,900 3,154 14,754 Secured debt assumed – – (2,183) (2,183) Exchange 370 83 – 453 Cash purchase price – Cdn dollars $ 9,070 $ 2,983 $ 971 $ 13,024 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 57. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 3. Business Combinations (cont’d) 2009 Acquisition ClubLink Corporation is a subsidiary of the Company. On July 28, 2009, the Company acquired the remaining 28.1% common share interest in ClubLink Corporation that it did not already own. The acquisition was effected through an amalgamation of a wholly-owned subsidiary of the Company and ClubLink Corporation. ClubLink issued 1.1 common shares for each common share of ClubLink Corporation acquired, resulting in the issuance of 5,164,015 common shares. The common shares issued were valued at $44,669,000, based on the independent third party valuation used to communicate with shareholders. In addition, the Company incurred $951,000 of business combination costs which have been included in the cost of the purchase. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the Company allocated the purchase price to the identifiable assets and liabilities acquired based on their estimated fair values at the time of acquisition. The operations of ClubLink Corporation have been included in the consolidated statements of earnings and comprehensive earnings and cash flows on a 100% basis since July 28, 2009. The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition which have been applied to ClubLink’s acquisition of 28.1% of ClubLink Corporation. (thousands of dollars) July 28, 2009 Capital assets $ 134,276 Brand 11,240 Membership base 4,707 Other assets 13,646 Total assets acquired 163,869 Less: liabilities assumed 55 Long-term debt (78,826) Capital lease obligations (4,167) Deferred membership fees (16,755) Future income tax liabilities (2,437) Other liabilities (16,064) Total purchase price $ 45,620 Consideration consisted of: Business combination costs $ 951 Share capital 44,669 $ 45,620 The following is a summary of the fair value adjustments to various balance sheet line items as a result of this transaction. (thousands of dollars) July 28, 2009 Assets Cash (Business combination costs) $ (951) Capital assets (14,700) Intangible assets 14,857 $ (794) Liabilities and shareholders’ equity Non-controlling interest $ (45,463) Share capital (note 12) 44,669 $ (794) CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 58. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 4. Mortgages and Loans Receivable Mortgages and loans receivable consist of the following: (thousands of dollars) 2010 2009 Officer loans $ 4,426 $ 4,429 Vendor take-back mortgages and loans 1,379 1,559 Due from Paros Enterprises Limited (note 16) – 5,000 Other loans – 760 5,805 11,748 Less: current portion 61 5,889 $ 5,744 $ 5,859 The officer loans bear interest at a market rate determined by the Compensation Committee of the Board of Directors of the Company which is 2.25% per annum (2009 – 3.50%), have maturities from December 31, 2012 to January 29, 2019 and were incurred to purchase common shares of a subsidiary that have subsequently been exchanged for common shares of the Company. The Company has indicated its intention to enforce the payment terms of these loans in the event of a decline in market value of the shares. The common shares financed by these loans, which are being held by the Company as collateral, had a market value of $3,853,000 at December 31, 2010 (2009 – $3,530,000). The vendor take-back mortgages and loans have maturities from May 2012 to November 2014 and have an average fixed interest rate of 6.2% (2009 – 6.2%). 5. Capital Assets Capital assets consist of the following: 56 2010 2009 Accumulated Net Book Accumulated Net Book (thousands of dollars) Cost Amortization Value Cost Amortization Value Golf Club and Resort Operations Golf course lands $ 261,332 $ – $ 261,332 $ 253,391 $ – $ 253,391 Leased lands 5,345 2,389 2,956 5,498 2,329 3,169 Buildings 150,499 40,718 109,781 146,654 36,872 109,782 Roads, cart paths and irrigation 86,230 36,781 49,449 83,398 32,526 50,872 Equipment 66,989 39,792 27,197 76,851 47,258 29,593 Development assets 18,056 – 18,056 17,910 – 17,910 588,451 119,680 468,771 583,702 118,985 464,717 Rail, Tourism and Port Operations Land 1,002 – 1,002 1,058 – 1,058 Buildings, structures and land improvements 21,559 5,441 16,118 21,421 5,157 16,264 Docks 45,431 17,960 27,471 47,693 17,413 30,280 Equipment 40,096 12,423 27,673 36,683 12,278 24,405 108,088 35,824 72,264 106,855 34,848 72,007 $ 696,539 $ 155,504 $ 541,035 $ 690,557 $ 153,833 $ 536,724 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 59. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 5. Capital Assets (cont’d) Interest of nil (2009 – $114,000) and direct project development and management costs in the amount of nil (2009 – $137,000) have been capitalized during the year to development assets. Certain capital assets have been assigned as collateral for secured debt and capital lease obligations (notes 8 and 9). ClubLink is committed to expenditures of US$557,000 (2009 – US$5,024,000) relating to the locomotive repower program which is expected to be paid in 2011. 6. Intangible Assets Intangible assets consist of the following: 2010 2009 Accumulated Net Book Accumulated Net Book (thousands of dollars) Cost Amortization Value Cost Amortization Value Membership base $ 11,676 $ 1,004 $ 10,672 $ 10,187 $ 644 $ 9,543 Brand 13,160 881 12,279 13,160 418 12,742 Below market rent terms 2,359 614 1,745 2,359 455 1,904 $ 27,195 $ 2,499 $ 24,696 $ 25,706 $ 1,517 $ 24,189 7. Accounts Payable Accounts payable consists of the following: (thousands of dollars) 2010 2009 57 Trade payables $ 3,604 $ 3,284 Accrued payroll costs 3,399 3,038 Accrued land lease rent 3,784 3,227 Accrued interest 1,834 1,958 Development capital asset costs to complete 581 1,706 Accrued liabilities and other 4,553 4,603 $ 17,755 $ 17,816 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 60. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 8. Secured Debt (thousands of dollars) 2010 2009 Revolving: Secured revolving operating line of credit to a maximum of $10 million due July 1, 2011 (a) $ 5,558 $ 7,883 Secured revolving operating line of credit to a maximum of $50 million due June 8, 2012 (b) Advances at prime plus 0.75% 2,942 5,554 Bankers acceptances’ plus 2.00% 40,000 13,500 48,500 26,937 Non-revolving: Mortgages with blended fixed monthly payments of principal and interest 7.540% Mortgage due January 1, 2017 13,569 15,263 8.345% Mortgages due July 1, 2022 20,599 21,614 7.550% Mortgage due July 1, 2022 2,529 2,661 7.416% Mortgages due September 1, 2023 30,044 31,410 7.268% Mortgage due July 1, 2024 12,276 12,788 8.060% Mortgage due July 1, 2024 65,697 68,397 6.194% Mortgage due March 1, 2026 55,916 58,056 6.315% Mortgage due December 1, 2027 46,798 48,288 8.000% Mortgage due October 1, 2029 (US $15,872,000; December 31, 2009 – US $16,221,000) 15,787 17,048 58 Other Mortgages due September 2012 to September 2019 2,183 – 265,398 275,525 Term Loan: Term loan due September 1, 2020 (US $36,286,000; December 31, 2009 – Nil) (c) 36,090 – Term loan due March 1, 2014 (Nil; December 31, 2009 – US $30,284,000) (d) – 31,828 36,090 31,828 Gross secured debt 349,988 334,290 Less: deferred financing costs 3,057 3,333 Net secured debt 346,931 330,957 Less: current portion 20,640 23,008 $ 326,291 $ 307,949 (a) The rail, tourism and port operations maintain a secured revolving operating line of credit with a US financial institution in the maximum amount of US$10,000,000 (December 31, 2009 – US$7,500,000) which is payable on demand. The next renewal date is July 1, 2011. This loan bears interest at LIBOR plus 215 basis points or 2.41% (December 31, 2009 – 5.0%). (b) This is a revolving operating line of credit with a two year term and provisions for annual one-year extensions. As at December 31, 2010 there are $1,841,000 (December 31, 2009 – $2,955,000) in letters of credit outstanding and there is availability of $5,217,000 (December 31, 2009 – $27,791,000) under this facility. (c) The term loan is due to a US institution and is denominated in US dollars. It bears interest at LIBOR plus 300 basis points. The interest rate in effect at December 31, 2010 was 3.26%. It is repayable by fixed monthly principal payments in the amount of US$238,000 plus interest. (d) The term loan was due to a US institution and was denominated in US dollars. It bears interest at LIBOR plus 345 basis points subject to a minimum floor of 5%. It was repayable by fixed monthly principal payments in the amount of US$294,020 plus interest. This facility is no longer available to be utilized as it was replaced by the term loan due September 1, 2020 in note (c) above. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 61. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 8. Secured Debt (cont’d) Secured debt is collateralized by certain operating capital assets. Minimum principal debt repayments are as follows: Mortgage and Term Loan Mortgage and Revolving Amortization Term Loan (thousands of dollars) Maturities Payments Maturities Total 2011 $ 5,558 $ 15,082 $ – $ 20,640 2012 42,942 15,989 547 59,478 2013 – 16,964 960 17,924 2014 – 18,011 520 18,531 2015 – 19,137 – 19,137 2016 and thereafter – 205,491 8,787 214,278 $ 48,500 $ 290,674 $ 10,814 $ 349,988 9. Capital Lease Obligations Capital lease obligations consist of the following: (thousands of dollars) 2010 2009 Total minimum lease payments $ 10,718 $ 14,298 Less: amount representing interest at average rate of 5.9% (2009 – 5.8%) 893 1,286 Capital lease obligations 9,825 13,012 59 Less: current portion 4,199 4,745 $ 5,626 $ 8,267 Future minimum lease payments are as follows: Capital Total Minimum Lease Lease (thousands of dollars) Maturities Amortization Obligations Interest Payments 2011 $ 439 $ 3,760 $ 4,199 $ 471 $ 4,670 2012 117 2,658 2,775 243 3,018 2013 501 1,338 1,839 128 1,967 2014 – 627 627 39 666 2015 – 354 354 12 366 2016 – 31 31 – 31 $ 1,057 $ 8,768 $ 9,825 $ 893 $ 10,718 10. Defer red Membership Fees Deferred membership fees consist of the following: (thousands of dollars) 2010 2009 Unamortized membership fees (note 10A) $ 93,517 $ 103,303 Future membership fee instalments (note 10B) (36,161) (43,969) Deferred membership fees $ 57,356 $ 59,334 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 62. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 10. Defer red Membership Fees (cont’d) (A) Changes in unamortized membership fees are as follows: (thousands of dollars) 2010 2009 Balance, beginning of year $ 108,863 $ 113,028 Sales to new members 8,278 12,602 Transfer and upgrade fees from existing members 1,474 2,612 Resignations and terminations (4,726) (4,595) Amortization of membership fees (15,292) (14,784) Balance, end of year 98,597 108,863 Allowance for future resignations and terminations (5,080) (5,560) Unamortized membership fees $ 93,517 $ 103,303 (B) Changes in future membership fee instalments and golf members are as follows: 2010 2009 Golf Golf (thousands of dollars) Members Amount Members Amount Balance, beginning of year 17,049 $ 49,529 16,647 $ 52,816 Sales to new members 1,456 8,278 1,477 12,602 Acquisition of Florida golf members at Sun City Center 1,512 – – – Transfer and upgrade fees from existing members – 1,474 – 2,612 Resignations and terminations (1,100) (4,726) (1,075) (4,595) 60 Instalments received in cash – (13,314) – (13,906) Balance, end of year 18,917 41,241 17,049 49,529 Allowance for future resignations and terminations (5,080) (5,560) Future membership fee instalments $ 36,161 $ 43,969 The following table estimates future cash flows and revenue recognition based on the collection of future membership fee instalments outstanding on December 31, 2010, net of an allowance for resignations and terminations. The estimated collection of future membership fee instalments, amortization of unamortized membership fees and the estimated deferred membership fees, assuming no further memberships are sold is as follows: Estimated collection Estimated Estimated of future amortization deferred membership fee of unamortized membership fees (thousands of dollars) instalments membership fees at year-end Balance, December 31, 2010 $ 57,356 2011 $ 7,278 $ 15,243 49,391 2012 6,205 15,242 40,354 2013 5,225 15,243 30,336 2014 4,341 11,262 23,415 2015 3,426 8,654 18,187 2016 and thereafter 9,686 27,873 – $ 36,161 $ 93,517 Membership fees are amortized over the estimated weighted average remaining life of memberships purchased each year. This is determined by subtracting the average age of members that joined in that year from 70 and dividing the result by 2. The amortization period is reviewed annually and any adjustments are made prospectively. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 63. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 11. Income Taxes The provision for income taxes differs from the expected amount calculated by applying the Canadian combined federal and provincial corporate income tax rates to earnings before income taxes. The major components of these differences are explained as follows: (thousands of dollars) 2010 2009 Earnings before income taxes and non-controlling interest $ 15,801 $ 12,505 Expected corporate tax rate 31.00% 33.00% Calculated income tax provision 4,898 4,127 Difference in statutory tax rates (549) 745 Permanent differences 133 271 Effect of foreign currency exchange on future income taxes (142) (395) Previous losses recognized in current year – (3,483) Change in future income tax rates – 388 Other (381) 349 $ 3,959 $ 2,002 At December 31, the components of the net future income tax assets are as follows: Loss carry forwards and other $ – $ 12,603 Capital and intangible assets – (8,079) Future income tax assets $ – $ 4,524 At December 31, the components of the net future income tax liabilities are as follows: 61 Capital and intangible assets $ 25,050 $ 17,367 Loss carry forwards and other (7,339) – Future income tax liabilities $ 17,711 $ 17,367 As at December 31, 2010, ClubLink and its Canadian subsidiaries, have the following non-capital income tax losses available to reduce future years’ income for income tax purposes, the benefit of which has been recognized. (thousands of dollars) Amount Expiry Date $ 2,207 2014 4,930 2015 20,283 2026 4,221 2027 6,511 2028 2,441 2029 3,510 2031 $ 44,103 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 64. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 12. Share Capital and Contributed Surplus (A) Authorized and issued share capital Authorized The authorized share capital consists of an unlimited number of common shares and preferred shares. As at December 31, 2010, no preferred shares have been issued. Issued Excess Charged to Common Share Contributed Retained (thousands of dollars) Shares Capital Surplus Earnings Balance, December 31, 2008 22,909,437 $ 61,543 $ 268 $ – Exercise of stock options 3,000 12 – – Shares issued pursuant to dividend reinvestment plan 5,567 34 – – Shares issued as consideration for business combination (note 3) 5,164,015 44,669 – – Shares purchased and cancelled through normal course issuer bid which expired on September 19, 2009 (Note 12B) (24,540) (67) (80) – Balance, December 31, 2009 28,057,479 106,191 188 – Shares issued pursuant to dividend reinvestment plan 3,389 21 – – Shares purchased and cancelled through normal course issuer bid which expired on September 19, 2010 (Note 12B) (55,500) (210) (138) (25) Shares purchased and cancelled through normal course 62 issuer bid which expires on September 19, 2011 (Note 12B) (8,700) (33) – (26) Shares purchased and cancelled (Note 12B) (94,050) (356) (50) (209) Charged to retained earnings – – – 260 Balance, December 31, 2010 27,902,618 $ 105,613 $ – $ – (B) Shares repurchased and cancelled The Company was approved by the Toronto Stock Exchange for a normal course issuer bid to purchase up to 1,146,304 of its common shares which expired September 19, 2009. During the year ended December 31, 2009, the Company purchased for cancellation 24,540 common shares for a total purchase price of $147,000 or $5.99 per common share, including commissions. The Company was approved by the Toronto Stock Exchange for a normal course issuer bid to purchase up to 1,402,752 of its common shares which expired on September 19, 2010. For the year ended December 31, 2010, the Company purchased for cancellation 55,500 common shares for a total purchase price of $373,000 or $6.72 per common share, including commissions. The Company has been approved by the Toronto Stock Exchange for a normal course issuer bid to purchase up to 1,395,000 of its common shares which will expire on September 19, 2011. For the year ended December 31, 2010, the Company purchased for cancellation 8,700 common shares for a total purchase price of $59,000 or $6.78 per common share, including commissions. In 2010, the Company repurchased and cancelled 94,050 common shares for the purchase price of $615,000 as part of an exempt issuer bid purchase. In recording the repurchase and cancellation of shares, share capital is reduced by the weighted average issue price of the outstanding common shares with the differential to the purchase price being credited or charged to contributed surplus. After contributed surplus has been reduced to nil, any differential is credited or charged to retained earnings. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 65. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 12. Share Capital and Contributed Surplus (cont’d) (C) Stock options The Company has a stock option plan open to directors, officers, full-time employees and consultants of the Company. Under this plan, the Company may grant total options to a maximum of 10% of the issued and outstanding common shares of the Company on a non- diluted basis. Under the plan, the exercise price equals the market price of the Company’s stock on the day prior to the date of grant and an option’s maximum term is ten years. Options generally vest over a four-year period. A summary of the Company’s stock option plan is presented below: 2010 2009 Weighted Weighted Average Average Number of Exercise Number of Exercise Options Price Options Price Outstanding and exercisable, beginning of year 474,150 $ 6.56 427,500 $ 6.76 Issued – – 130,900 6.20 Exercised – – (3,000) 4.00 Cancelled or expired (55,650) 6.90 (81,250) 7.12 Outstanding and exercisable, end of year 418,500 $ 6.51 474,150 $ 6.56 Available for grant, end of year 1,869,500 1,813,850 The stock options issued during 2009 were stock options issued to former stock option holders of ClubLink Corporation, which were transferred to ClubLink Enterprises in conjunction with the privatization of ClubLink Corporation. As at December 31, 2010, the outstanding and exercisable stock options have the following terms: 63 Options Exercise Outstanding Price $ Expiry Date 62,500 4.06 2011 44,000 5.15 2011 11,000 6.05 2011 15,000 7.25 2011 11,000 7.00 2012 25,000 7.25 2013 250,000 7.25 2014 418,500 6.51 As at December 31, 2009, the outstanding and exercisable stock options had the following terms: Options Exercise Outstanding Price $ Expiry Date 1,100 6.00 2010 22,550 6.45 2010 22,000 7.25 2010 62,500 4.06 2011 44,000 5.15 2011 11,000 6.05 2011 11,000 7.00 2012 300,000 7.25 2014 474,150 6.56 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 66. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 12. Share Capital and Contributed Surplus (cont’d) (D) Earnings per share The dilutive effect of outstanding stock options per share is based on the application of the treasury stock method. Under this method, the proceeds from the exercise of such securities are assumed to be used to purchase common shares of ClubLink. Based on this approach, the effect of stock options on the weighted average common shares on the years ended December 31, 2010 and 2009 are as follows: (thousands of common shares) 2010 2009 Weighted average common shares outstanding – basic 27,976 25,113 Effect of stock options 33 26 Weighted average common shares outstanding – diluted 28,009 25,139 13. Employee Benefit Plans The rail, tourism and port operations are required to participate in a multi-employer benefit plan sponsored by the Railroad Retirement Board for employees in the United States. The Company contributed 19.75% (2009 – 19.75%) of eligible compensation for the year ended December 31, 2010. The amounts contributed to the plan by the Company for the years ended December 31, 2010 and 2009 were US$1,073,000 and US$1,179,000, respectively. The rail, tourism and port operations also participate in two benefit plans covering substantially all of its employees covered by collective bargaining agreements. These plans are both contributory and non-contributory multi-employer plans. The plans provide health care and other welfare benefits during the employees’ working lives and, for a monthly premium, benefits after retirement. Amounts charged to benefit costs and contributed to the plans for the years ended December 31, 2010 and 2009 totalled US$735,000 and US$794,000, respectively. The Company makes monthly contributions to the plans based on hours worked by employees. 64 14. Interest, net (thousands of dollars) 2010 2009 Revolving secured debt $ 1,049 $ 668 Non-revolving secured debt 19,401 20,276 Term loan 1,428 1,636 Capital leases 680 770 Notes payable 199 819 Amortization of deferred financing costs 762 496 Other 20 143 23,539 24,808 Interest capitalized to properties under construction – (114) Interest expense 23,539 24,694 Interest income (1,431) (1,297) Interest, net $ 22,108 $ 23,397 15. Supplementary Cash Flow Information (thousands of dollars) 2010 2009 Interest paid $ 22,749 $ 24,274 Income taxes paid – US Authority nil 3,195 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 67. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 16. Related Party Transactions The Company receives managerial and consulting services from Morguard Corporation (“Morguard”). The Chairman and Chief Executive Officer of the Company is a significant shareholder of Morguard. The Company paid a management fee of $240,000 for the year ended December 31, 2010 (2009 – $240,000), under a contractual agreement which is included in operating expenses. The Company has provided an unsecured revolving demand credit facility to Morguard in the amount of $30,000,000, with no fixed maturity date. The facility bears interest at ClubLink’s short-term borrowing rate plus 10 basis points. During the years ended December 31, 2010 and 2009 there were no advances or repayments under this facility. Morguard has provided an unsecured revolving demand credit facility to ClubLink in the amount of $30,000,000 with no fixed maturity date. This facility bears interest at Morguard’s short-term borrowing rate plus 10 basis points. The highest balance outstanding during 2010 on this facility was $28,400,000 (2009 – $28,400,000). Interest incurred for the year ended December 31, 2010 amounted to $199,000 (2009 – $766,000). The amount outstanding on this facility as of December 31, 2010 is nil (2009 – $28,400,000). Paros Enterprises Limited (“Paros”) is a privately owned company whose sole shareholder is the Chairman and Chief Executive Officer of the Company and is also the controlling shareholder of the Company. The Company has provided an unsecured revolving demand credit facility to Paros in the amount of $5,000,000, with no fixed maturity date. During the year ended December 31, 2009, $5,000,000 was advanced under this facility and was repaid during 2010. This facility bears interest at prime plus 1%. Interest earned during the year ended December 31, 2010 amounts to $123,000 (2009 – $48,000). Paros has provided an unsecured revolving demand credit facility to ClubLink in the amount of $5,000,000 with no fixed maturity date. A maximum amount of nil (2009 – $3,341,000) was outstanding during 2010. There was a nil balance outstanding as of December 31, 2010 and December 31, 2009. This facility bears interest at prime plus 1%. Interest incurred for the year ended December 31, 2010 amounted to nil (2009 – $53,000). As at December 31, 2010, $188,000 (2009 – $192,000) in vendor take-back mortgages was outstanding relating to sales of Lakeside at Rocky Crest fractions to employees of ClubLink at a 6.84% (2009 – 6.84%) interest rate. 65 All related party transactions have been recorded at the exchange amounts. 17. Segmented Information ClubLink’s reportable segments are strategic business units that offer different services and/or products. They are managed separately because each segment requires different strategies and involves different aspects of management expertise. The corporate operations include corporate office and other management and corporate investment operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Any inter- segment transfers are recorded at cost. Geographical information is not separately presented due to the fact that the industry segments operate in separate and distinct geographical segments on their own with the exception of the United States operations of the golf club and resort operations segment which is not sufficiently material to be presented separately. All other golf club and resort operations are located in Ontario and Quebec. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 68. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 17. Segmented Information (cont’d) For the Year Ended December 31, 2010 Golf Club Rail, Tourism and Resort and Port Corporate (thousands of dollars) Operations Operations Operations Total Operating revenue $ 153,366 $ 36,537 $ – $ 189,903 Expenses 118,119 19,267 2,659 140,045 Net operating income (loss) 35,247 17,270 (2,659) 49,858 Net membership fee income 13,781 – – 13,781 EBITDA 49,028 17,270 (2,659) 63,639 Amortization (16,932) (3,857) – (20,789) Land lease rent (5,285) – – (5,285) Segment earnings (loss) before interest, other income and income taxes $ 26,811 $ 13,413 $ (2,659) 37,565 Interest, net (unallocated) (22,108) Other income (unallocated) 344 Provision for income taxes (unallocated) (3,959) Net earnings $ 11,842 Capital expenditures $ 5,832 $ 8,081 $ – $ 13,913 66 For the Year Ended December 31, 2009 Golf Club Rail, Tourism and Resort and Port Corporate (thousands of dollars) Operations Operations Operations Total Operating revenue $ 147,414 $ 42,798 $ – $ 190,212 Expenses 114,828 22,221 1,726 138,775 Net operating income (loss) 32,586 20,577 (1,726) 51,437 Net membership fee income 12,829 – – 12,829 EBITDA 45,415 20,577 (1,726) 64,266 Amortization (17,527) (4,006) – (21,533) Land lease rent (5,024) – – (5,024) Segment earnings (loss) before interest, other expense, income taxes and non-controlling interest $ 22,864 $ 16,571 $ (1,726) 37,709 Interest, net (unallocated) (23,397) Other expense (unallocated) (1,807) Provision for income taxes (unallocated) (2,002) Non-controlling interest (unallocated) 652 Net earnings $ 11,155 Capital expenditures $ 11,170 $ 5,725 $ – $ 16,895 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 69. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 17. Segmented Information (cont’d) December 31, 2010 December 31, 2009 Rail, Rail, Golf Club Tourism Golf Club Tourism and Resort and Port Corporate and Resort and Port Corporate (thousands of dollars) Operations Operations Operations Total Operations Operations Operations Total Segment capital assets $ 468,771 $ 72,264 $ – $ 541,035 $ 464,717 $ 72,007 $ – $ 536,724 Segment assets $ 534,464 $ 76,001 $ 947 $ 611,412 $ 531,803 $ 85,169 $ 10,781 $ 627,753 18. Operating Lease Commitments Land Lease Rent ClubLink is committed to the following minimum land lease rentals for the next five years and thereafter as follows: Golf Club Rail, Tourism and Resort and Port (thousands of dollars) Operations (CDN) Operations (US) 2011 $ 4,678 $ 250 2012 4,760 218 2013 4,850 200 2014 4,943 192 2015 5,039 188 2016 and thereafter 63,155 2,943 $ 87,425 $ 3,991 67 The above land lease arrangements for the golf club and resort operations are subject to standard lease termination clauses. ClubLink has two non-cancellable leases for tidelands with the State of Alaska, dated June 1, 1996 and June 1, 2004, which expire in 2051, and a non-cancellable lease for tidelands with the City of Skagway, which expires in 2023, with certain rights to renew. Guarantees In the normal course of operations, the Company executes agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets, sales of services, securitization agreements and underwriting and agency agreements. The Company has also agreed to indemnify its directors and certain of its officers and employees. The nature of substantially all of the indemnification undertakings prevents the Company from making a reasonable estimate of the maximum potential amount that could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. 19. Capital Management ClubLink’s objective is to ensure that capital resources are readily available to meet obligations as they become due to complete its approved capital expenditure program and to take advantage of attractive acquisitions as these opportunities arise. Certain secured debt obligations of the golf club and resort operations segment have restrictive covenants that require maintenance of certain financial ratios. These covenants include debt service ratios, debt to adjusted equity/asset ratios and a minimum total equity requirement. For all of 2009 and 2010, the Company was in compliance with these debt covenants. The rail, tourism and port operations segment also has certain restrictive covenants on its secured debt. These covenants include a minimum net worth ratio and a debt service ratio. White Pass was in compliance with its covenants for all of 2009 and 2010. There were no changes in the Company’s approach to capital management during the year. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 70. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 19. Capital Management (cont’d) ClubLink monitors capital on the basis of the net debt-to-adjusted equity ratio. This ratio is calculated as net debt divided by adjusted equity. Net debt is calculated as gross debt less cash and loan receivable from affiliated company. Adjusted equity is comprised of all components of shareholders’ equity (i.e. share capital, contributed surplus, retained earnings and accumulated other comprehensive loss) and deferred membership fees, less a related statutory tax provision. The Company sets its capital structure in proportion to risk. It manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, purchase and cancel shares pursuant to issuer bids, issue new shares, or sell assets to reduce debt. When considering the declaration of dividends, the amount of free cash flow from operating activities is considered. ClubLink’s objective is to maintain a net debt-to-adjusted equity ratio of less than 2.50, in order to maintain access to financing at a reasonable cost. The net debt-to-adjusted equity ratios at December 31, 2010 and December 31, 2009 are as follows: (thousands of dollars) 2010 2009 Revolving secured debt $ 48,500 $ 26,937 Non-revolving secured debt 265,398 275,525 Term loan 36,090 31,828 Capital lease obligations 9,825 13,012 Notes payable – 28,400 Loan receivable from affiliated company – (5,000) Cash (1,447) (10,670) Net debt (A) $ 358,366 $ 360,032 68 Share capital $ 105,613 $ 106,191 Contributed surplus – 188 Retained earnings and accumulated other comprehensive loss 50,184 48,181 Deferred membership fees 57,356 59,334 Less: tax provision at statutory income tax rates (25.64%; 2009 – 25.64%) (14,706) (15,213) Adjusted equity (B) $ 198,447 $ 198,681 Net debt-to-adjusted equity ratio (A/B) 1.81 1.81 Both operating segments have revolving credit arrangements which are used to fund operations during the off season. This allows each segment the flexibility to manage its highly seasonal cash inflows and regular year round disbursements while providing appropriate returns to the shareholder. Cash flows considered surplus to the long-term needs of the business segment are generally utilized in corporate operations. ClubLink has the potential to access financing from related party companies such as Morguard and Paros, as needed. ClubLink funds its quarterly dividend by way of cash flows received from its business segments. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 71. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 20. Financial Instruments and Risk Management Categories of financial assets and liabilities Pursuant to GAAP, financial instruments are classified into one of the following five categories: held-for-trading, held to maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. The carrying values of the Company’s financial instruments on the consolidated balance sheets are classified into the following categories: (thousands of dollars) 2010 2009 Held-for-trading (1) $ 1,447 $ 10,670 Loans and receivables (2) 9,043 14,171 Financial assets available-for-sale (3) 560 560 Other financial liabilities (4) 364,686 377,173 (1) Includes cash. (2) Includes accounts receivable and mortgages and loans receivable. (3) Includes other long-term investments included in other assets. (4) Includes accounts payable and accrued liabilities, secured debt and notes payable. A portion of the accounts receivable balance has been pledged in conjunction with the assignment of certain capital assets as collateral for secured debt. Fair values The Company has determined, using considerable judgment, the estimated fair values of its financial instruments based on the valuation methodologies which are described below. The fair values of ClubLink’s financial instruments approximate their carrying values for financial statement purposes. The methods and assumptions used to estimate the fair value of each type of financial instrument are as follows: 69 The fair values of cash, accounts receivable, accounts payable and accrued liabilities, and revolving secured debt approximate their carrying values given their short-term maturities. The carrying value of mortgages and loans receivable was assumed to approximate fair value as they bear interest at current market rates. The Company’s long-term portfolio investment is accounted for using the cost method which approximates its fair value. The fair value of non-revolving secured debt was estimated based on the discounted cash flows of the debt at the Company’s estimated incremental borrowing rates for debt of the same remaining maturities. The carrying value of notes payable was assumed to approximate fair value as they incur interest at current market rates. Financial instruments recorded at fair value on the consolidated balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 – valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities. Level 2 – valuation techniques based on inputs that are quoted prices of similar instruments in active markets; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 – valuation techniques with significant unobservable market inputs CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 72. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 20. Financial Instruments and Risk Management (cont’d) Fair values (cont’d) Since the long-term investment relates to a private company, the valuation techniques for this investment are judgmental, using unobservable market inputs. There have been no transfers in the year between levels. Total financial assets/financial liabilities at As at December 31, 2010 Level 1 Level 2 Level 3 fair value Financial assets Cash $ 1,447 $ – $ – $ 1,447 Long-term investments – – 560 560 Total financial assets $ 1,447 $ – $ 560 $ 2,007 Financial liabilities – nil $ – $ – $ – $ – Total financial assets/financial liabilities at As at December 31, 2009 Level 1 Level 2 Level 3 fair value Financial assets Cash $ 10,670 $ – $ – $ 10,670 Long-term investments – – 560 560 Total financial assets $ 10,670 $ – $ 560 $ 11,230 70 Financial liabilities – nil $ – $ – $ – $ – Risks arising from financial instruments and risk management The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate risks), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. Risk management is the responsibility of the corporate finance department whose function is to identify, evaluate and, where appropriate, hedge financial risks. The Company’s overall risk management program focuses on establishing policies to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company aims to develop a disciplined control environment in which all employees understand their roles and obligations. Risks are monitored and are regularly discussed with the board of directors. Foreign exchange risk As discussed in note 1, the rail, tourism and port operations have a reporting currency in U.S. dollars. During 2010, the Company has made two golf club acquisitions in Florida. Therefore, fluctuations in the U.S. dollar exchange rate will impact the earnings of ClubLink. For the year ended December 31, 2010, if the Canadian dollar had weakened (strengthened) 10% against the U.S. dollar, all other variables held constant, the after tax earnings would have increased (declined) by $1,056,000 (2009 – $735,000). CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 73. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 20. Financial Instruments and Risk Management (cont’d) Interest rate risk The following debt instruments have variable interest rates: (thousands of dollars) 2010 2009 Revolving secured debt (2010 – LIBOR plus 215 basis points or 2.41%; 2009 – US Prime plus 50 basis points or one month LIBOR plus 335 basis points, both subject to a minimum floor of 5.0%) $ 5,558 $ 7,883 Revolving secured debt (BA’s plus 200 basis points; prime plus 75 basis points) 42,942 19,054 Term loan 2010 – LIBOR plus 300 basis points or 3.26%; 2009 – LIBOR plus 345 basis points subject to a minimum floor of 5.0%) 36,090 31,828 Notes payable to related parties (Prime plus 210 basis points) – 28,400 $ 84,590 $ 87,165 For the year ended December 31, 2010, an increase (decrease) of 100 basis points of each the Canadian and U.S. prime would have increased (decreased) interest expense by $564,000 (December 31, 2009 – $294,000). The objective of the Company’s interest rate management activities is to minimize the volatility of the Company’s earnings. Credit risk Credit risk arises from cash held with banks and financial institutions, as well as credit exposure to trade accounts receivable and 71 mortgages and loans receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing credit risk is to prevent losses in financial assets. It is ClubLink’s experience that the credit worthiness of its member accounts receivable balances is very good because it has the ability to suspend the playing and charging privileges of members who have overdue accounts in order to manage credit risk exposure to its members. Further, the Company collects deposits on group functions such as corporate events, banquets and resort stays to help mitigate this risk. The rail, tourism and port operations have historically had very few bad debts because of its strong relationships with the cruise lines and related travel groups. The credit risk associated with mortgages and loans receivable is considered minimal as they are adequately secured. Collateral for mortgages and loans receivable include a charge on the underlying asset for vendor take-back mortgages and loans and the underlying security for share purchase loans. The carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the statement of earnings within operating expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts receivable. Subsequent recoveries of amounts previously written off are credited to the allowance account. The following table describes the changes in the allowance for doubtful accounts receivable: (thousands of dollars) 2010 2009 Balance, beginning of year $ 425 $ 331 Increase in allowance through bad debt expense 178 166 Collection costs (15) (5) Bad debt write-offs (161) (67) Balance, end of year $ 427 $ 425 CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 74. Clublink_AR2010_pgs14-72_v2.3.qxd:AR 2010 4/4/11 10:08 AM Page 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 20. Financial Instruments and Risk Management (cont’d) Credit risk (cont’d) The following table sets forth details of the age of receivables that are not overdue as well as an analysis of overdue amounts and related allowance for doubtful accounts: (thousands of dollars) 2010 2009 Accounts receivable Current $ 2,445 $ 1,869 Past due for more than one day but not more than 60 days 569 416 Past due for more than 60 days 651 563 Less: allowance for doubtful accounts (427) (425) Subtotal 3,238 2,423 Mortgages and loans receivable Current 5,805 11,753 Past due – 31 Less: allowance for doubtful accounts – (36) Subtotal 5,805 11,748 Total loans and receivables $ 9,043 $ 14,171 Liquidity risk Liquidity risk arises through excess of financial obligations over available financial assets due at any point in time. The Company’s objective 72 in managing liquidity risk is to maintain sufficient readily available cash reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining sufficient cash and through the availability of funding from committed credit facilities. The Company and its subsidiaries are subject to risks associated with debt financing, including the possibility that existing mortgages may not be refinanced or may not be refinanced on as favourable terms or with interest rates as favourable as those of the existing debt. The Company and it subsidiaries mitigate these risks by its continued efforts to stagger and to extend the maturity profile of its secured debt, enhance the value of its real estate properties and foster excellent relations with its lenders. The Company believes that cash on hand, future free cash flows generated by operations and availability under its revolving operating lines of credit will be adequate to meet its financial obligations. The Company has financial liabilities with varying contractual maturity dates. Total financial liabilities at December 31, 2010 based on contractual undiscounted payments are as follows: 2016 and (thousands of dollars) 2011 2012 2013 2014 2015 thereafter Total Accounts payable and accrued liabilities $ 17,755 $ – $ – $ – $ – $ – $ 17,755 Revolving secured debt 5,558 42,942 – – – – 48,500 Non-revolving mortgages – principal 12,241 13,695 15,083 15,690 16,296 192,393 265,398 Non revolving mortgages – interest 18,639 17,714 16,681 15,598 14,435 73,669 156,736 Term loan – principal 2,841 2,841 2,841 2,841 2,841 21,885 36,090 Term loan – interest 1,140 1,046 953 860 766 2,446 7,211 Capital lease obligations – principal 4,199 2,775 1,839 627 354 31 9,825 Capital lease obligations – interest 471 243 128 39 12 – 893 $ 62,844 $ 81,256 $ 37,525 $ 35,655 $ 34,704 $ 290,424 $ 542,408 21. Contingencies From time to time, ClubLink and certain of its subsidiaries, employees, officers and/or directors are defendants in a number of legal actions arising in the ordinary course of operations. In the opinion of management, it is expected that the ultimate resolution of such pending legal proceedings will not have a material effect on ClubLink’s consolidated financial position. CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 75. BOARD OF DIRECTORS SENIOR OFFICERS PATRICK S. BRIGHAM (b, c) ClubLink Enterprises Limited PAUL CAMPBELL (b, c) K. (RAI) SAHI Chairman and Chief Executive Officer DAVID A. KING (a) ROBERT VISENTIN JOHN LOKKER (a) Chief Financial Officer SAMUEL J.B. POLLOCK (a, b) EUGENE N. HRETZAY Vice President, General Counsel and Secretary K. (RAI) SAHI President, White Pass and Yukon Route DONALD W. TURPLE (c) ROBERT WRIGHT Vice President JACK D. WINBERG (b, c) (a) Audit Committee ClubLink Enterprises Limited has a strategic objective to (b) Corporate Governance and Compensation Committee Golf Club and Resort Operations EDGE M. CARAVAGGIO (c) Environmental, Health and Safety Committee maximize shareholder value over a five to ten year horizon, though the Company may monetize an investment when business Vice President, Operations SCOTT DAVIDSON conditions present a suitable opportunity. ClubLink is engaged in golf club and resort operations under CORPORATE INFORMATION Vice President, Corporate Operations CHARLES F. LORIMER the trademark “ClubLink One Membership More Golf”. ClubLink Executive Office Vice President, Sales & Marketing is Canada’s largest owner and operator of golf clubs with 48½, 73 18-hole equivalent championship and six 18-hole equivalent 15675 Dufferin Street academy courses at 41 locations, primarily in Ontario, Quebec King City, Ontario L7B 1K5 NEIL E. OSBORNE and Florida. Tel: (905) 841-3730 Vice President, Clubhouse Operations ClubLink is also engaged in rail, tourism and port operations Fax: (905) 841-1134 Websites: based in Skagway, Alaska, which operates under the trade name “White Pass & Yukon Route.” The railway stretches approximately Rail, Tourism and Port Operations clublinkenterprises.ca/com clublink.ca/com MICHAEL D. BRANDT 177 kilometres (110 miles) from Skagway, Alaska, through British wpyr.com Senior Vice President, Planning & Administration Columbia to Whitehorse, Yukon. In addition, ClubLink operates three docks primarily for cruise ships. Investor Relations ED C. HANOUSEK Contact: Robert Visentin Superintendent, Rail Operations Tel: 905-841-5360 Fax: 905-841-1134 Email: rvisentin@clublink.ca CONTENTS 1 Financial Highlights 2 Chairman’s Message Bankers 4 ClubLink Establishes a Florida Region HSBC Bank Canada 5 Heron Bay Golf Club – Florida 6 ClubLink in Sun City Center – Florida 8 Glendale Joins ClubLink Wells Fargo Bank Alaska Annual Meeting of Shareholders10 Your Passport to More Excitement at White Pass Auditors12 Map of Canadian Golf Club and Resort Locations13 Golf Club and Resort Property Listing Annual Meeting of Shareholders of ClubLink Enterprises14 Management’s Discussion and Analysis of Financial Condition and Results of Operations Deloitte & Touche LLP Limited will be held at 11 a.m. on May 19, 2011 at King Valley Golf Club, 15675 Dufferin Street, King City, Ontario, L7B 1K5.47 Management’s Responsibility for Financial Reporting Stock Exchange Listings47 Independent Auditor’s Report48 Consolidated Balance Sheets4949 Consolidated Statements of Earnings and Comprehensive Earnings Consolidated Statements of Retained Earnings and Accumulated Other Comprehensive Loss Common shares: TSX: CLK Transfer Agent50 Consolidated Statements of Cash Flows51 Notes to Consolidated Financial Statements Canadian Stock Transfer Company, Inc.73 Board of Directors, Senior Officers, Corporate Information and Location of Annual Meeting of Shareholders CLUBLINK ENTERPRISES LIMITED ANNUAL REPORT 2010
  • 76. Your Passport to C LU B L I N K ENTERPRISES LIMITED 15675 Dufferin Street, King City, Ontario, Canada L7B 1K5 Tel 905 841 3730 Fax 905 841 1134 Clubhouse at Club RenaissancePhoto courtesy of The Greg Wilson Group more !