Ballard Power Systems Inc.
Notice of Annual Meeting,
Management Proxy Circular and
2008 Annual Report
TABLE OF CONTENTS
2008 ANNUAL REPORT
LETTER FROM IAN A. BOURNE, CHAIR OF THE BOARD............................................................................................ 1
LETTER FROM JOHN W. SHERIDAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER .......................................... 3
SUSTAINABILITY REPORT................................................................................................................................................ 8
BALLARD EMPLOYEE AWARDS OF EXCELLENCE FOR 2008 ................................................................................... 9
NOTICE OF ANNUAL MEETING ............................................................................................................................................... 10
MANAGEMENT PROXY CIRCULAR ........................................................................................................................................ 11
DEFINED TERMS ............................................................................................................................................................... 11
MATTERS TO BE VOTED UPON...................................................................................................................................... 11
ELECTION OF DIRECTORS .............................................................................................................................................. 12
APPOINTMENT OF AUDITORS........................................................................................................................................ 15
EQUITY BASED COMPENSATION MATTERS............................................................................................................... 16
Overgrant of Deferred Share Units ................................................................................................................................. 16
Consolidation of Current Equity-Based Compensation Plans......................................................................................... 17
Change in Number of Shares Issuable under the Consolidated Equity-Based Compensation Plans ............................... 19
VOTING ............................................................................................................................................................................... 20
Solicitation Of Proxies .................................................................................................................................................... 20
How To Vote .................................................................................................................................................................. 20
Execution And Revocation Of Proxies ........................................................................................................................... 20
Voting Of Shares And Exercise Of Discretion By Proxies ............................................................................................. 21
Voting Shares And Principal Shareholders ..................................................................................................................... 21
Interest Of Certain Persons Or Companies In Matters To Be Acted Upon ..................................................................... 21
BOARD AND COMMITTEES ............................................................................................................................................ 21
Board Composition And Nomination Process ................................................................................................................ 21
Majority Voting Policy ................................................................................................................................................... 22
Board Meetings............................................................................................................................................................... 22
Committees Of The Board .............................................................................................................................................. 22
Audit Committee ...................................................................................................................................................... 23
Management Development, Nominating & Compensation Committee.................................................................... 23
Corporate Governance Committee ........................................................................................................................... 23
CORPORATE GOVERNANCE........................................................................................................................................... 23
COMPENSATION................................................................................................................................................................ 24
Compensation Discussion And Analysis ........................................................................................................................ 24
Objectives of Our Executive Compensation Program .............................................................................................. 24
Philosophy and Objectives........................................................................................................................................ 24
How Executive Compensation is Determined .......................................................................................................... 24
Executive Pay Mix and the Emphasis on "At Risk" Pay........................................................................................... 25
The Use of Benchmarking ........................................................................................................................................ 25
Current Executive Compensation Elements.............................................................................................................. 26
Annual Salary ........................................................................................................................................................... 26
Annual Bonus for Executive Officers....................................................................................................................... 26
Long Term Incentives............................................................................................................................................... 28
Chief Executive Officer Compensation .................................................................................................................... 30
Termination and Change of Control Benefits ........................................................................................................... 31
Perquisites................................................................................................................................................................. 31
Retirement Benefits .................................................................................................................................................. 32
Total Executive Officer Compensation..................................................................................................................... 32
Minimum Share Ownership Guidelines.................................................................................................................... 32
Performance Graph ......................................................................................................................................................... 33
Executive Compensation................................................................................................................................................. 34
Incentive Plan Awards .................................................................................................................................................... 36
Pension Plan Benefits...................................................................................................................................................... 38
Termination And Change Of Control Benefits ............................................................................................................... 38
Employment Contracts ............................................................................................................................................. 38
Equity-Based Compensation Plans ........................................................................................................................... 39
Director Compensation ................................................................................................................................................... 40
Incentive Plan Awards .................................................................................................................................................... 43
Securities Authorized for Issuance under Equity Compensation Plans........................................................................... 43
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT ............................................................ 44
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS .................................................................... 44
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS ................................................................................ 44
i
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE............................................................................................. 45
ADDITIONAL INFORMATION ......................................................................................................................................... 45
PROPOSALS ........................................................................................................................................................................ 45
APPROVAL BY BOARD .................................................................................................................................................... 45
APPENDIX A DESCRIPTION OF CONSOLIDATED OPTION PLAN...................................................................................... 46
APPENDIX B DESCRIPTION OF CONSOLIDATED SDP ........................................................................................................ 51
FINANCIAL INFORMATION ...................................................................................................................................................... 56
MANAGEMENT’S DISCUSSION AND ANALYSIS ........................................................................................................ 57
CONSOLIDATED FINANCIAL STATEMENTS ............................................................................................................... 80
CORPORATE INFORMATION.................................................................................................................................................. 124
This document contains forward-looking statements, including our estimated product shipments,
revenue and operating cash consumption(1) for 2009, which are provided to enable external
stakeholders to understand Ballard's outlook as at the date of this circular and may not be
appropriate for other purposes. These forward-looking statements are based on the beliefs and
assumptions of Ballard's management and reflect Ballard's current expectations as contemplated
under section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such assumptions relate to Ballard's financial forecasts and
expectations regarding its product development efforts, manufacturing capacity, and market
demand, and include matters such as generating new sales, producing and delivering the expected
number of units, and controlling its costs.
These statements involve risks and uncertainties that may cause Ballard's actual results to be
materially different, including, without limitation, the rate of mass adoption of its products,
product development delays, changing environmental regulations, its ability to attract and retain
business partners and customers, its access to funding, increased competition, its ability to protect
its intellectual property, changes in its customers' requirements, foreign exchange impacts on its net
monetary assets and its ability to provide the capital required for product development, operations
and marketing. For a detailed discussion of these risk factors and other risk factors that could
affect Ballard's future performance, please refer to Ballard's most recent Annual Information
Form. Readers should not place undue reliance on Ballard's forward-looking statements and
Ballard assumes no obligation to update or release any revisions to these forward looking
statements, other than as required under applicable legislation.
(1) Operating cash consumption is not a GAAP measure. For a description of this measure, and the manner in which it may be
reconciled to a GAAP measure, see our Management’s Discussion and Analysis
ii
LETTER FROM IAN BOURNE
Chair of the Board
Fellow Shareholders:
Continued Progress in 2008
In my letter last year, I discussed the strategic decision made by the management team and Board to
change Ballard(cid:2)s direction, reducing our involvement with automotive fuel cell development and increasing
efforts to capture near term commercial market opportunities. In 2008, we completed this strategic re-
positioning of Ballard and also progressed in strengthening the financial base of the company.
The automotive transaction which closed in January, resulted in a $97 million gain through the
cancellation of approximately 30% of Ballard’s outstanding common shares, and enabled the company to
shed the challenges of costly automotive fuel cell research and development, against the backdrop of a long
and uncertain automotive commercialization timeline.
Ballard’s financial position was further strengthened by continued intensive efforts on reducing
operating cash consumption, and through the augmentation of cash reserves from the non-dilutive financing
transaction with Superior Plus that closed in December. This transaction resulted in net cash proceeds of
$34 million. With these transformational achievements in place, the Board feels Ballard is now well
positioned to focus on achieving market growth.
A third area of progress in 2008 relates to accelerating fuel cell product adoption. The company
entered into key new agreements, strengthening channel strategies and expanding geographic focus, both of
which serve as a solid foundation in the near term growth markets. These achievements are the result of
hard work and strong customer focus by the company’s employees and leadership team. John Sheridan’s
CEO letter provides further detail on these achievements.
Board Governance
At the beginning of 2008, your Board was very actively engaged in governance of the automotive
fuel cell asset sale transaction. All of our independent directors served on the Special Committee, which
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thoroughly reviewed key elements of the transaction and ultimately recommended the transaction for your
approval. The Board appreciated your support, reflected in the overwhelming positive vote of 97.8%.
The Board was also closely involved in reviewing and approving the details of the non-dilutive
financing with the Superior Plus Income Fund. The Audit Committee, comprised of independent directors,
reviewed the transaction and engaged a third party to provide a fairness opinion on the transaction. The
Audit Committee then recommended approval to the Board. This transaction was a very positive step
forward for Ballard, resulting in the bolstering of an already strong company balance sheet, without any
dilution to current shareholders. Once again, the Board appreciated your support with an overwhelmingly
positive 98.3% vote.
Most recently, management and the Board have been working closely together to develop a new
approach to the equity-based compensation plans. Our objective is to simplify and consolidate the plans and
to ensure that the correct funding model is in place to support appropriate incentive awards to the employees
and executive team, while at the same time supporting growth in shareholder value. The Board recently
approved an open market purchase plan for the long-term restricted share awards. Under the new plan, share
based incentive awards for employees will be funded through purchases of Ballard shares on the open
market, as opposed to the traditional method of using shares issued from treasury. This change will result in
a positive impact to shareholders by eliminating the historical approach which resulted in annual share
dilution associated with restricted share awards. Further, your Board has approved a policy change to pay
annual incentive bonuses in cash, rather than the traditional policy of payment in shares. We are able to
implement these changes now due to the company’s strengthened financial position, and we feel this is the
right time to start to make these changes given our focus on driving to profitability in the near term.
Our Employees
Every time I visit Ballard, I am struck by the passion, dedication, and enthusiasm shown by the
employees of Ballard. Once again this year, we are pleased to feature employees who went ‘Above and
Beyond’ with their 2008 achievements. This year’s winners can be found in the table following the Letter
from John Sheridan.
In closing, on behalf of my fellow Directors, thank you for your continued support and I look
forward to reporting next year on our 2009 performance.
"Ian A. Bourne"
IAN A. BOURNE
Chair of the Board of Directors
April 14, 2009
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LETTER FROM JOHN SHERIDAN
President & Chief Executive Officer
Fellow Shareholders:
Shortly after I was appointed CEO of Ballard in February 2006, the Ballard Team embarked on a
journey to transform Ballard from an ‘Automotive Fuel Cell Technology Company’ to a ‘Fuel Cell Products
Leader’. Prior to that time, Ballard had spent more than a decade engaged in extensive automotive fuel cell
powertrain R&D, with high levels of operating cash consumption. In fact, for the five year period from
2001-2005, Ballard's operating cash consumption averaged about $87 million per year.
Marked progress has been made over the past three years, culminating in several transformative
achievements in 2008:
(cid:2) Closing the automotive transaction in Q1, with a $97 million gain;
(cid:2) Accelerating fuel cell product adoption, as evidenced by doubling the 2007 level of product
shipments and closing a high volume supply agreement for back-up power for the Indian market;
(cid:2) Augmenting Ballard’s cash reserves by $34 million through the transaction with Superior Plus.
In 2008, as in the previous two years, we have said what we would do, and did what we said we
would do. We recognize that this is critical to rebuilding credibility, given the fuel cell sector’s
disappointing history of ‘over promise’ and ‘under delivery’. So with three years of focused efforts to
transform our company and build strong product and market capabilities, we believe that we are now
positioned to build a clean energy growth company—the tough economy notwithstanding.
3
2008 Highlights
In 2008, we shipped 1,855 fuel cell stack products, exceeding our guidance of 1,700 units. The
breakdown of our 2008 unit shipments was as follows:
(cid:2) Material handling: 508 units, up 149% over
2007
(cid:2) Back-up power: 720 units, up 260% over
2007
(cid:2) Residential cogeneration: 403 units, down
from 445 units in 2007
(cid:2) Automotive & Other: 224 units
As the numbers show, we posted significant growth in both material handling and back-up power. As
anticipated though, with the Japanese residential cogeneration market still several years away from
commercialization, product shipments in cogeneration were marginally down year over year. We see further
challenges ahead on the road to the successful commercialization of residential fuel cell cogeneration.
However, in material handling and back-up power we are exploiting commercial opportunities today -
supplying fuel cell products that provide strong customer value propositions.
In October, 2008, we signed a high volume supply agreement with ACME Tele Power and IdaTech,
which will drive growth in back-up power in 2009 and 2010. This agreement provides for the purchase of
approximately 1,000 fuel cell units in 2009 and 9,000 units in 2010, for wireless base station back-up power
in India, subject to meeting product design and acceptance specifications. This agreement represents a big
step forward for Ballard and the broader fuel cell sector. The ten thousand unit volume will enable significant
cost reductions and the new low cost, natural gas fuel cell product will be an important enabler for the
acceleration of product adoption in other stationary power markets.
In material handling, we renewed a supply agreement with Plug Power, our lead customer. Plug also
announced late last year a sale to Central Grocers of 220 Plug GenDriveTM units, using Ballard stacks, to
power the entire forklift truck fleet at the Central Grocers facility in Joliet, Illinois. This will be the first
facility designed from the "ground up" to fully operate fuel cell powered forklift trucks, showcasing the full
potential of the fuel cell solution to increase productivity in high throughput distribution centers.
In terms of financial results in 2008, our revenue was $59.6 million, which was within our revised
guidance range. Although this level of revenue was weaker than we originally projected, on a pro forma
basis excluding automotive engineering development revenue, this represents 17% revenue growth relative to
2007. Operating cash consumption was $29.3 million, down 23% from 2007, meeting our guidance range
target.
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Looking at these financial results for 2008 in the context of the 3 year journey that I referenced
earlier:
(cid:2) Pro forma revenue has grown 61%; and
(cid:2) Operating cash consumption has been reduced by 65%.
With this financial performance in 2008 and the Superior Plus transaction, which closed on
December 31st, we ended last year with a strong balance sheet:
(cid:2) $85.4 million in cash reserves;
(cid:2) $39 million in property, plant, and equipment; and
(cid:2) No debt.
With this balance sheet position and our reduced level of operating cash consumption, we can focus on the
execution of our growth plan, without the need for public market financing for the foreseeable future. This is
especially important given the broader market conditions and the ongoing crises in debt and equity markets.
Commitment to Grow Shareholder Value
With these solid fundamentals in place and the significant progress posted in 2008, a key question
that bothers the Ballard Team, along with our other shareholders, is: why aren’t these factors reflected in the
Ballard share price?
In 2008, the turbulence in the broader equity markets has affected Ballard, as it has most other
companies over the past year. Further, we also had a sharp decline in our share price late in December, when
an index fund liquidated a large holding of Ballard shares over a two-day period. This appears to have been
related to broader portfolio re-balancing activity and general financial market conditions, rather than a
reaction to any specific Ballard developments. The lack of resiliency in equity markets has made it very
difficult to recover from this impact. While this situation is very frustrating to all shareholders, it does
present a significant upside potential for shareholder value growth as we go forward.
Working to grow shareholder value is one of our key corporate priorities. We are sharply and
aggressively focused on driving to profitability in the near term. Also, as Ian mentioned in the Chairman’s
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Letter, we are implementing changes to our compensation plans that reduce the annual share dilution
pressures associated with short term and long term incentive compensation. These changes are described in
detail in the enclosed proxy circular.
Looking Forward – Building a Clean Energy Growth Company
With the repositioning of our company over the past three years and our strengthened financial
position, we are now focused on ‘building a clean energy growth company’. That has a ‘nice ring’, but what
does it really mean? Well, to the Ballard Team, it means:
(cid:2) Driving to profitability in the near term;
(cid:2)
Investing strategically to maintain product leadership, as with the FCgenTM 1300, the natural gas
reformate product being developed for the Indian market;
(cid:2) Demonstrating sustainable, strong revenue growth; and
(cid:2) Contributing to the economic base of the communities in which we operate, through jobs and
building our supply base.
A question that comes up frequently is: how will the current economic conditions affect this growth
direction? The first point to note is that our strong balance sheet and improved level of operating cash
consumption put us in the position of not having to look to public financial markets for financing for the
foreseeable future—this is a very positive situation. Secondly though, the weak and deteriorating economy
does present clear risks to our growth projections. With customers confronted by weaknesses in their
markets, credit challenges, and uncertainties about the future, this is clearly resulting in challenges with
respect to near term sales of our products. However, we are continuing to see evidence that companies will
invest in our clean energy solutions that improve their productivity and offer compelling economic payback.
Also, we are seeing governments investing in clean energy technology as part of economic stimulus
packages, and we believe that the fuel cell sector may benefit from these incentives. Overall, while we
remain positive about our 2009 growth opportunities, our optimism is guarded and we will be very vigilant
and ensure we are positioned to react quickly to the unfolding macroeconomic challenges.
Leading By Example
As always, an important priority for Ballard is our long held vision – The Power to Change the
World – which we intend to achieve through commercialization of our leading clean energy, fuel cell
products. We are confident that fuel cells will be an important part of the clean energy mix of the future. We
are already seeing deployments of our products in our priority markets contributing to help tackle the global
environmental and climate change challenges we all face. Some of the key environmental advantages our
products have demonstrated over the incumbent technologies include:
(cid:2) No need to store, handle and dispose of lead and acid;
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(cid:2) Elimination of particulates and noise from diesel generators;
(cid:2) Reduction in greenhouse gas emissions; and
(cid:2) More efficient energy use.
We recognize that in addition to the environmental benefits our products can bring on a global scale,
we ourselves have to set the example by improving our day-to-day operations, and by each making personal
choices that contribute to leaving the world a better place for our children. In 2008, we launched a Green
Initiative at Ballard, to help us focus on becoming a more sustainable company, and to help employees make
sustainable choices in their personal lives. We have added a new page in our report this year, which provides
a snapshot of our sustainability focus in 2008.
Finally, I’d like to thank you for your interest in Ballard and your continued support in these
challenging times. I look forward to speaking to you at our upcoming Shareholders Meeting and reporting
on our progress throughout 2009.
"John Sheridan"
JOHN SHERIDAN
President & CEO
Ballard Power Systems
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BALLARD’S VISION: Power to Change the World —
is what continues to drive the passionate employees at Ballard who have dedicated
their careers to the commercialization of fuel cell products. We are already seeing
deployments of our products helping to tackle the global environmental and
climate change challenges we all face. Ballard also recognizes that it is important
to lead by example, and as such we have launched an internal Green Team to
business, and to help employees make sustainable and informed choices in their
own lives. Together, we have the Power to Change our Environmental Footprint.
THE PILLARS OF BALLARD’S GREEN INITIATIVE
OUR PRODUCTS
cell products over incumbent technologies
PRODUCTS
OUR OPERATIONS
We will improve the way we operate our business to
minimize our environmental impacts
OPERATIONS
P E O P L E
hydrogen consumption, carbon footprint
OUR PEOPLE
We will promote participation in events, and provide access to information about
green choices we can make in our daily lives
ACHIEVEMENTS TO DATE
Beyond employee awards
GHG Impact study published on website
Lean manufacturing methods implemented
Carbon footprint baselines calculated for
Burnaby operations
manaufacturing plant, and laboratory
Active recycling program in place: paper,
cardboard, wood, metal, glass, drink
containers, electronics
Use of public transport encouraged
Bike racks and changing rooms provided to
encourage biking to work
Annual report & proxy circular
combined to save paper, published on
10% recycled content,
soy- based ink
OUR PRODUCTS IN ACTION
Commercialization of our clean energy fuel cell products is where
Ballard can make the biggest positive impact on the environment
For example, in December 2008, we announced BC Transit’s notice
to proceed on the build of 20 fuel cell hybrid buses that will be
deployed in time for the 2010 Olympic and Paralympic Winter
Games. Each bus will reduce CO2 emissions by 62% compared to
a conventional diesel bus reducing GHG emissions by 90 tonnes
of 1800 tonnes per year. About 1000 cars would have to switch
from conventional combustion engines to hybrids to achieve
the same impact.
Imagine the possibilities…
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“Above and Beyond” Winners
(cid:3) CUSTOMER SUCCESS
ACME & IDATECH (BACKUP POWER IN INDIA)
(cid:3) Caroline Andrewes
(cid:3) Brendan Burns
(cid:3)
Tony Cochrane
(cid:3)
(cid:3) Emerson Gallagher
(cid:3)
Ian Gilchrist
Ian Eldergill
(cid:3) Kerry Hillier
(cid:3) Seungsoo Jung
(cid:3) Karim Kassam
(cid:3) Dave Pauluzzi
(cid:3) George Skinner
(cid:3) Alfred Wong
BC TRANSIT OLYMPIC BUS PROGRAM (ZERO EMISSION BUS FLEET)
Janusz Blaszczyk
(cid:3) Denise Abasi
(cid:3) Bruce Bailey
(cid:3) Daljit Bawa
(cid:3)
(cid:3) Andrew Bogacki
(cid:3) Paul Cass
(cid:3)
(cid:3) Michael Ehmke
(cid:3) Ken Fezzi
(cid:3) Simon Gould
Jake De Vaal
(cid:3)
Jeff Grant
(cid:3) Edit Hicks
(cid:3) Perry Ho
(cid:3) Rob Holland
(cid:3) Kevin Hutton
(cid:3) Karl Ingelhart
(cid:3) Alejandro Jalandoon
(cid:3) Parminder Kambo
(cid:3) Colin Keddie
(cid:3)
Zoltan Kollar
(cid:3)
TJ Lawy
(cid:3) Karm Layegh
(cid:3) Mark Lee
(cid:3) Alan Loke
(cid:3) Paul Mann
(cid:3) Steve Mok
(cid:3) Ryan Paddon
(cid:3) Paul Peterson
(cid:3) Campbell Perry
(cid:3) Wayne Phan
(cid:3)
Jens Schiffner
(cid:3) Simon Shapira
(cid:3) Byron Somerville
(cid:3) Alex Tiekler
(cid:3) Eddy Tran
(cid:3) Christian Tuazon
(cid:3) Emilio Urmaza
(cid:3) Hung Vuong
(cid:3) Peter Wunder
(cid:3) MANUFACTURING LEADERSHIP
LEAN MANUFACTURING IMPLEMENTATION
(cid:3) Colm Murphy
(cid:3) Craig Padberg
(cid:3)
Jyoti Sidhu
(cid:3) PRODUCT & TECHNOLOGY LEADERSHIP
RESIDENTIAL COGENERATION PRODUCT DEVELOPMENT
(cid:3) Mike Abley
(cid:3) Dana Ayotte
(cid:3)
Irwin Bellosillo
(cid:3) Patricia Chong
(cid:3) Vesna Colbow
(cid:3) Geoff Crocker
(cid:3) Steve Gabrys
(cid:3)
Jeff Glandt
(cid:3) Ping He
(cid:3)
(cid:3) Rahim Jaffer
(cid:3) Matthew Klippenstein
Froilan Hernandez
(cid:3) FISCAL DISCIPLINE
(cid:3) Duarte Sousa
(cid:3) Kelly Whitehead
(cid:3)
Joanna Kolodziej
(cid:3)
Jitesh Kutty
(cid:3) Chetan Lad
(cid:3) Evelyn Lai
(cid:3) Mike Lauritzen
(cid:3)
Yeng Lim
(cid:3)
Frank Lin
(cid:3) Svetlana Loif
(cid:3) Brent Mackay
(cid:3) George Skinner
(cid:3)
Jielin Song
SUPERIOR PLUS TRANSACTION TEAM ($34M NON-DILUTIVE FINANCING)
(cid:3) Chris Hall
(cid:3) Stewart Hayne
(cid:3) Kerry Hillier
(cid:3) Ai-Le Leroux
(cid:3) Karen Mar
(cid:3)
Jay Murray
(cid:3) Pierre Robinson
(cid:3)
Elvira Soler
(cid:3) GREEN AWARD
(cid:3) BALLARD SPIRIT AWARD
CHEMICAL DISPOSAL / MANAGEMENT TEAM
(cid:3) Paul Beattie
(cid:3) Erin Rogers
(cid:3) Don Johnson
(cid:3)
Judy Giesbrecht
(cid:3)
Jyoti Sidhu
(cid:3) Byron Somerville
9
BALLARD POWER SYSTEMS INC.
9000 Glenlyon Parkway
Burnaby, British Columbia, Canada V5J 5J8
NOTICE OF ANNUAL MEETING
TO OUR SHAREHOLDERS:
Our 2009 Annual Meeting (the "Meeting") will be held at the Pan Pacific Hotel, 999 Canada Place,
Vancouver, B.C., on Tuesday, June 2, 2009 at 1:00 p.m. (Pacific Daylight Time) for the following
purposes:
1.
2.
3.
4.
5.
To receive the report of our directors;
To receive our audited financial statements for the financial year ended December 31, 2008 and
the report of our auditors thereon;
To elect our directors for the ensuing year;
To appoint our auditors for the ensuing year and to authorize our Audit Committee to fix the
remuneration of the auditors; and
To consider and, if deemed advisable, to pass ordinary resolutions to implement the equity-based
compensation matters described in the accompanying Management Proxy Circular.
In addition, shareholders will be asked to consider any amendment to or variation of a matter identified in
this Notice and to transact such other business as may properly come before the Meeting or any
adjournment thereof.
A detailed description of the matters to be dealt with at the Meeting, our 2008 Annual Report, our
consolidated financial statements for the year ended December 31, 2008 and the report of our auditors
thereon, and our 2008 Management’s Discussion and Analysis, are included with this Notice.
If you are unable to attend the Meeting in person and wish to ensure that your shares will be voted at the
Meeting, you must complete, date and execute the enclosed form of proxy and deliver it in accordance
with the instructions set out in the form of proxy and in the Management Proxy Circular accompanying
this Notice, so that it is received by Computershare Investor Services Inc. no later than 1:00 p.m. (Pacific
Daylight Time) on Friday, May 29, 2009.
If you plan to attend the Meeting you must follow the instructions set out in the form of proxy and in the
Management Proxy Circular to ensure that your shares will be voted at the Meeting.
DATED at Burnaby, British Columbia, April 14, 2009.
BY ORDER OF THE BOARD
"Glenn Y. Kumoi"
GLENN Y. KUMOI
Vice President, Human Resources,
Chief Legal Officer and Corporate Secretary
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MANAGEMENT PROXY CIRCULAR
dated as of April 14, 2009
DEFINED TERMS
In this Management Proxy Circular:
"Ballard", "Corporation", "we", "us" and "our" refer to Ballard Power Systems Inc.
"Beneficial Shareholders" means holders of our Shares that do not hold our Shares in their own name, but
instead, whose Shares are held on the Record Date by a bank, trust company, securities broker or other
nominee.
"Board" means the board of directors of Ballard.
"C$" refers to Canadian currency.
"DSU" means deferred share unit.
"$" or "dollars" refer to United States currency unless specifically stated otherwise.
"Meeting" means the 2009 annual meeting of our Registered Shareholders and includes any adjournment
thereof, unless otherwise indicated.
"NASDAQ" means the NASDAQ Stock Market LLC.
"Record Date" means 5:00 p.m. Pacific Daylight Time on April 14, 2009.
"Registered Shareholders" means registered holders of our Shares on the Record Date.
"RSU" means restricted share unit.
"Shares" means common shares without par value in the capital of Ballard.
"TSX" means the Toronto Stock Exchange.
"US$" refers to United States currency.
MATTERS TO BE VOTED UPON
Registered Shareholders or their duly appointed proxyholders will be voting on:
the election of directors to our Board;
the re-appointment of our auditors and authorization for our Audit Committee to fix the remuneration
of the auditors; and
•
•
•
the implementation of certain equity-based compensation matters.
As of the date of this Management Proxy Circular, we know of no amendment, variation or other
matter that may come before the Meeting other than the matters referred to in the Notice of Annual Meeting.
If any other matter is properly brought before the Meeting, it is the intention of the persons named in the
enclosed proxy to vote the proxy on that matter in accordance with their best judgment. Execution of the
enclosed proxy should not be construed as either approval or disapproval of the report or financial statements
referred to in the Notice of Annual Meeting.
With respect to all of the specific matters to be voted on, a simple majority of the votes (greater than
50%) cast by Registered Shareholders, by proxy or in person, will constitute approval of each matter.
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ELECTION OF DIRECTORS
At the Meeting you will be asked to elect nine directors. All of our nine nominees are currently
members of the Board. Each elected director will hold office until the end of our next annual shareholders’
meeting (or if no director is then elected, until a successor is elected) unless the director resigns or is
otherwise removed from office earlier. If any nominee for election as a director advises us that he or she is
unable to serve as a director, the persons named in the enclosed proxy will vote to elect a substitute director
at their discretion.
The following information pertains to our nominees for election as directors at the Meeting, as of
April 14, 2009. The number of Shares shown as being held by each nominee constitute the number
beneficially owned, or controlled or directed, directly or indirectly, by that nominee and such information has
been provided to us by that nominee.
Mr. Bourne’s principal occupation is corporate director, and he has been the Chair of the Board of Ballard since February 2006.
Mr. Bourne was also our lead director from October 2005 to February 2006. Previously, Mr. Bourne was the Executive Vice
President and the Chief Financial Officer of TransAlta Corporation (electricity generation and marketing) from January 1998 to
December 2006 and from January 1998 to December 2005, respectively. He has completed the Directors Education Program of the
Institute of Corporate Directors and has received his ICD.D designation.
Board and Committee
Membership
Board (Chair)
Audit
Corporate Governance
Management Development,
Nominating & Compensation
Attendance
Board Memberships(1)
8 of 8
9 of 9
4 of 4
6 of 6
100%
100%
100%
100%
Current: Wajax Income Fund; Wajax Limited; Canada
Pension Plan Investment Board; Canadian Oil Sands
Trust; Glenbow Museum; Calgary Philharmonic
Orchestra; The Calgary Foundation
Previous: Purolator Courier Ltd.; TransAlta Power LP;
TransAlta CoGen LP
Securities Held(2)
Year
2009
2008
Shares
26,824
1,824
DSUs
77,706
64,764
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
104,530
66,588
C$282,231
C$179,788
Mr. Kilroy is the Chief Executive Officer of Symcor Inc. (business process outsourcing services), a position he has held since
January 2005. Mr. Kilroy was the Chief Executive Officer of IBM Canada Ltd. (information technology) from April 2001 to
January 2005.
Board and Committee
Membership
Board
Audit (Chair)
Corporate Governance
Attendance
Board Memberships(1)
8 of 8
9 of 9
4 of 4
100%
100%
100%
Current: Symcor Inc.; The Conference Board of Canada
Previous: Canadian Council of Chief Executives
Securities Held(2)
Year
2009
2008
Shares
2,424
2,424
DSUs
42,844
36,162
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
45,268
38,586
C$122,224
C$104,182
Ian A. Bourne
Age: 61
Alberta, Canada
Director since: 2003
Independent
Edwin J. Kilroy
Age: 49
Ontario, Canada
Director since: 2002
Independent
12
Dr. Chong Sup
(C.S.) Park
Age: 61
California, U.S.A.
Director since: 2007
Independent
John W. Sheridan
Age: 54
B.C., Canada
Director since: 2001
Non-Independent
Dr. Park’s principal occupation is corporate director. Previously, Dr. Park was the Chief Executive Officer and Chairman of the
Board of Maxtor Corporation (storage solutions and hard disk drives) from November 2004 to May 2006. Dr. Park was also the
Managing Director, Investment Partner and Senior Advisor of H&Q Asia Pacific (private equity investment) from November 2002
to September 2004.
Board and Committee
Membership
Board
Management Development,
Nominating & Compensation
Attendance
8 of 8
6 of 6
100%
100%
Board Memberships(1)
Current: Brooks Automation, Inc.; Seagate Technology;
Smart Modular Technologies, Inc.; Computer Sciences
Corp.; Sand Force Inc.; American Leadership Forum
(Silicon Valley); Silicon Valley Community Foundation
Securities Held(2)
Year
2009
2008
Shares
17,091
11,366
DSUs
0
0
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
17,091
11,366
C$46,146
C$30,688
Mr. Sheridan is President and Chief Executive Officer of Ballard. Previously, Mr. Sheridan was our interim President and Chief
Executive Officer from October 2005 to February 2006 at which time he was appointed our President and Chief Executive Officer.
Mr. Sheridan was also Chair of our Board from June 2004 to February 2006.
Board and Committee
Membership
Attendance
Board Memberships(1)
Board
8 of 8
100%
Current: NewPage Corporation; AFCC Automotive Fuel
Cell Cooperation Corp.
Previous: Aliant Inc.; Bell Canada, Bell Actimedia, Bell
Distribution, Bell Express Vu, Bell Mobility, Bell West,
Bell Sygma UK Ltd; Encom Cable TV &
Telecommunications, plc; Manitoba Telecom Services
Inc.; MTS Communications Inc.; Photowatt Technologies;
Sun Media Corp. Ltd.
Securities Held(2)
Year
2009
2008
Shares
336,840
159,779
DSUs
57,943
57,942
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
394,783
217,721
C$1,065,914
C$587,847
Dr. Sinclair is the Executive Director of the Center for Digital Media of the Great Northern Way Campus a position she has held
since 2006. Previously, Dr. Sinclair was the Chair of the Canadian Telecommunications Policy Review Panel and a Strategic
Management Consultant from 2005 to 2006. Dr. Sinclair was also the General Manager, MSN of Microsoft Canada (internet
services) from September 2002 to October 2004.
Board and Committee
Membership
Board
Corporate Governance
Management Development,
Nominating & Compensation
Year
2009
2008
Shares
176
176
Dr. Geraldine B.
Sinclair
Age: 61
B.C., Canada
Director since: 2005
Independent
Attendance
Board Memberships(1)
8 of 8
4 of 4
6 of 6
100%
100%
100%
Current: TMX Group Inc.; Just Leapin Entertainment;
Social Sciences & Humanities Research Council, Canada;
Premier’s Technology Council , British Columbia
Previous: Canadian Foundation for Innovation; Genome
BC; Telus Corporation; BC Telecom; Canada Pension
Plan Investment Board
Securities Held(2)
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
25,531
20,478
C$68,934
C$55,291
DSUs
25,355
20,302
13
Mr. Smith is a part-time Commissioner of the British Columbia Securities Commission (provincial securities regulator), a position
he has held since July 2006. Mr. Smith was counsel with Lawson Lundell LLP (law firm) from May 2005 until April 2006, and
prior to that, he was a partner at Lawson Lundell LLP and predecessor firms practicing corporate, commercial and securities law.
He has completed the Directors Education Program of the Institute of Corporate Directors and has received his ICD.D designation.
Board and Committee
Membership
Board
Corporate Governance (Chair)
Management Development,
Nominating & Compensation
Attendance
Board Memberships(1)
8 of 8
4 of 4
6 of 6
100%
100%
100%
Current: Member of Executive Committee, British
Columbia Chapter, Institute of Corporate Directors
Previous: Scott Paper Limited; Pacific Forest Products
Limited
Securities Held(2)
Year
2009
2008
Shares
7,911
1,358
DSUs
14,841
14,839
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
22,752
16,197
C$61,430
C$43,732
Mr. Sutcliffe’s principal occupation is corporate director. Previously, Mr. Sutcliffe was the Chief Executive Officer of Sierra
Wireless, Inc. (electrical and electronic industrial products) from May 1995 to October 2005. From May 2001 to April 2005, he
was also the Chair of the Board of Sierra Wireless, Inc. He has completed the Directors Education Program of the Institute of
Corporate Directors and has received his ICD.D designation.
Board and Committee
Membership
Board
Audit
Management Development,
Nominating & Compensation
(Chair)
Attendance
Board Memberships(1)
8 of 8
9 of 9
6 of 6
100%
100%
100%
Current: Sierra Wireless, Inc.; E-Comm 911
Previous: Cellular Telecommunications and Internet
Association; BC Technology Social Venture Partners;
Premier’s Technology Council, British Columbia
Securities Held(2)
Year
2009
2008
Shares
3,600
3,600
DSUs
25,528
20,473
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
29,128
24,073
C$78,646
C$64,997
Mr. Suwyn is Chief Executive Officer and Chairman of the Board of NewPage Corporation (coated papers), positions he has
held since April 2006 and May 2005, respectively. Previously, Mr. Suwyn was the President of MARSUW LLC (consulting)
from November 2004 to April 2005. He was the Chief Executive Officer and Chairman of the Board of Louisiana-Pacific
Corporation (building products) from January 1996 to October 2004.
Board and Committee
Membership
Board
Audit
Attendance
7 of 8
6 of 9
88%
67%(4)
Board Memberships(1)
Current: NewPage Corporation; BlueLinx Corporation
Previous: Hope College Board of Trustees; Louisiana
Pacific Corporation; International Paper Company; Junior
Achievement Inc.; Junior Achievement International;
Kelly Cabinets; The Nature Conservancy of Oregon;
United Rentals Inc.
Securities Held(2)
Year
2009
2008
Shares
7,237
1,130
DSUs
35,019
35,018
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
42,256
36,148
C$114,091
C$97,600
David J. Smith
Age: 74
B.C., Canada
Director since: 2006
Independent
David B. Sutcliffe
Age: 49
B.C., Canada
Director since: 2005
Independent
Mark A. Suwyn
Age: 66
Florida, U.S.A.
Director since: 2003
Independent
14
Mr. Whitehead is the Chairman of Finning International Inc. (heavy equipment reseller). Previously, Mr. Whitehead was the
President and Chief Executive Officer of Finning International Inc. from 1999 to May 2008.
Board and Committee
Membership
Board
Audit
Attendance
5 of 8
6 of 9
63%(4)
67%(4)
Board Memberships(1)
Current: International Forest Products Inc.; INMET
Mining Corporation; Belkorp Enterprises Ltd.; Finning
International Inc.; Vancouver General
Hospital/University of British Columbia Hospital
Foundation
Previous: Terasen Inc.; British Columbia Pulp and Paper
Employee Relations Forum; Canadian Pulp and Paper
Association; Conference Board of Canada; Finlay Forest
Industries Inc.; Fletcher Challenge Canada Ltd.;
TimberWest Forest Ltd; Kinder Morgan Inc.
Securities Held(2)
Year
2009
2008
Shares
4,383
4,383
DSUs
36,916
31,861
Total of Shares and
DSUs
Total Value of Shares and
DSUs(3)
41,299
36,244
C$111,507
C$97,859
Douglas W.G.
Whitehead
Age: 62
B.C., Canada
Director since: 1998
Independent
(1) Previous board memberships are shown for the past five years.
(2) As of March 20, 2008 and April 14, 2009, respectively.
(3) Based on C$2.70 closing price of the Shares on the TSX on April 14, 2009.
(4) These directors attended more than 70% of the regularly-scheduled Board and committee meetings, however, they were unable to attend certain
extraordinary meetings scheduled on short notice in connection with the Superior Plus transaction.
APPOINTMENT OF AUDITORS
Our Audit Committee has recommended that KPMG LLP, Chartered Accountants, of 777 Dunsmuir
Street, Vancouver, British Columbia, be nominated at the Meeting for re-appointment as our external
auditors. Our Audit Committee will fix the remuneration of our external auditors if authorized to do so by
shareholders at the Meeting. It is expected that representatives of KPMG LLP will be present at the Meeting.
KPMG LLP was appointed as our external auditors in 1999. Total fees paid to KPMG in 2008 and 2007 are
set forth in the table below. We comply with the requirement regarding the rotation of our audit engagement
partner every five years. The current audit engagement partner at KPMG LLP may continue in his role until
the end of 2010.
The following table shows the fees we incurred with KPMG LLP in 2008 and 2007:
Type of Audit Fees
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
2008
(C$)
$415,187(1)
$13,995
$37,864(3)
Nil
2007
(C$)
$360,884
$143,058(2)
$132,130(3)
Nil
(1) The Audit Fees for 2008 includes services as a result of the AFCC Transaction and the Superior Plus Transaction.
(2) The Audit-Related Fees for 2007 primarily related to a special audit required as a result of the disposition of our Dearborn operations and for
Sarbanes-Oxley section 404 documentation.
(3) The Tax Fees for 2008 and 2007 related to tax advisory services and the filing of our 2007 Canadian provincial and federal and United States
state and federal tax returns.
15
EQUITY BASED COMPENSATION MATTERS
At the Meeting, shareholders will be asked to approve, by way of three separate ordinary resolutions,
the following three matters related to our equity-based compensation plans:
1.
2.
3.
Overgrant - ratification of the issuance to our independent Directors, during the period September
2006 to October 2008, of a total of 169,276 DSUs which were granted in excess of a specified limit
in our 2003 SDP;
Consolidation - the consolidation of our current nine equity-based compensation plans into one
consolidated option plan and one consolidated share distribution plan, having terms and conditions
similar to our nine current plans; and
Maximum Number of Shares Issuable – the conversion of our equity-based compensation plans from
fixed maximum number plans to rolling maximum percentage plans under which the maximum
number of Shares reserved for issuance is equal to 10% of the issued and outstanding Shares.
Each of these proposed actions is described below.
Overgrant of Deferred Share Units
In reviewing the status of Ballard’s equity-based compensation plans in connection with the recently
completed transaction with Superior Plus Income Fund ("Superior Plus"), the Corporation determined that a
total of 169,276 DSUs had been issued to directors in excess of a limitation set out in Ballard’s 2003 Share
Distribution Plan (the "2003 SDP"). This limitation, implemented at a time when Ballard’s share price was
above C$15.00, limited the number of Shares that may be reserved for issuance or issued to the directors of
the Corporation (other than directors who are also officers of Ballard or any of its subsidiaries) to 200,000
Shares (the "Maximum"). This limitation was administratively overlooked and, as DSUs are issued to
directors in lieu of cash compensation at the market price of the Shares on the date of issuance, the decline in
Ballard’s share price led to the issuance of 169,276 DSUs in excess of the Maximum.
DSUs were issued to directors in excess of the Maximum in respect of compensation payable over
three years, 2006, 2007 and 2008. The directors who received DSUs in excess of the Maximum, the cash
compensation they were entitled to receive and the DSUs issued to each of the directors (the "Overgrant") in
lieu of such cash compensation is specified below:
Director
Ian A. Bourne
Edwin J. Kilroy
Dr. Geraldine B. Sinclair
David J. Smith
David B. Sutcliffe
Mark A. Suwyn
Douglas W.G. Whitehead
Total
Cash Compensation
(C$)
DSUs Granted in Excess of
Maximum
$259,799.97
$130,295.88
$106,185.05
$76,930.63
$102,214.32
$90,939.07(1)
$98,543.08
$864,908.00
51,844
26,128
21,084
13,903
20,346
16,211
19,760
169,276
(1)
The cash compensation in respect of Mr. Suwyn’s Overgrant was originally payable as US$84,137.36. The Canadian dollar amount
disclosed above is calculated based on the Canadian dollar value of the DSUs at the time the DSUs were awarded.
In order to rectify the Overgrant, the Corporation must either:
(a)
cancel the DSUs included in the Overgrant and pay to each of the directors the cash
compensation (listed in the table above) that they were entitled to receive in respect of those
DSUs, reflecting the payment, on average, of approximately C$5.17 per DSU, as opposed to
16
the current trading price of the underlying Shares as at the date hereof, which is C$2.70 per
Share; or
(b)
obtain the required shareholder approval of the Overgrant, ratifying, confirming and
approving the grant of those DSUs on the same terms and conditions as previously granted.
The Board has determined that alternative (b) is in the best interests of the Corporation, as it is the
lower cost alternative and would conserve the Corporation’s cash. Shareholders are therefore being asked to
ratify, confirm and approve the Overgrant by passing the following ordinary resolution:
"BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1.
2.
The Overgrant be and is hereby ratified, confirmed and approved on the same terms and conditions
as previously granted.
Any one officer or director of the Corporation is authorized on behalf and in the name of the
Corporation to execute all such documents and to take all such actions as may be necessary or
desirable to implement and give effect to these resolutions or any part thereof."
In order for this ordinary resolution to be passed, it requires the positive approval of a simple majority
(greater than 50%) of the votes cast thereon at the Meeting.
Consolidation of Current Equity-Based Compensation Plans
In connection with the recently-completed transaction with Superior Plus, on December 31, 2008 the
Corporation adopted nine different equity-based compensation plans (collectively, the "Current Equity-
Based Compensation Plans"), which are substantially the same as the nine equity–based compensation
plans historically adopted by Ballard. The Current Equity-Based Compensation Plans consist of:
1.
the following share option plans (together, the "Current Option Plans"):
(a)
(b)
(c)
(d)
the 2002 Share Option Plan (the "2002 Option Plan");
the 2000 Share Option Plan (the "2000 Option Plan");
the 1997 Share Option Plan (the "1997 Option Plan"); and
the special purpose BGS Option Exchange Plan (the "BGS Option Exchange Plan"), which
supports Ballard options issued in respect of options previously issued with respect to one of
our subsidiaries, Ballard Generation Systems Inc. ("BGS"); and
2.
the following share distribution plans (together, the "Current SDPs"):
(a)
(b)
(c)
(d)
the 2003 SDP;
the 2000 Share Distribution Plan (the "2000 SDP");
the Deferred Share Unit Plan for Directors (the "Current DSU Plan for Directors");
the Deferred Share Unit Plan for Executive Officers (the "Current DSU Plan for Executive
Officers", and together with the Current DSU Plan for Directors, the "Current DSU
Plans"); and
(e)
the Restricted Share Unit Plan (the "Current RSU Plan").
Historically, when Ballard sought shareholder approval to reserve Shares for issuance under equity-
based compensation plans, it would adopt a new equity-based compensation plan rather than increasing the
number of Shares reserved for issuance under an existing equity-based compensation plan. This historical
approach has led to inconsistencies between the plans and these inconsistencies have led to difficulties in
administering all of these plans. In order to simplify these plans, simplify and streamline the Corporation’s
executive compensation and benefits disclosure for shareholders and other stakeholders, and to simplify the
Corporation’s administration of its equity-based compensation plans, the Corporation proposes to adopt two
equity-based compensation plans (together, the "Consolidated Equity–Based Compensation Plans") to
supersede and replace the nine Current Equity Compensation Plans as follows:
17
(a)
(b)
a consolidated share option plan (the "Consolidated Option Plan") to supersede and replace
the four Current Option Plans; and
a consolidated share distribution plan (the "Consolidated SDP") to supersede and replace
the five Current SDPs.
Set out in Appendix A is a discussion of the principal terms of the Consolidated Option Plan and the
major differences between it and the Current Option Plans. Set out in Appendix B is a discussion of the
principal terms of the Consolidated SDP and the major differences between it and the Current SDPs.
The Consolidated Option Plan consolidates the four Current Option Plans into a single plan under
which the number of Shares reserved and authorized for issue will be equal to the aggregate number of
Shares reserved and authorized under the Current Option Plans, at the time of adoption. Similarly, the
Consolidated SDP consolidates the five Current SDPs into a single plan under which the number of Shares
reserved and authorized for issue will be equal to the aggregate number of Shares reserved and authorized for
issue under the 2000 SDP and the 2003 SDP at the time of adoption.
As described in Appendices A and B to this Management Proxy Circular, if the Consolidated Equity-
Based Compensation Plans were adopted on April 14, 2009, a maximum of 8,846,108 Shares would have
been reserved and authorized for issue under the Consolidated Option Plan, of which 1,980,660 Shares
would have been available for future option grants, and 7,050,000 Shares would have been reserved and
authorized for issue under the Consolidated SDP, of which 1,980,660 Shares would have been available for
future awards of RSUs and DSUs.
Ballard is requesting that shareholders approve an ordinary resolution approving the Consolidated
Equity-Based Compensation Plans. Provided that the Consolidated Equity-Based Compensation Plans
receive the required shareholder and TSX approvals, all securities previously granted under the Current
Equity-Based Compensation Plans (the "Old Security Grants") will continue under the terms of the
Consolidated Equity-Based Compensation Plans.
The Board has determined that it is in the best interests of the Corporation to adopt the Consolidated
Equity-Based Compensation Plans and recommends that shareholders vote in favour of the following
ordinary resolution.
Shareholders are being asked to approve the adoption by the Corporation of the Consolidated Equity-
Based Compensation Plans by passing the following ordinary resolution:
"BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1.
2.
3.
4.
The Consolidated Share Option Plan (the "Consolidated Option Plan"), in the form approved by the
directors and described in the Company’s Management Proxy Circular dated April 14, 2009 and its
adoption by the Corporation is hereby authorized and approved.
The Consolidated Share Distribution Plan (the "Consolidated SDP"), in the form approved by the
directors and described in the Company’s Management Proxy Circular dated April 14, 2009 and its
adoption by the Corporation is hereby authorized and approved.
The Corporation be and is hereby authorized to make any necessary application to applicable
regulatory authorities and to the Toronto Stock Exchange regarding the adoption of the Consolidated
Option Plan, the adoption of the Consolidated SDP, the continuation of all outstanding equity-based
compensation previously granted under the Corporation’s equity-based compensation plans and any
other matters contemplated in this resolution, and any such applications made prior to the date
hereof, are hereby ratified, confirmed and approved.
Any one officer or director of the Corporation is authorized on behalf and in the name of the
Corporation to execute all such documents and to take all such actions as may be necessary or
desirable to implement and give effect to this resolution or any part thereof."
In order for this ordinary resolution to be passed, it requires the positive approval of a simple
majority (greater than 50%) of the votes cast thereon at the Meeting.
18
Change in Number of Shares Issuable under the Consolidated Equity-Based Compensation Plans
Ballard wishes to convert the Consolidated Equity-Based Compensation Plans from plans under
which a fixed maximum number of Shares are available for allotment and issuance to plans under which a
“rolling” maximum number of Shares are available for allotment and issuance. If the Consolidated Equity-
Based Compensation Plans are adopted, it is proposed that the maximum number of Shares reserved for
issuance under those plans (taken together) is a “rolling maximum” equal to 10% of the issued and
outstanding Shares.
The Board is shifting its focus to provide employees with a greater proportion of their equity-based
compensation in a manner which is not dilutive to shareholders. As a result, in March 2009 the Board
adopted the market-purchase based RSU plan described in the "Compensation" section of this Management
Proxy Circular. This shift towards using the market-purchase based RSU plan and paying annual bonus
awards in cash will significantly reduce dilution to shareholders. However, despite this shift, stock options
will remain a key component of our long-term incentive compensation. The number of Shares which are
reserved for issuance in respect of stock options was last increased in 2002 with the adoption of the 2002
Option Plan. Over the past seven years options have been granted in respect of the majority of these shares.
Accordingly, the 1,980,660 Shares remaining reserved for issue under future option grants is no longer
sufficient to enable Ballard to provide its employees and executives with long-term incentives in accordance
with its established practices.
At our special meeting in December 2008, shareholders approved the transfer of 1.25 million Shares
reserved for issuance from our 2002 Option Plan to our 2003 SDP. Ballard made this request of its
shareholders based on market conditions as they existed in October 2008 and in order to meet Ballard’s
short-term equity-based compensation requirements in the first quarter of 2009.
Since that time, the Board has shifted its focus as described above, and anticipates that the requested
change in the number of Shares available for issuance under the plans associated with the move to rolling
maximum percentage plans (with the aggregate maximum of 10% of the issued and outstanding Shares) will
meet Ballard’s requirements for the foreseeable future.
The proposal to convert the Consolidated Equity-Based Compensation Plans from fixed maximum
number plans to rolling maximum percentage plans will result in a change in potential dilution from 11.17%
(as at April 14, 2009) to 10% or less.
While potential dilution is one measure against which to assess whether a proposed change in the
number of Shares reserved for issuance is reasonable in the circumstances, Ballard understands that certain
investor advisory firms primarily rely on other measures to assess whether a proposed increase is reasonable
in the circumstances. Such a measure is the shareholder value transfer ("SVT") cost of the Shares reserved
for issuance under the plan. The SVT cost is calculated by using a binomial option pricing model to
determine the aggregate cost of the Shares reserved for issuance, and dividing that figure into the market
capitalization of Ballard. This SVT cost figure is then compared to an average figure for companies in the
same industry to assess whether this cost exceeds the industry average. Ballard’s analysis indicates that the
proposed increase in the number of Shares reserved for issuance will not result in Ballard’s SVT cost
exceeding the applicable industry average.
If the Consolidated Equity-Based Compensation Plans had been adopted on April 14, 2009 with the
proposed rolling maximum 10% limit, a maximum of 8,394,068 Shares would have been reserved and
authorized for issuance under the Consolidated Equity-Based Compensation Plans on that date (as the total
number of issued and outstanding shares of the Company on April 14, 2009 was 83,940,682 Shares). Of
these 8,394,068 Shares, 7,339,738 Shares would have been reserved for issuance on the exercise of then
outstanding options, DSUs and RSUs (representing 8.74% of the issued and outstanding Shares as of April
14, 2009) and 1,054,330 Shares would have remained available for issuance under options, DSUs and RSUs
that may be granted in the future (representing 1.26% of the issued and outstanding Shares as of that date).
The Board has determined that it is in the best interests of the Corporation to convert the
Consolidated Equity-Based Compensation Plans from fixed maximum number plans to rolling maximum
19
percentage plans and recommends that shareholders approve this change by voting in favour of the following
ordinary resolution:
"BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1.
2.
3.
The reservation of an aggregate maximum number of common shares of the Corporation (“Shares”)
equal to 10% of the Shares issued and outstanding from time to time for issuance under the
Consolidated Option Plan and the Consolidated SDP (collectively the "Consolidated Equity-Based
Compensation Plans") is hereby authorized and approved.
The Corporation be and is hereby authorized to make any necessary application to applicable
regulatory authorities and to the Toronto Stock Exchange regarding the reservation of Shares for
issuance under the Consolidated Equity-Based Compensation Plans and any other matters
contemplated in this resolution, and any such applications made prior to the date hereof, are hereby
ratified, confirmed and approved.
Any one officer or director of the Corporation is authorized on behalf and in the name of the
Corporation to execute all such documents and to take all such actions as may be necessary or
desirable to implement and give effect to this resolution or any part thereof."
In order for this ordinary resolution to be passed, it requires the positive approval of a simple
majority (greater than 50%) of the votes cast thereon at the Meeting.
SOLICITATION OF PROXIES
VOTING
This Management Proxy Circular is furnished in connection with the solicitation of proxies by our
management in connection with the Meeting to be held on Tuesday, June 2, 2009 at 1:00 p.m. Pacific
Daylight Time in Vancouver, British Columbia, Canada, or the date and place of any adjournment thereof.
We are soliciting proxies primarily by mail, but our directors, officers and employees may solicit proxies
personally, by telephone, by facsimile transmission or by other means of electronic communication. The
cost of the solicitation will be borne by us. The approximate date on which this Management Proxy Circular
and the related materials are first being sent to Registered Shareholders is May 8, 2009.
HOW TO VOTE
Only Registered Shareholders or their duly appointed proxyholders are permitted to vote at the
Meeting. Beneficial Shareholders are not permitted to vote at the Meeting as only proxies from Registered
Shareholders can be recognized and voted at the Meeting. You may vote as follows:
Registered Shareholders: If you are a Registered Shareholder you may vote by attending the
Meeting in person, or if you do not plan to attend the Meeting, by completing the proxy and delivering it
according to the instructions contained in the form of proxy and this Management Proxy Circular.
Beneficial Shareholders: If you are a Beneficial Shareholder you may only vote by carefully
following the instructions on the voting instruction form or proxy form provided to you by your stockbroker
or financial intermediary. If you do not follow the special procedures described by your stockbroker or
financial intermediary, you will not be entitled to vote.
EXECUTION AND REVOCATION OF PROXIES
A Registered Shareholder or the Registered Shareholder’s attorney authorized in writing or, where
the Registered Shareholder is a company, a duly authorized officer or attorney of that company, must execute
the proxy. In order to be effective, completed proxies must be deposited at the office of the registrar and
transfer agent for the Shares, being Computershare Investor Services Inc. ("Computershare"), Proxy Dept.,
100 University Avenue, 9th Floor, Toronto Ontario, M5J 2Y1 (Fax: within North America: 1-866-249-7775;
outside North America: 1-416-263-9524), not less than 48 hours (excluding Saturdays and holidays) before
the time of the Meeting. The individuals named as proxyholders in the accompanying form of proxy are
20
directors and officers of Ballard. A Registered Shareholder desiring to appoint a person (who need not
be a shareholder) to represent him or her at the Meeting, other than the persons named in the enclosed
proxy, may do so by inserting the name of such other person in the blank space provided in the proxy.
A proxy may be revoked by written notice executed by the Registered Shareholder or by his or her
attorney authorized in writing or, where the Registered Shareholder is a company, by a duly authorized
officer or attorney of that company, and delivered to:
• Computershare, at the address or fax number set out above, at any time up to and including the last
business day preceding the day of the Meeting at which the proxy is to be used;
•
•
the registered office of the Corporation at any time up to and including the last business day
preceding the day of the Meeting at which the proxy is to be used; or
the chair of the Meeting on the day of the Meeting and before any vote in respect of which the proxy
is to be used is taken.
A proxy may also be revoked in any other manner provided by law. Any revocation of a proxy will
not affect a matter on which a vote is taken before such revocation.
VOTING OF SHARES AND EXERCISE OF DISCRETION BY PROXIES
If you complete and deposit your proxy properly, then the proxyholder named in the accompanying
form of proxy will vote or withhold from voting the Shares represented by the proxy in accordance with your
instructions. If you do not specify a choice on any given matter to be voted upon, your Shares will be
voted in favour of such matter. The proxy grants the proxyholder the discretion to vote on
amendments to or variations of matters identified in the Notice of Annual Meeting and with respect to
other matters that may properly come before the Meeting.
VOTING SHARES AND PRINCIPAL SHAREHOLDERS
As of the Record Date of April 14, 2009 we had 83,940,682 Shares issued and outstanding, each
carrying the right to one vote. On a show of hands, every individual who is present as a Registered
Shareholder or as a representative of one or more corporate Registered Shareholders, or who is holding a
proxy on behalf of a Registered Shareholder who is not present at the Meeting, will have one vote, and on a
poll, every Registered Shareholder present in person or represented by proxy and every person who is a
representative of one or more corporate Registered Shareholders, will have one vote for each Share recorded
in the Registered Shareholder’s name on the register of shareholders, which is available for inspection during
normal business hours at Computershare and will be available at the Meeting.
As of the Record Date, to the knowledge of our directors and executive officers, no person
beneficially owns, controls or directs, directly or indirectly, Shares carrying more than 10% of the voting
rights attached to all issued and outstanding Shares carrying the right to vote in all circumstances.
INTEREST OF CERTAIN PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON
No one who has been a director or executive officer of ours at any time since January 1, 2008, or any
of his or her associates, has any material interest, direct or indirect, by way of beneficial ownership of Shares
or otherwise, in any matter to be acted on at the Meeting other than the election of directors and the
implementation of certain equity-based compensation matters including the ratification, confirmation and
approval of the previous Overgrant of DSUs to directors.
BOARD AND COMMITTEES
BOARD COMPOSITION AND NOMINATION PROCESS
Our Management Development, Nominating & Compensation Committee ("MDNCC") conducts an
annual process under which an assessment is made of the skills, expertise and competencies of the directors
21
and is compared to our needs and the needs of the Board. This process culminates in a recommendation to
the Board of individual nominee directors for election at our annual shareholders’ meeting.
Directors are elected yearly at our annual shareholders’ meeting and serve on the Board until the
following annual shareholders’ meeting, at which time, they either stand for re-election or resign from the
Board. If no meeting is held, each director serves until his or her successor is elected or appointed, unless the
director resigns earlier. The Board has established director resignation guidelines, which set out the
circumstances under which a director would be compelled to submit a resignation or be asked to resign.
MAJORITY VOTING POLICY
The Board has adopted a policy which requires that any nominee for director who receives a greater
number of votes "withheld" than "for" his or her election shall tender his or her resignation to the Board
following our annual shareholders’ meeting, to take effect immediately upon acceptance by the Board. Upon
receipt of such conditional resignation, the Corporate Governance Committee will consider the matter and, as
soon as possible, make a recommendation to the full Board regarding whether or not such resignation should
be accepted. After considering the recommendation of the Corporate Governance Committee, the Board will
decide whether or not to accept the tendered resignation and will, not later than 90 days after the annual
shareholders’ meeting, issue a press release which either confirms that they have accepted the resignation or
provides an explanation for why they have refused to accept the resignation. The director tendering his or
her resignation will not participate in any meeting of the Board or the Corporate Governance Committee at
which the resignation is considered. Subject to any restrictions or requirements contained in applicable
corporate law or Ballard’s constating documents, the Board may: (a) leave a resulting vacancy unfilled until
the next annual shareholders’ meeting; (b) appoint a replacement director whom the Board considers merits
the confidence of the shareholders; or (c) call a special meeting of shareholders to elect a replacement
director nominated by management. The policy does not apply in respect of any contested shareholders’
meeting, which is any meeting of shareholders where the number of nominees for director is greater than the
number of directors to be elected.
BOARD MEETINGS
The Board meets on a regularly scheduled basis and directors are kept informed of our operations at
meetings of the Board and its committees, and through reports by and discussions with management. At
Board meetings held after January 31, 2008, one in-camera session was held after each regularly scheduled
Board meeting. The in-camera session consisted of all of the independent directors without the presence of
management. The Chair of the Board chairs the in-camera session. In 2008, there were six regularly
scheduled meetings of the Board and two extraordinary meetings scheduled on short notice in connection
with the Superior Plus Transaction. In addition, communications between the directors and management
occur apart from regularly scheduled Board and committee meetings. The Board has set a minimum meeting
attendance guideline of 70%. Non-compliance with this guideline by a director is one of the factors
considered in his or her individual performance evaluation at the end of the year.
COMMITTEES OF THE BOARD
The Board has established three standing committees: (1) the Audit Committee; (2) the MDNCC;
and (3) the Corporate Governance Committee. Each committee has been delegated certain responsibilities,
performs certain advisory functions and either makes certain decisions or makes recommendations to the
Board. Each committee chair reports on the activities of the committee to the Board following each
committee meeting. None of the members of these committees are current or former officers or employees
of ours, or any of our subsidiaries.
The information below sets out the current members of each of our standing committees and
indicates the number of meetings that each committee held in 2008. After the Meeting, we will reconstitute
all of the committees to reflect the newly elected Board.
22
Audit Committee
The Audit Committee met nine times during the financial year ended December 31, 2008. The
members in 2008 were Ian A. Bourne, Edwin J. Kilroy (Chair), David B. Sutcliffe, Mark A. Suwyn and
Douglas W.G. Whitehead. All of the members of the Audit Committee are independent of our management
in accordance with the applicable Canadian and United States securities laws and exchange requirements.
For a more detailed description of the Audit Committee or to see the Audit Committee’s mandate, a
copy of which is posted on our website, see the section entitled "Board Committees – Audit Committee" in
our Annual Information Form dated March 10, 2009, which section is incorporated by reference into this
Management Proxy Circular.
Management Development, Nominating & Compensation Committee
The MDNCC met six times during the financial year ended December 31, 2008. The members in
2008 were Ian A. Bourne, Dr. C.S. Park, Dr. Geraldine B. Sinclair, David J. Smith and David B. Sutcliffe
(Chair). All of the members of the MDNCC are independent of our management in accordance with the
applicable Canadian and United States securities laws and exchange requirements.
For a more detailed description of the MDNCC or to see the MDNCC’s mandate, a copy of which is
posted on our website, see the section entitled "Board Committees – Management Development, Nominating
& Compensation Committee" in our Annual Information Form dated March 10, 2009, which section is
incorporated by reference into this Management Proxy Circular.
Corporate Governance Committee
The Corporate Governance Committee met four times during the financial year ended December 31,
2008. The members in 2008 were Ian A. Bourne, Edwin J. Kilroy, Dr. Geraldine B. Sinclair and David J.
Smith (Chair). All of the members of the Corporate Governance Committee are independent of our
management in accordance with the applicable Canadian and United States securities laws and exchange
requirements.
For a more detailed description of the Corporate Governance Committee or to see the Corporate
Governance Committee’s mandate, a copy of which is posted on our website, see the section entitled "Board
Committees – Corporate Governance Committee" in our Annual Information Form dated March 10, 2009,
which section is incorporated by reference into this Management Proxy Circular.
CORPORATE GOVERNANCE
Our Board and senior management consider good corporate governance to be central to our effective
and efficient operation. We monitor corporate governance initiatives as they develop and benchmark
industry practices to ensure that we are in compliance with corporate governance rules.
Our corporate governance practices are reflected in our Corporate Governance Guidelines, which
provide for director qualification standards, director responsibilities, the form and amount of director
compensation, director orientation and continuing education, management succession planning and
performance evaluation of the Board. A copy of the Corporate Governance Guidelines can be found on our
website. We have also reviewed our internal control and disclosure procedures, and are satisfied that they
are sufficient to enable our Chief Executive Officer and Acting Chief Financial Officer to certify our interim
and annual reports filed with Canadian securities regulatory authorities, and to certify our annual reports filed
with or submitted to the SEC.
In addition, we have set up a process for shareholders to communicate to the Board, the details of
which can be found on our website. A summary of shareholder feedback is provided to the Board through a
semi-annual report.
For a more detailed description of our corporate governance policies and practices, and a comparison
of those practices to published guidelines, see the section entitled "Corporate Governance" in our Annual
23
Information Form dated March 10, 2009, which section is incorporated by reference into this Management
Proxy Circular.
COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This section of this Management Proxy Circular contains a discussion of the elements of
compensation earned by our "Named Executive Officers", who are listed in the Summary Compensation
Table below: John W. Sheridan (President and Chief Executive Officer), Dave S. Smith (Vice President and
Chief Financial Officer), Noordin Nanji (Vice President, Corporate Strategy and Development), Christopher
J. Guzy (Vice President, Operations and Chief Technical Officer), and Glenn Y. Kumoi (Vice President,
Human Resources, Chief Legal Officer and Corporate Secretary).
Objectives of Our Executive Compensation Program
The structure of our executive compensation program is designed to compensate and reward
executives appropriately for driving superior performance. For our Named Executive Officers, a significant
portion of their total direct compensation is "at risk" and tied closely to the success of the Corporation’s short
and long-term objectives. "At risk" means that the executive will not realize value unless specified goals,
many of which are directly tied to the Corporation’s performance, are achieved or the price at which our
common shares are traded on the TSX or NASDAQ appreciates. In 2008, these performance goals, and
resulting compensation awards, were largely focused on the Corporation’s current key business drivers
including growing revenue, increasing product shipments and reducing annual operating cash consumption.
This compensation philosophy puts a strong emphasis on pay for performance, and uses equity awards as a
significant component in order to correlate the long-term growth of shareholder value with management’s
most significant compensation opportunities. The strategic goals of the Corporation are reflected in the
incentive-based executive compensation programs so that executives’ interests are aligned with shareholders
interests.
Philosophy and Objectives
Our philosophy and objectives regarding compensation are to:
(a)
(b)
(c)
attract and retain experienced, qualified, capable executive officers by paying salaries which
are competitive in the markets in which we compete for executive talent;
motivate short and long-term performance by directly linking annual bonuses to
performance; and
link our shareholders’ interests with those of our executive officers by providing our
executive officers with equity-based compensation, requiring them to comply with minimum
share ownership guidelines and build a sustained ownership position.
How Executive Compensation is Determined
The MDNCC is charged, on behalf of our Board, with reviewing and approving executive officers’
benefit policies and compensation plans, including our annual bonus plan and our long-term equity-based
compensation plans. As part of its mandate, the committee approves and recommends to the Board the
appointment of our executive officers. The committee also reviews and approves the amount and form of
their compensation, their development and succession plans, and any significant organizational or
management changes. The committee retains independent compensation consultants for professional advice
and as a source of competitive market information. In 2008, the committee directly retained Towers Perrin
to provide independent compensation analysis and advice specifically related to Chief Executive Officer
compensation, updating the comparator group for external comparator analysis for all senior executives, and
an assessment of pay levels and mix for all senior executives. The committee also seeks the advice and
recommendations of our President and Chief Executive Officer, and Vice President, Human Resources, with
24
respect to the compensation of our other executive officers. The President and Chief Executive Officer does
not participate in the portions of the committee discussions that relate directly to his personal compensation.
Executive Pay Mix and the Emphasis on "At Risk" Pay
We place emphasis on performance by having a significant proportion of our executive officers’ total
annual compensation linked to corporate and individual performance. For 2008, an average of 64% of the
annual compensation earned by each of our Named Executive Officers came from "at risk", variable,
performance-related compensation containing inherent market performance risk, where annual compensation
includes base salary, equity annual bonus and equity-based long-term incentives (including share options and
RSUs).
The Use of Benchmarking
Our overall compensation objective is to pay executives on average at the 50th percentile of the
comparator group for full achievement of performance goals. Over-achievement or under-achievement will
result in being over or under the average.
In 2008, the MDNCC, working with Towers Perrin, updated the comparator companies contained
within the Corporation’s compensation comparator group to better reflect the Corporation’s business size and
market focus following the divestment of the automotive business in January 2008. A new list of comparator
companies was reviewed and accepted by the committee, which selected the group of comparators ensuring a
suitable mix of Canadian and United States companies exhibiting a growth oriented mix of revenues,
employee base, asset base, market capitalization and market focus. This comparator group comprised the
primary source of compensation data for review of the Corporation’s market competitiveness. The committee
reviews the composition of the comparator company list on an annual basis. The committee, in consultation
with Towers Perrin, decided to also change the benchmark level to the 50th percentile of the total comparator
group, from the previous practice of benchmarking the Canadian comparators at the 75th percentile and
United States comparators at the 50th percentile. The committee believes that this more accurately reflects the
comparison for attracting and retaining executive talent given the Corporation’s current business focus.
The committee compares each executive officer’s annual salary, target annual incentive bonus and
long-term incentive compensation value, both separately and in the aggregate, to amounts paid for similar
positions at comparator group companies. As noted above, the committee’s practice is to target annual total
direct compensation for each executive at approximately the 50th percentile among the comparator group
companies.
The Corporation’s current comparator group is:
Canadian Companies
Gennum Corp.
United States Companies
American Superconductor Corp.
MacDonald Dettwiler and Associates Ltd.
Clean Energy Fuels Corp.
QLT Inc.
Sierra Wireless Inc.
Westport Innovations Inc.
Xantrex Technology Inc.
Comverge Inc.
Energy Conversion Devices Inc.
Evergreen Solar Inc.
FuelCell Energy Inc.
Maxwell Technologies Inc.
PMC-Sierra Inc.
Plug Power Inc.
Power Integrations Inc.
25
Current Executive Compensation Elements
Our compensation program for our executive officers has three primary components:
annual salary;
annual incentives (bonus) paid in the form of Shares, DSUs, cash or a combination of these
instruments; and
equity-based long-term incentives comprised of awards that may be issued under our Current
Option Plans or Current RSU Plan.
(a)
(b)
(c)
Annual Salary
The MDNCC approves, on behalf of our Board, the annual salary of our executive officers. Salary
guidelines and salary adjustments for our executive officers are considered with reference to:
(a)
(b)
(c)
(d)
comparative market assessments performed by external compensation consultants;
the experience and qualifications of each executive officer;
the individual performance of each executive officer; and
the roles and responsibilities of each executive officer.
The Corporation chooses to pay this element of compensation, because the Corporation’s view is that
a competitive base salary is a necessary element for attracting and retaining qualified and experienced
executive talent.
The Corporation’s decisions about this element of compensation and its annual level, impacts
decisions about the level of target annual incentive an executive might receive, but only in the sense that the
incentive bonus target is set as a percentage of annual salary.
In 2008, there were no annual salary increases for the Named Executive Officers, with the exception
of Glenn Y. Kumoi, whose annual salary was increased to US$212,470(1) (a 10% increase in his Canadian
dollar salary). Mr. Kumoi’s annual salary increase was reflective of his strong performance since joining the
Corporation in mid-2007 and his assumption of an expanded leadership role, assuming the leadership of
human resources in addition to the legal and intellectual property functions.
Annual Bonus for Executive Officers
The MDNCC reviews and approves the annual bonus for each executive officer based on the
recommendations of our President and Chief Executive Officer in accordance with the factors described in
the foregoing section. Ballard has historically paid the annual bonus to which an executive officer is entitled
in Shares or in DSUs. In adopting this philosophy of equity-based compensation, we understand that our
executive officers will, from time to time, sell Shares for a variety of reasons. However, they remain subject
to our share ownership guidelines (see the section entitled "Minimum Share Ownership Guidelines"). Under
the annual bonus plan, each executive officer elects to receive his bonus in Shares or DSUs(2), and at our
discretion, all or a portion of the bonus can also be paid in cash. In March 2009, bonuses for 2008 were
authorized to be paid in Shares, net of statutory deductions which were paid in cash.
(1)
(2)
Mr. Kumoi’s salary is payable in Canadian dollars (C$260,192) and was converted into United States dollars for the above
disclosure using the Bank of Canada noon rate of exchange on December 31, 2008.
Our Current DSU Plan for Executive Officers allows our Shares to be issued to our executive officers as incentive
compensation upon the redemption of DSUs. DSUs may only be redeemed for Shares upon the executive officer’s
retirement or departure from Ballard. The provisions of the American Jobs Creation Act of 2004 (United States federal
legislation) apply to our Current DSU Plan for Executive Officers. As bonuses are performance-based, and as the results
are not known until the end of the performance period (year-end), each executive officer is required to make an annual
election to receive his incentive compensation in the form of Shares, net of statutory deductions, and/or DSUs by June 30th
of each year.
26
The annual target bonus for executive officers (excluding the President and Chief Executive Officer)
was set at 70% of base salary in 2008. This was a planned reduction from 75% in 2007 (this reduction
followed a similar reduction in the target bonus level of 5% from 2006 levels to better align annual incentive
levels to market levels relative to the Corporation’s comparator group). Each executive officer’s actual 2008
bonus was based on a combination of his individual performance and our corporate performance relative to
goals, as discussed below under the section entitled "Methodology for Determining Annual Bonus".
The Corporation maintains an annual bonus program in order to motivate short and long-term
performance by directly linking annual bonuses to the performance and progress of the Corporation.
The Corporation’s decisions about this element of compensation do not directly affect decisions
about any other element of the Corporation’s compensation program.
For a full discussion of annual incentive compensation for our President and Chief Executive
Officer, see the section entitled "Chief Executive Officer Compensation". The section below entitled
"Methodology for Determining Annual Incentives" applies equally to the President and Chief Executive
Officer as it does to the other executives.
Methodology for Determining Annual Bonuses
The actual annual bonus for each executive officer is determined by the MDNCC on the basis of the
following formula:
annual base salary x target bonus percentage x individual performance multiplier x corporate multiplier
A discussion of the annual base salary and target bonus percentage components of this formula for
each executive officer is set out above.
The individual performance multiplier for the Chief Executive Officer is determined by the MDNCC
and the individual performance multiplier for every other executive officer is determined by the MDNCC
upon the recommendation by the Chief Executive Officer. The performance multiplier is determined with
reference to achievement against the individual goals set for the executive officer, with an individual
performance multiplier greater than 100% being awarded for superior performance against these goals, and
an individual performance multiplier of less than 100% being awarded for substandard performance against
these goals. Individual goals are set for individual executive officers by the Chief Executive Officer and are
based on agreed upon objective/identifiable measures relative to their respective functional accountabilities,
but aligned to the corporate performance goals. Each executive officer's performance is measured against his
individual goals and an evaluation of his leadership competency. The President and Chief Executive Officer
attributes a performance rating to each executive based on this performance level and determines a specific
individual performance multiplier for each executive officer. Our Named Executive Officers’ individual
performance multipliers for 2008 ranged from 100% to 130% and are discussed in greater detail below.
Mr. Smith met his overall performance goals for his CFO role in 2008, related to financial
operations, administration, investor relations and information technology. As well, Mr. Smith played a key
leadership role in the non-dilutive financing transaction with Superior Plus. He was awarded an individual
performance multiplier rating of 100%.
Mr. Nanji transitioned in 2008 from the Chief Customer Officer role, responsible for Sales,
Marketing and Business Development responsibilities, to a part-time role focused on Strategy and Corporate
Development. Mr. Nanji met his key performance goals other than revenue, which was not delivered largely
related to difficult economic conditions. He led the successful negotiations of the high volume supply
agreement with IdaTech and ACME Telepower for the Indian market. He was awarded an individual
performance multiplier rating of 100%.
Mr. Guzy assumed additional responsibility in 2008 for operations, manufacturing, engineering and
supply chain. Key performance goals for the year were met or exceeded despite peaked year-end production
demands. Key over-achievements were delivered in production yield, inventory management and product
cost reductions. On balance, after assessing these achievements, relative to the expanded scope and
workload, Mr. Guzy was awarded an individual performance multiplier rating of 130%.
27
Mr. Kumoi met his overall performance goals for 2008 related to Legal, IP and HR. He also
managed an extremely heavy workload with significant additional activities and pressures related to the
closing of the AFCC Transaction and the negotiation and closing of the Superior Plus non-dilutive financing
transaction. Key leadership contributions were made in these complex transactional projects. He was
awarded an individual performance multiplier rating of 130%.
The corporate multiplier is determined by the MDNCC with reference to achievement against the
corporate goals set out in a Corporate Performance Scorecard approved by the MDNCC and the Board prior
to the commencement of the year (in December 2007 for the 2008 fiscal year). Each corporate performance
goal on the scorecard is assigned a relative weighting in terms of relative importance to annual performance
and growth of the Corporation, as well as a range of targeted outcomes, such that below a certain
performance level the contribution of that goal to the overall corporate multiplier is zero. The overall
corporate multiplier for 2008, as reviewed and agreed to by the MDNCC and the Board, based on
achievement relative to these corporate goals, was 102%. The goals in the 2008 Corporate Performance
Scorecard, their relative weightings, and our results with respect to the specific goals are as follows:
Goal
Weighting
Achievement
Product Shipments
Product Cost Reductions
Supporting Segment EBITDA
On-time Deliveries
Production Yield
Inventory Management
Revenue
EBITDA
Operating Cash Consumption
Total
18%
18%
24%
5%
2.5%
2.5%
15%
5%
10%
100%
118% increase in product shipments
40% reduction in product costs
20% improvement
97.7% of deliveries were on-time
27% improvement in production yield
35% reduction in year-end inventory levels
Result
15.5%
27%
24%
6.4%
2.9%
3.4%
17% growth in revenue, after adjusting for
automotive engineering revenue
13.7%
11% improvement
0%
23% reduction in operating cash consumption
9.5%
102%
Given the nature of the corporate performance multiplier, for any particular year the corporate
performance multiplier is not determined until our annual financial statements for that particular financial
year are complete. However, notwithstanding that the corporate performance multiplier is not determined,
and the annual bonus based thereon is not paid until the first quarter following each particular financial year,
in our summary compensation table we report the annual bonus for each particular financial year as if it had
been determined and paid in the particular financial year. Also, we report the cash value of that annual
bonus, regardless of the actual manner of payment (historically in a combination of Shares, DSUs and cash).
Long Term Incentives
We provide our executive officers with equity-based long-term incentives through our Current
Option Plans and Current RSU Plan. These plans are designed to reinforce the connection between executive
officer remuneration and our performance by motivating and rewarding participants for improving our long-
term financial strength and enhancing shareholder value, and also providing retention value to executives.
With respect to equity-based long-term compensation awards for our executive officers, individual
performance and future contribution expectations are taken into account in determining the award. In 2008,
the President and Chief Executive Officer recommended to the MDNCC a value amount in dollars based on
the comparator company study by Towers Perrin, which was approved for each executive: see the amounts
set out under “Share-Based Awards” and “Option-Based Awards” in our Summary Compensation Table.
28
Fifty percent of this value amount was then converted to RSUs at the then current market price by dividing
the dollar value by the closing share price on either the TSX or NASDAQ on the award date. Fifty percent
of this value amount was converted to options by dividing the dollar value by the Black-Scholes value of a
Ballard option on the award date. These options were then priced at the closing share price on the day prior
to the award date.
This element of compensation and the Corporation’s decisions about this element fit into the
Corporation’s overall compensation objectives in that they link our shareholders’ interests with those of our
executive officers by providing our executive officers with equity-based compensation, and requiring them to
comply with minimum share ownership guidelines.
The Corporation’s decisions about this element of compensation do not affect decisions about any
other element of the Corporation’s compensation.
Share Options
As noted above, Share options are granted annually in respect of 50% of the long-term compensation
to be provided to an executive. As a result, previous grants of Share options are not generally taken into
account when making new grants. The actual number of Share options granted is determined by dividing the
dollar value of the portion of the long-term incentive to be satisfied though an option grant by the Black-
Scholes value of a Ballard option on the award date.
Under our Current Option Plans:
(a)
(b)
the exercise price of each option is determined by the Board, but must not be less than the
closing price per Share on the TSX on the last trading day before the grant date of the
option; and
each option may be exercised by the holder in respect of up to one-third of the Shares subject
to the option on or after the first, second and third anniversary of the effective date of the
option on a cumulative basis.
Share options are typically granted for a term of seven years.
Restricted Share Units
Employees and executive officers are eligible to receive RSUs under our Current RSU Plan. The
Current RSU Plan provides for vesting over periods of up to three years and awards may be subject to certain
performance criteria, both as determined by the Board upon the recommendation of the MDNCC.
Redemption of RSUs is currently satisfied with Shares reserved under the current 2003 SDP. However, the
Board is shifting its focus to provide employees with equity-based compensation in a manner that is less
dilutive to shareholders. As a result, the Board has adopted a market-purchase based RSU plan under which
the redemption of RSUs for Shares is satisfied with Shares purchased on the open market. Ballard has
entered into a trust agreement with an independent trustee under which the independent trustee makes these
open market purchases through the facilities of the TSX, and holds the purchased Shares in escrow until the
restriction period is complete and any performance criteria have been satisfied.
The amount of the long-term incentive that is awarded to each executive officer is typically
determined in the first quarter of each financial year, in conjunction with the determination of that executive
officer’s annual bonus for the prior financial year. Since the long-term incentive is tied to future (as opposed
to past) corporate performance, in our summary compensation table we report the grant of the long-term
incentive in the “Share-Based Awards” column and the “Option-Based Awards” column for the particular
year in which they were actually granted. The year-end values of unexercised or unvested Share options and
RSUs, and the vesting during the year of Share options and RSUs are reported in the tables under the heading
“Incentive Plan Awards”.
Except for the special, one-time three-year RSU award to Mr. Sheridan described below, the RSUs
awarded to all our executive officers in 2008 included a performance criteria achievement goal of a
minimum corporate multiplier in 2008 of 75% (see the section above entitled "Methodology for Determining
29
Annual Incentives" for a description of the determination of the 2008 corporate multiplier). As the Board has
determined that the performance criteria was met for 2008, one-third of the RSUs vested and were redeemed
in Shares on March 4, 2009. Another one-third of these RSUs will vest in 2010, and the final one-third will
vest in 2011, and will be redeemed in Shares, provided the executive officer continues to be employed by
Ballard.
In addition to the grant of 59,952 RSUs awarded to Mr. Sheridan in accordance with the
Corporation’s usual practices for annual long-term incentives awards for the Chief Executive Officer, the
Board approved a recommendation by the MDNCC to award Mr. Sheridan a special, one-time three-year
RSU award designed to retain and provide incentive to Mr. Sheridan through mid-2011. This three-year
award, issued on May 12, 2008, had an award value at grant of C$1.5 million (359,712 RSUs at a price of
C$4.17 per share) with a three-year cliff vesting provision that requires Mr. Sheridan to continue to be
employed by Ballard until that date in order to receive the full award.
Chief Executive Officer Compensation
Mr. Sheridan was appointed President and Chief Executive Officer by the Board on February 22,
2006. When appointed, his base salary at that time was fixed at US$432,790(1) per year. It has not changed
since that time by mutual agreement between Mr. Sheridan and the Board to ensure that the President and
Chief Executive Officer’s compensation package is focused more heavily on pay for performance. Mr.
Sheridan’s target bonus for 2008, subject to the successful achievement of corporate and individual
performance goals, as detailed below was equal to 90% of his annual base salary. This was a planned
reduction from 95% in 2007, which followed a similar 5% reduction in the bonus target in 2007. Mr.
Sheridan is entitled to receive an RRSP contribution (US$16,332(2) in 2008) and company paid health
insurance premiums (US$7,450(3) in 2008).
In addition to the corporate financial and operational goals reflected in the Corporate Performance
Scorecard rating, as outlined on page 28, the Chief Executive Officer had five individual goals for 2008, as
approved by the Board. The performance achievement on each of these five goals is outlined below.
1.
2.
Deliver strategic plan for 2009 to 2013, which addresses the Corporation’s future financing
requirements (exceeded);
-
cogent strategic plan was developed and approved by the Board in July 2008 and
dependence on public market financings have been eliminated for the foreseeable future
Deliver positive shareholder value performance as measured to comparator fuel cell companies
(missed);
-
Ballard was the second strongest performer through September 2008, but in December 2008
an index fund re-balanced its year-end portfolio, liquidating about 5 million Shares on
December 29 and 30 2008, leading to a 50% Share price drop in two days, and causing the
52-week low in Share price to occur on December 30, 2008;
3.
Establish presence in India for back-up power (exceeded);
-
high volume supply agreement with an affiliate of the ACME group closed in October 2008;
4.
Extend supply agreement with lead systems integrator customer for the material handling segment
(exceeded);
-
two-year extension to an exclusive sourcing agreement was secured in July 2008;
(1)
(2)
(3)
Mr. Sheridan’s salary is payable in Canadian dollars (C$530,000) and was converted into United States dollars for the
purpose of the disclosure above using the Bank of Canada noon rate of exchange on December 31, 2008.
RRSP contribution was paid in Canadian dollars (C$20,000) and was converted into United States dollars for the purpose of
the disclosure above using the Bank of Canada noon rate of exchange on December 31, 2008.
Health insurance premiums were paid in Canadian dollars (C$9,123) and were converted into United States dollars for the
purpose of the disclosure above using the Bank of Canada noon rate of exchange on December 31, 2008.
30
5.
Continue to strengthen leadership team effectiveness (met);
-
implemented smooth transition with Mr. Nanji, with Mr. Sheridan taking over direct
leadership of sales and marketing; initiated search for Chief Commercial Officer and a new
Chief Financial Officer; and led programs with the full management team to build enhanced
customer focus.
These individual goals were purposely not weighted in advance so that the Board could retain the
flexibility to assess the overall individual performance of Mr. Sheridan after reviewing all aspects of
performance for the full year, without the constraint of a pre-set weighting on any particular goal.
Beyond the Corporate Performance Scorecard and the individual Chief Executive Officer goals, the
Board also considered the Chief Executive Officer’s success in the following areas:
-
-
-
architecture and execution of the Superior Plus Transaction;
completing the strategic transformation of Ballard; and
maintaining the Corporation’s focus and momentum in volatile external and internal
environments.
After assessing the above achievements relative to the goals, the Board approved an individual
performance multiplier of 140%; this multiplier reflects a weighting towards the achieved overperformance
on financial, strategic and operational objectives. Applying this individual multiplier and the corporate
multiplier of 102% (determined in accordance with the corporate multiplier methodology set forth in the
section entitled "Methodology for Determining Annual Incentives"), to Mr. Sheridan’s target bonus for 2008
of 90% of base salary, resulted in a bonus payment to Mr. Sheridan of US$556,227(1) for the fiscal year
ended December 31, 2008.
Termination and Change of Control Benefits
The employment contract for each Named Executive Officer provides that the termination of
employment by the Corporation requires the provision of notice, or payment in lieu thereof. The required
notice is fixed at 12 months, plus an additional month for every completed year of service to a maximum of
24 months notice or payment in lieu thereof. This required notice period is consistent with the Corporation’s
obligations at common law.
All of the employment contracts for the Named Executive Officers include a “double-trigger” in
relation to a change of control – if the executive’s employment is terminated (including a constructive
dismissal) within 2 years following the date of a change of control, the executive is entitled to an enhanced
payment equivalent to payment in lieu of a 24 month notice period. This enhanced entitlement, equivalent to
an additional notice of up to 12 months, is consistent with market practice.
Finally, certain rights are triggered upon a change of control under our equity-based compensation
plans, all as described below in the specific disclosure relating to the compensation of our Named Executive
Officers and as also described above in connection with the proposed adoption of our Consolidated Equity-
Based Compensation Plans.
Perquisites
In addition to cash and equity compensation, the Corporation provides Named Executive Officers
with certain personal benefits, consistent with similar benefits coverage within the comparator group. These
benefits include a car allowance, medical benefits program, long and short-term disability coverage, life
insurance, an annual medical and a financial planning allowance.
(1)
Mr. Sheridan’s bonus was paid in Canadian dollars (C$681,156) and was converted into United States dollars for the
purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2008.
31
Retirement Benefits
Each Named Executive Officer receives an RRSP contribution from the Corporation each year, equal
to the maximum amount allowable under the Income Tax Act (Canada). In 2008, this amount was
US$16,332(1). None of the Named Executive Officers participate in a Corporation-sponsored Defined
Benefits Plan, Defined Contribution Plan, or Supplemental Executive Retirement Plan, nor do they receive
contributions to any such plan on their behalf from the Corporation.
Total Executive Officer Compensation
The total value of the compensation of the Chief Executive Officer together with all of the other
Named Executive Officers (as defined below in the section entitled "Executive Compensation") was
US$5,374,324(2).
Minimum Share Ownership Guidelines
We established executive officer minimum share ownership guidelines in 2003, which obligate each
executive officer to own a minimum number of our Shares. Those guidelines were modified by our Board in
December 2007 to increase the minimum share ownership requirements for our executive officers.
For current executive officers other than the President and Chief Executive Officer, a new minimum
share ownership guideline(3) was established requiring the executive officers to acquire a number of Shares,
equal to the lesser of:
(a)
the number of Shares with a fair market value equal to the executive officer’s annual base
salary; or
(b)
35,300 Shares.
In 2006, the policy for the President and Chief Executive Officer was reviewed and the equity
ownership requirement for the President and Chief Executive Officer was increased such that the minimum
share ownership guideline is equal to the lesser of:
(a)
the number of Shares that have a fair market value of three times the President and Chief
Executive Officer’s base salary; or
(b)
181,903 Shares.
For the purposes of this section, the "fair market value" is defined as the closing price of our Shares
as listed on the TSX on the date of review of the guideline. For the President and Chief Executive Officer,
the share acquisition period is five years from the date of hire. All executive officers have met or are on
track to achieve the applicable guidelines.
(1)
(2)
(3)
RRSP contributions were paid in Canadian dollars (C$20,000) and were converted into United States dollars for the
purpose of the disclosure above using the Bank of Canada noon rate of exchange on December 31, 2008.
The majority of compensation was paid in Canadian dollars and the aggregate amount paid was converted into United
States dollars for the purpose of the disclosure above using the Bank of Canada noon rate of exchange on December 31,
2008.
For current executive officers other than the President and Chief Executive Officer, the time for acquiring the new
minimum share ownership level has been extended by three years for a total of eight years. For future executive officers,
the minimum number of Shares must be acquired over a five-year period.
32
32
PERFORMANCE GRAPH
The following graph compares the total cumulative return to a shareholder who invested C$100 in
our Shares on December 31, 2003, assuming reinvestment of dividends, with the total cumulative return of
C$100 on the S&P/TSX Composite Index for the last five years.
Cumulative Value of a C$100 Investment
200
150
$
100
50
0
Ballard
S&P/TSX
Composite
Index
December 31,
2003
December 31,
2004
December 31,
2005
December 31,
2006
December 31,
2007
December 31,
2008
Ballard (BLD)
S&P/TSX Composite Index
2003 (Dec 31)
(C$)
2004 (Dec 31)
(C$)
2005 (Dec 31)
(C$)
2006 (Dec 31)
(C$)
2007 (Dec 31)
(C$)
2008 (Dec 31)
(C$)
100
100
53.23
112.48
32.09
137.12
43.44
157.02
34.05
168.27
8.74
109.33
The trend shown by this graph does not reflect the trend in the Corporation’s compensation to its
Named Executive Officers.
33
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid for the fiscal year ended on December 31,
2008 to our Named Executive Officers.
Summary Compensation Table
Long-Tern Incentives
Year
2008
Salary(3)
(US$)
432,790
Bonus(4)
(US$)
Share-Based
Awards(5)
(US$)
Option-Based
Awards(7)
(US$)
All Other
Compensation(8)
(US$)
Total
Compensation
(US$)
556,227
1,431,055(6)
204,207
39,238
2,663,517
2008
253,140
180,745
98,031
97,872
42,074
671,862
2008
243,090
171,319
98,031
97,872
33,340
643,652
2008
253,140
234,969
98,031
97,872
49,188
733,200
2008
212,470
197,216
136,561
85,638
30,208
662,093
Name and Principal
Position
John W. Sheridan(1)
President and Chief Executive
Officer
Dave S. Smith(2)
Vice President and Chief
Financial Officer
Noordin Nanji
Vice President, Corporate
Strategy and Development
Christopher J. Guzy
Vice President, Operations and
Chief Technical Officer
Glenn Y. Kumoi
Vice President, Human
Resources, Chief Legal Officer
and Corporate Secretary
(1) Mr. Sheridan is also a director, but receives no compensation for his service as a director.
(2) Mr. Smith resigned as Vice President and Chief Financial Officer effective January 30, 2009. Jay Murray was appointed Acting Chief Financial
Officer effective January 30, 2009 following Mr. Smith’s resignation. Bruce Cousins was appointed Vice President & Chief Financial Officer
effective April 6, 2009.
(3) Salary of each of the Named Executive Officers was paid in Canadian dollars. The Canadian dollar amounts were C$530,000, C$310,000,
C$297,692, C$310,000 and C$260,192 for Messrs. Sheridan, Smith, Nanji, Guzy and Kumoi, respectively. The Canadian dollar amounts were
converted into United States dollars for the purpose of the table above using the Bank of Canada noon rate of exchange on December 31, 2008.
(4) The bonus of each of the Named Executive Officers was paid in Canadian dollars. The Canadian dollar amounts were C$681,156, C$221,340,
C$209,797, C$287,743 and C$241,510 for Messrs. Sheridan, Smith, Nanji, Guzy and Kumoi, respectively. The Canadian dollar amounts were
converted into United States dollars for the purpose of the table above using the Bank of Canada noon rate of exchange on December 31, 2008.
Under the Corporation’s annual bonus plan, each executive officer elects to receive his bonus in Shares or DSUs and, at the Corporation’s
discretion, all or part of the bonus can be paid in cash. The number of Shares or DSUs issued to satisfy the bonus obligation is equal to the
amount of the bonus to be satisfied by the issue of Shares or DSUs, as applicable, divided by the fair market value of the Shares at the time of
issuance (based on the closing trading price of the Shares on the TSX on the day of grant).
(5) Represents the total fair market value of RSUs issued to each Named Executive Officer during the fiscal year. This amount is based on the grant
date fair market value of the award, which equals the closing price of the Shares on the TSX on the date of issuance of the award. Fair value
determined in accordance with Section 3870 of the CICA Handbook (accounting fair value) is recorded as compensation expense in the statement
of operations on a straight-line basis over vesting periods of one to three years. There is no difference in Canadian dollars between the grant date
fair market value of the award and the accounting fair value. The Canadian dollar amounts were converted into United States dollars for the
purpose of the table above using the Bank of Canada noon rate of exchange on December 31, 2008.
As noted above, a dollar value is approved for the long term incentive awarded to each executive and 50% of this amount is awarded in the form
of RSUs with the remaining 50% being awarded in the form of Share options. The number of RSUs awarded is equal to the dollar amount of the
award to be awarded in RSUs divided by the fair market value of the Shares at the time of issuance (based on the closing price of the Shares on
the TSX on the date of issuance). The number of RSUs issued to each Named Executive Officer in respect of this amount in respect of the fiscal
year ended December 31, 2008 is as follows:
Named Executive
Officer
John W. Sheridan
Dave S. Smith
Noordin Nanji
Christopher J. Guzy
Glenn Y. Kumoi
Year
2008
2008
2008
2008
2008
RSUs
(#)
419,664
23,622
23,622
23,622
32,906
Fair Market Value
of a Share
(US$)(A)
3.41
4.15
4.15
4.15
4.15
Total
(US$)
1,431,055
98,031
98,031
98,031
136,561
34
(A) The fair market value of a Share has been calculated using the Canadian dollar closing price of the Shares underlying the
RSUs on the TSX on the date of issuance. The Canadian dollar amounts were converted to United States dollars for the
purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2008.
(6) In addition to the grant of 59,952 RSUs awarded to Mr. Sheridan in accordance with the Corporation’s usual practices for annual long-term
incentives awards, the Board approved a recommendation by the MDNCC to award Mr. Sheridan a special, one-time three-year RSU award
designed to retain and provide incentive to Mr. Sheridan through mid-2011. This three-year award, issued on May 12, 2008 had an award value
at grant of US$1,226,618 (359,712 RSUs at a price of US$3.41 per share) with a three-year cliff vesting provision that requires Mr. Sheridan to
continue to be employed by Ballard until that date in order to receive the full award. The special RSU award was based on a Canadian dollar
amount (C$1.5 million) which has been converted into United States dollars using the Bank of Canada noon rate of exchange on the date of grant.
(7) Represents the total of the fair market value of options to purchase our Shares issued under the Current Option Plans granted to each Named
Executive Officer during the fiscal year. There were no options that were amended or modified during the year. This amount is based on the
grant date fair market value of the award determined using the Black-Scholes valuation model using the following key assumptions: expected
life of 7 years, expected volatility of 46% and risk free interest rate of 4%. Accounting fair value is recorded as compensation expense in the
statement of operations on a straight-line basis over vesting period. There is no difference in Canadian dollars between the grant date fair market
value of the award determined using the Black-Scholes valuation model and accounting fair value determined in accordance s.3870 of the CICA
Handbook (accounting fair value). The Canadian dollar amounts were converted into United States dollars for the purpose of the table above
using the Bank of Canada noon rate of exchange on December 31, 2008.
As noted above, a dollar value is approved for the long term incentive awarded to each executive and 50% of this amount is awarded in the form
of RSUs with the remaining 50% being awarded in the form of Share options. The number of Share options awarded is equal to the dollar
amount of the award to be awarded in options divided by the fair market value of the Shares at the time of issuance (based on the closing trading
price of the Shares on the TSX on the day prior to issuance). The number of Share options issued to each Named Executive Officer in respect of
this amount in the fiscal year ended December 31, 2008 is as follows:
Named Executive
Officer
John W. Sheridan
Dave S. Smith
Noordin Nanji
Christopher J. Guzy
Glenn Y. Kumoi
Year
2008
2008
2008
2008
2008
Option-Based Awards
Shares Under
Options
(#)
Black-Scholes Value of Shares
Underlying Options on Date of
Grant
(US$/Share)(A)
Fair Market Value
(US$)
123,762
42,553
42,553
42,553
37,234
1.65
2.30
2.30
2.30
2.30
204,207
97,872
97,872
97,872
85,638
(A) The fair market value of a Share has been calculated using the Canadian dollar closing price of the Shares underlying the
RSUs on the TSX on the date of issuance. The Canadian dollar amounts were converted into United States dollars for the
purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2008.
(8) All Other Compensation was actually paid in Canadian dollars. The Canadian dollar amounts were C$48,051, C$51,524, C$40,828, C$60,235
and C$36,993 for Messrs. Sheridan, Smith, Nanji, Guzy and Kumoi, respectively. The Canadian dollar amounts were converted into United
States dollars for the purpose of the table above using the Bank of Canada noon rate of exchange on December 31, 2008.
The value of the items included in this amount was based on the aggregate incremental cash cost to the Corporation. All Other Compensation,
including the type and amount of each perquisite, the value of which exceeds 25% of the total value of perquisites reported for a Named
Executive Officer, includes:
Named Executive
Officer
John W. Sheridan
Dave S. Smith
Noordin Nanji
Christopher J. Guzy
Glenn Y. Kumoi
Year
2008
2008
2008
2008
2008
All Other Compensation
RRSP Contribution
(US$)(A)
Insurance Premiums
(US$)(A)
Other(B)
(US$)
16,332
16,332
16,332
16,332
16,332
1,555
933
660
660
660
21,351
24,809
16,348
32,196
13,216
Total
(US$)
39,238
42,074
33,340
49,188
30,208
(A) The amounts in this table were paid in Canadian dollars and have been converted into United States dollars using the Bank of
Canada noon rate of exchange on December 31, 2008. The Canadian dollar amounts of the RRSP Contribution paid in respect
of each of the Named Executive Officers was C$20,000. The Canadian dollar amounts of insurance premiums paid were
C$1,904, C$1,143, C$808, C$808 and C$808 for Messrs. Sheridan, Smith, Nanji, Guzy and Kumoi, respectively. The
Canadian dollar amounts of “other” compensation paid were C$26,147, C$30,381, C$20,020, C$39,427 and C$16,185 for
Messrs. Sheridan, Smith, Nanji, Guzy and Kumoi, respectively.
(B)
Includes automobile allowances, financial planning services and medical and health benefits.
35
INCENTIVE PLAN AWARDS
The following table sets forth all option-based and share-based awards granted to our Named
Executive Officers that are outstanding as of December 31, 2008.
Outstanding Share-Based Awards and Option-Based Awards
(as of December 31, 2008)
Option-Based Awards
Share-Based Awards(1)
Number of
Securities
Underlying
Unexercised
Options
(#)
Option
Exercise
Price(2)
(US$)
6,000
2,500
6,000
76,713(5)
123,762(6)
175,000(7)
30,000
30,000
15,000
45,000
40,000
22,484(8)
35,000
42,553(6)
55,000
60,000(9)
60,000
60,000
60,000
15,000
60,000
50,000
22,484(8)
35,000
42,553(6)
60,000
60,000(9)
22,484(8)
40,000
42,553(6)
35,000
60,000(9)
40,000(10)
37,234(6)
72.27
35.77
31.64
6.37
3.41
5.86
124.12
57.98
35.77
31.64
11.99
6.37
11.24
4.15
6.18
5.86
32.87
156.79
57.98
35.77
31.64
11.99
6.37
11.24
4.15
6.18
5.86
6.37
6.49
4.15
6.18
5.86
4.22
4.15
Value of
Unexercised
In-The-
Money
Options(3)
(US$)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Option
Expiration
Date
May 17, 2011
Nov. 30, 2011
May 16, 2012
Feb. 23, 2014
May 13, 2015
Mar. 8, 2016
Oct. 26, 2010
Mar. 1, 2011
Nov. 30, 2011
May 16, 2012
Mar. 28, 2013
Feb. 23, 2014
Mar. 5, 2014
Feb. 22, 2015
Mar. 2, 2015
Mar. 8, 2016
Mar. 3, 2009
Mar. 2, 2010
Mar. 1, 2011
Nov. 30, 2011
May 16, 2012
Mar. 28, 2013
Feb. 23, 2014
Mar. 5, 2014
Feb. 22, 2015
Mar. 2, 2015
Mar. 8, 2016
Feb. 23, 2014
Feb. 1, 2015
Feb. 22, 2015
Mar. 2, 2015
Mar. 8, 2016
June 21, 2014
Feb. 22, 2015
Named Executive
Officer
John W. Sheridan
Dave S. Smith
Noordin Nanji
Christopher J.
Guzy
Glenn Y. Kumoi
Number of RSUs
That Have Not
Vested
(#)
Market or Payout
Value of RSUs That
Have Not Vested(4)
(US$)
560,416
613,226
69,307
75,838
69,307
75,838
69,307
75,838
32,906
36,007
(1) As noted above, executive officers may elect to receive all or part of their bonus in DSUs. DSUs are fully vested when granted and are
redeemed for Shares upon the executive officer’s retirement or departure from Ballard. Accordingly, DSUs are not reflected in this table.
(2) All figures are in United States dollars. Where options are exercisable in Canadian dollars, the exercise price has been converted to United
States dollars using the Bank of Canada noon rate of exchange on December 31, 2008.
(3) This amount is based on the difference between the closing price of the Shares underlying the options on the TSX as at December 31, 2008, and
the exercise price of the option converted to United States dollars using the Bank of Canada noon rate of exchange on December 31, 2008.
Where the difference is a negative number the value is deemed to be 0.
(4) This amount is calculated by multiplying the number of RSUs that have not vested by the closing price of the Shares underlying the RSUs on the
TSX as at December 31, 2008. It has then been converted United States dollars for the purpose of this disclosure using the Bank of Canada noon
rate of exchange on December 31, 2008. The Canadian dollar amounts were C$750,959, C$92,872, C$92,872, C$92,872 and C$44,094 for
Messrs. Sheridan, Smith, Nanji, Guzy and Kumoi, respectively.
Such amounts may not represent the actual value of the RSUs which ultimately vest, as the value of the Shares underlying the RSUs may be of
greater or lesser value and/or the exchange rate may be higher or lower on vesting. However, given that it would be not be feasible for the
36
Corporation to estimate, with any certainty, the market value of its Shares or the exchange rate on vesting, the Corporation has used the market
value and exchange rate at the end of the most recently completed financial year for the purpose of calculating the amount disclosed.
(5) Comprising 25,571 vested and 51,142 unvested options.
(6) Unvested options.
(7) Comprising 116,666 vested and 58,334 unvested options.
(8) Comprising 7,494 vested and 14,990 unvested options.
(9) Comprising 40,000 vested and 20,000 unvested options.
(10) Comprising 13,333 vested and 26,667 unvested options.
The following table sets forth the value of the incentive plan awards vested or earned during the year
ended December 31, 2008 by our Named Executive Officers.
Incentive Plan Awards – Value Vested or Earned During the Year
(2008)
Named Executive Officer
John W. Sheridan
Dave S. Smith
Noordin Nanji
Christopher J. Guzy
Glenn Y. Kumoi
Option-Based Awards –
Value Vested During the
Year(1)
(US$)
Share-Based Awards – Value
Vested During the Year(2)
(US$)
Non-equity incentive plan
compensation – Value earned
during the year
(US$)
0
0
0
0
0
63,506
217,960
217,960
168,124
Nil
Nil
Nil
Nil
Nil
Nil
(1) This value was determined by calculating the difference between the market price of the underlying Shares on the vesting date and the exercise
price of the options on the vesting date. It has then been converted United States dollars for the purpose of this disclosure using the Bank of
Canada noon rate of exchange on December 31, 2008. Where the difference is a negative number the value is deemed to be 0.
(2) This value was determined by calculating the dollar value realized by multiplying the number of Shares by the market value of the underlying
Shares on the vesting date. It has then been converted United States dollars for the purpose of this disclosure using the Bank of Canada noon rate
of exchange on December 31, 2008. The Canadian dollar amounts were C$77,770, C$266,915, C$266,915 and C$205,885 for Messrs. Sheridan,
Smith, Nanji and Guzy, respectively
The number of options vesting to Named Executive Officers under the Current Option Plans during
the most recently completed financial year is 229,719, none of which were exercised by Named Executive
Officers during 2008.
As noted in the Outstanding Share-Based Awards and Option-Based Awards table, as at December
31, 2008, there were 801,245 RSUs awarded to Named Executive Officers that were still unvested. The
performance criteria for each of these RSUs has been met and they are set to vest (subject to the terms of the
Current RSU Plan) as follows:
Named Executive Officer
Number of RSUs That Have Not Vested
John W. Sheridan
Dave S. Smith(1)
15,310
110,132
19,984
15,310
19,984
379,696
7,874
4,487
36,710
7,874
4,487
7,874
37
Vesting Date
Feb. 22, 2009
Mar. 8, 2009
May 12, 2009
Feb. 22, 2010
May 12, 2010
May 12, 2011
Feb. 21, 2009
Feb. 22, 2009
Mar. 8, 2009
Feb. 21, 2010
Feb. 22, 2010
Feb. 21, 2011
Named Executive Officer
Number of RSUs That Have Not Vested
Noordin Nanji
Christopher J. Guzy
Glenn Y. Kumoi
7,874
4,487
36,710
7,874
4,487
7,874
7,874
4,487
36,710
7,874
4,487
7,874
12,237
6,890
6.890
6,889
Vesting Date
Feb. 21, 2009
Feb. 22, 2009
Mar. 8, 2009
Feb. 21, 2010
Feb. 22, 2010
Feb. 21, 2011
Feb. 21, 2009
Feb. 22, 2009
Mar. 8, 2009
Feb. 21, 2010
Feb. 22, 2010
Feb. 21, 2011
Feb. 21, 2009
Feb. 21, 2009
Feb. 21, 2010
Feb. 21, 2011
(1) Mr. Smith’s unvested RSUs lapsed on January 30, 2009, the effective date of his resignation from Ballard.
PENSION PLAN BENEFITS
None of the Named Executive Officers participate in a Corporation-sponsored Defined Benefits Plan
or Defined Contribution Plan, nor do they receive contributions to any such plan on their behalf from the
Corporation.
TERMINATION AND CHANGE OF CONTROL BENEFITS
Employment Contracts
Ballard employs a standard-form executive employment agreement which all of our Named
Executive Officers have executed. These agreements have indefinite terms, provide for payments to be made
on termination and otherwise include standard industry terms and conditions, including intellectual property,
confidentiality, and non-competition and non-solicitation provisions in favour of Ballard.
The annual salary paid(1) to each of our Named Executive Officers under their employment
agreements for 2008 was as follows: Mr. Sheridan received US$432,790, Mr. Smith received US$253,140,
Mr. Nanji received US$243,090, Mr. Guzy received US$253,140 and Mr. Kumoi received US$212,470.
Pursuant to these employment agreements, we can terminate a Named Executive Officer’s
employment immediately, without any required period of notice or payment in lieu thereof, for just cause,
upon the death of the executive, or if the executive does not renew any required work permits. In every other
circumstance, other than one following a change of control, we are required to provide notice of 12 months
plus one month for every year of employment completed with us, to a maximum of 24 months, or payment in
lieu of such notice, consisting of the salary, bonus and other benefits that would have been earned during
such notice period.
All of the employment contracts for the Named Executive Officers includes a “double-trigger” in
relation to a change of control – if the executive’s employment is terminated (including a constructive
dismissal) within 2 years following the date of a change of control, the executive is entitled to a payment
equivalent to payment in lieu of a 24 month notice period. For these purposes, a "change of control" under
the employment agreements is defined as occurring when:
(a)
a person or persons acting in concert acquires at least one-half of Ballard’s shares;
(1)
All figures are in United States dollars. However, as the majority of compensation is paid in Canadian dollars, the amounts paid were
converted into United States dollars using the Bank of Canada noon rate of exchange on December 31, 2008.
38
(b)
(c)
(d)
the persons who comprise the Board of Ballard do not consist of a majority of persons who
were previously directors of Ballard, or who were recommended to the shareholders for
election to the Board by a majority of the Directors;
there is a disposition of all or substantially all of Ballard’s assets to an entity in which
Ballard does not have a majority interest; or
Ballard is involved in any business combination that results in Ballard’s shareholders
owning less than one-half of the voting shares of the combined entity.
Equity-Based Compensation Plans
The Consolidated Option Plan provides that, if a participant ceases to be an employee of Ballard or
its subsidiaries, he or she will have up to 90 days, in the event of termination other than for just cause, or 30
days, in the event of voluntary resignation, in which to exercise his or her vested options (in each case
subject to extension if the option would otherwise expire during, or within 9 business days after the end of, a
blackout period). In the event of termination other than for just cause, the CEO has the discretion to extend
the exercise period to up to one year after the optionee ceases to work for Ballard and to accelerate the
vesting of unvested options that would have otherwise vested during that period in the next year (in effect
enabling the continuance of the options during a notice period).
All Ballard RSUs awarded under the Consolidated SDP expire (no longer be capable of being
converted into Shares) on the last day on which the participant works for Ballard or any of its subsidiaries.
DSUs will be redeemed for Shares under the Consolidated SDP by no later than December 31 of the
first calendar year commencing after the holder’s employment with Ballard and its subsidiaries is terminated,
except in the case of US holders, whose DSUs will be redeemed for Shares approximately 6 months after
termination of employment.
The Consolidated Option Plan provides for the acceleration of vesting of options upon a change of
control, which is defined as:
(a)
(b)
(c)
(d)
a person making a take-over bid that could result in that person or persons acting in concert
acquiring at least two-thirds of Ballard’s shares and in respect of which the Board approves
the acceleration of options;
any person or persons acting in concert acquiring at least two-thirds of the outstanding
Shares;
there is a disposition of all or substantially all of Ballard’s assets to an entity in which
Ballard does not have a majority interest;
Ballard joins in any business combination that results in Ballard’s shareholders owning one-
third or less of the voting shares of the combined entity and Ballard is privatized (or the
parties to the business combination have publicly expressed an intention to privatize
Ballard); or
(e)
any other transaction, a consequence of which is to privatize Ballard is approved by Ballard
security holders or, if such approval is not required, is approved by Ballard.
If an accelerated vesting event occurs any outstanding option may be exercised at any time before the 60th
day after such event.
Under the Consolidated SDP, the occurrence of any of the accelerated vesting events described
above triggers (subject to Board approval in the case of a take-over bid) the termination of the restriction
period applicable to RSUs such that holders will become immediately entitled to receive Shares in respect of
their RSUs (subject to satisfaction of any performance criteria or other conditions specified in the award).
The following table shows, for each Named Executive Officer, the amount such person would have
been entitled to receive on the termination of his employment, without just cause, on December 31, 2008, the
amount such person would have been entitled to if a change of control occurred on December 31, 2008 and
39
the amount such person would have been entitled to receive on the termination of his employment, without
just cause, on December 31, 2008 if that termination occurred following a change in control:
Named Executive Officer
Termination of Employment (2)
(US$)(1)
Change of Control (3)
(US$)(1)
Termination of Employment
following Change of Control
(US$)(1)
Triggering Event
John W. Sheridan
Severance
Other benefits
Accelerated vesting
Total
Dave S. Smith
Severance
Other benefits
Accelerated vesting
Total
Noordin Nanji
Severance
Other benefits
Accelerated vesting
Total
Christopher J. Guzy
Severance
Other benefits
Accelerated vesting
Total
Glenn Y. Kumoi
Severance
Other benefits
Accelerated vesting
Total
$964,559
$47,743
$0
$1,012,303
$731,025
$74,818
$0
$805,843
$608,402
$58,485
$0
$666,887
$540,846
$66,711
$0
$607,556
$400,691
$34,219
$0
$434,910
$0
$0
$616,550
$616,550
$0
$0
$76,249
$76,249
$0
$0
$76,249
$76,249
$0
$0
$76,249
$76,249
$0
$0
$36,202
$36,202
$1,653,530
$122,897
$0
$1,776,427
$865,353
$130,833
$0
$996,186
$720,197
$111,233
$0
$831,430
$865,353
$147,788
$0
$1,013,141
$739,737
$104,225
$0
$843,962
(1) All values are in United States dollars. However, as the majority of payments are payable in Canadian dollars, the amounts disclosed
above were converted into United States dollars using the Bank of Canada noon rate of exchange on December 31, 2008.
(2)
Based on accrued service to December 31, 2008 and the annual bonus amount earned during 2008.
(3) All options and RSUs vest immediately upon a change of control. Value shown equals, in the case of RSUs, the price of the underlying
Shares on December 31, 2008 multiplied by the number of RSUs. As the exercise price of the relevant options exceeded the market price
of the underlying Shares on December 31, 2008, no value is attributable to options.
DIRECTOR COMPENSATION
Our Corporate Governance Committee has the responsibility for determining compensation for our
Directors. The committee has determined that the principal method of compensating Directors should be
through an annual retainer and meeting fees. The retainer has historically been paid in DSUs or Shares, at
the election of the individual directors, but with the current shift in focus on limiting shareholder dilution, it
is expected director retainers will be paid in cash. Directors have not been issued any stock options or
similar equity-based compensation in the last 5 years, and there is no current intention to do so in the future.
40
The objective of the committee is to ensure that the annual retainer and meeting fees paid to
Directors is commensurate with the high quality of candidates Ballard has enjoyed in the past and expects in
the future. As a result the committee seeks to provide compensation for directors that would compensate
them at approximately the 50% mark for the comparator group of North American companies. The
committee retains independent compensation consultants for professional advice and as a source of
competitive market information. In 2008, the committee retained Towers Perrin to provide independent
compensation analysis and advice related to director compensation. Based on Towers Perrin’s report in
November 2008, the compensation provided to directors is slightly lower than the 50% mark. However, the
committee determined that, given the difficult global economic environment, the annual retainer for the
directors should be unchanged even though it did not currently meet the 50% level.
The Board sets annual effectiveness goals and tracks performance against those goals.
In 2008, compensation was earned by the directors as follows(1):
Name
Ian A. Bourne
Edwin J. Kilroy
Dr. C.S. Park
Dr. Geraldine B. Sinclair
David J. Smith
David B. Sutcliffe
Mark A. Suwyn
Douglas W.G. Whitehead
Fees Earned
(US$)(2)(3)
150,253
72,922
66,300
59,612
62,796
69,493
66,300
51,691
(1) All figures are in United States dollars. However, the compensation paid to directors (other than Dr. C.S. Park and Mr. Suwyn) was
actually paid in Canadian dollars. The Canadian dollar amounts were C$184,000, C$89,300, C$73,000, C$76,900, C$85,100 and
C$63,300 for Mr. Bourne, Mr. Kilroy, Ms. Sinclair, Mr. Smith, Mr. Sutcliffe and Mr. Whitehead, respectively. The Canadian dollar
amounts were converted into United States dollars for the purpose of the table above using the Bank of Canada noon rate of exchange on
December 31, 2008.
(2)
Represents the aggregate retainers and attendance fees paid:
Director
Ian A. Bourne
Edwin J. Kilroy
Dr. C.S. Park
Dr. Geraldine B. Sinclair
David J. Smith
David B. Sutcliffe
Mark A. Suwyn
Douglas W.G. Whitehead
Compensation
Board Retainer
(US$)
Committee Retainer
(US$)
Board and Committee
Attendance Fees
(US$)
Total Compensation
(US$)
140,454
36,747
45,000
36,747
36,747
36,747
45,000
36,747
Nil
11,841
1,500
2,450
5,308
6,533
3,000
2,450
9,799
24,334
19,800
20,415
20,741
26,213
18,300
12,494
150,253
72,922
66,300
59,612
62,796
69,493
66,300
51,691
All figures are in United States dollars. However, the compensation paid to directors (other than Dr. C.S. Park and Mr. Suwyn) was
actually paid in Canadian dollars. The Canadian dollar amounts in respect of Board Retainer were C$172,000 for Mr. Bourne and
C$45,000 for each of Mr. Kilroy, Ms. Sinclair, Mr. Smith, Mr. Sutcliffe and Mr. Whitehead. The Canadian dollar amounts in respect of
Committee Retainer were C$14,500, C$3,000, C$6,500, C$8,000 and C$3,000 for Mr. Kilroy, Ms. Sinclair, Mr. Smith, Mr. Sutcliffe and
Mr. Whitehead, respectively.The Canadian dollar amounts in respect of Board and Committee Attendance Fees were C$12,000,
C$29,800, C$25,000, C$25,400, C$32,100 and C$15,300 for Mr. Bourne, Mr. Kilroy, Ms. Sinclair, Mr. Smith, Mr. Sutcliffe and Mr.
Whitehead, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of the table above using
the Bank of Canada noon rate of exchange on December 31, 2008.
(3)
Each non-executive director may elect to receive part of his compensation in Shares or DSUs as described in the table below. The number
of Shares or DSUs issued to satisfy the compensation obligation is equal to the amount of the compensation to be satisfied by the issue of
Shares or DSUs, as applicable, divided by the fair market value of the Shares at the time of issuance (based on the closing trading price of
the Shares on the TSX on the day of grant).
41
We remunerate directors who are not executive officers directors for services to the Board,
committee participation and special assignments. The following table describes the compensation of
independent directors in 2008:
Annual Retainer (Non-Executive Chair of the Board) - Payable in Shares or DSUs, and up to 1/3 in Cash
Annual Retainer (Director) - Payable in Shares or DSUs
Annual Retainer (Committee Chairs) – Payable in Shares, DSUs or Cash
- Audit Committee
- All other Committees
Annual Retainer for Committee Members - Payable in Shares, DSUs or Cash
-Audit Committee
-All other Committees
Committee Meeting Attendance Fee (per meeting) – Payable in Cash
- Committee Chair
- Committee Member
Board Meeting Attendance Fee (per meeting) – Payable in Cash
C$
172,000
45,000
13,000
5,000
3,000
1,500
1,400
1,300
1,500
(1) The majority of compensation is paid in Canadian dollars. However, Dr. Park’s and Mr. Suwyn’s compensation was payable in United States
dollars and they received the following amounts:
Annual Retainer (Director) - Payable in Shares or DSUs
Annual Retainer (Committee Chairs) – Payable in Shares, DSUs or Cash
- Audit Committee
- All other Committees
Annual Retainer for Committee Members - Payable in Shares, DSUs or Cash
-Audit Committee
-All other Committees
Committee Meeting Attendance Fee (per meeting) – Payable in Cash
- Committee Chair
- Committee Member
Board Meeting Attendance Fee (per meeting) – Payable in Cash
US$45,000
US$13,000
US$5,000
US$3,000
US$1,500
US$1,400
US$1,300
US$1,500
(2) The Chair of the Board does not receive additional retainers or meeting attendance fees for the committees.
At the discretion of the Chair, a meeting fee may be paid to independent directors for meetings that
the director is requested or required to attend that are not official meetings of the Board or committees.
Directors are also reimbursed for travel and other reasonable expenses incurred in connection with
attending Board or committee meetings. If a meeting or group of meetings is held on a continent other than
the continent on which an independent director is resident, that director will receive an additional fee of
U.S.$2,250 (or C$2,250 in the case of a non-United States resident), in recognition of the additional time
required to travel to and from the meeting or meetings.
Historically, we have satisfied our Chair’s annual retainer by utilizing up to 1/3 cash and the
remainder in equity-based compensation. For our directors, we have historically satisfied annual retainers by
utilizing 100% in equity-based compensation, and committee retainers by utilizing cash or equity-based
compensation, based on an election made by each director. In 2008, after discovering the Overgrant, we paid
all retainers and meeting fees accrued thereafter in cash. Starting in 2003, we ceased the practice of annual
grants of share options to our independent directors. Meeting attendance fees are paid in cash.
Under the Current DSU Plan for Directors, each independent director may elect to receive a number
of DSUs to satisfy his or her total annual retainer. A DSU under this plan is a notional Share having the
same value as a Share at the time of grant. However, a DSU is not redeemed until the director leaves the
42
Board, and its value on redemption will be based on the value of our Shares at that time. The Current DSU
Plan for Directors thereby provides the financial equivalent of an ongoing equity interest in the Corporation
through our directors’ Board service. Directors are entitled to elect to participate in the Current DSU Plan
for Directors or to receive their annual retainers in Shares. The 2003 SDP or any successor plans will be
used to satisfy the redemption of DSUs issued pursuant to the Current DSU Plan for Directors and any
issuance of Shares to satisfy the annual retainer.
INCENTIVE PLAN AWARDS
The following table sets forth all option-based and share-based awards granted to our non-executive
directors that are outstanding as of December 31, 2008.
Name
Ian A. Bourne
Edwin J. Kilroy
Dr. C.S. Park
Dr. Geraldine B. Sinclair
David J. Smith
David B. Sutcliffe
Mark A. Suwyn
Douglas W.G. Whitehead
Outstanding Share-Based Awards and Option-Based Awards
(as of December 31, 2008)
Option-Based Awards
Number of Securities
Underlying
Unexercised Options
(#)
Option Exercise Price(1)
(US$)
Option Expiration Date
Value of Unexercised
In-The-Money
Options(2)
(US$)
0
6,000
0
0
0
0
0
7,500
6,000
6,000
2,500
6,000
(cid:2)
31.64
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
43.48
96.56
72.27
53.64
31.64
(cid:2)
May 16, 2012
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
May 20, 2009
Jun. 13, 2010
May 17, 2011
Nov. 30, 2011
May 16, 2012
(cid:2)
0
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
0
0
0
0
0
(1) All figures are in United States dollars. Where options are exercisable in Canadian dollars, the exercise price has been converted to
United States dollars using the Bank of Canada noon rate of exchange on December 31, 2008.
(2) This amount is based on the difference between the closing price of the Shares underlying the options on the TSX as at December 31,
2008, and the exercise price of the option converted to United States dollars using the Bank of Canada noon rate of exchange on
December 31, 2008. Where the difference is a negative number the value is deemed to be 0.
No incentive plan awards vested for, or were earned by, our Directors during the year ended
December 31, 2008.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets out, as of December 31, 2008, the number of securities we are authorized to
issue under our equity-based compensation plans and the relevant exercise prices at which such securities
may be issued.
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights (#)
(a)
Weighted -Average Exercise
Price of Outstanding
Options, Warrants and
Rights (C$)
(b)
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans excluding securities
reflected in column (a)
(c)
6,928,869(1)
Nil
6,928,869
19.67
N/A
19.67
2,890,950
N/A
2,890,950
Plan Category
Equity-based compensation plans
approved by security holders
Equity-based compensation plans
not approved by security holders
Total
43
(1) Shares issuable under the 2003 SDP, Current DSU Plans and Current RSU Plan will be satisfied with Shares reserved under the 2003 SDP
or any successor plan.
For a detailed description of our equity-based compensation plans, see the description above under
the heading "Equity-Based Compensation Matters".
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table shows securities beneficially owned, or controlled or directed, directly or
indirectly, by all directors and nominees and each of the Named Executive Officers as of April 14, 2009.
Amount and Nature of Beneficial
Ownership
Name of Beneficial Owner
Shares
DSUs
Percent of Class
(2)
(%)
Value (3)
(C$)
Value (4)
(US$)
Named Executive Officers
Christopher J. Guzy
Noordin Nanji
John W. Sheridan
Dave S. Smith(1)
Glenn Y. Kumoi
Directors
Ian A. Bourne
Edwin J. Kilroy
Dr. C.S. Park
Dr. Geraldine B. Sinclair
David J. Smith
David B. Sutcliffe
Mark A. Suwyn
Douglas W.G. Whitehead
All Directors and
Named Executive Officers
119,017
57,927
336,840
12,165
32,495
26,824
2,424
17,091
176
7,911
3,600
7,237
4,383
Nil
Nil
57,943
16,914
Nil
77,706
42,844
Nil
25,355
14,841
25,528
35,019
36,916
628,090
333,066
0.1412
0.0687
0.4685
0.0345
0.0386
0.1240
0.0537
0.0203
0.0303
0.0270
0.0346
0.0501
0.0490
1.1405
321,346
156,403
1,065,914
78,513
87,737
282,231
122,224
46,146
68,934
61,430
78,646
114,091
111,507
265,750
129,344
881,500
64,929
72,558
233,402
101,078
38,162
57,008
50,802
65,039
94,352
92,215
2,595,122
2,146,139
(1) Mr. Smith resigned as Vice President and Chief Financial Officer effective January 30, 2009, the number of Shares and DSUs held by him
are stated as at that date.
(2) For the purpose of this table, Shares and DSUs are treated as a single class. Based on 83,940,682 Shares and 333,066 DSUs issued and
outstanding as of April 14, 2009.
(3) Calculated on basis of C$2.70 closing Share price on the TSX as of April 14, 2009.
(4) Calculated on basis of C$2.70 closing Share price on the TSX as of April 14, 2009 and converted into United States dollars using the Bank
of Canada noon rate of exchange on April 14, 2009.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
To the best of our knowledge, no informed person, proposed director or person who has been a
director or executive officer of the Corporation (or any associate of affiliate of such persons) had any interest
in any material transactions during the past year or has any interest in any material transaction to be
considered at the Meeting, except as disclosed in this Management Proxy Circular.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
In compliance with Sarbanes-Oxley, we do not make or arrange personal loans to directors or
executive officers. As of April 14, 2009, our current or former directors, officers and employees have no
outstanding indebtedness to the Corporation, its subsidiaries or to any other entity and which is guaranteed
by the Corporation or its subsidiaries.
44
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE
We purchase and maintain insurance for the benefit of our directors and officers for losses arising
from claims against them for certain actual or alleged wrongful acts they may undertake while performing
their director or officer function. The total annual premium in respect of our directors’ and officers’ liability
insurance program was approximately US$700,000 for 2008 and US$600,000 for 2009. The aggregate
maximum coverage provided by the policy for all claims, for both directors and officers, in any single policy
year is US$40 million. In addition to the payment of the premiums, we are accountable for the payment of
the policy deductible of US$200,000 to US$500,000 per claim. We have also agreed to indemnify each of
our directors and officers against all expenses, liability and loss, reasonably incurred or suffered, arising from
the performance of his or her duties as an officer or director of Ballard.
ADDITIONAL INFORMATION
Additional information relating to us is included in the following public filings, which are
incorporated by reference (the "Incorporated Documents") into, and form an integral part of, this
Management Proxy Circular:
•
•
•
Annual Information Form dated March 10, 2009;
Audited Annual Financial Statements for the year ended December 31, 2008 together with
the auditors’ report thereon; and
Management's Discussion and Analysis for the year ended December 31, 2008.
Copies of the Incorporated Documents and all our other public filings providing additional
information relating to us may be obtained at www.sedar.com or www.sec.gov, or upon request and without
further charge from either our Corporate Secretary, at 9000 Glenlyon Parkway, Burnaby, British Columbia,
Canada V5J 5J8, or by calling our Investor Relations Department at (604) 454-0900.
PROPOSALS
Any shareholder who intends to present a proposal at our 2010 annual shareholders’ meeting must
send the proposal to our Corporate Secretary at 9000 Glenlyon Parkway, Burnaby, British Columbia, Canada
V5J 5J8. In order for the proposal to be included in the proxy materials we send to shareholders for that
meeting, the proposal:
•
•
must be received by us no later than January 14, 2010; and
must comply with the requirements of section 137 of the Canada Business Corporations Act.
We are not obligated to include any shareholder proposal in our proxy materials for the 2010 annual
shareholders’ meeting if the proposal is received after the January 14, 2010 deadline.
Our Board has approved the contents and the sending of this Management Proxy Circular to the
shareholders of the Corporation.
APPROVAL BY BOARD
BY ORDER OF THE BOARD
"Glenn Y. Kumoi"
GLENN Y. KUMOI
Vice President, Human Resources,
Chief Legal Officer and Corporate Secretary
Dated: April 14, 2009
45
APPENDIX A
DESCRIPTION OF CONSOLIDATED OPTION PLAN
The Consolidated Option Plan is designed to recognize contributions made by directors, officers
and employees of Ballard or any of its subsidiaries and to provide an incentive for their continuing
relationship and to promote a greater alignment of interests between directors, officers and employees
and the shareholders by providing equity incentives. The Board, on the recommendation of the MDNCC,
makes all grants of Ballard options under the Consolidated Option Plan.
All directors, officers and employees of Ballard and its subsidiaries will be eligible to participate
in the Consolidated Option Plan. The same categories of people were eligible to participate in the 2002
Option Plan, while consultants to the Corporation were also eligible to participate in each of the 1997
Option Plan and the 2000 Option Plan.
Former Ballard employees who have been transferred (the "Transferred Employees") to AFCC
Automotive Fuel Cell Cooperation Corp. ("AFCC") are be permitted to participate in the Consolidated
Option Plan on the same basis as they are entitled to participate in the Current Option Plans. That is, to a
limited extent, for so long as they remain employees of AFCC. New Ballard options may not be granted
to Transferred Employees under either the Consolidated Option Plan or the Current Option Plans.
The Consolidated Option Plan consolidates the four Current Option Plans into a single plan under
which the number of Shares reserved and authorized for issue will be equal to the aggregate number of
Shares reserved and authorized under the Current Option Plans, at the time of adoption.
As at April 14, 2009, the number of Shares issued and reserved and authorized for issue under
each of the Current Option Plans and the percent of the issued and outstanding Shares represented by that
number of Shares is as follows:
Shares Issued or
Reserved for Issue
No. of
Shares
% of
Outstanding
Shares
Plan
2002 Option Plan
2,750,000
2000 Option Plan
3,469,839
1997 Option Plan
2,454,456
BGS
Exchange Plan
Option
171,813
3.3
4.1
2.9
0.2
Shares Issued
Shares Reserved for
Issue in respect of
Outstanding Options
Shares no longer
available for Issue
(Lapsed Options)(1)
Shares Available in
respect of Future
Option Grants
% of
Outstanding
Shares
No. of
Shares
% of
Outstanding
Shares
<0.01
2,322,210
2.8
3.3
0.7
2,748,849
599,184
No. of
Shares
390,235
452,380
691,225
No. of
Shares
4,550
Nil
1,164,047
Nil
Nil
1.4
Nil
26,608
<0.1
52,889
% of
Outstanding
Shares
No. of
Shares
% of
Outstanding
Shares
0.5
0.5
0.8
0.1
33,055
<0.1
268,610
Nil
92,316(2)
0.3
Nil
0.1
Total
8,846,108
10.5
1,168,597
1.4
5,696,851
6.8
1,586,729
1.9
393,931
0.5
(1) Under the Consolidated Option Plan, these Shares (which are already reserved for issuance) would become issuable as they would
form part of the larger pool of Shares available for issue.
(2) As all BGS options have either been exchanged for Ballard options or expired, no further grants are capable of being made these
92,316 Shares cannot be used under the BGS Option Exchange Plan. Under the Consolidated Option Plan, such Shares (which are
already reserved for issuance) would become issuable as they would form part of the larger pool of Shares available for issue.
If the Consolidated Option Plan had been adopted on April 14, 2009, a maximum of 8,846,108
Shares would have been reserved and authorized for issuance under it (representing 10.5% of the issued
and outstanding Shares as of April 14, 2009). Of these 8,846,108 Shares, 5,696,851 Shares would have
been reserved for issuance on the exercise of then outstanding options (representing 6.8% of the issued
and outstanding Shares as of April 14, 2009) and 1,980,660 Shares would have remained reserved for
issuance under options that may be granted in the future (representing 2.4% of the issued and outstanding
46
Shares of that date), 1,586,729 of which would have been in respect of options which have lapsed and,
therefore, would not have been available under the Current Option Plans.
If the Consolidated Equity-Based Compensation Plans receive the required shareholder and TSX
approvals, all outstanding options granted under the Current Option Plans will continue under the terms
of the Consolidated Option Plan.
The Consolidated Option Plan provides that Shares that had been reserved for issue under options
that are surrendered, terminated or expire without being exercised will form part of the pool of Shares
available for options and may be the subject of further option grants. This is a change from the Current
Option Plans, which are either silent on the issue or provide that such Shares are only available for reissue
if the Board so determines (other than the 1997 Option Plan and the BGS Option Exchange Plan which
prohibit further grants in respect of Shares not purchased under lapsed options). The 1,980,660 Shares
which would be available for future grants under the Consolidated Options Plan had it been adopted on
April 14, 2009 would include 1,586,729 Shares which were no longer available for issue under the
Current Option Plans because they had been previously allotted for issue under lapsed options.
The number of options granted under the Consolidated Option Plan may adjust if any share
reorganization, stock dividend or corporate reorganization occurs.
The Consolidated Option Plan limits insider participation such that the number of Shares issued
to insiders, within any one-year period, and issuable to insiders, at any time, under the plan and any other
Ballard equity-based compensation arrangements, cannot exceed 10% of Ballard’s issued and outstanding
Shares.
These limits comply with TSX requirements and differ from those under the Current Option
Plans which restrict the number of Shares that can be issued or reserved for issue under each plan,
together with all other Ballard equity-based compensation arrangements, to insiders to 10% of the
Outstanding Issue (as defined in the plans) and to any insider and his or her associates, within a one-year
period, to 5% of the Outstanding Issue, at the relevant time.
The Current Option Plans (other than the BGS Option Exchange Plan) also limit the number of
Shares that can be reserved for issue to any one person under the relevant plan, or in the case of the 2002
Option Plan, under all stock option plans, to 5% of the Outstanding Issue. These limits have been
removed in the Consolidated Option Plan.
The 2002 Option Plan and the 2000 Option Plan further restrict the number of Shares that can be
issued or reserved for issuance to directors (other than directors who are also officers). Under the 2002
Option Plan a maximum of 150,000 Shares in the aggregate and 10,000 Shares annually to each
individual can be issued or reserved for issue to non-executive directors. Under the 2000 Option Plan, the
maximum number of Shares that can be issued or reserved for issue to non-executive directors under that
plan and any other Ballard equity-based compensation arrangement is 295,000. These limits have been
removed in the Consolidated Option Plan and replaced with a new limit which specifies that, in any year,
a non-executive Director’s participation in all Ballard equity-based compensation arrangements is limited
to that number of shares (or that number of securities in respect of underlying shares) having a value of
not more than C$100,000 on the date of grant, excluding any securities issued in respect of the non-
executive Director’s annual retainer.
Apart from the limits on Shares issued or issuable to insiders and to non-executive Directors,
described above, the Consolidated Option Plan does not restrict the number of Shares that can be issued
to any one person or to Directors.
As is the case under the 2002 Option Plan, under the Consolidated Option Plan the exercise price
of a Ballard option will be determined by the Board and is to be no less than the closing price per Share
on the TSX on the last trading day before the date the option is granted. Under the 2000 Option Plan and
the 1997 Option Plan the exercise price is fixed at the closing price per Share on the TSX on the last
trading day before the day the option is granted.
47
Under the Consolidated Option Plan, Ballard options may have a term of up to 10 years from the
date of grant, and unless otherwise determined by the Board, will vest in equal amounts on the first,
second and third anniversaries of the date of grant. These provisions are substantially the same as the
corresponding provisions of the Current Option Plans.
Vesting of options may be accelerated in certain cases. If an "accelerated vesting event" occurs,
any outstanding option may be exercised at any time before the 60th day after such event. An accelerated
vesting event occurs when: (a) a person makes a take-over bid that could result in that person or persons
acting in concert acquiring at least two-thirds of Shares; (b) any person or persons acting in concert
acquire at least two-thirds of Shares; (c) there is a disposition of all or substantially all of Ballard’s assets;
(d) Ballard joins in any business combination that results in Ballard’s shareholders owning one-third or
less of the voting shares of the combined entity and Ballard is privatized (or the parties to the business
combination have publicly expressed an intention to privatize Ballard); or (e) any other transaction, a
consequence of which is to privatize Ballard is approved. The Current Option Plans contain similar
provisions with respect to accelerated vesting, except that (i) an intention to privatize is not required for
vesting to be accelerated in the event of a business combination and (ii) vesting is not accelerated on
approval of "other" privatization transactions. The Consolidated Option Plan includes these events so as
to conform the acceleration events under the Consolidated Option Plan with those under the Consolidated
SDP and eliminate discrepancies between the events that trigger accelerated vesting under the Current
Option Plans and those that trigger accelerated vesting (technically, a shortening of the restriction period)
under the Current RSU Plan thus providing for equality of treatment between option holders and RSU
holders.
In addition to the conforming changes referred to above, a “double trigger” has been added in the
event of a take-over. Accordingly, vesting will only be accelerated if the Board approves the
acceleration. In such circumstances, the Board will also have the ability to make such changes as it
considers fair and appropriate, including accelerating vesting, otherwise modifying the terms of options to
assist the holder to tender into the take-over bid or terminating options which have not been exercised
prior to the successful completion of the accelerated vesting event. A similar double trigger has been
added to the Consolidated SDP.
Under the Consolidated Option Plan each option will expire (or no longer be capable of being
exercised) on the earlier of:
(a)
(b)
the expiration date as determined by the Board, which date will not be more than 10
years from the date of grant; and
if the optionee is a director, officer or employee, the optionee ceases to hold such
position, except that, an option will be capable of exercise, if the optionee ceases to be a
director, officer or employee:
(i)
(ii)
(iii)
(iv)
because of his or her death, for one year after the optionee dies;
because of his or her retirement, for three years after the optionee retires (or, if
the optionee dies after retirement, one year after his or her death, if earlier);
as a result of voluntary resignation, for 30 days after the last day on which the
optionee ceases to be a director, or the officer or employee ceases to work for
Ballard;
other than as a result of voluntary resignation (in the case of a director) or
termination other than for just cause (in the case of an officer or employee), for
90 days after the last day on which the optionee ceases to be a director, or the
officer or employee ceases to work for Ballard (although in these circumstances,
the Chief Executive Officer has discretion to extend the exercise period to up to
one year after the optionee ceases to work for Ballard).
In the event that the optionee dies, all previously unvested options vest and, in the circumstances
described in (b)(iv) above, the Chief Executive Officer has discretion to accelerate the vesting of unvested
48
options that would have otherwise vested in the next year. In the other circumstances described above, an
option is only capable of being exercised in respect of options that were vested at the time the optionee
ceased to be a director or ceased to work for Ballard.
In the event that an optionee becomes "totally disabled" (as defined in the Consolidated Option
Plan), his or her options will continue to vest and be exercisable as they would have had the optionee
continued to be a director, officer or employee of Ballard.
If an option would otherwise expire or cease to be exercisable during a blackout period or within
nine business days after the end of a blackout period (that is, a period during which employees and/or
directors cannot trade in securities of the Corporation because they may be in possession of insider
information), the expiry date of the option is extended to the date which is 10 business days after the end
of the blackout period.
The 2002 Option Plan contains similar provisions with respect to when options expire or cease to
become exercisable. The provisions of the other Current Option Plans with respect to expiry and
exercisability differ from those of the Consolidated Option Plan as follows:
(a)
under the 2000 Option Plan and the 1997 Option Plan:
(i)
(ii)
options are exercisable for up to 30 days after the optionee ceases to be a director
(in any circumstances) or ceases to work for Ballard other than for cause; and
in the event that the optionee ceases to work for Ballard as a result of retirement
or becoming totally disabled, previously unvested options become capable of
being exercised; and
(b)
under the 2000 Option Plan, options are exercisable for up to three years after the
optionee dies or becomes totally disabled;
(c)
under the 1997 Option Plan and the BGS Option Exchange Plan:
(i)
(ii)
options are exercisable for up to two years after the optionee dies; and
options are exercisable for up to five years after the optionee retires or becomes
totally disabled; and
(d)
under the BGS Option Exchange Plan, in the event that an optionee ceases to be
employed by Ballard other than as a result of termination for cause, death, retirement or
becoming totally disabled, his or her options are exercisable for 30 days.
The Board is entitled to make, at any time, and from time to time, and without obtaining
shareholder approval, amend any provision of the Consolidated Option Plan and/or any option previously
granted including, without limitation, any of the following amendments
(a)
(b)
amendments to the definitions and other amendments of a clerical nature;
amendments to any provisions relating to the granting or exercise of options, including
but not limited to provisions relating to the term, termination, amount and payment of the
subscription price, vesting period, expiry or adjustment of options, provided that, without
shareholder approval, such amendment does not entail:
(i)
(ii)
(iii)
(iv)
a change in the number or percentage of Shares reserved for issuance under the
plan;
a reduction in the exercise price of an option or the cancellation and reissuance of
options;
an extension of the expiry date of an outstanding option;
an increase to the maximum number of Shares that may be:
(A)
issued to insiders within a one-year period; or
49
(B)
issuable to insiders at any time,
under all of Ballard’s equity-based compensation arrangements, which could
exceed 10% of the issued and outstanding Shares of at that time;
(v)
an increase in the maximum number of securities that can be granted to directors
(other than directors who are also officers) under all of Ballard’s equity-based
compensation arrangements, which could exceed such number of securities in
respect of which the underlying Shares have a Fair Market Value (as defined in
the plan) on the date of grant of such securities of C$100,000;
(vi)
permitting options to be transferable or assignable other than for normal course
estate settlement purposes; or
(vii)
a change to the amendment provisions of the plan;
(c)
(d)
(e)
(f)
the addition or amendment of terms relating to the provision of financial assistance to
optionees or resulting in optionees receiving any Ballard securities, including pursuant to
a cashless exercise feature;
any amendment in respect of the persons eligible to participate in the plan, provided that,
without shareholder approval, such amendment does not permit non-employee directors
to re-gain participation rights under the plan at the discretion of the Board if their
eligibility to participate had previously been removed or increase limits previously
imposed on non-employee director participation;
such amendments as are necessary for the purpose of complying with any changes in any
relevant law, rule, regulation, regulatory requirement or requirement of any applicable
stock exchange or regulatory authority; or
amendments to correct or rectify any ambiguity, defective provision, error or omission in
the plan or in any agreement to purchase options.
Each of the Current Option Plans (other than the BGS Option Exchange Plan) permits the Board
to make similar amendments. Although there are some minor technical wording changes between the
amendment provisions of each of the Current Option Plans (other than the BGS Option Exchange Plan)
and the Consolidated Option Plan, there is no substantive difference.
The Consolidated Option Plan includes a customary provision, which allows the Board to
terminate the plan, or any part of it, at any time. No such termination will adversely affect an
optionholder’s rights without his or her consent or unless required by law. The BGS Option Exchange
Plan is the only Current Option Plan that permits termination.
Options are not assignable except as permitted by applicable regulatory authorities in connection
with a transfer to an optionee’s registered retirement savings plan (an "RRSP") or registered retirement
income fund (an "RIFF") or to the personal representative of an optionee who has died. Each of the
Current Option Plans contains similar provisions except for the 1997 Option Plan, which does not permit
assignment to an RRSP or an RIFF.
The Consolidated Option Plan provides that the plan and all option grants and exercises
(including Ballard’s obligation to deliver Shares) under it are subject to all applicable laws and regulatory
requirements and that none of Ballard, the directors, the Chief Executive Officer or any other person
acting pursuant to any delegated authority under the plan will be liable to an optionholder for any action
taken in order to comply with applicable law and regulatory requirements. There is no similar provision
in the Current Option Plans.
In addition to the differences described above, the Consolidated Option Plan differs from the
Current Option Plans to the extent that it includes certain non-material revisions to definitions and
provisions reflecting current securities law and practice, other changes to eliminate inconsistencies and
amendments of a clerical nature.
50
APPENDIX B
DESCRIPTION OF CONSOLIDATED SDP
The Consolidated SDP is designed to recognise contributions made by employees and directors
and to promote a greater alignment of their interests with those of shareholders. The Consolidated SDP is
a single plan divided into the following three principal sections:
(a)
(b)
A deferred share unit section for senior executives (the "New DSU Plan for Executive
Officers") to enable Ballard to recognise contributions made by certain senior executives
through the granting of DSUs. Under the Consolidated SDP, DSUs are granted at the
election of each executive officer of Ballard who is eligible (as determined by the Board)
in partial or full payment of his or her annual bonus, which otherwise is paid in Shares.
A deferred share unit section for directors (the "New DSU Plan for Directors", and
together with the New DSU Plan for Executive Officers, the "New Consolidated DSU
Plans") enables Ballard to satisfy directors’ annual retainers. Under the New DSU Plan
for Directors, each independent outside director elects annually the proportion (0% to
100%) of his or her annual retainer that he or she wishes to receive in DSUs.
Under the Consolidated SDP, DSUs are credited to an account maintained for each
eligible person by Ballard. Each DSU is convertible into one Share. The number of
DSUs to be credited to an eligible person is determined on the relevant date by dividing
the amount of the eligible remuneration to be deferred into DSUs by the fair market value
per Share, being a price not less than the closing sale price at which the Shares are traded
on the TSX (in respect of a Deferred Share Unit issued or to be issued to a person who is
resident in any country other than the U.S.) or NASDAQ (in respect of a Deferred Share
Unit issued or to be issued to a person who is resident in any country other than the U.S.)
on the trading day before the relevant date. In the case of the executive officers, the
relevant date is set by the Board but if such date occurs during a trading blackout, the
number of DSUs will be determined on the first trading day after the day on which the
blackout is lifted. For directors, DSUs are credited at the time specified by the Board
(currently DSUs are granted in equal instalments over the course of a year, at the end of
each quarter). Under the Current DSU Plan for Directors, the Board has the ability to
determine the date on which the calculation would be based.
On any date on which a dividend is paid on the Shares, an eligible person's account will
be credited with the number of DSUs calculated by: (i) multiplying the amount of the
dividend per Share by the aggregate number of DSUs that were credited to that account
as of the record date for payment of the dividend; and (ii) dividing the amount obtained in
(i) by the fair market value (determined as set out above) of Shares on the date on which
the dividend is paid. The same provision is found in the Current DSU Plans.
A departing director or executive officer may receive Shares in respect of the DSUs
credited to that person's account (at the ratio of one Share per DSU, subject to the
deduction of any applicable withholding tax in the case of an eligible person who is a
United States citizen or resident for the purpose of United States tax). A DSU, however,
cannot be redeemed until such time as the director leaves the Board or the executive
officer ceases to work for Ballard, and its value on redemption will be based on the value
of Shares at that time. All DSUs vest immediately as they are issued in respect of
remuneration that would have otherwise been paid in Shares or cash. DSUs do not
expire. Except in the case of death, DSUs can only be assigned with consent. The
Current DSU Plans contain similar provisions.
(c)
A restricted share unit section (the "New RSU Plan") designed to annually recognize
contributions made by certain employees in accordance with the Corporation’s bonus
plan through the issuance of RSUs. All employees (excluding non-executive directors)
51
are eligible to participate in the New RSU Plan. All grants under the New RSU Plan are
made at the discretion of the Board. Transferred Employees are also permitted to
participate in the New RSU Plan on the same basis as they are entitled to participate in
the Current RSU Plan. That is, with respect to their previously granted RSUs, to a
limited extent, for so long as they remain employees of AFCC. New RSUs may not be
granted to Transferred Employees under either the Current RSU Plan or the New RSU
Plan.
The vesting of RSUs issued under the Consolidated SDP occurs up to three years from
the date of issuance, subject to the achievement of any performance criteria which may
be set by the Board and to earlier vesting upon the occurrence of any accelerated vesting
event (as defined in the Consolidated SDP). Each RSU is convertible into one Share,
which will be issued under the Consolidated SDP. RSUs granted under the Current RSU
Plan vest and convert on the same basis.
A “double trigger” has been added in the event of a take-over. Accordingly, in the event
of a take-over the accelerated vesting of an RSU (technically, the shortening of the
restriction period) will only occur if the Board so determines. In such circumstances, the
Board will also have the ability to make such changes as it considers fair and appropriate
in the circumstances, including the date on which the restriction period ends or otherwise
modifying the terms of RSUs to assist the holder to tender into the take-over bid.
In addition, the Board has been given the discretion to deem performance criteria or other
conditions to have been met on the occurrence of an accelerated vesting event. There is
no similar discretion under the Current RSU Plan.
If any performance criteria or other conditions specified in an award of RSUs is not met
on or before the last day of the restriction period applicable to the relevant grant (usually
three years less one day from the date of grant), the RSUs will expire and the participant
will no longer be entitled to receive any Shares upon conversion of those RSUs.
All RSUs awarded to a participant under the Consolidated SDP will also expire on the
last day on which the participant works for Ballard or any of its subsidiaries (or, in the
case of a Transferred Employee, AFCC or its subsidiaries) except that, in the event of the
participant's death or total disability, the performance criteria and conditions specified in
the participant's award of RSUs will, unless otherwise specified in the award, be deemed
satisfied and the RSUs will be converted into Shares.
RSUs cannot be assigned other than by will or the laws of descent and distribution.
In a departure from the Current RSU Plan, under the Consolidated SDP, the Board can
elect to satisfy the conversion of RSUs through Ballard Shares purchased on the open
market.
One of the purposes of the 2000 SDP and the 2003 SDP was to enable Ballard to conserve its
cash reserves by allowing it to satisfy in Shares the following cash obligations: (i) annual bonus plan
payments; (ii) signing bonus payments; and (iii) contractual amounts payable as a result of termination of
employment. The Consolidated SDP does not carry-forward this purpose and, as a result, when the
Consolidated SDP is adopted Ballard will no longer be able to issue Shares to satisfy these cash
obligations.
The Consolidated SDP consolidates the 2000 SDP, the 2003 SDP, the Current DSU Plans and the
Current RSU Plan into a single plan under which the number of Shares reserved and authorized for issue
will be equal to the aggregate reserved and authorized under the 2000 SDP and the 2003 SDP.
As of April 14, 2009, the number of Shares issued and reserved and authorized for issue under the
Current SDPs and the percent of the issued and outstanding Shares represented by such number of Shares
is as follows:
52
Shares Issued or Reserved
for Issue
Shares Issued
Shares Reserved for Issue
in respect of Outstanding
DSUs and RSUs
Shares Available in respect
of Future Grants
No. of
Shares
Percent of
Outstanding
Shares
Plan
2000 SDP
500,000
2003 SDP
7,050,000
Total
7,550,000
0.6
8.4
9.0
No. of
Shares
476,453
5,373,314
5,849,767
Percent of
Outstanding
Shares
0.7
6.4
7.0
No. of
Shares
0
1,642,887
1,642,887
Percent of
Outstanding
Shares
0
2.0
2.0
No. of
Shares
23,547
33,799
57,346
Percent of
Outstanding
Shares
0.03
0.04
0.07
If the Consolidated SDP had been adopted on April 14, 2009, a maximum of 7,050,000 Shares
would have been reserved and authorized for issuance under it (representing that number of Shares equal
to 9.0% of the issued and outstanding Shares as of that date). Of these 7,050,000 Shares, 1,642,887
Shares would have been reserved for issuance on the exercise of then outstanding DSUs and RSUs
(representing 2.0% of the issued and outstanding Shares as of April 14, 2009) and 57,346 Shares would
have remained reserved for issuance under DSUs and RSUs that may be granted in the future
(representing that number of Shares equal to 0.07% of the issued and outstanding Shares as of that date).
The Consolidated SDP provides that Shares that had been reserved for issue under DSUs or RSUs
that expire or are cancelled, surrendered or terminated without having been redeemed or converted in
whole or in part or are satisfied otherwise than through the issue of treasury Shares, will form part of the
pool of Shares available for issue under Consolidated SDP and may be made the subject of further
awards.
If the Consolidated Equity-Based Compensation Plans receive the required shareholder and TSX
approvals, all outstanding DSUs and RSUs granted under the Current DSU Plans or the Current RSU Plan
will continue under the terms of the Consolidated SDP.
The Consolidated SDP limits insider participation such that the number of Shares issued to
insiders, within any one-year period, and issuable to insiders, at any time, under the plan and any other
Ballard equity-based compensation arrangements, cannot exceed 10% of Ballard’s issued and outstanding
Shares.
These limits comply with TSX requirements and differ from those under the 2000 SDP and the
2003 SDP, each of which restricts the number of Shares that can be issued or reserved for issue under the
plan, together with all other Ballard equity-based compensation arrangements, to insiders to 10% of the
Outstanding Issue (as defined in the plans) and to any insider and his or her associates, within a one-year
period, to 5% of the Outstanding Issue, at the relevant time.
The 2003 SDP further restricts the number of Shares that may be issued under that plan to
directors (other than directors who are also officers of Ballard or any of its subsidiaries) to a maximum of
200,000 Shares. This limit has been removed in the Consolidated SDP and replaced with a new limit
which specifies that, in any year, a non-executive Director’s participation in all Ballard equity-based
compensation arrangements is limited to that number of shares (or that number of securities in respect of
underlying shares) having a value of not more than C$100,000 on the date of grant, excluding any
securities issued in respect of the non-executive Director’s annual retainer.
The Consolidated SDP does not limit the number of DSUs that can be issued to executive
officers. The Current DSU Plan for Executive Officers limits the number of DSUs which can be issued to
executive officers to the number of DSUs that, if converted to Shares, have a fair market value as of the
date of calculation, equal to the greater of:
(a)
in the case of the Chief Executive Officer, two times his or her annual base salary, or for
any other participant, an amount equal to his or her annual base salary, in either case for
the relevant performance period; and
53
(b)
in the case of the Chief Executive Officer, the fair market value of 52,000 Shares, or for
any other participant, the fair market value of 11,000 Shares.
Unlike the Current RSU Plan, the Consolidated SDP does not limit the number of RSUs that can
be issued to any one participant. The Current RSU Plan limits the number of Shares in respect of which
awards can be made to any one participant under the plan (when aggregated with all Shares reserved for
issuance to such person under all other Ballard equity-based compensation plans) to 5% of Ballard’s
issued and outstanding Shares.
Apart from the limits on Shares issued or issuable to insiders and non-executive Directors
described above, the Consolidated SDP does not restrict the number of Shares that can be issued to any
one person, to executive officers or to Directors.
The Consolidated SDP permits the Board, without obtaining shareholder approval, to amend any
provision of the Consolidated SDP and/or any RSU and/or DSU governed by it (whether outstanding or
otherwise) (subject to any stock exchange or regulatory requirement at the time of any such amendment)
including, without limitation, any of the following amendments:
(a)
(b)
amendments to the definitions and other amendments of a clerical nature;
amendments to any provisions relating to the issuance of Shares, granting or conversion
of DSUs or RSUs, including but not limited to provisions relating to the term,
termination, and number of DSUs or RSUs to be awarded, provided that, without
shareholder approval, such amendment does not entail:
(i)
(ii)
(iii)
(iv)
a change in the number or percentage of Shares reserved for issuance under the
plan;
a reduction of the issue price of the Shares issued under the plan or the
cancellation and reissue of Shares;
a reduction to the fair market value used to calculate the number of DSUs to be
awarded;
an extension of time for redemption of a DSU or an extension beyond the
original restriction period of an RSU;
(v)
an increase to the maximum number of Shares that may be:
(A)
(B)
issued to insiders within a one-year period; or
issuable to insiders at any time,
under all of Ballard’s equity-based compensation arrangements, which could
exceed 10% of the issued and outstanding Shares at that time;
(vi)
an increase in the maximum number of securities that can be granted to directors
(other than directors who are also officers) under all of Ballard’s equity-based
compensation arrangements, which could exceed such number of securities in
respect of which the underlying Shares have a Fair Market Value (as defined in
the plan) on the date of grant of such securities of C$100,000;
(vii)
permitting DSUs or RSUs to be transferable or assignable other than for normal
course estate settlement purposes; or
(viii)
a change to the amendment provisions of the plan;
(c)
any amendment in respect of the persons eligible to participate in the plan (or any part of
it), provided that, without shareholder approval, such amendment does not permit non-
employee directors to:
(i)
participate as holders of RSUs at the discretion of the Board;
54
(ii)
re-gain participation rights under any section of the plan at the discretion of the
Board if their eligibility (as a class) to participate had previously been removed;
or
(iii)
increase limits previously imposed on non-employee director participation;
(d)
(e)
such amendments as are necessary for the purpose of complying with any changes in any
relevant law, rule, regulation, regulatory requirement or requirement of any applicable
stock exchange or regulatory authority; or
amendments to correct or rectify any ambiguity, defective provision, error or omission in
the plan or in any option agreement, notice to redeem DSUs or RSU agreement.
Each of the Current SDPs permits the Board to make similar amendments. Although there are
some minor technical wording changes between the amendment provisions of the Current SDPs and the
Consolidated SDP, there are no substantive differences.
The Consolidated SDP includes a customary provision, which allows the Board to terminate the
plan, or any part of it, at any time. No such termination will adversely affect an award holder’s rights
without his consent or unless required by law. There is no similar provision in the Current SDPs.
The Consolidated SDP provides that the plan, all grants of RSUs and DSUs and Ballard’s
obligation to deliver Shares under the plan are subject to all applicable laws and regulatory requirements,
and that none of Ballard, the directors, the Chief Executive Officer or any other person acting pursuant to
any delegated authority under the plan will be liable to an participant for any action taken in order to
comply with applicable law and regulatory requirements. There is no similar provision in the Current
SDPs.
In addition to the differences described above, the Consolidated SDP differs from the Current
SDPs to the extent that it includes certain non-material revisions to definitions and provisions reflecting
current securities law and practice, other changes to eliminate inconsistencies and amendments of a
clerical nature.
55
Ballard Power Systems Inc.
Financial Information
(cid:3) Management’s Discussion and Analysis
(cid:2) Consolidated Financial Statements
56
MANAGEMENT’S DISCUSSION AND ANALYSIS
BASIS OF PRESENTATION
The information below should be read in conjunction with the Audited Consolidated Financial Statements
for the year ended December 31, 2008. Our consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles (“GAAP”). The effect of significant
differences between Canadian and U.S. GAAP has been disclosed in note 21 to the consolidated financial
statements for the year ended December 31, 2008. Unless the context otherwise requires, all references to
“Ballard”, “the Company”, “we”, “us” and “our” refer to Ballard Power Systems Inc. and its subsidiaries.
This discussion and analysis is dated March 2, 2009.
All amounts in this report are in U.S. dollars, unless otherwise stated.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that are based on the beliefs of management and
reflect our current expectations as contemplated under the safe harbor provisions of Section 21E of the
United States Securities Exchange Act of 1934, as amended. Such statements include, but are not limited
to, statements with respect to our objectives, goals and outlook including our estimated product
shipments, revenue and operating cash consumption (see Non-GAAP Measures), as well as statements
with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. Words
such as "estimate", "project", "believe", "anticipate", "intend", "expect", "plan", "predict", "may",
"should", "will", the negatives of these words or other variations thereof and comparable terminology are
intended to identify forward-looking statements. These statements are not guarantees of future
performance and involve assumptions, risks and uncertainties that are difficult to predict.
In particular, these forward-looking statements are based on certain specific assumptions relating to our
expectations with respect to the generation of new sales, producing, delivering and selling the expected
product volumes at the expected prices, and controlling our costs. They are also based on a variety of
general factors and assumptions including, but not limited to, our expectations regarding product
development efforts, manufacturing capacity, product pricing, market demand, and the availability and
prices of raw materials, labour and supplies. These assumptions have been derived from information
available to the Company including information obtained by the Company from third parties. These
assumptions may prove to be incorrect in whole or in part. In addition, actual results may differ
materially from those expressed, implied, or forecasted in such forward-looking statements. Factors that
could cause our actual results or outcomes to differ materially from the results expressed, implied or
forecasted in such forward-looking statements include, but are not limited to: the condition of the global
economy; the rate of mass adoption of our products; changes in product pricing; changes in our
customers' requirements,
the competitive environment and related market conditions; product
development delays; changes in the availability or price of raw materials, labour and supplies; our ability
to attract and retain business partners, suppliers, employees and customers; changing environmental
regulations; our access to funding and our ability to provide the capital required for product development,
operations and marketing efforts; our ability to protect our intellectual property; the magnitude of the rate
of change of the Canadian dollar versus the U.S. dollar; and the general assumption that none of the risks
identified in the Risks and Uncertainties section of this report or in our most recent Annual Information
Form will materialize. Readers should not place undue reliance on Ballard's forward-looking statements.
The forward-looking statements contained in this document speak only as of the date of this Management
Discussion and Analysis. Except as required by applicable legislation, Ballard does not undertake any
obligation to release publicly any revisions to these forward-looking statements to reflect events or
57
circumstances after the date of this Management Discussion and Analysis, including the occurrence of
unanticipated events.
BUSINESS OVERVIEW
At Ballard, we are building a clean energy growth company. We are recognized as a world leader in
proton exchange membrane (“PEM”) fuel cell development and commercialization. Our principal
business is the design, development, manufacture, sale and service of fuel cell products for a variety of
applications, focusing on motive power (material handling and buses) and stationary power (back-up
power and residential cogeneration).
A fuel cell is an environmentally clean electrochemical device that combines hydrogen fuel with oxygen
(from the air) to produce electricity. The hydrogen fuel can be obtained from natural gas, kerosene,
methanol or other hydrocarbon fuels, or from water through electrolysis. As long as fuel is supplied, the
fuel cell produces electricity efficiently and continuously without combustion, with water and heat as the
main by-products when hydrogen is used as the fuel source.
Ballard® fuel cell products feature high fuel efficiency, low operating temperature, low noise and
vibration, compact size, quick response to changes in electrical demand, modular design and
environmental cleanliness.
We sold our automotive fuel cell systems operations
Over the past three years, the Company implemented a strategy to focus on key growth opportunities with
to
near-term commercial prospects.
DaimlerChrysler AG (“Daimler”) and Ford Motor Company (“Ford”) on August 31, 2005. We
subsequently sold our electric drive operations to Siemens VDO Automotive Corporation ("Siemens
VDO") on February 15, 2007. Finally, we completed our exit from the fuel cell car business by selling
our automotive fuel cell research and development assets to Daimler, Ford and a newly created private
corporation, AFCC Automotive Fuel Cell Cooperation Corp. (“AFCC”). We completed this transaction
(the “AFCC Transaction”) on January 31, 2008, we completed the AFCC Agreement and recorded a gain
of $96.8 million. Under the terms of the AFCC Transaction, we transferred to Daimler, Ford and AFCC
our automotive patents, automotive fuel cell test equipment, automotive fuel cell inventory, $60 million in
cash, all automotive fuel cell warranty liabilities and automotive fuel cell development contracts between
Ballard, Daimler and Ford, 80.1% of the outstanding shares of AFCC, 112 personnel, and a royalty free,
sub-licensable license to the remaining Ballard intellectual property for use in automotive applications. In
exchange, Daimler and Ford returned to us an aggregate of 34,261,298 of our common shares valued at
$173.9 million, one Class A share and one Class B share, collectively representing Daimler and Ford’s
entire direct and indirect equity interest in Ballard. These shares were then cancelled. In accordance with
GAAP, the operations of our automotive segment disposed of in the AFCC Transaction have not been
presented as discontinued operations due to our continuing relationship with AFCC and the provision of
product and services subsequent to the sale of the automotive assets. As a result, comparative figures
have not been restated. See note 3 to our consolidated financial statements. After the closing of the
AFCC Transaction, our automotive segment’s focus is on fuel cell buses and contract technical and
manufacturing services.
Following completion of these dispositions, we identified a way to extract value from our tax attributes in
2008 through a restructuring transaction with Superior Plus Income Fund ("Superior Plus") resulting in a
non-dilutive financing with net cash proceeds of $33.8 million (Canadian $41.2 million). Pursuant to this
corporate reorganization, completed on December 31, 2008 under a Plan of Arrangement
(“Arrangement”), Superior Plus transferred $38.0 million (Canadian $46.3 million) to us. We
subsequently transferred all of our assets and liabilities (including the net cash proceeds from this
Arrangement of $33.8 million, but excluding our historic Canadian income tax carry forward attributes),
58
to the Company. Ballard shareholders exchanged their old shares, on a one-for-one basis, for shares of the
Company. The Company will now carry on the full scope of our business of the design, development,
manufacture, sale and service of hydrogen fuel cells for a variety of applications and will hold all rights to
intellectual property as we held prior to the completion of the Arrangement. As part of the Arrangement,
Superior Plus’ unitholders obtained new shares of the old Ballard entity. That entity will retain Ballard’s
historic Canadian income tax carry forward attributes.
As the transfer of the business assets, liabilities and operations from old Ballard to the Company
represented a transaction with no change in shareholder ownership, the transaction was accounted for
using continuity of interest accounting. Pursuant to continuity of interest accounting, the assets
transferred and liabilities assumed were recorded at their carrying values as reported by old Ballard
immediately prior to the completion of the Arrangement. As a result, the net cash proceeds of $33.8
million (Canadian $41.2 million) were recorded as a credit to shareholders’ equity. In addition, as the
future income tax benefits of old Ballard’s Canadian non-capital losses, capital losses, scientific research
and development expenditures and investment tax credits generated through to the date of the completion
of the Arrangement are not available to the Company after the completion of the Arrangement, the gross
future income tax assets related to these Canadian tax pools was reduced to nil, with a corresponding
reduction of the related valuation allowance. Details of the Arrangement are described more fully in our
Management Information Circular dated November 14, 2008. See also note 2 to our consolidated
financial statements.
We are based in Canada, with head office, research and development, testing and manufacturing facilities
in Burnaby, British Columbia. In addition, we have sales, research and development and manufacturing
facilities in Lowell, Massachusetts. We also participate in a joint venture, EBARA BALLARD
Corporation (“EBARA BALLARD”), in Tokyo, Japan that develops, manufactures and sells fuel cell
stationary power products to customers in Japan.
In 2008, we operated in three market segments:
1. Power Generation: Fuel cell products and services for material handling, back-up power and
residential cogeneration purposes;
2. Automotive: Fuel cell products and services for fuel cell cars, vans and buses; and
3. Material Products: Carbon fiber products primarily for automotive transmissions and gas
diffusion layers (“GDL”) for fuel cells.
59
SELECTED ANNUAL FINANCIAL INFORMATION
Years ended December 31 (Expressed in thousands of U.S. dollars, except per share amounts)
Product and service revenues
Engineering development revenue
Total revenues
Net income (loss)
Net income (loss) per share
Income (loss) from continuing operations
Income (loss) per share from continuing operations
Normalized net loss (1)
Normalized net loss per share (1)
Operating cash consumption (1)
Cash, cash equivalents and short-term investments
Total assets
2008
52,726
6,854
59,580
34,079
0.40
34,079
0.40
(59,954)
(0.71)
(29,294)
85,399
208,443
$
$
$
$
$
$
$
$
$
$
$
2007
43,352
22,180
65,532
(57,302)
(0.50)
(56,809)
(0.50)
(52,226)
(0.46)
(38,229)
145,574
298,691
$
$
$
$
$
$
$
$
$
$
$
2006
36,535
13,288
49,823
(181,137)
(1.60)
(56,994)
(0.50)
(56,216)
(0.50)
(51,339)
187,072
356,268
$
$
$
$
$
$
$
$
$
$
$
1
Normalized net loss and operating cash consumption are non-GAAP measures. We use certain Non-GAAP measures to assist in assessing
our financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to
be comparable to similar measures presented by other companies. See reconciliation to GAAP in Non-GAAP Measures section.
FINANCIAL OVERVIEW – Year ended December 31, 2008
In 2008, our revenues decreased 9% to $59.6 million from $65.5 million in 2007, meeting our revised
guidance range of $58 to $64 million. However, adjusting for light-duty automotive engineering
development revenue in 2008 and 2007 which relates to the business sold to AFCC of $1.6 million and
$15.8 million, respectively, pro forma revenues increased $8.2 million, or 17%, in 2008 compared to
2007.
We reduced operating cash consumption in 2008 (see non-GAAP measures section) by 23% to $29.3
million, down from $38.2 million in 2007, meeting our guidance range of $20-$30 million despite the
negative impact of foreign exchange losses on our Canadian monetary assets in the fourth quarter of
2008.
Revenue
While overall revenue for 2008 declined 9%, or $6.0 million, compared to 2007, product and service
revenues increased 22%, or $9.4 million, due to higher shipments of bus, material handling, light duty
automotive and back-up power fuel cell products and to new testing and engineering services to AFCC
which were only partially offset by lower shipments of residential cogeneration and carbon fiber products.
Engineering development revenue declined $15.3 million primarily as a result of the elimination of light-
duty automotive fuel cell program work subsequent to the closing of the AFCC Transaction on January
31, 2008.
Net income (loss)
Our net income for 2008 increased to $34.1 million, or $0.40 per share, compared with a net loss of $57.3
million, or ($0.50) per share, in 2007. Net income for 2008 includes a gain on sale of assets of $96.8
million resulting from the AFCC Transaction partially offset by the write-down of a non-core investment
in Chrysalix Energy Limited Partnership (“Chrysalix”) of $3.0 million. Net loss for 2007 includes a
60
write-down of our non-core investment in Advanced Energy Inc. (“Advanced Energy”) of $4.6 million
and a loss from discontinued operations of $0.5 million.
Normalized net loss
Our normalized net loss (see Non-GAAP Measures) for 2008 increased to $60.0 million, or ($0.71) per
share, compared with a normalized net loss of $52.2 million, or ($0.46) per share, for 2007. The primary
reasons for the $7.7 million higher normalized net loss in 2008 were due to decreases in foreign exchange
gains of $12.4 million and decreases in investment income of $6.2 million. Decreases in product and
service gross margins of $13.0 million and engineering development revenues of $15.3 million were more
than offset by decreases in operating expenses of $29.3 million and depreciation and amortization of $9.7
million. Lower gross margins were driven by larger reductions in warranty provisions in 2007 compared
to 2008, combined with reduced field service activities for fuel cell buses and more aggressive product
pricing and enhanced warranty coverage on material handling products in order to escalate market
adoption. This was partially offset by improved gross margin as a result of new testing and engineering
services provided to AFCC and increased fuel cell bus margins as a result of the B.C. Transit 2010
Olympic fuel cell bus program. The decline in operating expenses was driven by lower research and
development expenses on automotive fuel cell programs as a result of the AFCC Transaction. The
increase in normalized net loss on a per share basis was due primarily to the 30% reduction in the number
of common shares outstanding as a result of the AFCC Transaction.
Operating cash consumption
Operating cash consumption (see Non-GAAP Measures) for 2008 decreased 23% to $29.3 million,
compared to $38.2 million for 2007. The $8.9 million improvement in operating cash consumption was
driven primarily by lower working capital requirements, lower operating expenses and lower net capital
expenditures, partially offset by lower foreign exchange gains of $12.4 million, a decline in investment
income of $6.2 million and lower product and service gross margins and engineering development
revenues.
FINANCIAL OVERVIEW – Quarter ended December 31, 2008
Revenue
Our revenues for the fourth quarter of 2008 decreased 6% to $18.9 million, compared to $20.1 million for
the same period of 2007. However, adjusting for light-duty automotive engineering development revenue
in the fourth quarter of 2007 which relates to the business sold to AFCC of $8.4 million, pro forma
revenues increased $7.2 million, or 61%, in the fourth quarter of 2008 compared to 2007. Product and
service revenues increased 76%, or $8.0 million, due to bus shipments for the B.C. Transit 2010 Olympic
fuel cell bus program combined with higher shipments of material handling, back-up power and carbon
fiber products partially offset by lower shipments of residential cogeneration products. Engineering
development revenue declined $9.2 million primarily as a result of the elimination of light-duty
automotive fuel cell program work subsequent to the closing of the AFCC Transaction on January 31,
2008.
Net income (loss)
Our net loss for the fourth quarter of 2008 increased to $18.0 million, or ($0.22) per share, compared with
a net loss of $15.9 million, or ($0.14) per share, in the fourth quarter of 2007. The primary reasons for the
$2.1 million higher net loss in the fourth quarter of 2008 was due to increases in foreign exchange losses
of $3.6 million and decreases in investment income of $1.8 million. Decreases in product and service
gross margins of $2.4 million and engineering development revenues of $9.2 million were more than
offset by decreases in operating expenses of $14.1 million and depreciation and amortization of $3.0
61
million. Lower gross margins were driven by larger reductions in warranty provisions in the fourth
quarter of 2007 compared to the fourth quarter of 2008 and more aggressive product pricing and enhanced
warranty coverage on material handling products in order to encourage market adoption, partially offset
by improved gross margin as a result of new testing and engineering services provided to AFCC and
increased fuel cell bus margins as a result of the B.C. Transit 2010 Olympic fuel cell bus program. The
decline in operating expenses was driven by lower research and development expenses on automotive fuel
cell programs as a result of the AFCC Transaction. The increase in net loss per share was primarily due
to the 30% reduction in the number of common shares outstanding as a result of the AFCC Transaction.
Net loss for the fourth quarter of 2008 also includes a $3.0 million write-down of a non-core investment
in Chrysalix and the net loss for the fourth quarter of 2007 includes a $4.6 million write-down of a non-
core investment in Advanced Energy.
Operating cash consumption
Operating cash consumption (see Non-GAAP Measures) for the fourth quarter of 2008 decreased 31% to
$8.5 million, compared to $12.4 million for the fourth quarter of 2007. The $3.8 million improvement in
operating cash consumption was driven primarily by lower working capital requirements, lower operating
expenses and lower net capital expenditures, partially offset by increased foreign exchange losses, a
decline in investment income and lower product and service gross margins and engineering development
revenues.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with Canadian GAAP, which require us
to make estimates and assumptions that affect the amounts reported in our consolidated financial
statements. We have identified the policies below as critical to our business operations and an
understanding of our results of operations. The application of these and other accounting policies are
described in note 1 to the consolidated financial statements. Our preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that actual results will not
differ from those estimates.
REVENUE RECOGNITION
We earn revenues under certain contracts to provide engineering development services. These contracts
provide for the payment for services based on our achieving defined milestones or on the performance of
work under our product development programs. Revenues are recognized under these contracts based on
assessments of progress achieved against these milestones or on the proportionate performance method of
accounting. There is a risk that a customer may ultimately disagree with our assessment of the progress
achieved against milestones or that our estimates of the percentage of work completed could change.
Should this occur, the revenues recognized in the period might require adjustment in a subsequent period.
Under the terms of certain other contracts under which we earn product and engineering service revenue,
revenue is recognized based on the proportion of performance completed. There is a risk that estimated
costs to complete a contract might change, which may result in an adjustment to previously recognized
revenues.
During the years ended December 31, 2008 and 2007, there were no material adjustments to engineering
development revenue and product and service revenue relating to revenue recognized in a prior period.
62
WARRANTY PROVISION
A provision for warranty costs is recorded on product sales at the time of shipment. In establishing the
accrued warranty liabilities, we estimate the likelihood that products sold will experience warranty claims
and the cost to resolve claims received. In making such determinations, we use estimates based on the
nature of the contract and past and projected experience with the products. Should these estimates prove
to be incorrect, we may incur costs different from those provided for in our warranty provisions. During
the years ended December 31, 2008 and 2007 we recorded provisions to accrued warranty liabilities of
$4.4 million and $0.8 million, respectively, for new product sales.
We review our warranty assumptions and make adjustments to accrued warranty liabilities quarterly
based on the latest information available and to reflect the expiry of contractual obligations. Adjustments
to accrued warranty liabilities are recorded in cost of product and service revenues. As a result of these
reviews, we recorded adjustments that reduced accrued warranty liabilities by $0.4 million and $8.9
million, respectively, for the years ended December 31, 2008 and 2007. The 2008 adjustments to reduce
accrued warranty liabilities were primarily due to contractual expirations and improved lifetimes of our
Power Generation fuel cells. The 2007 adjustments to reduce accrued warranty liabilities were primarily
due to cost reductions, contractual expirations and improved lifetimes of our Automotive fuel cells.
INVENTORY PROVISION
In determining the lower of cost and net realizable value of our inventory and establishing the appropriate
provision for inventory obsolescence, we estimate the likelihood that inventory carrying values will be
affected by changes in market pricing or demand for our products and by changes in technology or design
which could make inventory on hand obsolete or recoverable at less than cost. We perform regular
reviews to assess the impact of changes in technology and design, sales trends and other changes on the
carrying value of inventory. Where we determine that such changes have occurred and will have a
negative impact on the value of inventory on hand, appropriate provisions are made. If there is a
subsequent increase in the value of inventory on hand, reversals of previous write-downs to net realizable
value are made. Unforeseen changes in these factors could result in additional inventory provisions, or
reversals of previous provisions, being required. During the year ended December 31, 2008 and 2007,
inventory provisions of $0.7 million and $1.4 million, respectively, were recorded as a charge to cost of
product and service revenues.
INVESTMENTS
We have made strategic investments in other companies or partnerships that are developing technology
with potential fuel cell applications. Each of these investments is either accounted for by the equity
method or carried at cost, depending on whether or not we have the ability to exercise significant
influence over the company or partnership. We regularly review such investments and should
circumstances indicate that an impairment of value has occurred that is other than temporary, we would
record this impairment in the earnings of the current period. Given that these entities are in the
development stage, there is significant judgment required in determining whether an impairment has
occurred in the value of these investments that must be recorded. During the year ended December 31,
2008, we recorded a $3.0 million write-down of our non-core investment in Chrysalix. During the year
ended December 31, 2007, we recorded a $4.6 million write-down of our non-core investment in
Advanced Energy to $0.5 million, representing proceeds received of $0.5 million.
INTANGIBLE ASSETS AND GOODWILL
In accordance with Canadian GAAP, we do not amortize goodwill, and we amortize intangible assets
over periods ranging from five to 15 years. At least annually, we review the carrying value of our
63
intangible assets and goodwill by segment for potential impairment. Among other things, this review
considers the fair value of the business based on discounted estimated cash flows. If circumstances
indicate that impairment in the value of these assets has occurred, we would record this impairment in the
earnings of the current period. During the year ended December 31, 2008, no write-downs of intangible
assets or goodwill were recorded. During the year ended December 31, 2007, we recorded a $1.4 million
charge to amortization expense for patents no longer in use.
NEW ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Convergence with International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board (“AcSB”) confirmed that Canadian GAAP, as
used by public companies, will be converged with International Financial Reporting Standards (“IFRS”)
effective January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable for us for the
first quarter of 2011 when we will prepare both the current and comparative financial information using
IFRS.
While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences on
recognition, measurement and disclosures. We commenced our IFRS conversion project in the second
quarter of 2008. The project consists of four phases: awareness raising; assessment; design; and
implementation. With the assistance of an external expert advisor, we have completed the awareness-
raising phase and have begun a high level review of the major differences between Canadian GAAP and
IFRS (the assessment phase). It is expected that this work will be completed during 2009. Subsequently,
we will initiate the design phase, which will involve establishing issue-specific work teams to focus on
generating options and making recommendations in identified areas. We will also establish a
communications plan, begin to develop staff training programs, and evaluate the impacts of the IFRS
transition on other business activities.
Capital Disclosures
In 2008, we adopted the recommendations of the Canadian Institute of Chartered Accountants (“CICA”)
for capital disclosures (CICA Handbook Section 1535). This new section establishes standards for
disclosing information about an entity’s capital and how it is managed. This standard requires us to
disclose (i) our objectives, policies and processes for managing capital; (ii) summary quantitative data
about what we manage as capital; (iii) whether during the period we complied with any externally
imposed capital requirements to which we are subject; and (iv) if we have not complied with such
requirements, the consequences of such non-compliance. See note 20 to our consolidated financial
statements.
Goodwill and Intangible Assets
In 2008, we elected to early adopt the new recommendations of the CICA for accounting for “Goodwill
and Intangible Assets” (CICA Handbook Section 3064). This new section will replace the existing
standards for “Goodwill and Other Intangible Assets” (CICA Handbook Section 3062) and “Research and
Development Costs” (CICA Handbook Section 3450). The new standard (i) states that upon their initial
identification, intangible assets are to be recognized as assets only if they meet the definition of an
intangible asset and the recognition criteria; (ii) provides guidance on the recognition of internally
generated intangible assets including research and development costs; and (iii) carries forward the current
requirements of Section 3062 for subsequent measurement and disclosure of intangible assets and
goodwill. As we have historically expensed all research and development costs as incurred, we were not
materially impacted by the implementation of this new standard for the years ended December 31, 2008
and 2007.
64
RESULTS OF OPERATIONS
Revenues for the year ended December 31, 2008 were $59.6 million, a $6.0 million, or 9% decrease from
2007. Increases in product and service revenue of $9.4 million, or 22%, were offset by declines in
engineering development revenue of $15.3 million, or 69%, primarily as a result of the AFCC
Transaction.
The following table provides a breakdown of our revenues for the reported periods:
(Expressed in thousands of U.S. dollars)
Years Ended December 31,
2008
2007
2006
Product
and
Service
Engineering
Develop-
ment
Total
Product
and
Service
Engineering
Develop-
ment
Total
Product
and
Service
Engineering
Develop-
ment
Total
Power Generation
$
12,581
$
4,032
$ 16,613 $
13,033
$
6,399
$ 19,432 $
7,314
$
5,972
$ 13,286
Automotive
Material Products
27,462
12,683
2,822
30,284
16,254
15,781
32,035
17,764
7,316
25,080
-
12,683
14,065
-
14,065
11,457
-
11,457
$
52,726
$
6,854
$ 59,580 $
43,352
$
22,180
$ 65,532 $ 36,535
$
13,288
$ 49,823
Power Generation product and service revenues for the year ended December 31, 2008 declined $0.5
million, or 3%, compared to 2007. Increased product shipments and a change in sales mix towards higher
power units in the material handling market combined with higher shipments in the back-up power
market were offset by lower residential cogeneration market sales and lower non-recurring engineering
service revenues for government contracts in the material handling market. The decline in residential
cogeneration market sales was expected due to the introduction in 2008 of a new lower cost product
combined with the delivery of fuel cell MEAs instead of fuel cell stacks as the fuel cell stacks will be
assembled in Japan by our joint venture, EBARA BALLARD.
Power Generation engineering development revenues for the year ended December 31, 2008 were
reduced $2.4 million, or 37%, compared to 2007. Revenues are derived from our 1kW residential
cogeneration fuel cell program and reflect the percentage of completed performance of our development
program for our customer, the related costs of which were included in research and development
expenses. As expected, the decline is due to the completion at the end of the third quarter of 2008 of our
current agreement with EBARA and EBARA BALLARD for the development of our 1kW residential
cogeneration fuel cell stack. Since 2005, we have recorded $18.0 million of engineering development
revenue from EBARA BALLARD, representing the full amount earned for the performance of work
under this development program.
Automotive product and service revenues increased $11.2 million, or 69%, for the year ended December
31, 2008, compared to 2007. Increased automotive service revenues derived from new testing and
engineering services provided to AFCC combined with the commencement of shipments of fuel cell bus
modules related to the B.C. Transit 2010 Olympic fuel cell bus program (which contributed $6.0 million
to revenue in December 2008) and increased light duty automotive product shipments at lower prices to
AFCC were partially offset by the expected decline in field service revenues for fuel cell buses due to a
lower number of fuel cell buses under service contracts.
Automotive engineering development revenue for the year ended December 31, 2008 decreased $13.0
million, or 82%, compared to 2007. The decline in 2008 is due primarily to the closing of the AFCC
Transaction on January 31, 2008 resulting in only one month of automotive development revenues in
2008 compared to a year of revenue in 2007. This decrease was only partially offset by engineering
65
development revenue related to the test bus phase of the B.C. Transit 2010 Olympic fuel cell bus
program. The costs associated with these engineering development revenues are included in research and
development expenses.
Material Products revenues for the year ended December 31, 2008 decreased $1.4 million, or 10%,
compared to 2007, due primarily to decreased customer volumes as a result of the impact of a three month
labor strike affecting a key customer prior to its resolution in May 2008 combined with lower automotive
sales due to the current unprecedented slow down in the U.S. automotive industry.
Power Generation product and service revenues for the year ended December 31, 2007 increased $5.7
million, or 78%, compared to 2006. Higher non-recurring engineering service revenues for government
contracts in the material handling and back-up power markets primarily drove the increase in the year.
Increased unit sales of cogeneration, material handling and back-up power fuel cell products, partially
offset by lower pricing, also contributed to the increase. Power Generation engineering development
revenues for the year ended December 31, 2007 increased $0.4 million, or 7%, compared to 2006, and
were derived from our 1kW residential cogeneration fuel cell program.
Automotive product and service revenues for the year ended December 31, 2007 decreased $1.5 million,
or 9%, compared to 2006. Increased automotive fuel cell product shipments were offset by a decline in
automotive service revenues due to a lower number of fuel cell buses under service contracts. The
decline in field service revenues for fuel cell buses was expected as the field trials were winding down.
Automotive service revenues were primarily earned from field service activities supporting fuel cell buses
in Europe, Australia and China.
Automotive engineering development revenue for the year ended December 31, 2007 increased $8.5
million, or 116%, compared to 2006. The increase in automotive engineering development revenue
reflects the planned timing of performance of work and timing of achievement of development milestones
under our automotive fuel cell development program for our customers, the related costs of which are
included in research and development expenses.
Material Products revenues for year ended December 31, 2007 increased $2.6 million, or 23%, compared
to 2006, due primarily to increased customer volumes.
Cost of product and service revenues for the year ended December 31, 2008 were $47.4 million, an
increase of $22.3 million, or 89%, compared to 2007. The $22.3 million increase for the year was driven
by lower reversals of accrued warranty liabilities in 2008 as compared to 2007, increased product
shipments in the bus, material handling, back-up power and automotive markets, enhanced warranty
terms and a change in sales mix towards higher power units in the material handling market and costs
incurred for new automotive testing and engineering services provided to AFCC. These increases were
partially offset by lower residential cogeneration product costs due to the delivery of fuel cell MEAs
instead of fuel cell stacks and reduced service costs related to fewer fuel cell buses under service
contracts. As mentioned above, cost of product sales was lower in 2007 compared to 2008 due in part to
the reversal of accrued warranty liabilities of $8.9 million in 2007, compared to $0.4 million in 2008. The
2007 reductions in accrued warranty liabilities were primarily due to cost reductions, contractual
expirations and improved lifetime for our Automotive fuel cells whereas the 2008 reductions were
primarily due to contractual expirations and improved lifetimes of our Power Generation fuel cells.
Gross margins on product and service revenues declined in 2008 to $5.3 million, compared to $18.3
million for 2007. This year over year decrease of $13.0 million was driven by larger reductions in
warranty provisions for 2007 compared to 2008, more aggressive product pricing and enhanced warranty
coverage on material handling products in order to encourage market adoption, declines in field service
revenues for fuel cell buses, declines in service revenue and higher program expenditures on Power
66
Generation non-recurring engineering government contracts, and lower volumes of carbon fiber products
due to the effects of a labor strike affecting a key customer (resolved in the second quarter of 2008) and
the slow down in the U.S. automotive industry. These declines were only partially offset by increased
margins as a result of new testing and engineering services provided to AFCC and the commencement of
shipments of fuel cell bus modules related to the B.C. Transit 2010 Olympic fuel cell bus project.
Cost of product and service revenues for the year ended December 31, 2007 were $25.1 million, an
increase of $3.8 million, or 18%, compared to 2006. The $3.8 million increase for 2007 was driven by
higher automotive and cogeneration product shipments and costs incurred for new government contracts
in the material handling market partially offset by lower costs related to automotive service revenues due
to a lower number of fuel cell buses under service contracts. Cost of product and service revenue was also
affected by the reduction of warranty provisions of $8.9 million in 2007 compared to $5.8 million in
2006. The reductions in accrued warranty liabilities were primarily due to cost reductions, contractual
expirations and improved lifetime for our automotive fuel cells. Gross margins on product and service
revenues improved in 2007 to $18.3 million, compared to $15.3 million in 2006. This increase was
driven by the reductions in warranty provisions mentioned above combined with increased volumes in our
carbon fiber products, partially offset by lower gross margins in our Power Generation segment as
increased volumes were offset by lower sales prices, and lower gross margins in our Automotive segment
as declines in field service for buses offset increased margins on automotive fuel cell products.
Research and product development expenses for the year ended December 31, 2008 were $37.2 million,
a decrease of $21.3 million, or 36%, compared to 2007. This decline in expenditures is due primarily to
the disposition of our automotive fuel cell development programs on the closing of the AFCC
Transaction, partially offset by increased investment in our Power Generation and fuel cell bus programs
and the negative effects of a stronger Canadian dollar, relative to the U.S. dollar. Lower operating
expenses in the fourth quarter of 2008 as a result of a weakening Canadian dollar only partially offset the
negative impacts of a stronger Canadian dollar in the first three quarters of 2008, compared to the
corresponding periods of 2007.
Included in research and product development expenses for the year ended December 31, 2008, were
costs of $5.9 million related to our achievement of predefined milestones for our customers under the
development programs for which we earned engineering development revenue. These same costs for the
year ended December 31, 2007 were $25.3 million.
Research and product development expenses for the year ended December 31, 2007 were $58.5 million,
an increase of $6.2 million, or 12%, compared to 2006. The increase in expenditures in 2007 related
primarily to the negative effect of a stronger Canadian dollar, relative to the U.S. dollar, combined with
increased investment in our Power Generation and fuel cell bus programs. Included in research and
product development expenses for 2007 were costs of $25.3 million, compared to $22.9 million in 2006,
related to our achievement of predefined milestones for our customers under the development programs
for which we earned engineering development revenue.
General and administrative expenses for the year ended December 31, 2008 were $12.6 million, a
decrease of $6.5 million, or 34%, compared to 2007. The decrease in 2008 is due to lower labour costs
and training and insurance expenditures combined with the 2007 impact of severance and related costs of
approximately $4.1 million incurred in conjunction with the AFCC Transaction. Income earned in 2008
from administrative service agreements with AFCC of $1.5 million is recorded as other income.
General and administrative expenses for the year ended December 31, 2007 were $19.1 million, an
increase of $5.8 million, or 44%, compared to 2006. The overall increase is due primarily to severance
and related costs of approximately $4.1 million incurred in conjunction with the AFCC Transaction, the
67
negative effects of a stronger Canadian dollar, relative to the U.S. dollar, and a one-time commodity tax
refund received in 2006.
Marketing and business development expenses for the year ended December 31, 2008 were $7.5 million,
a decrease of $1.5 million, or 17%, compared to 2007. The decrease is primarily due to decreased
marketing development support for our light duty automotive market.
Marketing and business development expenses for the year ended December 31, 2007 were $9.0 million,
an increase of $1.8 million, or 24%, compared to 2006. The overall increase is primarily due to increased
marketing development support for our Power Generation markets combined with the negative effects of
a stronger Canadian dollar, relative to the U.S. dollar.
Depreciation and amortization was $6.0 million for the year ended December 31, 2008, a decrease of
$9.7 million, or 62%, compared to 2007. Depreciation and amortization has declined in 2008 as several
assets became fully depreciated or amortized during 2007 and certain intangible assets were disposed of
in the AFCC Transaction.
Depreciation and amortization was $15.7 million for the year ended December 31, 2007, a decrease of
$0.7 million, or 4%, compared to 2006. Certain intangible assets became fully amortized at the end of
2006, resulting in the decline in depreciation and amortization. We also stopped recording depreciation
and amortization expense in November 2007 on the long-lived assets included in the AFCC Transaction
and reclassified them to assets held for sale due to our decision to dispose of the assets at that time. This
overall decline in depreciation and amortization expense for 2007 was partially offset by a $1.4 million
charge to amortization expense for patents that were no longer in use.
Investment and other income (loss) was negative $0.2 million for the year ended December 31, 2008,
compared to income of $16.9 million for 2007.
The following table provides a breakdown of our investment and other income and foreign exchange gain
for the reported periods:
(Expressed in thousands of U.S. dollars)
Years Ended December 31,
Investment income
Foreign exchange gain (loss)
Other income
Investment and other income (loss)
2008
2,012
(3,653)
1,455
$
$
2007
8,207
8,726
-
2006
9,913
19
-
(186)
$
16,933
$
9,932
$
$
Investment income was $2.0 million for the year ended December 31, 2008, a decrease of $6.2 million, or
75%, compared to 2007. The decrease was a result of lower average cash balances in 2008 compared to
2007 due primarily to the $60 million cash transfer in the AFCC Transaction, combined with declining
interest rates in the last half of 2007 and into 2008. We classify our cash, cash equivalents and short-term
investments as held-for-trading and measure these assets at fair value with changes in fair value
recognized in income. The fair values are determined directly by reference to quoted market prices.
During 2008, the investment market was negatively impacted by liquidity and credit market concerns
along with increased concerns about a global economic slowdown. We continue to review our exposure
to these issues and have determined that there are no material impacts on our investment portfolio. In
addition, we do not hold any asset-backed commercial paper that was issued by a non-bank trust.
Foreign exchange gains and losses are attributable to the effect of the changes in the value of the
Canadian dollar, relative to the U.S. dollar, on our Canadian dollar-denominated net monetary assets and
68
on outstanding foreign exchange contracts to buy or sell Canadian dollars over the respective periods.
The foreign exchange loss of $3.7 million for 2008 resulted from the weakening of the Canadian dollar in
2008. Compared to the U.S. dollar, the Canadian dollar has weakened in 2008 from 0.99 at December 31,
2007 to 1.22 at December 31, 2008. In addition to foreign exchange contracts, we hold Canadian dollar
cash and short-term investments to reduce the foreign currency risk inherent in expenditures denominated
in Canadian dollars. Our foreign denominated cash and short-term investments do not qualify for hedge
accounting and therefore foreign exchange gains and losses are recognized when they occur.
See note 19 to the consolidated financial statements for additional information about the significance of
financial instruments to our financial position and performance, the nature and extent of risks arising from
those financial instruments to which we are exposed, and how we manage those risks.
Other income was $1.5 million for the year ended December 31, 2008 and relates to administrative
services contracts with AFCC under which we provide accounting, supply chain, human resources,
information technology, facilities and other administrative support.
Investment and other income for the year ended December 31, 2007 was $16.9 million, an increase of
$7.0 million, or 70%, compared to 2006. The increase is due to foreign exchange gains in 2007 of $8.7
million partially offset by lower investment income of $1.7 million. Foreign exchange gains in 2007
were a result of movements in the Canadian dollar relative to the U.S. dollar on our net monetary assets
and liabilities. Compared to the U.S. dollar, the Canadian dollar strengthened from 1.17 at December 31,
2006 to 0.99 at December 31, 2007. Investment income declined in 2007 due to lower average cash
balances in 2007 compared to 2006 combined with declining interest rates in the last half of 2007.
Loss on disposal and write-down of long-lived assets were $2.8 million for the year ended December 31,
2008, compared to $4.6 million and $0.8 million for the corresponding periods in 2007 and 2006,
respectively. The expense in 2008 is primarily a result of a $3.0 million write-down in our investment in
Chrysalix to $0.5 million, representing estimated net realizable value. The expense in 2007 is a result of a
$4.6 million write-down in our investment in Advanced Energy to $0.5 million, representing proceeds on
sale received in the fourth quarter of 2007. The expense in 2006 is primarily a result of a loss on disposal
of our investment in QuestAir of $0.6 million.
Gain on assets held for sale was $96.8 million for the year ended December 31, 2008 reflecting the
disposition of automotive assets pursuant to the AFCC Transaction.
Equity in loss of associated companies was $8.6 million for the year ended December 31, 2008,
compared to $7.4 million and $7.0 million in 2007 and 2006, respectively, and relate to our share of the
losses of EBARA BALLARD. The increase in equity losses in 2008 is due to the negative effects of a
stronger Yen, relative to the U.S. dollar, combined with EBARA BALLARD’s introduction of its next
generation system product in Japan and increased residential cogeneration market development activities.
CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash, cash equivalents and short-term investments were $85.4 million as at December 31, 2008,
compared to $145.6 million at the end of 2007. The decrease of $60.2 million in 2008 was driven by the
transfer of $60 million to Daimler, Ford and AFCC as part of the AFCC Transaction combined with a net
loss (excluding non-cash items) of $35.1 million, net investment in EBARA BALLARD of $5.9 million
and net capital expenditures of $3.1 million partially offset by working capital cash inflows of $8.9
million and proceeds from the non-dilutive financing Arrangement with Superior of $36.9 million.
69
For the year ended December 31, 2008, working capital requirements resulted in cash inflows of $8.9
million compared to cash outflows of $13.8 million for 2007. In 2008, working capital cash inflows were
driven by lower inventory of $4.5 million due to higher fourth quarter Power Generation shipments and
fuel cell bus product shipments combined with improved inventory management and increased platinum
recoveries, higher accrued warranty liabilities of $3.1 million as a result of the above noted fourth quarter
product shipments, and higher deferred revenue of $0.8 million due to the timing of payments on pre-
funded contracts.
For the year ended December 31, 2007, working capital requirements resulted in cash outflows of $13.8
million compared to $12.3 million for 2006. In 2007, cash outflows were impacted by higher accounts
receivable of $4.1 million due to higher fourth quarter engineering development revenue compared to the
prior year and the timing of collections of our product and engineering development revenues, combined
with increased working capital requirements of $4.6 million related to assets and liabilities held for sale.
The $4.6 million cash outflow from current assets and current liabilities held for sale primarily represent
lower accrued warranty liabilities to service our automotive fuel cells, along with warranty adjustments
for expirations, lower projected costs and improved lifetimes. Cash outflows from accounts payable and
accrued liabilities of $1.7 million were primarily due to the timing of payments combined with lower
accrued liabilities as a result of settlement in the year of previously disputed amounts, partially offset by
increased employee bonus accruals.
Investing activities resulted in cash outflows of $6.0 million for the year ended December 31, 2008,
compared to cash inflows of $19.8 million in 2007. Changes in short-term investments resulted in cash
inflows of $64.9 million in 2008 as compared to inflows of $29.4 million in 2007 as balances changed
between cash equivalents and short-term investments as we made investment decisions with regards to the
term of investments in response to changes in yield curves in order to improve our investment returns and
in response to the $60 million funding requirement to close the AFCC Transaction in the first quarter of
2008. Net capital spending of $3.1 million in 2008 was primarily for manufacturing equipment,
compared to net capital spending in 2007 of $6.4 million primarily for manufacturing, test and computer
equipment. The cash flows used for other investing activities in 2008 of $6.2 million represent a net
investment in EBARA BALLARD of $5.9 million, comprising of an additional investment of $11.2
million offset by licensing cash receipts of $5.3 million, combined with an investment in Chrysalix of
$0.3 million. The cash flows used for other investing activities of $3.3 million in 2007 represent a net
investment in EBARA BALLARD comprising of an additional investment of $8.4 million offset by
licensing cash receipts of $5.3 million, combined with an investment in Chrysalix of $0.2 million. During
2007, we also disposed of net assets of $1.8 million related to the finalization of the sale of our electric
drive business.
Investing activities resulted in cash outflows of $50.8 million during 2006. Changes in short-term
investments resulted in cash outflows of $41.6 million as balances changed between cash equivalents and
short-term investments. Net capital spending in 2006 of $8.7 million was primarily for manufacturing,
test stands and computer equipment. During 2006, we sold our investment in QuestAir for proceeds of
$3.3 million and recorded net cash outflows of $3.3 million related to an additional investment in
EBARA BALLARD offset by licensing cash receipts from EBARA BALLARD. We also made an
additional investment of $0.8 million in Chrysalix.
Financing activities resulted in cash inflows of $36.9 million for the year ended December 31, 2008,
compared to nil and $5.9 million, respectively, for 2007 and 2006. Financing activities in 2008 represent
gross proceeds received on the closing of the Arrangement with Superior of $38.0 million (Cdn. $46.3
million) less closing costs paid in 2008 of $1.1 million (Cdn. $1.3 million). We have accrued the
70
remaining estimated closing costs of $3.1 million (Cdn. $3.8 million) at December 31, 2008. Financing
activities for 2006 relate to equity funding received from EBARA.
As at March 2, 2009, we had 82,122,135 common shares issued and outstanding and stock options to
purchase 5,224,439 of our common shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2008, we had cash, cash equivalents and short-term investments totaling $85.4
million. We will use our funds to meet net funding requirements for the development and
commercialization of products in our target markets. This includes research and product development for
fuel cells and carbon fiber products, the purchase of equipment for our manufacturing and testing
facilities, the further development of business systems and low-cost manufacturing processes and the
further development of our marketing, product distribution and service capabilities.
At this stage of our development, we expect to record losses for at least the next few years as we continue
to make significant investments in research, and product and market development activities necessary to
commercialize our products. Our actual funding requirements will vary based on the factors noted above,
our relationships with our lead customers and strategic partners, our success in developing new channels
to market and relationships with customers, our success in generating revenue growth from near-term
product opportunities, our working capital requirements, foreign exchange fluctuations, and the progress
and results of our research, development and demonstration programs.
Our financial strategy is to manage our cash resources with strong fiscal discipline, focus on markets with
high product and service revenue growth potential, license technology in cases where it is advantageous
to us, and access available government funding for research and development projects. Our current
financing principle is to maintain cash balances sufficient to fund at least six quarters of operating cash
consumption at all times. We believe that our current cash, cash equivalents and short-term investments,
combined with our ability to potentially monetize other assets, including our interest in AFCC through the
share purchase agreement with Ford, are sufficient to meet our planned growth and development activities
for the foreseeable future without the need to access public market financing. However, circumstances
could change which would make it advantageous for us to access additional capital.
OUTLOOK
Over the past three years, we have re-vectored the Company to establish a sharp focus on key growth
opportunities with near-term commercial prospects in our core fuel cell markets. As a result, for 2009 we
will report our results in the following market segments:
1. Fuel Cell Products and Servicing (core segment): fuel cell products and services for motive power
(material handling and bus markets) and stationary power (back-up power and residential cogeneration
markets);
2. Contract Automotive (supporting segment): contract technical and manufacturing services primarily for
AFCC, Daimler and Ford.
3. Material Products (supporting segment): material products primarily for automotive transmissions and
gas diffusion layers (“GDL”).
We expect overall revenues for 2009 to be between $68 million to $78 million, compared to $59.6 million
in 2008.
Fuel Cell Products revenue is expected to increase in 2009, as compared to 2008, due primarily to volume
increases in our back-up power, bus and material handling markets as a result of our announced ACME
71
(subject to product acceptance test in the fourth quarter of 2009), Dantherm, B.C. Transit 2010 Olympic
fuel cell bus program, Transport of London fuel cell bus program and Plug Power Central Grocer
agreements. This increase in Fuel Cell Products revenue is expected to be partially offset by declines in
Fuel Cell Products service revenues due to the completion of our existing engineering service government
contracts in the material handling and back-up power markets, and declines in Fuel Cell Products
engineering development revenues due to the completion of our 1kW residential cogeneration fuel cell
development program in 2008. Residential cogeneration product revenues in 2009 are expected to be
similar to 2008 as the program is still in the development stage of the Japanese government trial program.
Fuel Cell Product shipments are expected to increase to 4,000 units in 2009, as compared to 1,855 units in
2008. Materials handling shipments are expected to increase to 1,000 units, from 508 units; back-up
power shipments to 2,500 units, from 720 units; and residential cogeneration shipments to 500 units, from
403 units, respectively.
Supporting business revenues are expected to decline in 2009, as compared to 2008, due primarily to
lower technical services and lower contract manufacturing for AFCC, Daimler and Ford. Material
Products revenues in 2009 are expected to be similar to 2008 due to the continued slow down in the U.S.
automotive industry, partially offset by growth in fuel cell GDL material sales.
We expect our operating cash consumption (see Non-GAAP Measures) for 2009 to be between $17
million to $27 million, compared to $29.3 million in 2008 assuming no material fluctuations in U.S. /
Canadian dollar exchange rates. A primary driver for this expected reduction in operating cash
consumption for 2009 is expected increases in gross margins as a result of increased product sales,
combined with additional reductions in operating expenses, to more than offset our increased investment
in production capacity. As a result of the timing of capital expenditures, working capital impacts related
to the B.C. Transit 2010 Olympic and Transport of London fuel cell bus programs, and the payment of
2008 employee bonuses in the first half of 2009, operating cash consumption is expected to be higher in
the first half of 2009, as compared to the second half of the year.
OFF-BALANCE SHEET ARRANGEMENTS & CONTRACTUAL OBLIGATIONS
We maintain a 19.9% interest in AFCC which is subject to a share purchase agreement under which Ford,
either at our option or Ford’s election, may purchase our interest in AFCC at any time on or after January
31, 2013 for $65 million plus interest accruing at LIBOR from January 31, 2008. The purchase may take
place earlier than January 31, 2013 if certain other events occur. Under Canadian GAAP, this share
purchase agreement is considered a derivative instrument and is therefore measured and recorded at its
fair value on the closing of the AFCC Transaction. We have recorded this derivative at its fair value of $1
representing the difference between the discounted present value of the share purchase agreement on
closing and the value of the underlying transferred AFCC assets. This derivative instrument is carried at
cost and is not marked to market each reporting period as we do not believe it is possible to regularly
determine its reliable fair value. If the share purchase agreement were to be held to maturity and
exercised on January 31, 2013, we anticipate that we would receive proceeds of approximately $68
million (based on current interest rates) and record an estimated gain of approximately $67 million on the
sale of our remaining 19.9% interest in AFCC. If we were to monetize this share purchase agreement
prior to its maturity date of January 31, 2013, the amount of proceeds received would be subject to a
number of variables including Ford’s cost of borrowing, expected future LIBOR rates, time remaining to
January 31, 2013 and general market and other conditions. Under present economic conditions, we
believe that these factors would result in a significant discount to the face value of the share purchase
agreement.
72
Periodically, we use foreign exchange contracts to manage our exposure to currency rate fluctuations and
platinum forward purchase contracts to manage our exposure to platinum price fluctuations. We record
these contracts at their fair value as either assets or liabilities on our balance sheet. Any changes in fair
value are recorded in our consolidated statements of operations. At December 31, 2008, we had
outstanding forward exchange contracts to sell a total of Canadian $8 million at an average rate of $1.12
Canadian per $1.00 United States dollar, resulting in an unrealized loss of $0.6 million. In addition, we
had outstanding platinum forward purchase contracts to purchase a total of $2.4 million of platinum at an
average rate of $890 per troy ounce, resulting in an unrealized gain of $0.2 million.
As at December 31, 2008, we did not have any other material obligations under guarantee contracts,
retained or contingent interests in transferred assets, outstanding derivative instruments or non-
consolidated variable interests.
We have agreed to pay total royalties up to a maximum of $40.3 million (Cdn. $49.0 million) in respect
of future sales of fuel cell-based stationary power products under two development programs with certain
Canadian governmental agencies. To December 31, 2008, we have made total royalty payments of $4.3
million (Cdn. $5.2 million) against this potential obligation including royalty payments of $0.2 million
(Cdn. $0.2 million) in 2008 and $0.1 million (Cdn. $0.2 million) in 2007. The conditions under which
these royalties become payable are described in more detail in note 14 to the consolidated financial
statements.
We have committed to make future capital contributions of $0.4 million (Cdn. $0.5 million) in Chrysalix,
in which we have a limited partnership interest.
As at December 31, 2008 we had the following contractual obligations and commercial commitments:
(Expressed in thousands of U.S. dollars)
Contractual Obligations
Operating leases
Asset retirement obligations
Total contractual obligations
Payments due by period,
Total
Less than
1-3 years
4-5 years
After 5
one year
$
$
13,970 $
1,448
$
2,946 $
3,087 $
3,441
-
-
-
17,411 $
1,448
$
2,946 $
3,087 $
years
6,489
3,441
9,930
In addition to the contractual purchase obligations above, we have commitments to purchase $0.2 million
of capital assets as at December 31, 2008. Capital expenditures pertain to our regular operations and will
be funded through operating cash flows and cash on hand.
The Arrangement with Superior Plus includes an indemnification agreement dated December 31, 2008
(the "Indemnity Agreement"), which sets out the parties’ continuing obligations to the other. The
Indemnity Agreement has two basic elements: it provides for the indemnification by each of the parties to
the other for breaches of representations and warranties or covenants as well as, in our case, any liability
relating to our business which is suffered by Superior Plus. Our indemnity to Superior Plus with respect
to our representation relating to the existence of our tax pools immediately prior to the completion of the
Arrangement is limited to an aggregate of $6.1 million (Canadian $7.4 million) with a threshold amount
of $0.4 million (Canadian $0.5 million) before there is an obligation to make a payment. Second, the
Indemnity Agreement provides for adjustments to be paid by us, or to us, depending on the final
determination of the amount of our Canadian non-capital losses, scientific research and development
expenditures and investment tax credits generated to December 31, 2008, to the extent that such amounts
are more or less than the amounts estimated at the time the Arrangement was executed. At December 31,
2008, we have not accrued any amount owing, or receivable, as a result of the Indemnity Agreement as
73
we have not yet finalized our 2008 Canadian income tax return and agreed upon any differences with
Superior Plus.
RELATED PARTY TRANSACTIONS
Related parties include shareholders with a significant ownership interest in us, together with their
subsidiaries and affiliates, our key management personnel and our equity-accounted investees. Revenues
and costs recognized from such transactions reflect the prices and terms of sale and purchase transactions
with related parties, which are in accordance with normal trade practices. Related parties include
EBARA BALLARD and EBARA Corporation, and prior to the closing of the AFCC Transaction on
January 31, 2008, Daimler and Ford. AFCC is not considered to be a related party, as we do not have the
ability to exercise significant influence over AFCC’s strategic operating, investing or financing policies.
We earn revenues from related parties from the sale of products and services and from engineering
development revenues. We provide funding to related parties for the purposes of conducting research and
development on our behalf. We have also purchased intellectual property and obtained licenses from, and
granted licenses to, related parties. As a result of the AFCC Transaction, related party transactions have
been reduced.
Related party transactions and balances are as follows:
(Expressed in thousands of U.S. dollars)
Transactions with related parties
Years Ended December 31,
2008
2007
2006
Revenues from products, engineering services and other
$
7,906
$
37,435
$
41,363
Purchases
188
442
899
(Expressed in thousands of U.S. dollars)
Balances with related parties
Accounts receivable
Accounts payable and accrued liabilities
As at December, 31
$
2008
4,500
31
2007
$
12,054
13
The AFCC Transaction, which closed on January 31, 2008, is also a related party transaction.
74
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table provides summary financial data for our last eight quarters:
(Expressed in thousands of U.S. dollars, except per share amounts)
Product and service revenue
Engineering development revenue
Total revenue
Net income (loss)
Net income (loss) per share
Income (loss) from continuing operations
Net income (loss) per share from continuing
operations
Weighted average common shares outstanding (000’s)
Product and service revenue
Engineering development revenue
Total revenue
Net loss
Net loss per share
Loss from continuing operations
Net loss per share from continuing operations
$
$
$
$
$
$
$
$
$
$
$
$
Dec 31,
2008
18,605
296
18,901
(18,028)
(0.22)
(18,028)
(0.22)
$
$
$
$
$
$
Sep 30,
2008
10,879
1,406
12,285
Quarter ended,
Jun 30,
2008
11,131
1,220
12,351
$
$
(15,457)
(0.19)
(15,457)
(0.19)
$
$
$
$
(13,481)
(0.16)
(13,481)
(0.16)
Mar 31,
2008
12,111
3,932
16,043
81,045
0.87
81,045
0.87
$
$
$
$
$
$
82,116
82,102
82,086
93,447
Dec 31,
2007
10,591
9,474
20,065
(15,891)
(0.14)
(15,891)
(0.14)
$
$
$
$
$
$
Sep 30,
2007
12,619
4,947
17,566
(16,017)
(0.14)
(15,588)
(0.14)
$
$
$
$
$
$
Jun 30,
2007
10,464
3,841
14,305
(11,140)
(0.10)
(10,814)
(0.10)
Mar 31,
2007
9,678
3,918
13,596
(14,254)
(0.12)
(14,516)
(0.12)
$
$
$
$
$
$
Weighted average common shares outstanding (000’s)
114,742
114,593
114,591
114,370
Summary of Quarterly Results: There were no significant seasonal variations in our quarterly results.
Variations in our net income (loss) for the above periods were affected primarily by the following factors:
• Product and service revenues: Variations in fuel cell product revenues reflect the timing of our
customers’ fuel cell vehicle, bus and field trial deployments. Product revenues in the fourth quarter of
2008 were positively impacted by $6.0 million by the commencement of shipments of fuel cell bus
modules related to the B.C. Transit 2010 Olympic fuel cell bus program. Testing and engineering
service revenue to AFCC commenced in the first quarter of 2008.
• Engineering development revenue: Variations in engineering development revenue reflect the
timing of work performed and the achievements of milestones under the 1kW residential cogeneration
fuel cell development program and from light duty automotive and fuel cell bus programs. As a result
of the AFCC Transaction, there were no light duty automotive fuel program engineering development
revenues subsequent to January 2008. In addition, the 1kW residential cogeneration fuel cell
development program was completed in the third quarter of 2008. Engineering development revenue
in the first three quarters of 2008 was positively impacted by $1.0 million of revenue related to the
B.C. Transit 2010 Olympic fuel cell bus program.
• Operating expenditures: Operating expenses have declined in the four quarters of 2008 due to the
impact of the AFCC Transaction. Operating expenses also reflect changes in the value of the
Canadian dollar versus the U.S. dollar. Operating expenses increased in the fourth quarter of 2007
due to severance and related costs of approximately $4.1 million incurred in conjunction with the
AFCC Transaction.
75
• Depreciation and amortization: Depreciation and amortization has declined for the four quarters of
2008 as several assets became fully depreciated or amortized during 2007 and certain intangible assets
were disposed of in the AFCC Transaction. Depreciation and amortization expense increased in the
fourth quarter of 2007 due to the acceleration of amortization on expired patents. Depreciation and
amortization has declined for the first three quarters of 2007 as a significant amount of intangible
assets acquired in 2001 became fully amortized in 2006.
•
Investment and other income: Investment income has continually declined for the last eight
quarters due to declines in our cash equivalents and short-term investment portfolios and declines in
interest rates. Investment and other income was positively impacted in the second, third and fourth
quarters of 2007 and the second quarter of 2008 by foreign exchange gains of $4.2 million, $3.3
million, $0.7 million, and $1.0 million, respectively, and was negatively impacted in the first, third
and fourth quarters of 2008 by foreign exchange losses of $1.3 million, $0.5 million, and $2.9 million,
respectively, due to fluctuations in the Canadian dollar, relative to the U.S. dollar, on our Canadian
dollar-denominated cash and short-term investments and on our outstanding foreign exchange
contracts to buy or sell Canadian dollars. Other income increased in the four quarters of 2008 due to
the provision of administrative services to AFCC.
• Loss on disposal and write-down of long-lived assets: The net loss for the fourth quarter of 2008
was negatively impacted by a $3.0 million write-down of our investment in Chrysalix and the third
quarter of 2007 was negatively impacted by a $4.6 million write-down of our investment in Advanced
Energy.
• Gain on sale of assets held for sale: The net income for the first quarter of 2008 was significantly
impacted by a $96.8 million gain on the sale of assets pursuant to the AFCC Transaction.
RISKS & UNCERTAINTIES
An investment in our common shares involves risk. Investors should carefully consider the risks
described below and the other information contained in, and incorporated into, this Management
Discussion and Analysis, our financial statements for the year ended December 31, 2008, and our Annual
Information Form. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties, including those that we do not know about now or that we currently deem
immaterial, may also adversely affect our business. For a more complete discussion of risks and
uncertainties summarized below which apply to our business and our operating results, please see our
Annual Information Form and other filings with Canadian (www.sedar.com) and U.S. securities
regulatory authorities (www.sec.gov). These documents are also available on our website at
www.ballard.com.
Our business entails risks and uncertainties that affect our outlook and eventual results of our business
and commercialization plans. The primary risks relate to meeting our product development and
commercialization milestones, which require that our products exhibit the functionality, cost, durability
and performance required in a commercial product and that we have sufficient access to capital to fund
these activities. To be commercially useful, most of our products must be integrated into products
manufactured by system integrators or OEMs. There is no guarantee that system integrators or OEMs will
provide products that use our products as components. There is also a risk that mass markets for certain
of our products may never develop, or that market acceptance might take longer to develop than
anticipated.
76
A summary of these identified risks and uncertainties are as follows:
• We may not be able to achieve commercialization of our products on the timetable we anticipate, or at
all;
• We expect our cash reserves will be reduced due to future operating losses, and we cannot provide
certainty as to how long our cash reserves will last or that we will be able to access additional capital
when necessary;
• We may not be able to successfully execute our business plan;
• Potential fluctuations in our financial and business results make forecasting difficult and may restrict
our access to funding for our commercialization plan;
• Exchange rate fluctuations are beyond our control and may have a material adverse effect on our
business, operating results, financial condition or profitability;
• Commodity price fluctuations are beyond our control and may have a material adverse effect on our
business, operating results, financial condition and profitability;
• A mass market for our products may never develop or may take longer to develop than we anticipate;
• We have limited experience manufacturing fuel cell products on a commercial basis;
• We are dependent on third party suppliers for the supply of key materials and components for our
products;
• We are dependent on systems integrators or Original Equipment Manufacturers to purchase certain of
our products;
• Global economic conditions are beyond our control and may have an adverse impact on our business
or on our key suppliers and / or customers;
• Public Policy and regulatory changes could hurt the market for our products;
• We depend on our intellectual property and our failure to protect that intellectual property could
adversely affect our future growth and success;
• We may be involved in intellectual property litigation that causes us to incur significant expenses or
prevents us from selling our products;
• We currently face and will continue to face significant competition;
• We could lose or fail to attract the personnel necessary to run our business;
• We could be liable for environmental damages resulting from our research, development or
manufacturing operations;
• Our products use flammable fuels, which could subject our business to product liability claims;
MANAGEMENT’S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES AND
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant
information is gathered and reported to senior management, including the President and Chief Executive
Officer (“CEO”) and the Corporate Controller and Acting Chief Financial Officer (“CFO”), on a timely
basis so that appropriate decisions can be made regarding public disclosure.
77
As of the end of the period covered by this report, we evaluated, under the supervision and with the
participation of management, including the CEO and the CFO, the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules 13(a) – 15(e) of the Securities
Exchange Act of 1934 (“Exchange Act”). We have concluded that as of December 31, 2008, our
disclosure controls and procedures were effective to ensure that information required to be disclosed in
reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified therein, and accumulated and reported to management to allow timely
discussions regarding required disclosure.
Internal control over financial reporting
The CEO and CFO, together with other members of management, are responsible for establishing and
maintaining adequate internal control over the Company’s financial reporting. Internal control over
financial reporting is designed under our supervision, and effected by the Company’s board of directors,
management, and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in Canada and the requirements of the Securities and Exchange Commission
in the United States, as applicable.
There are inherent limitations in the effectiveness of internal control over financial reporting, including
the possibility that misstatements may not be prevented or detected. Accordingly, even effective internal
controls over financial reporting can provide only reasonable assurance with respect to financial statement
preparation. Furthermore, the effectiveness of internal controls can change with circumstances.
Management, including the CEO and CFO, have evaluated the effectiveness of internal control over
financial reporting in relation to criteria described in Internal Control–Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this
evaluation, we have determined that internal control over financial reporting was effective as of
December 31, 2008.
KPMG LLP, our independent registered public accounting firm, has audited our consolidated financial
statements and expressed an unqualified opinion thereon. KPMG has also expressed an unqualified
opinion on the effective operation of our internal control over financial reporting as of December 31,
2008.
Changes in internal control over financial reporting
During the year ended December 31, 2008, there were no material changes in internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Non-GAAP Measures
We use certain non-GAAP measures to assist in assessing our financial performance and liquidity. Non-
GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to
be comparable to similar measures presented by other companies. A description of non-GAAP measures
and reconciliations to financial statement line items for the periods indicated are as follows:
Normalized net loss measures our net loss after excluding items that are unusual in nature or do not
reflect the normal continued operating activity of the business. Gains on sale of assets held for sale,
losses from discontinued operations and write-downs of long-lived assets are not considered part of our
core activities, and are expected to occur infrequently. Therefore we have removed these in our
78
calculation of normalized net loss. We believe normalized net loss assists investors in assessing our
performance.
(Expressed in thousands of U.S. dollars, except per share amounts)
Year ended December 31,
Normalized net loss
2008
2007
2006
Reported net income (loss)
$
34,079
$ (57,302)
$ (181,137)
Loss on disposal and write-down of long-lived assets
Gain on sale of assets
Loss from discontinued operations
Normalized net loss
Normalized net loss per share
2,812
(96,845)
-
4,583
-
493
778
-
124,143
$
$
(59,954)
$ (52,226)
$ (56,216)
(0.71)
$
(0.46)
$ (0.50)
Weighted average common shares outstanding (000’s)
84,922
114,575
113,391
Operating cash consumption measures the amount of cash required to fund the operating activities of our
business and excludes financing and investing activities except for net additions to property, plant and
equipment. We believe operating cash consumption assists investors in assessing our requirements to
fund operations.
(Expressed in thousands of U.S. dollars)
Operating Cash Consumption
Year ended December 31,
2008
2007
2006
Cash used by operations
Net additions to property, plant and equipment
Operating cash consumption
$
(26,209)
(3,085)
$
(29,294)
$
$
(31,850)
(6,379)
(38,229)
$
$
(42,670)
(8,669)
(51,339)
79
Consolidated Financial Statements
(Expressed in U.S. dollars)
BALLARD POWER SYSTEMS INC.
Years ended December 31, 2008, 2007 and 2006
80
MANAGEMENT’S REPORT
Management’s Responsibility for the Financial Statements and Report on Internal
Control over Financial Reporting
The consolidated financial statements contained in this Annual Report have been prepared by
management in accordance with Canadian generally accepted accounting principles (“GAAP”). The
integrity and objectivity of the data in these consolidated financial statements are management’s
responsibility. Management is also responsible for all other information in the Annual Report and for
ensuring that this information is consistent, where appropriate, with the information and data
contained in the consolidated financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external reporting purposes in accordance with GAAP. Internal control over financial
reporting may not prevent or detect fraud or misstatements because of limitations inherent in any
system of internal control. Management has assessed the effectiveness of the Corporation’s internal
control over financial reporting based on the framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and concluded
that the Corporation’s internal control over financial reporting was effective as of December 31, 2008.
In addition, management maintains disclosure controls and procedures to provide reasonable
assurance that material information is communicated to management and appropriately disclosed.
Some of the assets and liabilities include amounts, which are based on estimates and judgments, as
their final determination is dependent on future events.
The Board of Directors oversees management’s responsibilities for financial reporting through the
Audit Committee, which consists of five directors who are independent and not involved in the daily
operations of the Corporation. The Audit Committee meets on a regular basis with management and
the external and internal auditors to discuss internal controls over the financial reporting process,
auditing matters and financial reporting issues. The Audit Committee is responsible for appointing
the external auditors (subject to shareholder approval), and reviewing and approving all financial
disclosure contained in our public documents and related party transactions.
The external auditors, KPMG LLP, have audited the financial statements and expressed an
unqualified opinion thereon. KPMG has also expressed an unqualified opinion on the effective
operation of the internal controls over financial reporting as of December 31, 2008. The external
auditors have full access to management and the Audit Committee with respect to their findings
concerning the fairness of financial reporting and the adequacy of internal controls.
"JOHN SHERIDAN"
"JAY MURRAY"
JOHN SHERIDAN
President and
Chief Executive Officer
March 2, 2009
JAY MURRAY
Corporate Controller and
Acting Chief Financial Officer
March 2, 2009
81
AUDITORS' REPORT
To the Shareholders of Ballard Power Systems Inc.
We have audited the consolidated balance sheets of Ballard Power Systems Inc. (the “Corporation")
as at December 31, 2008 and 2007 and the consolidated statements of operations and comprehensive
loss, shareholders’ equity and cash flows for each of the years in the three-year period ended
December 31, 2008. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. With
respect to the consolidated financial statements for the years ended December 31, 2008 and 2007, we
also conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the
financial position of the Corporation as at December 31, 2008 and 2007 and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2008
in accordance with Canadian generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Corporation's internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 2, 2009 expressed an unqualified opinion on the effectiveness of the Corporation’s internal
control over financial reporting.
"KPMG LLP"
Chartered Accountants
Vancouver, Canada
March 2, 2009
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Ballard Power Systems Inc.
We have audited Ballard Power Systems Inc. (the “Corporation")’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Corporation’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting presented in the section entitled “Management’s Report on Disclosure Controls and
Procedures and Internal Controls over Financial Reporting” under the heading “Internal control over
financial reporting” included in Management Discussion and Analysis. Our responsibility is to
express an opinion on the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
83
We also have conducted our audits on the consolidated financial statements in accordance with
Canadian generally accepted auditing standards and in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our report dated March 2, 2009 expressed an
unqualified opinion on those consolidated financial statements.
"KPMG LLP"
Chartered Accountants
Vancouver, Canada
March 2, 2009
84
2008
2007
$
$
$
54,086
31,313
18,856
10,402
1,434
-
116,091
38,755
3,726
48,106
1,765
-
-
208,443
21,819
947
3,841
-
26,607
20,502
47,109
49,340
96,234
18,963
14,859
1,740
105
181,241
42,906
4,303
48,106
3,250
16,286
2,599
298,691
20,042
169
752
1,933
22,896
17,606
40,502
832,711
283,466
(954,607)
(236)
161,334
208,443
$
1,174,821
72,290
(988,686)
(236)
258,189
298,691
$
$
$
$
BALLARD POWER SYSTEMS INC.
Consolidated Balance Sheets
December 31,
(Expressed in thousands of U.S. dollars)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable (notes 5 & 16)
Inventories (note 6)
Prepaid expenses and other current assets
Current assets held for sale (note 3)
Property, plant and equipment (note 7)
Intangible assets (note 8)
Goodwill
Investments (note 9)
Long-term assets held for sale (note 3)
Other long-term assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (notes 10 & 16)
Deferred revenue
Accrued warranty liabilities
Current liabilities held for sale (note 3)
Long-term liabilities (notes 11 & 12)
Shareholders’ equity:
Share capital (note 13)
Contributed surplus (notes 2, 13(b), (d) & (e))
Accumulated deficit
Accumulated other comprehensive loss
See accompanying notes to consolidated financial statements.
Commitments, guarantees and contingencies (note 14)
Approved on behalf of the Board:
"Ed Kilroy"
Director
"Ian Bourne"
Director
85
BALLARD POWER SYSTEMS INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31,
(Expressed in thousands of U.S. dollars, except per share amounts and number of shares)
Revenues:
Product and service revenues
Engineering development revenue
Total revenues
Cost of revenues and expenses:
Cost of product and service revenues
Research and product development
General and administrative
Marketing and business development
Depreciation and amortization
Total cost of revenues and expenses
Loss before undernoted
Investment and other income (loss) (note 19)
Gain on sale of assets (note 3)
Loss on disposal and write-down of long-lived
assets (note 9)
Equity in loss of associated companies
Income (loss) before income taxes
Income taxes (recovery) (note 15)
Income (loss) from continuing operations
Loss from discontinued operations (note 4)
Net income (loss) and comprehensive
income (loss)
Basic earnings (loss) per share from continuing
operations
Basic loss per share from discontinued operations
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted average number of common
shares outstanding - basic
Impact of dilutive options
Weighted average number of common
shares outstanding – diluted
$
$
2008
52,726
6,854
59,580
47,401
37,172
12,615
7,461
6,034
110,683
(51,103)
(186)
96,845
(2,812)
(8,649)
34,095
16
34,079
-
34,079
$
2007
43,352
22,180
65,532
25,052
58,478
19,068
8,981
15,732
127,311
(61,779)
16,933
-
(4,583)
(7,433)
(56,862)
(53)
(56,809)
(493)
(57,302)
$
$
$
0.40
0.00
0.40
0.40
$
$
$
(0.50)
$
(0.00)
(0.50)
(0.50)
$
$
2006
36,535
13,288
49,823
21,206
52,274
13,262
7,226
16,391
110,359
(60,536)
9,932
-
(778)
(7,029)
(58,411)
(1,417)
(56,994)
(124,143)
(181,137)
(0.50)
(1.10)
(1.60)
(1.60)
84,922,364
114,575,473
113,390,728
840,843
85,763,207
-
114,575,473
-
113,390,728
See accompanying notes to consolidated financial statements.
86
BALLARD POWER SYSTEMS INC.
Consolidated Statements of Shareholders’ Equity
December 31,
Unaudited (Expressed in thousands of U.S. dollars except per share amounts and number of shares)
Balance, December 31, 2005
Net loss
Issuance of common shares
for cash (net of issue costs)
Options exercised
Share distribution plan
Balance, December 31, 2006
Net loss
Share distribution plan
Balance, December 31, 2007
Net income
Non-dilutive financing (note 2)
Cancellation of common shares
upon disposition of assets held
for sale (note 3)
RSUs and DSUs redeemed
Share distribution plan
Balance, December 31, 2008
Number of
shares
112,750,115
-
1,022,549
5,249
434,664
114,212,577
-
886,565
115,099,142
-
-
(34,261,300)
Share capital
$ 1,161,281
-
5,909
34
2,554
1,169,778
-
5,043
$ 1,174,821
-
-
(349,438)
$
Contributed
surplus
62,017
-
-
-
4,918
66,935
-
5,355
72,290
-
33,812
175,538
$
$
$
Accumulated
deficit
(750,247) $
(181,137)
-
-
-
(931,384)
(57,302)
-
(988,686) $
34,079
-
-
321,576
962,717
82,122,135
2,557
4,771
832,711
$
(2,557)
4,383
283,466
$
-
-
$
(954,607) $
Accumulated
other
comprehensive
loss
(236)
-
-
Total
shareholders’
equity
472,815
(181,137)
5,909
$
$
-
-
(236)
-
-
(236)
-
-
-
-
-
(236)
34
7,472
305,093
(57,302)
10,398
258,189
34,079
33,812
(173,900)
-
9,154
161,334
See accompanying notes to consolidated financial statements.
87
BALLARD POWER SYSTEMS INC.
Consolidated Statements of Cash Flows
Years ended December 31,
(Expressed in thousands of U.S. dollars)
Cash provided by (used for):
Operating activities:
Net income (loss) for the year
Items not affecting cash:
Compensatory shares
Depreciation and amortization
Gain on sale of assets (note 3)
Unrealized loss on forward contracts
Loss on disposal and write-down of long-lived assets
from continuing operations
Loss (gain) on disposal and write-down of long-lived
assets from discontinued operations (note 4)
Equity in loss of associated companies
Other
Changes in non-cash working capital:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued liabilities
Deferred revenue
Accrued warranty liabilities
Net current assets and liabilities held for sale (notes 3 & 4)
Cash used by operations
Investing activities:
Net decrease (increase) in short-term investments
Additions to property, plant and equipment
Proceeds on sale of property, plant and equipment
Proceeds on sale of investments (note 9)
Disposition of assets held for sale (notes 3 & 4)
Investments (notes 9 & 11)
Other long-term assets
Long-term liabilities
Financing activities:
Non-dilutive financing (note 2)
Net proceeds on issuance of share capital
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
Supplemental disclosure of cash flow information (note 17)
See accompanying notes to consolidated financial statements.
88
2008
2007
2006
$
34,079
$
(57,302)
$
(181,137)
7,267
8,021
(96,845)
408
2,812
12,093
18,080
-
-
4,583
7,983
23,131
-
-
778
-
(2,897)
112,124
8,649
490
(35,119)
107
4,457
510
5
778
3,089
(36)
8,910
(26,209)
64,921
(3,560)
475
-
(61,285)
(6,212)
-
(304)
(5,965)
36,920
-
36,920
4,746
49,340
54,086
7,433
-
(18,010)
(4,052)
(196)
(456)
(1,657)
(1,645)
(1,214)
(4,620)
(13,840)
(31,850)
29,439
(6,379)
-
541
1,787
(3,290)
(2,401)
94
19,791
-
-
-
7,029
(247)
(30,339)
(1,630)
(2,337)
(100)
(3,041)
1,358
(3,680)
(2,901)
(12,331)
(42,670)
(41,559)
(8,735)
66
3,302
(687)
(4,057)
78
799
(50,793)
-
5,943
5,943
(12,059)
61,399
49,340
$
$
(87,520)
148,919
61,399
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies:
(a) Description of business:
The principal business of Ballard Power Systems Inc. (the “Corporation”) is the design, development,
manufacture, sale and service of fuel cell products for a variety of applications. A fuel cell is an
environmentally clean electrochemical device that combines hydrogen fuel with oxygen (from the air)
to produce electricity. Our technology is based on proton exchange membrane (“PEM”) fuel cells.
The Corporation operated in three market segments:
• Power Generation: Fuel cell products and services for material handling, back-up power and
residential co-generation purposes;
• Automotive: Fuel cell products and services for fuel cell cars, vans and buses; and
• Material Products: Carbon fiber products primarily for automotive transmissions and gas
diffusion layers (“GDL”) for fuel cells.
(b) Basis of presentation:
The consolidated financial statements of the Corporation have been prepared in accordance with
Canadian GAAP. Material measurement differences to United States GAAP are disclosed in note 21.
The consolidated financial statements include the accounts of the Corporation and its principal
subsidiaries as follows:
Ballard Advanced Materials Corporation
Ballard Generation Systems Inc.
Ballard GmbH
Ballard Material Products Inc.
Ballard Power Corporation
Ballard Power Systems Corporation (note 4)
Percentage ownership
2008
77.5%
-
100.0%
100.0%
100.0%
-
2007
77.5%
100.0%
100.0%
100.0%
100.0%
-
2006
77.5%
100.0%
100.0%
100.0%
100.0%
100.0%
On December 23, 2008, Ballard Generation Systems Inc. (“BGS”), a wholly owned subsidiary
company of the Corporation, was dissolved and the Corporation assumed all of BGS’ assets, debts,
obligations and liabilities.
All significant intercompany balances and transactions have been eliminated.
89
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(c) Convergence with International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board (“AcSB”) confirmed the date of changeover
from GAAP to International Financial Reporting Standards (“IFRS”). Canadian publicly
accountable enterprises must adopt IFRS for their interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011. While IFRS uses a conceptual framework similar
to Canadian GAAP, there are significant differences on recognition, measurement and disclosures.
The Corporation, with the assistance of an external expert advisor, has begun a high level review of
the major differences between Canadian GAAP and IFRS. This work is expected to be completed in
2009.
(d) Translation of foreign currencies:
The measurement currency of the Corporation is the U.S. dollar. Transactions in foreign currencies
are translated at the exchange rate in effect at the transaction date. Monetary assets and liabilities
denominated in other than the measurement currency are translated at the exchange rates in effect at
the balance sheet date. The resulting exchange gains and losses are recognized in earnings.
(e) Use of estimates:
The preparation of consolidated financial statements requires the Corporation’s management to make
estimates and assumptions that affect the amounts reported in these consolidated financial statements
and notes thereto. Significant areas requiring management to make estimates include the net
realizable valued inventory, product warranty obligations, valuation of investments, revenue
recognition and recoverability of intangibles and goodwill. Actual results could differ from those
estimates.
(f) Cash, cash equivalents and short-term investments:
Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest-bearing
securities with maturities at the date of purchase of three months or less.
Short-term investments consist of highly liquid interest bearing securities with maturities at the date
of purchase between three months and three years.
90
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(g) Financial instruments:
The Corporation measures its financial assets in the balance sheet at fair value, except for loans and
receivables, which are measured at amortized cost. Financial liabilities classified as held for trading,
including derivatives, are measured in the balance sheet at fair value; all other financial liabilities are
measured at amortized cost. Long-term investments are measured at cost as they are privately held
entities.
Measurement in subsequent periods depends on whether the financial instrument has been classified
as held for trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities.
The Corporation classifies its accounts receivables as loans and receivables and its accounts payable
and warranty liabilities as financial liabilities that are not classified as held for trading.
Periodically, the Corporation enters into forward exchange contracts to limit its exposure to foreign
currency rate fluctuations and to platinum price fluctuations. These derivative contracts are recorded
as either assets or liabilities in the consolidated balance sheet at fair value. Any changes in fair value
are recognized in net income.
The Corporation does not designate its financial instruments as hedges.
(h) Capital Disclosure:
Effective January 1, 2008, the Corporation adopted the recommendations of the Canadian Institute of
Chartered Accountants (“CICA”) for Capital Disclosures (CICA Handbook Section 1535). This new
section establishes standards for disclosing information about an entity’s capital and how it is
managed. This standard requires an entity to disclose: (i) its objectives, policies and processes for
managing capital; (ii) summary quantitative data about what it manages as capital; (iii) whether
during the period it complied with any externally imposed capital requirements to which it is subject;
and (iv) when the entity has not complied with such requirements, the consequences of such non-
compliance (note 20).
91
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(i) Inventories:
Inventories are recorded at the lower of cost and net realizable value. The cost of inventories is based
on the first-in first-out principle, and includes expenditures incurred in acquiring the inventories,
production or conversion costs and other costs incurred in bringing them to their existing location and
condition. In the case of manufactured inventories and work in progress, cost includes materials,
labor and appropriate share of production overhead based on normal operating capacity. Costs of
materials are determined on an average per unit basis. Net realizable value is the estimated selling
price in the ordinary course of business, less the estimated costs of completion and selling expenses.
In establishing the appropriate inventory obsolescence, management estimates the likelihood that
inventory carrying values will be affected by changes in market demand, technology and design,
which would make inventory on hand obsolete.
(j) Property, plant and equipment:
Property, plant and equipment are initially recorded at cost and are amortized from the date of
acquisition or, in respect of internally constructed assets, from the time an asset is completed and
ready for use, using the straight-line method over the estimated useful lives of the assets as follows:
Building
Computer equipment
Furniture and fixtures
Leasehold improvements
Production and test equipment
(k) Goodwill and intangible assets:
30 to 39 years
3 to 7 years
5 to 14 years
The shorter of initial term of the respective
lease and estimated useful life
4 to 15 years
Effective December 31, 2008, the Corporation early adopted the recommendations of the CICA for
Goodwill and Intangible Assets (CICA Handbook Section 3064). The new standard provides more
guidance on intangible assets and the recognition of internally generated intangible assets including
research and development costs. This accounting standard was applied retrospectively, however there
were no material impacts on prior period financial statements requiring restatement by adopting the
new standard.
Research costs are expensed as they are incurred. Product development costs are expensed as
incurred except when they meet specific criteria for deferral as set forth under Canadian GAAP.
92
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(k) Goodwill and intangible assets (cont’d):
Goodwill is recognized in the Corporation’s consolidated financial statements as the excess of the
purchase price of businesses acquired over the fair values assigned to identifiable assets acquired and
liabilities assumed and is assigned to reporting units of a market segment.
Intangible assets consist of fuel cell technology acquired from third parties and are recorded at cost.
Intangible assets are amortized over their estimated useful lives of 5 to 15 years using the straight-line
method. Intangible assets are tested for impairment when conditions exist which may indicate that
the estimated future net cash flows from the asset will be insufficient to cover its carrying value.
The Corporation tested goodwill and intangible assets for impairment in each of the reporting units
using a discounted cash flow methodology and determined that there was no impairment to goodwill
and intangible assets.
Costs incurred in establishing and maintaining patents and license agreements are expensed in the
period incurred.
(l) Investments:
Investments in shares of companies over which the Corporation has the ability to exercise significant
influence are accounted for by the equity method. Investments in companies where significant
influence does not exist are carried at cost.
(m) Accrued warranty liabilities:
A provision for warranty costs is recorded on product sales at the time of shipment. In establishing
the accrued warranty liability, management estimates the likelihood that products sold will experience
warranty claims and the estimated cost to resolve claims received, taking into account the nature of
the contract and past and projected experience with the products.
(n) Asset retirement obligations:
Legal obligations to retire tangible long-lived assets are recorded at fair value at acquisition with a
corresponding increase in asset value. These include assets leased under operating leases. The
liability is accreted over the life of the asset to fair value and the increase in asset value is depreciated
over the remaining useful life of the asset.
93
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(o) Revenue recognition:
The Corporation recognizes product revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured.
Revenue from products is recognized when title passes to the customer and all of the revenue
recognition criteria specified above is met. Revenue from engineering services is recognized as
services are rendered and predefined milestones are achieved, or on the percentage of completion
method of accounting. For contracts with multiple deliverables, the Corporation allocates revenue to
each element of the contract based on objective evidence of the fair value of the element. Revenue
from long-term fixed price service contracts is determined under the proportionate performance
method where revenues are recognized on a pro-rata basis in the relation that contract costs incurred
have to total contract costs. Unbilled revenue (included in accounts receivable) represents revenue
earned in excess of amounts billed on uncompleted contracts. Deferred revenue represents cash
received from customers in excess of revenue recognized on uncompleted contracts.
(p) Income taxes:
The Corporation follows the asset and liability method of accounting for income taxes. Under this
method, future income taxes are recognized for the future income tax consequences attributable to
differences between the financial statement carrying values of assets and liabilities and their
respective income tax bases (temporary differences) and for loss carry-forwards. The resulting
changes in the net future tax asset or liability are included in income. Future tax assets and liabilities
are measured using enacted, or substantively enacted, tax rates expected to apply to taxable income in
the years in which temporary differences are expected to be recovered or settled. The effect on future
income tax assets and liabilities, of a change in tax rates, is included in income in the period that
includes the substantive enactment date. Future income tax assets are evaluated, and if realization is
not considered to be “more likely than not,” a valuation allowance is provided.
(q) Employee future benefit plans:
The Corporation has a defined benefit pension plan covering employees in the United States. In
addition, the Corporation provides other retirement benefits for certain employees in the United
States. The benefits are based on years of service and the employee’s compensation level. The
Corporation accrues its obligations under employee benefit plans and the related costs, net of plan
assets.
94
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(q) Employee future benefit plans (cont’d):
The cost of pensions earned by employees is actuarially determined using the projected benefit
method prorated on service and management’s best estimate of expected plan investment
performance, salary escalation, and retirement ages of employees. For the purpose of calculating the
expected rate of return of plan assets, those assets have been valued at fair value.
The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation, and the
fair value of plan assets, is amortized over the average remaining service period of active employees.
Any increase in the projected benefit obligation resulting from amendments affecting prior service is
amortized on a straight-line basis over the remaining service period of active plan participants who
are expected to receive benefits under the plan on the date the amendment is first recognized. To the
extent that the liability is not covered by assets of the plan, nor reflected in the accrued pension cost,
there is a transition asset, or obligation, to be recognized over a specified period in accordance with
an amortization schedule.
(r) Share-based compensation plans:
The Corporation uses the fair-value based method of accounting for share-based compensation for all
awards of shares and share options granted. The resulting compensation expense, calculated using
the Black-Scholes valuation method and estimated for forfeitures, is charged to net income over the
vesting period, whereby the compensation expense is recognized when services are received with a
corresponding increase to contributed surplus.
The Corporation issues shares and share options under its share-based compensation plans as
described in note 13. Any consideration paid by employees on exercise of share options or purchase
of shares, together with the amount initially recorded in contributed surplus, is credited to share
capital.
(s) Earnings (loss) per share:
Basic earnings (loss) per share is computed using the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share is calculated using the treasury stock
method. Under the treasury stock method, the dilution is calculated based upon the number of
common shares issued should deferred share units (“DSUs”), restricted share units (“RSUs”), and “in
the money” options, if any, be exercised.
95
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
1. Significant accounting policies (cont’d):
(t) Comprehensive income (loss):
Other comprehensive income (loss) represents changes in shareholders’ equity and includes items
such as unrealized gains and losses on financial assets classified as available-for-sale, and cumulative
translation adjustments. The Corporation has included a reconciliation of comprehensive income and
accumulated other comprehensive income, which is presented as a separate category of shareholders’
equity, on the consolidated balance sheet and the consolidated statement of shareholders’ equity.
(u) Government assistance and investment tax credits:
Government assistance and investment tax credits are recorded as either a reduction of the cost of the
applicable assets, or credited against the related expense incurred in the statement of operations, as
determined by the terms and conditions of the agreements under which the assistance is provided to
the Corporation or the nature of the expenditures which gave rise to the credits. Government
assistance and investment tax credit receivables are recorded when their receipt is reasonably assured.
(v) Comparative figures:
Certain comparative figures have been reclassified to conform with the presentation adopted for the
current year.
2. Non-dilutive financing:
On December 31, 2008, the Corporation completed a restructuring transaction with Superior Plus
Income Fund (“Superior Plus”) to reorganize the Corporation’s business under a Plan of Arrangement
(the “Arrangement”). Pursuant to the Arrangement, Superior Plus transferred $38,029,000 (CDN
$46,319,000) to the Corporation’s parent company (“Old Ballard”). Old Ballard subsequently
transferred all of its assets and liabilities (including the net cash proceeds, but excluding Old Ballard’s
historic Canadian income tax carry forward attributes), to a new wholly owned company, (“the
Corporation”). Old Ballard’s shareholders exchanged their shares, on a one-for-one basis, for shares
of the Corporation. The Corporation will now carry on the full scope of the Old Ballard’s business
operations, and will hold all rights to intellectual property, as held by Old Ballard prior to the
completion of the Arrangement.
As the transfer of the business assets, liabilities and operations from Old Ballard to the Corporation
represented a transaction with no change in shareholder ownership, the transaction was accounted for
using continuity of interest accounting.
96
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
2. Non-dilutive financing (cont’d):
Pursuant to continuity of interest accounting, the assets transferred and liabilities assumed were
recorded at their carrying values as reported by the Corporation immediately prior to the completion
of the Arrangement. As a result, the net cash proceeds were recorded as a credit to shareholders’
equity. In addition, as the future income tax benefits of Old Ballard’s Canadian non-capital losses,
capital losses, scientific research and development expenditures and investment tax credits generated
through to the date of the completion of the Arrangement are not available to the Corporation after the
completion of the Arrangement, the gross future income tax assets related to these Canadian tax pools
was reduced to nil, with a corresponding reduction of the related valuation allowance (note 15).
Proceeds of Arrangement
Disposal costs incurred
Net cash proceeds at December 31, 2008
Disposal costs accrued
Net proceeds of Arrangement
3. Disposition of certain automotive fuel cell assets:
$
$
2008
38,029
(1,109)
36,920
(3,108)
33,812
On January 31, 2008, the Corporation completed the sale of its automotive fuel cell research and
development assets (the “AFCC Transaction”) to Daimler, Ford and AFCC Automotive Fuel Cell
Cooperation Corp. (“AFCC”). AFCC, which is controlled by Daimler and Ford, was created to carry
on the development of automotive fuel cells for Daimler and Ford. Under the terms of the AFCC
Transaction, the Corporation transferred to Daimler, Ford and AFCC its automotive patents,
automotive fuel cell test equipment, automotive fuel cell inventory, $60,000,000, all automotive fuel
cell warranty liabilities and all automotive fuel cell development contracts with Daimler and Ford,
80.1% of the outstanding shares of AFCC (note 9), 112 personnel, and a royalty free, sub-licensable
license to the Corporation’s remaining intellectual property for use in automotive applications. In
exchange, Daimler and Ford returned to the Corporation an aggregate of 34,261,298 of its common
shares valued at $173,900,000, one Class A share and one Class B share, collectively representing
Daimler and Ford’s entire direct and indirect equity interest in the Corporation. These shares were
then cancelled.
97
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
3. Disposition of certain automotive fuel cell assets (cont’d):
The Corporation recorded a gain of $96,845,000 on the closing of the AFCC transaction.
Proceeds on disposal
Cash transferred to Daimler and Ford
Disposal costs
Net proceeds
Cash transferred to AFCC
Net investment in remaining automotive assets as of January 31, 2008
Net gain on disposal
2008
173,900
(58,000)
(3,823)
112,077
(2,000)
(13,232)
96,845
$
$
As the Corporation was determined to have significant continuing involvement with AFCC, the
historic results of the operations transferred are reported in results from continuing operations.
Included in the assets and liabilities held for sale related to the AFCC Transaction at December 31,
2007 are:
Inventories
Current assets held for sale
Property, plant and equipment
Intangible assets
Goodwill
Long-term assets held for sale
Accrued warranty liabilities
Current liabilities held for sale
2007
105
105
2,331
10,150
3,805
16,286
1,933
1,933
$
$
$
$
$
$
4. Disposition of Ballard Power Systems Corporation:
On February 15, 2007, the Corporation disposed of its electric drive operations, Ballard Power
Systems Corporation (“BPSC”), an indirectly wholly-owned subsidiary to a third party. Net proceeds
on disposition were $1,689,000, which included cash proceeds of $3,754,000, partly offset by
disposal cost of $2,065,000. The total net loss on disposal of $108,464,000 was recorded as a net loss
of $111,355,000 in 2006 and an offsetting net gain of $2,891,000 in 2007 primarily as a result of
employee future benefit plan curtailments in 2007. Upon closing, the Corporation ceased to
consolidate the results of BPSC.
98
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
4. Disposition of Ballard Power Systems Corporation (cont’d):
The results of operations of BPSC have been presented as discontinued operations in the prior period
figures. The results of BPSC had previously been reported in both the Automotive and Power
Generation segments.
Net loss from discontinued operations is summarized as follows:
Total revenue from discontinued
operations
Loss from operating activities
Loss (gain) on long-lived assets held
for sale
Loss from discontinued operations
2007
311
3,384
(2,891)
2006
12,193
12,788
111,355
$
$
493
$
124,143
$
$
$
In 2006, loss from operating activities included $769,000 in loss on disposal and write-down of long-
lived assets.
5. Accounts receivable:
Trade receivables
Other
6. Inventories:
Raw materials and consumables
Work-in-progress
Finished goods
2008
18,601
255
18,856
2008
6,632
1,891
1,879
10,402
$
$
$
$
2007
18,115
848
18,963
2007
9,497
3,371
1,991
14,859
$
$
$
$
In 2008, changes in raw materials and consumables, finished goods and work-in-progress recognized
as cost of product and service revenues amounted to $25,948,000 (2007 - $21,252,000; 2006 –
$13,677,000). In 2008, the write-down of inventories to net realizable value amounted to $745,000
(2007 - $1,375,000; 2006 - $2,301,000). There were no reversals of write-downs in 2008, 2007 or
2006. Write-downs and reversals are included in either cost of product and service revenues, or
research and product development expense, depending on the nature of inventory.
99
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
7. Property, plant and equipment:
2008
Land
Building
Computer equipment
Furniture and fixtures
Leasehold improvements
Production and test equipment
2007
Land
Building
Computer equipment
Furniture and fixtures
Leasehold improvements
Production and test equipment
8. Intangible assets:
2008
Fuel cell technology
2007
Fuel cell technology
9. Investments:
$
$
$
$
$
$
Cost
4,803
13,574
17,874
5,342
10,659
65,877
118,129
Cost
4,803
13,392
18,397
5,366
10,515
65,151
117,624
$
Accumulated
depreciation
-
5,140
14,905
4,830
6,108
48,391
79,374
$
Accumulated
depreciation
-
$
4,612
14,559
4,821
5,341
45,385
74,718
$
Cost
49,801
Accumulated
amortization
46,075
$
Cost
49,801
Accumulated
amortization
45,498
$
Net book
value
4,803
8,434
2,969
512
4,551
17,486
38,755
Net book
value
4,803
8,780
3,838
545
5,174
19,766
42,906
Net book
value
3,726
Net book
value
4,303
$
$
$
$
$
$
Investments are comprised of the following:
2008
Chrysalix Energy Limited Partnership
AFCC
Amount Percentage
ownership
15.0%
19.9%
$
500
1,265
$ 1,765
2007
Amount Percentage
ownership
15.0%
-
$ 3,250
-
$ 3,250
Chrysalix Energy Limited Partnership (“Chrysalix”) is recorded at the lower of cost and estimated
net realizable value. During 2008, the Corporation made additional investments of $273,000 (2007 -
$163,000) in Chrysalix and recorded a write-down of $3,020,000 to adjust the carrying value of
Chrysalix to its estimated net realizable value of $500,000.
100
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
9. Investments (cont’d):
The Corporation maintains a 19.9% interest in AFCC which is accounted for using the cost method
and is subject to a share purchase agreement under which Ford, either at the option of the Corporation
or Ford’s election, may purchase the Corporation’s interest in AFCC at any time after January 31,
2013 for $65,000,000 plus interest accruing at LIBOR from January 31, 2008. The purchase may
take place earlier than January 13, 2013 if certain events occur. The Corporation has no obligation to
fund any of AFCC’s operating expenses. The share purchase agreement is considered to be a
derivative instrument and is recorded at its fair value of $1. This derivative investment is carried at
cost and is not marked to market each reporting period as the Corporation has determined that it is not
possible to reliably determine the derivative fair value.
In 2007, the Corporation sold its 25% interest in Advanced Energy Technology Inc. (“Advanced
Energy”) for proceeds of $541,000, recording a write-down of long-lived assets of $4,563,000.
10. Accounts payable and accrued liabilities:
Trade accounts payable
Other liabilities
Accrued non-dilutive financing costs (note 2)
Compensation payable
Taxes payable
11. Long-term liabilities:
EBARA BALLARD Corporation
Deferred revenue
Employee future benefit plans (note 12)
Asset retirement obligation
2008
6,274 $
3,663
3,108
8,657
117
21,819 $
2008
13,245 $
4,250
1,988
1,019
20,502 $
2007
2,202
2,420
-
15,218
202
20,042
2007
10,536
3,760
1,971
1,339
17,606
$
$
$
$
The Corporation’s 49% interest in EBARA BALLARD Corporation (“EBARA BALLARD”) is
accounted for using the equity method. As the Corporation’s proportionate share of losses from
EBARA BALLARD has exceeded the Corporation’s net funded investment, the net investment of
($13,245,000) (2007 – ($10,536,000)) has been presented in long-term liabilities.
101
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
11. Long-term liabilities (cont’d):
During 2008, the Corporation made an additional investment of $11,249,000 (2007 - $8,461,000), in
EBARA BALLARD, representing the Corporation’s final committed proportionate share of financing
by EBARA BALLARD’s shareholders under the 2005 funding agreement. In addition, the
Corporation received from EBARA BALLARD the final payment (net of taxes) of $5,310,000 (2007
- $5,310,000), related to a license to certain intellectual property and manufacturing rights totaling
(net of withholding taxes) $21,240,000. This receipt is recorded as a credit against the Corporation’s
investment in EBARA BALLARD.
In determining the fair value of the asset retirement obligations, the estimated future cash flows have
been discounted at 12% per annum. The total undiscounted amount of the estimated cash flows
required to settle this obligation is $3,441,000. The obligation will be settled at the end of the term of
the operating lease, which extends to 2019.
12. Employee future benefit plans:
The Corporation maintains a defined benefit pension plan covering employees in the United States.
The benefits under the pension plan are based on years of service and salary levels. Certain
employees are also eligible for post-retirement healthcare, life insurance and other benefits. The
measurement date used to determine pension and other post-retirement benefit measures for the
pension plan and the post-retirement benefit plan is December 31 of each year. The most recent
actuarial valuation of the pension plans for funding purposes was as of January 1, 2008.
Information about the Corporation’s employee future benefit plans, in aggregate, is as follows:
Defined benefit plan obligations:
2008
2007
Balance, beginning of year
Current service cost
Interest cost
Plan participant contributions
Benefits paid
Actuarial (gains) losses
Curtailments
Balance, end of year
$
$
Pension
plans
9,430 $
348
562
-
(116)
(243)
-
9,981 $
Other benefit
plans
Pension
plans
9,587 $
359
479
-
(104)
298
(1,189)
9,430 $
Other benefit
plans
4,094
12
33
2
(27)
(44)
(3,456)
614
614 $
3
35
-
(31)
(5)
-
616 $
102
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
12. Employee future benefit plans (cont’d):
Defined benefit plan assets:
Balance, beginning of year
Actual return (loss) on
plan assets
Employer’s contributions
Plan Participant Contributions
Benefits paid
Balance, end of year
2008
Pension
plans
7,849
(2,337)
396
-
(147)
5,761
$
$
Other benefit
plans
$
- $
-
31
-
(31)
$
- $
2007
Pension
plans
6,847 $
413
Other benefit
plans
-
-
736
-
(147)
7,849 $
25
2
(27)
-
The plan assets for the funded pension plans consist of:
Asset Category:
Equity securities
Debt securities
Total
Reconciliation of the funded status of the benefit plans:
2008
Fair value of plan assets
Accrued benefit obligation
Funded status – deficit
Unamortized net actuarial (gain)
loss
Accrued benefit liability
$
Pension
plans
5,761 $
9,981
(4,220)
3,117
Other benefit
plans
- $
616
(616)
(269)
2008
2007
74%
26%
100%
73%
27%
100%
2007
Pension
plans
7,849 $
9,430
(1,581)
430
Other benefit
plans
-
614
(614)
(206)
$
(1,103) $
(885) $
(1,151) $
(820)
103
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
12. Employee future benefit plans (cont’d):
The elements of the defined benefit costs recognized for the years ended December 31, 2008 and
2007 are:
2008
Pension plans Other benefit
plans
2007
Pension plans
Other benefit
plans
$
$
348
562
2,337
(243)
$
3,004
$
3 $
35
-
(5)
33
$
$
359
479
(413)
298
723
$
(2,897)
-
(90)
243
5
(298)
12
33
-
(44)
1
-
44
Current service cost
Interest cost
Actual (return) loss on plan
assets
Actuarial (gains) losses
Elements of employee future
benefit costs before adjustments
Adjustments to recognize the
long-term nature of employee
future benefit costs:
Differences between expected
and actual return on plan
assets for year
Difference between actuarial
gains (losses) recognized for
year and actuarial gains
(losses) on accrued benefit
obligation for year
Amortization of prior service
cost
Amortization of (gain) loss
-
-
47
(22)
63 $
(3)
-
332
$
101
(13)
133
Defined benefit costs recognized
$
350
$
The significant actuarial assumptions adopted in measuring benefit obligations at December 31, 2008
and 2007 were as follows:
Discount rate
Rate of compensation increase
2008
2007
Pension
plans
Other benefit
plans
Pension
plans
Other benefit
plans
6.0%
3.3%
6.0%
n/a
6.0%
3.0%
6.0%
n/a
104
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
12. Employee future benefit plans (cont’d):
The significant actuarial assumptions adopted in determining net cost for the years ended December
31, 2008 and 2007 were as follows:
Discount rates
Expected long-term rate of
return on plan assets
Rate of compensation
increase
2008
2007
Pension
plans
Other benefit
plans
Pension
plans
Other benefit
plans
6.0%
7.0%
3.3%
6.0%
n/a
n/a
5.8%
7.0%
3.3%
5.8%
n/a
n/a
The assumed health care cost trend rates applicable to the other benefit plans at December 31, 2008
and 2007 were as follows:
Initial medical health care cost trend rate
Initial dental health care cost trend rate
Cost trend rate declines to medical and dental
Year that the medical rate reaches the rate it is
assumed to remain at
Year that the dental rate reaches the rate it is
assumed to remain at
2008
9.0%
5.0%
5.0%
2017
2009
2007
11.0%
7.0%
5.0%
2016
2010
A one-percentage-point change in assumed health care cost trend rates would not have a material
impact on the Corporation’s financial statements.
In 2007, due to the sale of BPSC (note 4), changes were made to benefits accruing to employees
under both the pension and other benefit plans, which resulted in the recognition of curtailment gains
of $2,699,000.
13. Share capital:
(a) Authorized and issued:
Unlimited number of common shares, voting, without par value.
Unlimited number of preferred shares, issuable in series.
At December 31, 2008, 82,122,135 (2007 – 115,099,140; 2006 – 114,212,575) common shares
are issued and outstanding.
On January 31, 2008, 34,261,298 common shares, one Class A share and one Class B share were
returned to the Corporation and cancelled upon completion of the AFCC Transaction (note 3).
105
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
13. Share capital (cont’d):
(b) Share option plans:
The Corporation has options outstanding under three share option plans. All directors, officers
and employees of the Corporation, and its subsidiaries, are eligible to participate in the share
option plans although as a matter of policy, options are currently not issued to directors. Option
exercise prices are denominated in both Canadian and U.S. dollars, depending on the residency
of the recipient. Canadian dollar denominated options have been converted to U.S. dollars using
the year-end exchange rate for presentation purposes. All options have a term of seven to ten
years from the date of grant unless otherwise determined by the board of directors. One-third of
the options vest and may be exercised, at the beginning of each of the second, third and fourth
years after granting.
As at December 31, 2008, options outstanding from the three share option plans were as follows:
2002 share option plan
2000 share option plan
1997 share option plan
Balance, December 31, 2005
Options granted
Options exercised
Options cancelled
Balance, December 31, 2006
Options granted
Options cancelled
Balance, December 31, 2007
Options granted
Options cancelled
Balance, December 31, 2008
Outstanding
options
2,444,050
2,219,410
812,922
Options to be
granted
-
798,049
-
Range of exercise
prices
$2.55 - $24.91
$4.17 - $157.64
$6.22 - $157.64
Options for common shares
Weighted average
exercise price
4,957,776
1,318,500
(5,249)
(430,169)
5,840,858
855,009
(1,110,791)
5,585,076
829,374
(938,068)
5,476,382
$
$
39.83
6.08
6.40
27.35
33.17
7.58
35.20
34.15
4.11
29.05
24.65
106
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
13. Share capital (cont’d):
(b) Share option plans (cont’d):
The following table summarizes information about the Corporation’s share options outstanding as at
December 31, 2008:
Range of exercise price
$2.55 – $6.65
$10.00 – $15.02
$24.91 - $31.20
$32.48 – $43.72
$54.19 – $72.66
$94.83 – $157.64
Options outstanding
Options exercisable
Weighted
average
remaining
contractual life
(years)
6.3
4.1
3.4
1.8
2.2
1.2
4.7
Number
outstanding
2,956,945
641,879
694,995
411,438
411,625
359,500
5,476,382
Weighted
average
exercise
price
$
$
5.53
11.81
24.91
34.97
58.56
153.74
24.65
Weighted
average
exercise
price
$ 6.06
11.98
24.91
34.97
58.56
153.74
33.14
$
Number
exercisable
1,348,829
582,458
694,995
411,438
411,625
359,500
3,808,845
The Corporation uses the fair-value method for recording employee and director share option
grants. During 2008, compensation expense of $2,763,000 (2007 - $3,462,000; 2006 -
$3,278,000) was recorded in net income as a result of fair value accounting for share options
granted. The share options granted during the year had a weighted average fair value of $2.65
(2007 - $3.92; 2006 - $3.86) and vesting periods of three years.
The fair values of the options granted were determined using the Black-Scholes valuation model
under the following weighted average assumptions:
Expected life
Expected dividends
Expected volatility
Risk-free interest rate
2008
7 years
Nil
48%
4%
2007
7 years
Nil
53%
4%
2006
7 years
Nil
59%
4%
In addition, at December 31, 2008, 26,608 options were outstanding under the BGS option
exchange plan with exercise prices ranging from $30.99 to $38.92 and a term expiring in 2009.
(c) Share distribution plans:
The Corporation has share distribution plans that permit the issuance of common shares for no
cash consideration to employees of the Corporation to recognize their past contribution and
encourage future contribution to the Corporation. At December 31, 2008, there were 2,092,901
shares available to be issued under these plans.
107
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
13. Share capital (cont’d):
(c) Share distribution plans (cont’d):
Compensation expense of $5,446,000 was charged against income during the year ended
December 31, 2008 (2007 - $9,592,000; 2006 - $5,001,000) for shares distributed and to be
distributed under the plans.
(d) Deferred Share Units:
Deferred share units (“DSUs”) are granted to the board of directors and executives. Eligible
directors may elect to receive all or part of their annual retainers and executives may elect to
receive all or part of their annual bonuses in DSUs. Each DSU is redeemable for one common
share in the capital of the Corporation after the director or executive ceases to provide services to
the Corporation. Shares will be issued from the Corporation’s share distribution plans. As at
December 31, 2008, 333,066 DSUs (2007 – 299,991) were issued and outstanding, and $202,000
(2007 - $481,000; 2006 - $387,000) of compensation expense was recorded for the year then
ended.
(e) Restricted Share Units:
Restricted share units (“RSUs”) are granted to employees and executives. The RSUs vest after a
specified number of years from the date of issuance, and under certain circumstances, are
contingent on achieving specified performance criteria. Each RSU is convertible into one
common share. Shares will be issued from the Corporation’s share distribution plans. As at
December 31, 2008, 1,092,813 RSUs (2007 – 631,307) were issued and outstanding, and
$1,388,000 (2007 - $1,796,000; 2006 -$1,233,000) of compensation expense was recorded for
the year then ended.
14. Commitments, guarantees and contingencies:
At December 31, 2008, the Corporation is committed to payments under operating leases as follows:
2009
2010
2011
2012
2013
Thereafter
Total minimum lease payments
$
$
1,403
1,543
1,543
1,543
1,543
9,809
17,384
The Corporation has agreed to pay royalties in respect of sales of certain fuel cell-based stationary
power products under two development programs with Canadian government agencies. The total
combined royalty is limited in any year to 4% of revenue from such products. Under the terms of the
108
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
14. Commitments, guarantees and contingencies (cont’d):
Utilities Development Program (Phase 1) with the Governments of Canada and British Columbia,
total royalties are payable to a maximum equal to the original amount of the government
contributions of $8,787,000 (CDN$10,702,000). As at December 31, 2008, no royalties have been
incurred for Phase 1. Under the terms of the Utilities Development Program (Phase 2) with
Technology Partnerships Canada (“TPC”) total royalties are payable to a maximum of $31,469,000
(CDN$38,329,000). As at December 31, 2008, a total of $4,368,000 (CDN $5,320,000) in royalty
repayments have been incurred for Phase 2 including payments of $151,000 (CDN$ 184,000) in
2008, $147,000 (CDN$ 172,000) in 2007, and $2,217,000 (CDN$ 2,530,000) in 2006.
Original maximum recoverable amount under Phase 1 and 2
Prior year payments applied
Maximum recoverable amount, December 31, 2005
2006 payments
Maximum recoverable amount, December 31, 2006
2007 payments
Maximum recoverable amount, December 31, 2007
2008 payments
Maximum recoverable amount, December 31, 2008
CDN$
CDN$
49,031
(2,320)
46,711
(2,530)
44,181
(172)
44,009
(184)
43,825
Maximum recoverable amount, December 31, 2008
US$
35,981
At December 31, 2008, the Corporation has outstanding commitments aggregating up to a maximum
of $164,000 (2007 - $974,000) relating primarily to purchases of property, plant and equipment.
The Corporation is also committed to make future investments totaling $420,000 in Chrysalix (note
9).
The Corporation has agreed to pay royalties in respect of sales of Ballard fuel cells or fuel cell
systems under a July 31, 1996 Fuel Cell Bus Program Agreement (“FC Bus Agreement”), with
Province of British Columbia, BC Transit, and BC Transportation Financing Authority (“BCTFA”).
Under the terms of FC Bus Agreement, the royalty payable is at a rate of 2% on future sales of such
products for commercial transit application to a maximum of $1,806,000 (CDN$ 2,200,000). No
royalties have been paid to date.
The Arrangement with Superior Plus (note 2) includes an indemnification agreement dated December
31, 2008 (the “Indemnity Agreement”), which sets out the parties’ continuing obligations to the other.
The Indemnity Agreement provides for the indemnification by each of the parties to the other for
breaches of representations and warranties or covenants, as well as, in the Corporation’s case, any
liability relating to the business which is suffered by Superior Plus. The Corporation’s indemnity to
109
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
14. Commitments, guarantees and contingencies (cont’d):
Superior Plus with respect to representation relating to the existence of the Corporation’s tax pools
immediately prior to the completion of the Arrangement is limited to an aggregate of $6,034,000
(CDN $7,350,000) with a threshold amount of $411,000 (CDN $500,000) before there is an
obligation to make a payment. The Indemnity Agreement also provides for adjustments to be paid by
the Corporation, or to the Corporation, depending on the final determination of the amount of 2008
Canadian non-capital losses, scientific research and development expenditures and investment tax
credits, to the extent that such amounts are more or less than the amounts estimated at the time the
Arrangement was executed.
At December 31, 2008, no amount payable or receivable has been accrued as a result of the Indemnity
Agreement as the Corporation has not yet finalized its 2008 Canadian income tax return and agreed
upon any differences with Superior Plus.
15. Income taxes:
The Corporation’s effective income tax rate differs from the combined Canadian federal and
provincial statutory income tax rate for manufacturing and processing companies. The principal
factors causing the difference are as follows:
2008
34,095
2007
$
(57,355)
$ 10,569 $ (19,570)
$
2006
$
(182,554)
$ (62,287)
(10,807)
-
(483)
-
-
(35)
-
756
-
1,035
2,850
(29,809)
-
74
-
45,420
-
16
-
16
$
-
-
(53)
(53) $
$
-
2,201
866
(10,286)
(97)
(692)
38,205
32,090
-
-
(1,417)
(1,417)
Net income (loss) before income taxes
Expected tax expense (recovery) at 31.00%
(2007–34.12%; 2006–34.12%)
Increase (reduction) in income taxes resulting from:
Income transferred on Arrangement
Non-deductible portion of capital loss
Non-deductible expenses (non-taxable income)
Investment tax credits earned
Financing costs
Foreign tax rate differences
Gain on assets held for sale
Losses and other deductions for which no benefit
has been recorded
Income tax expense
Branch tax
Large corporations tax (recovery)
Income taxes (recovery)
110
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
15. Income taxes (cont’d):
The Corporation has available to carry forward the following as at December 31:
Canadian scientific research expenditures
Canadian losses from operations
Canadian capital losses
Canadian investment tax credits
German losses from operations for corporate tax purposes
U.S. federal losses from operations
U.S. state losses from operations
U.S. research and development and investment tax credits
U.S. capital losses
$
$
2008
4,555
-
-
810
130
28,158
19,072
2,162
171,338
2007
585,420
147,641
241,963
172,958
393
30,415
26,727
2,030
287,389
As a result of the Arrangement (note 2), the Corporation’s gross future tax assets related to the
Canadian tax pools, excluding Ballard Advanced Materials Corporation, were reduced to nil.
The Canadian scientific research expenditures and capital losses may be carried forward indefinitely.
The German losses from operations may be used to offset future taxable income in Germany for
corporate tax and trade tax purposes and may be carried forward indefinitely. The U.S. federal losses
from operations may be used to offset future U.S. taxable income and expire over the period from
2011 to 2028. The U.S. states losses from operations arising in California and Massachusetts may be
used to offset future state taxable income and may be carried forward for ten and five years
respectively. The U.S. federal and state research and development and investment tax credits are
available to reduce future U.S. taxable income and expire over the period from 2009 to 2027. The
U.S. capital losses are available to reduce U.S. capital gains and expire over the period from 2010 to
2012.
The Canadian investment tax credits may be used to offset future Canadian income taxes otherwise
payable and expire as follows:
2010
2011
2012
2013
2014
2015
2016
2017
$
$
145
264
51
99
87
-
78
86
810
111
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
15. Income taxes (cont’d):
The following sets forth the tax effect of temporary differences that give rise to future income tax
assets and liabilities:
Future income tax assets:
Scientific research expenditures
Investment in associated companies
Accrued warranty liabilities
Share issuance costs
Losses from operations carried forward
Capital losses
Investment tax credits
Property, plant and equipment and intangible assets
Total future income tax assets
Less valuation allowance:
- Canada
- U.S.
- Germany
Net future income taxes
16. Related party transactions:
$
$
2008
1,184
2,511
1,264
-
10,705
58,255
2,976
17,109
94,004
2007
158,064
1,395
290
1
52,366
131,843
141,431
32,869
518,259
(23,515)
(70,455)
(34)
-
$
(408,004)
(110,151)
(104)
-
$
Related parties include shareholders with a significant ownership interest in the Corporation, together
with its subsidiaries and affiliates, and the Corporation’s equity accounted investee. The revenue and
costs recognized from transactions with such parties reflect the prices and terms of sales and purchase
transactions with related parties which are in accordance with normal trade practices.
Balances with related parties:
Accounts receivable
Accounts payable
Transactions during the year with related parties:
Revenues from products and services and
engineering development
Purchases
2008
2007
$
4,500 $
31
12,054
13
2008
2007
2006
$
7,906
$ 37,435 $
41,363
188
442
899
In addition, the AFCC Transaction is a related party transaction (note 3).
112
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
17. Supplemental disclosure of cash flow information:
Non-cash financing and investing activities:
Compensatory shares
Accrued disposition costs related to AFCC
transaction (note 3)
Accrued costs related to Arrangement (note 2)
Shares cancelled on AFCC transaction (note 3)
18. Segmented financial information:
2008
7,299
155
$
$
3,108
$
$ 173,900
$
$
$
$
2007
2006
2,651
232
-
-
$
$
$
$
2,220
-
-
-
The Corporation’s business operates in three market segments: Power Generation, Automotive, and
Material Products. Segmented information excludes amounts reported as discontinued operations.
Segment revenues and segment loss represent the primary financial measures used by senior
management in assessing performance and allocating resources, and include the revenues, cost of
product revenues and expenses for which management is held accountable. Segment expenses
include research and product development costs directly related to individual segments. Costs
associated with shared services and other costs are allocated based on headcount and square footage.
Corporate amounts include expenses for research and product development, marketing and general
and administrative, which apply generally across all segments and are reviewed separately by senior
management.
A significant portion of the Corporation’s production, testing and lab equipment, facilities, as well as
intellectual property, are common across the segments. Therefore, management does not classify asset
information on a segmented basis. Instead, performance assessments of these assets and related
resource allocations are done on a company-wide basis.
113
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
2007
2006
18. Segmented financial information (cont’d):
Total revenues
Power Generation
Automotive
Material Products
Segment income (loss) for the year (1)
Power Generation
Automotive
Material Products
Total
$
$
$
2008
16,613
30,284
12,683
59,580
(6,820)
5,747
(115)
(1,188)
$
$
$
19,432 $
32,035
14,065
65,532 $
2,918 $
9,168
1,528
13,614
Corporate amounts
Research and product development
General and administrative
Marketing and business development
Depreciation and amortization
Investment and other income (loss)
Gain on sale of assets
Loss on disposal and write-down of
long-lived assets
Equity in loss of associated companies
Income (loss) from continuing operations
before income tax
(1) Research and product development costs directly related to segments are included in segment income (loss) for the year.
(31,612)
(19,068)
(8,981)
(15,732)
16,933
-
(4,583)
(23,805)
(12,615)
(7,461)
(6,034)
(186)
96,845
(2,812)
(7,433)
(56,862) $
(8,649)
34,095
$
$
13,286
25,080
11,457
49,823
1,911
(241)
(257)
1,413
(25,070)
(13,262)
(7,226)
(16,391)
9,932
-
(778)
(7,029)
(58,411)
As at December 31, 2008 and 2007, goodwill was allocated $46,291,000 to the Power Generation
segment and $1,815,000 to the Material Products segment. Goodwill of $3,805,000 related to the
Automotive segment was disposed of as a result of the AFCC transaction (note 3).
In 2008, revenues from the Automotive segment included sales to three customers that each exceed
10% of total revenue in the amount of $9,343,000, $8,256,000 and $8,053,000, respectively.
In 2007, revenues from the Power Generation segment included sales to one customer that exceed
10% of total revenue in the amount of $10,161,000. Revenues from the Automotive segment
included sales to two customers that exceed 10% of total revenue in the amount of $15,983,000 and
$9,818,000, respectively. Revenues for the Material Products segment included sales to one customer
that exceed 10% of total revenue in the amount of $6,472,000.
114
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
18. Segmented financial information (cont’d):
In 2006, revenues from the Power Generation segment included sales to one customer that exceed
10% of total revenue in the amount of $9,701,000. Revenues from the Automotive segment included
sales to one customer that exceed 10% of total revenue in the amount of $15,839,000. Revenues for
the Material Products segment included sales to one customer that exceed 10% of total revenue in the
amount of $6,840,000.
Revenues and capital asset information by geographic area, as at and for the years ended December
31, is as follows:
2008
Property,
plant and
equipment
and goodwill
$
77,570 $
9,232
-
59
-
86,861 $
$
Revenues
670
30,993
11,076
21,028
1,765
65,532
Revenues
$
$
9,991
29,713
5,138
11,822
2,915
59,580
Canada
U.S.
Japan
Germany
Other countries
2007
Property,
plant and
equipment
and goodwill
$
80,815 $
10,134
-
63
-
91,012 $
$
Revenues
2006
Property,
plant and
equipment
and goodwill(1)
82,026
10,898
-
137
-
93,061
1,305 $
17,041
10,344
19,567
1,566
49,823 $
(1) Excludes assets associated with disposition of BPSC which has been presented as discontinued operations.
Revenues are attributed to countries based on customer location.
19. Financial risk management:
The Corporation primarily has exposure to currency exchange rate risk, interest rate risk and credit
risk. These risks arise primarily from the Corporation’s holdings of U.S. and Canadian dollar
denominated cash and cash equivalents and short-term investments.
Canadian
dollar
portfolio(1)
$ 43,343
2008
U.S. dollar
portfolio
Total
Canadian
dollar
portfolio(1)
2007
U.S. dollar
portfolio
Total
$
10,743 $
54,086 $
5,202 $
44,138 $
49,340
15,289
16,024
31,313
46,993
49,241
96,234
$ 58,632
$ 26,767
$ 85,399
$ 52,195
$ 93,379
$ 145,574
Cash and cash equivalents
Short-term investments
Total cash, cash
equivalents and short-
term investments
(1) U.S. dollar equivalent
115
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
19. Financial risk management (cont’d):
Changes arising from these risks could impact the Corporation’s reported investment and other
income through either changes to investment income or foreign exchange gains or losses. Reported
investment and other income is as follows:
Investment income
Other income
Foreign exchange gain (loss)
Investment and other income (loss)
2008
2,012
1,455
(3,653)
(186)
$
$
2007
8,207
-
8,726
16,933
$
$
$
$
2006
9,913
-
19
9,932
The Corporation did not realize any material gains or losses on its accounts receivable or its financial
liabilities measured at amortized cost.
a) Foreign currency exchange rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in foreign exchange rates. The
Corporation is exposed to currency risks primarily due to its holdings of Canadian dollar
denominated cash equivalents and short-term investments and its Canadian dollar denominated
purchases and accounts payable. Substantially all receivables are denominated in U.S. dollars.
The Corporation limits its exposure to foreign currency risk by holding Canadian denominated
cash, cash equivalents and short-term investments in amounts up to 100% of forecasted twelve
month Canadian dollar net expenditures and up to 50% of the following twelve months of
forecasted Canadian dollar net expenditures, thereby creating a natural hedge. Periodically, the
Corporation also enters into forward foreign exchange contracts to further limit its exposure. At
December 31, 2008, the Corporation had Canadian dollar cash, cash equivalents and short-term
investments of CDN $71,414,000, and outstanding forward foreign exchange contracts
outstanding to sell a total of CDN $8,000,000 in 2009 at an average rate of $0.90 to $1.00 CDN.
The following exchange rates applied during the year ended December 31, 2008:
January 1, 2008 Opening rate
December 31, 2008 Close rate
Fiscal 2008 Average rate
Fiscal 2008 Year high
Fiscal 2008 Year low
$U.S. to $1.00 CDN
$ 1.012
0.821
0.937
1.021
0.808
$CDN to $1.00 $U.S.
$ 0.988
1.218
1.067
0.980
1.237
116
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
19. Financial risk management (cont’d):
Based on cash, cash equivalents and short-term investments and outstanding forward foreign
exchange contracts held at December 31, 2008, a 10% increase in the Canadian dollar against the
U.S. dollar, with all other variables held constant, would result in an increase in foreign exchange
gains of approximately $6,518,000. If the Canadian dollar weakened 10% against the U.S.
dollar, there would be an equal, and opposite impact, on net income. This sensitivity analysis
includes foreign currency denominated monetary items, and adjusts their translation at year-end,
for a 10% change in foreign currency rates.
b)
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will
fluctuate because of changes in market interest rates. The Corporation is exposed to interest rate
risk arising primarily from fluctuations in interest rates on its cash, cash equivalents and short-
term investments. The Corporation limits its exposure to interest rate risk by continually
monitoring and adjusting portfolio duration to align to forecasted cash requirements and
anticipated changes in interest rates.
Based on cash, cash equivalents and short-term investments at December 31, 2008, a 0.25%
decline in interest rates, with all other variables held constant, would result in a decrease in
investment income $213,000, arising mainly as a result of an increase in the fair value of fixed
rate financial assets classified as held-for-trading. If interest rates had been 0.25% higher, there
would be an equal and opposite impact on net income.
c) Credit risk is the risk of financial loss to the Corporation if a counterparty to a financial
instrument fails to meet its contractual obligations and arises principally from the Corporation’s
cash, cash equivalents, short-term investments and accounts receivable. The Corporation limits
its exposure to credit risk on cash, cash equivalents and short-term investments by only investing
in liquid, investment grade securities. The Corporation manages its exposure to credit risk on
accounts receivable by assessing the ability of counterparties to fulfill their obligations under the
related contracts prior to entering into such contracts, and continuously monitors these
exposures.
117
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
20. Capital disclosures:
As at December 31, 2008, the Corporation considers its shareholders’ equity as its capital. The
Corporation does not have any bank debt or externally imposed capital requirements to which it is
subject. The Corporation’s objectives when managing capital are to manage its capital with strong
fiscal discipline; focus on markets with high product and service revenue growth potential; license
technology in cases where it is advantageous to the Corporation; and access available government
funding for research and development projects. The Corporation’s current financing principle is to
maintain cash balances sufficient to fund at least six quarters of operating cash consumption at all
times.
21. Differences between Canadian and United States accounting principles and practices:
These consolidated financial statements have been prepared in accordance with Canadian GAAP
which differ in certain respects from those principles and practices that the Corporation would have
followed had its consolidated financial statements been prepared in accordance with accounting
principles and practices generally accepted in the United States (“U.S. GAAP”).
(a) Under Canadian GAAP, the adoption of the U.S. dollar in 2001 as the presentation and
measurement currency was implemented by translating all prior year financial statement
amounts at the foreign exchange rate on December 31, 2001. Under U.S. GAAP, a change in
presentation and measurement currency is implemented retroactively, such that prior period
financial statements are translated under the current rate method using foreign exchange rates in
effect on those dates. As a result, there is a difference in the share capital, additional paid-in
capital, accumulated deficit and accumulated other comprehensive income amounts under U.S.
GAAP as compared to Canadian GAAP.
(b) Under Canadian GAAP, the Corporation has accounted for funding received in prior years under
the TPC agreement in accordance with specific pronouncements on accounting for government
assistance by reducing research and product development expenses, cost of revenues, inventory
and capital assets by the amount of the funding received.
Under U.S. GAAP, there are no authoritative accounting standards addressing the various types
of government assistance programs. Since the TPC funding combines the characteristics of a
grant with some characteristics of a debt instrument, the Corporation has recorded the entire
funding as long-term debt under U.S. GAAP. In addition, the U.S. GAAP liability is a Canadian
dollar denominated liability and, as a result, foreign exchange gains and losses are incurred.
118
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
21. Differences between Canadian and United States accounting principles and practices (cont’d):
(c) Under Canadian GAAP, the Corporation is required to account for gains and losses on the
issuance of shares by a subsidiary or other entity which the Corporation accounts for on an
equity basis, as a component of income. Under U.S. GAAP, the effect of such dilution gains are
recorded in equity, as an increase in paid-in capital rather than as income.
(d) Prior to 2002, under Canadian GAAP, no compensation expense was recorded for employee
share option plans under the intrinsic value method. The option exchange plan (note 13(b)) was
accounted for as a variable option plan under U.S. GAAP. Prior to the Corporation’s 100%
acquisition of BGS in 2003, minority interest under U.S. GAAP included the minority interest’s
percentage share of compensation expense under variable plan accounting. The balance of the
purchase price allocated to goodwill from the acquisition of the minority interest in BGS reflects
this difference under U.S. GAAP.
(e) Under Canadian GAAP, short-term investments are classified as held for trading and carried at
fair market value with changes in fair market value recognized in net income. Under U.S.
GAAP, the Corporation adopted Statement of Financial Accounting Standards No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities (FAS 159)”, effective January 1,
2008 and elected to classify short-term investments as held for trading, making the treatment
consistent with Canadian GAAP. Prior to that, the short-term investments were classified as
available-for-sale and are carried at fair market value. As a result of the adoption of FAS 159,
prior year gains of $4,733,000 have been reclassified from accumulated other comprehensive
loss to accumulated deficit. Previously, unrealized holding gains and losses related to the short-
term instruments were reflected as a separate component of shareholders’ equity under
accumulated other comprehensive income (loss).
(f) Under Canadian GAAP, investments where no significant influence exists are accounted for
using the cost method. Under U.S. GAAP, investments in limited partnerships such as Chrysalix
are accounted for using the equity method. In 2008, Chrysalix was written down to its estimated
net realizable value and there is no difference in the carrying value of such investment as of
December 31, 2008 between Canadian and U.S. GAAP.
119
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
21. Differences between Canadian and United States accounting principles and practices (cont’d):
(g) Under U.S. GAAP, Statement of Financial Accounting Standards No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Post-Retirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132-R” (SFAS No. 158), requires an entity to recognize in
its balance sheet the funded status of its defined benefit pension and post-retirement plans,
measured as the difference between the fair value of the plan assets and the benefit obligation.
SFAS No. 158 also requires an entity to recognize changes in the funded status of a defined
benefit pension and post-retirement plan within accumulated other comprehensive income, net of
tax, to the extent such changes are not recognized in earnings as components of periodic net
benefit cost.
(h) Under Canadian GAAP, assets and liabilities held for sale are presented separately on the
balance sheet classified as current and non-current. Under U.S. GAAP, non-current assets and
liabilities held for sale are classified as current when the sale is expected to be completed within
one year.
(i) Under Canadian GAAP, in-process research and development is amortized over its remaining
useful life, which has been estimated as five years. Under U.S. GAAP, in-process research and
development is written off immediately if it does not have any other alternative uses.
(j) Under U.S. GAAP, no sub-total would be provided in the operating section of the consolidated
statement of cash flows. There are no other differences in operating, investing and financing
cash flows.
(k) Under U.S. GAAP, effective January 1, 2007, the Corporation adopted FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109” (FIN 48). FIN 48 established threshold and measurement attributes for financial statement
measurement and recognition of tax positions taken or expected to be taken in a tax return.
There is no similar standard under Canadian GAAP. The adoption of FIN 48 did not have a
material impact on the Corporation’s financial statements or require restatement on prior period
financial statements under U.S. GAAP.
120
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
21. Differences between Canadian and United States accounting principles and practices (cont’d):
Under U.S. GAAP, these differences would have been reported in the consolidated balance sheets,
consolidated statements of operations and comprehensive income (loss), consolidated statements of
cash flows and consolidated statements of shareholders’ equity as follows:
Consolidated balance sheets:
Canadian
GAAP
2008
Difference
U.S.
GAAP
Canadian
GAAP
Difference
U.S.
GAAP
2007
Current assets:
Cash and cash equivalents
$
54,086 $
- $
54,086 $
49,340 $
- $
49,340
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Current assets held for sale (h)
Property, plant and equipment
Intangible assets
Goodwill (d)
Investments (f)
Long-term assets held for sale (h)
Other long-term assets
Current liabilities:
Accounts payable and accrued
Liabilities
Deferred revenue
Accrued warranty liabilities
Current liabilities held for sale
Long-term liabilities (b) (g)
Shareholders' equity:
Share capital (a)
Additional paid-in capital (a)(c)
Accumulated deficit
Accumulated other comprehensive
income (a)(e) (g)
31,313
18,856
10,402
1,434
-
116,091
38,755
3,726
48,106
1,765
-
-
-
-
-
-
-
-
-
-
490
-
-
-
31,313
18,856
10,402
1,434
-
116,091
38,755
3,726
48,596
1,765
-
-
96,234
18,963
14,859
1,740
105
181,241
42,906
4,303
48,106
3,250
16,286
2,599
-
-
-
-
16,286
16,286
-
-
490
(1,325)
(16,286)
-
96,234
18,963
14,859
1,740
16,391
197,527
42,906
4,303
48,596
1,925
-
2,599
$
208,443 $
490 $
208,933 $
298,691 $
(835) $
297,856
$
21,819
$
- $
21,819
$
20,042 $
-
$
20,042
947
3,841
-
26,607
20,502
47,109
832,711
283,466
(954,607)
(236)
-
-
-
-
38,736
38,736
947
3,841
-
26,607
59,238
85,845
169
752
1,933
22,896
17,606
40,502
-
-
-
-
44,498
44,498
169
752
1,933
22,896
62,104
85,000
119,583
952,294
1,174,821
119,583
1,294,404
86,929
370,395
72,290
86,929
159,219
(166,270)
(78,488)
(1,120,877)
(78,724)
(988,686)
(236)
(180,795)
(71,050)
(1,169,481)
(71,286)
Shareholders' equity
161,334
(38,246)
123,088
258,189
(45,333)
212,856
$
208,443 $
490 $
208,933 $
298,691 $
(835) $
297,856
121
BALLARD POWER SYSTEMS INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
(Tabular amounts expressed in thousands of U.S. dollars, except per share amounts and number of shares)
21. Differences between Canadian and United States accounting principles and practices (cont’d):
Consolidated statements of operations and comprehensive income (loss):
Income (loss) under Canadian GAAP
Research and development (b)
Amortization of intangible assets (i)
Foreign exchange gain (loss) (b) (e)
Equity in loss in associated companies (f)
Net income (loss) under U.S. GAAP
Other comprehensive income:
Change in unrealized holding gains (e)
Other (g)
Comprehensive income (loss) in accordance
with U.S. GAAP
Basic earnings (loss) per share, U.S. GAAP
Diluted earnings (loss) per share, U.S. GAAP
Consolidated statements of shareholders’ equity:
2008
34,079
94
-
8,373
1,325
43,871
-
(2,705)
41,166
0.52
0.51
$
$
$
$
$
$
$
$
2007
(57,302) $
163
-
(11,503)
(853)
(69,495)
4,733
1,672
(63,090) $
2006
(181,137)
(1,424)
1,375
(19)
(75)
(181,280)
-
-
(181,280)
(0.61) $
(0.61) $
(1.60)
(1.60)
Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
shareholders’
equity
148,946 $ (918,706)
(181,280)
-
$ (75,875)
-
$ 435,229
(181,280)
Balance, December 31, 2005
Net Loss
Adjustment to apply FAS 158
Issuance of common shares for cash
(net of issue costs)
Options exercised
Share distribution plan
Balance, December 31, 2006
Net Loss
Change in unrealized holding gains
arising during the year
Other
Share distribution plan
Balance, December 31, 2007
Net Income
Cumulative effect of adoption
of FAS 159 (e)
Cancellation of common shares
upon disposition of assets held
for sale
Non-dilutive financing
Other
RSUs and DSUs redeemed
Share distribution plan
Share capital
$
1,280,864 $
-
-
5,909
34
2,554
1,289,361
-
-
-
5,043
1,294,404
-
-
-
-
-
4,918
153,864
-
-
-
5,355
159,219
-
-
-
-
-
-
(1,099,986)
(69,495)
-
-
-
(1,169,481)
43,871
4,733
(349,438)
175,538
-
-
2,557
4,771
33,812
-
(2,557)
4,383
-
-
-
-
-
(1,816)
-
-
-
(77,691)
-
4,733
1,672
-
(71,286)
-
(4,733)
-
-
(2,705)
-
-
(1,816)
5,909
34
7,472
265,548
(69,495)
4,733
1,672
10,398
212,856
43,871
-
(173,900)
33,812
(2,705)
-
9,154
Balance, December 31, 2008
$
952,294 $
370,395 $
(1,120,877)
$
(78,724)
$
123,088
122
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123
CORPORATE INFORMATION
Corporate Offices
Executive Management
Board of Directors
Ballard Power Systems Inc.
Corporate Headquarters
9000 Glenlyon Parkway
Burnaby, BC Canada V5J 5J8
T: 604.454.0900
F: 604.412.4700
Ballard Material Products Inc.
Two Industrial Avenue
Lowell, MA USA 01851-5191
Ballard GmbH
Neue Strasse 95
7320 Kirchheim/Tech Nabern
Germany
Transfer Agent
Computershare Trust Company
of Canada
Shareholder Services Department
510 Burrard Street
Vancouver, BC Canada V6C 3B9
T: 1.800.564.6253
F: 1.866.249.7775
Stock Listing
Ballard’s common shares are listed on
the Toronto Stock Exchange under the
trading symbol BLD and on the
NASDAQ Global Market under the
trading symbol BLDP.
Investor Relations
To obtain additional information please
contact:
Ballard Power Systems
Investor Relations
9000 Glenlyon Parkway
Burnaby, BC Canada V5J 5J8
T: 604.412.3195
F: 604.412.3100
E: investors@ballard.com
W: www.ballard.com
John W. Sheridan
President & Chief Executive Officer
Bruce Cousins
Vice President & Chief Financial Officer
William T. Foulds
President, Ballard Material Products Inc.
and Vice President, Sales
Christopher J. Guzy
Vice President, Operations & Chief
Technical Officer
Glenn Y. Kumoi
Vice President, Human Resources, Chief
Legal Officer & Corporate Secretary
Noordin Nanji
Vice President, Corporate Strategy and
Development
Independent Auditors
KPMG LLP
Vancouver, BC Canada
Legal Counsel
Canada:
Stikeman Elliott, LLP
Vancouver, BC Canada
United States:
Dorsey & Whitney LLP
Seattle, WA USA
Intellectual Property
Seed Intellectual Property Law
Group, LLC
Seattle, WA USA
Ian A. Bourne
Corporate Director Alberta,
Canada
Edwin J. Kilroy
Chief Executive Officer
Symcor Inc.
Ontario, Canada
Dr. C.S. Park
Corporate Director
California, USA
John W. Sheridan
President & Chief Executive
Officer
Ballard Power Systems Inc.
British Columbia, Canada
Dr. Geraldine B. Sinclair
Executive Director
World Center for Digital Media
British Columbia, Canada
David J. Smith
Member
British Columbia Securities
Commission
British Columbia, Canada
David B. Sutcliffe
Corporate Director
British Columbia, Canada
Mark A. Suwyn
Chair & Chief Executive Officer
NewPage Corporation
Florida, USA
Douglas W.G. Whitehead
Chairman
Finning International Inc.
British Columbia, Canada
124
Visit us at www.ballard.com.