Calian Group
Annual Report 2013

Plain-text annual report

Table of Contents Message from the Chairman Message from the President and CEO Report on Operations - Systems Engineering Report on Operations - Business and Technology Services Business of the Company Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Statement of Responsibility Independent Auditors’ Report Consolidated Statements of Financial Position Consolidated Statements of Net Profit Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 1 3 4 5 6 8 24 25 26 27 28 29 30 31 Message from the Chairman 2013 was another successful year for Calian. Although the financial results are slightly less than the prior year, they still represent a strong showing in today’s unsettled business environment. I know firsthand how gov- ernment spending constraints can impact companies that have served these markets for years. With the reduced level of demand comes increased competition and our management team has once again done an excellent job of addressing the tradeoffs between revenue maintenance and margin compression. Also, during times like these it is imperative to maintain a disciplined approach to business. While trying to attract new business amidst stiff competition our management team has remained sound and managed to keep risks at acceptable levels. I was very pleased that we were able to attract George Weber to our board very early in Fiscal 2013. He brings not only a long history of executive leadership, but also an in-depth background in healthcare that will be vital to the board as we look to grow that segment of our business. Overall, we believe that our board pos- sesses the right mix of talent and background to properly advise and guide the senior management team of the Company. At the same time, we constantly review the board makeup to ensure that it will continue to meet the needs of the Company well into the future. This year, we once again experienced the retirement of a few key members of management at each of our two divisions. The board is pleased that the processes that have been put in place to provide for the orderly succession of management have operated effectively. This ensured that the transitions were properly planned and executed in a timely manner with minimal risk to the Company. Overall, we believe that we have a strong and highly motivated senior management team that will take measured and manageable risks in the quest for growth and superior results for our shareholders. Kenneth Loeb Chairman Calian Technologies Ltd. 2013 Annual Report 1 (millions of dollars, except per share data) Revenues Net Earnings Earnings Per Share Backlog 236 232 227 216 227 16.5 2.12 14.1 13.6 13.2 13.1 1.84 924 1.75 1.71 1.73 873 702 533 450 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 Comparison of Cumulative Total Return CTY $200 $150 $100 $50 S&P/TSX Composite Index 2008 2009 2010 2011 2012 2013 2 2013 Annual Report Calian Technologies Ltd. Message from the President and CEO Fiscal 2013 was a continuation of the themes of recent years, with political and eco- nomic pressures making for a challenging business environment. Fortunately, our diverse business once again provided protection against downturns experienced in certain market segments. In order to maintain and strengthen this diversity, we have enhanced our service and product offerings while at the same time broadening our cus- tomer base. Of course, the key tenets of quality and customer satisfaction are always paramount in our pursuit of new business and we believe this approach will leave us in good stead once the current market softness abates. It is during times like these that our long standing business doctrines of controlled profitable growth and positive cash flows must be continually revisited and respected. Our Business and Technology Services division was faced with a declining federal government and defence market, one that accounted for the vast majority of the division’s revenues in past years. While we made strides in evolving our services lines and expanding our customer base, we were not quite able to overcome the reduced revenues from this important customer. In addition, the reduced demand gave rise to increased competition among suppliers resulting in significant margin pressure throughout the year. Despite the current setback and the expected short-term sluggishness in these important markets, we believe that our strategies for long-term growth remain intact. Our Systems Engineering Division (SED) also faced a challenging environment but was able to post revenues and bottom line contribution levels similar to those achieved in the prior year. Manufacturing demand was dampened somewhat as our international defence and commercial manufacturing customers adjusted to their own business issues. Fortunately our satellite communications business was very robust and was able to mitigate the shortfall in manufacturing related revenues. Ironically, a Canadian federal government depart- ment was largely responsible for this healthy level of business. Continued strength in the SED division will be dependent on both commercial and government program opportunities materializing as planned. On a consolidated basis, we achieved revenues of $232 million representing a slight drop of 1.4% compared to the prior year. Despite the excellent performance of our recent acquisition, Primacy Management, main- taining revenues during a period of intense competition took its toll on realized margins in both divisions. Maintaining close control of operating costs helped to mitigate some of the pressure on margins and we ended the year with net earnings of $1.73 per share. This represents a decrease of approximately 6% from the prior year. While these results are certainly a setback from our long term growth aspirations, they still repre- sent an excellent rate of return on invested capital. Throughout the year we maintained our quarterly dividend at $0.28 per share. The annualized distribution of $1.12 per share represents a yield in excess of 5%. This translates into a payout ratio of 65% and we plan to continue our policy of paying dividends at levels commensurate with after tax earnings. Including the rein- vestment of dividends, our shareholders have realized a return of 9.1% for the fiscal year, still more than double the 3.8% for the TSX composite index for the same period. With the share price compression experienced during the year, we used the opportunity to repurchase 283,000 shares under our Normal Course Issuer Bid at an average price of $19.82 per share. We continue to believe that the repurchase of shares, especially during periods of price pressure, is both an excellent use of cash resources as well as a means of combatting an undervalued share price. In summary, while we strived for better, I am still very proud of the results we achieved for 2013. I would like to thank our customers for the opportunities they have given us and our suppliers and employees who have col- lectively contributed to the fine execution thereof. We have a strong and motivated management team, a healthy backlog and excellent financial credentials. With these tools, our goal is for long term growth and the continued generation of exceptional returns, culminating in a healthy dividend stream for our shareholders. Ray Basler President and CEO Calian Technologies Ltd. 2013 Annual Report 3 Report on Operations - Systems Engineering (SED) Despite facing a number of challenges, the SED division still managed to complete the year with relative success. The most complicating factor for this year was the unpredictable timing of many government programs. That being said, one govern- ment program, the RF Antenna Upgrades for the Canadian Centre for Remote Sensing (CCRS), contributed significantly to fiscal year 2013 revenues. The majority of proj- ects were well executed and all project activities were to the full satisfaction of our customers. This resulted in divisional contribution levels of $10.6 million or 15 % on revenue levels of $70.4 million. The manufacturing business continued at a steady rate with production of harnesses and unit assemblies for General Dynamics Land Systems, Kidde and DRS Technologies. Test set orders from Blackberry peaked earlier in the year due to sales of their new smartphones. Technical issues on a certain military project resulted in some cost overruns, but these issues were overcome and the program has moved to the production phase without further cost increases. Although anticipated orders for legacy products and assembly manufacturing for the Tactical Armoured Patrol Vehicle program were delayed, we remain focused on winning this new work in the next fiscal year. Our engineering group remained very busy in 2013 as work continued on various segments of Inmarsat’s Global Express program. Our satellite earth station business was bolstered by the signing of additional earth stations for the CCRS which contributed significantly to our divisional revenues. Sirius/XM work continued at traditional levels and our satellite gateway work continued with the deployment of the Inmarsat Aeronautical systems and the development of new Low Data Rate Gateways for Honeywell Global Tracking Solutions. The Radarsat I mission came to an end this year after a lifespan which exceeded its original design life by 12 years. This resulted in significant changes to our Satellite Operations business as we had to cope with reduced budgets from both the Canadian Space Agency (CSA) and MDA. Although the funding situation has stabilized, the profitability of this work has reduced as we continue to retain a critical team size in support of our obligations to fly Radarsat 2, Scisat and other CSA missions. We continue to be the primary operations centre for the Ciel II satellite and to host the LightSquared communications gateway equipment. We are active- ly looking for opportunities to replenish and expand our satellite operations business. Our product business continues to grow as we achieved solid revenues from both our Decimator and Satellite Communications Modulator products. We also signed new contracts with Rohde and Schwarz for the devel- opment and manufacture of test products in both the cable television and satellite communications markets. In addition, our continued participation on the Cable DOCSIS 3.1 standards committee will better position us to develop future products for the cable media market. Overall, despite delays in program signings, we still achieved a marginal increase in revenues compared to the previous fiscal year. While we fell short of the exceptional level of bottom line contribution achieved in the prior year, our efforts to maintain staff utilization levels and minimize operating and administrative costs sig- nificantly helped to offset intense margin pressures in certain sectors. Overall, I am pleased with our performance considering the many challenges that we faced during the year. I believe our results demonstrate the resourcefulness of our division to find opportunities to meet our objec- tives even during uncertain times. The dedication of our management team to the profitable execution of projects, while at the same time maintaining the full satisfaction of our customers, will help to ensure continued success as we face the opportunities and challenges of the upcoming fiscal year. Patrick Thera VP and General Manager, Systems Engineering 4 2013 Annual Report Calian Technologies Ltd. Report on Operations - Business and Technology Services (BTS) The Business and Technology Services division navigated through many challenges in what can only be described as a very tough market. Our financial results were impacted by a very difficult federal government environment, reduced demand on current defence contracts and continued downward pressure on margins. Overall, we achieved revenues of $162 million and provided a divisional contribu- tion of $9.0 million. While these results represent a slight reduction from the prior year, we still fared better than many other companies in the defence and government sector. From an opera- tions perspective, we continued to develop and evolve plans to grow the capabilities in each of our service lines. Also, we were successful in managing existing contracts while at the same time maintaining high client satisfaction as evidenced by recent customer surveys. The Training Service line was significantly impacted by the defence budget reductions with cuts affecting the majority of our defence training contracts in one way or another. On a positive note, the win of DND's Air Technician Training Renewal procurement and the Army Learning Services contract will provide an excellent base to evolve and grow our training business. Our Health Service line had a very strong year showing significant growth over the prior year. Increased demand on our defence health services contract, the expansion of the Primacy clinic program and beach- heads into new health service line customers were significant growth drivers. In addition, we opened our first managed health clinic in Sackville, Nova Scotia and completed our second managed clinic rollout in Ottawa near the end of the fiscal year. The IT Professional Service line (ITPS) was also impacted by Federal government budget cuts and general slowdown in government procurement. We also experienced some weakness in our Toronto and Montreal regions but have redoubled our efforts to recoup revenue decreases experienced during the year. The Division continues to drive sales to established customers as well as diversify its customer base. Fiscal year 2013 was one of our best years for establishing new customers. In the Health service line, we spear- headed wins with new customers in the oil and gas sectors, as well as new federal government departments while at the same time building relationships with provincial organizations for significant longer term oppor- tunities. We also added new customers in the Training and IT service lines which is critical to establishing our brand outside of the defence marketplace. We continue to invest in our back office and have implemented numerous process improvement projects with a goal of being able to grow our business while holding or decreasing our back office costs. In summary, given the business environment in which we operate, fiscal year 2013 was challenged from the onset. This is not a Calian-only event, as many of our competitors are also feeling the effects of government budget reductions and defence cut backs. While our growth plans may not have been fully realized, we still maintain a very robust business generating significant profits and positive cash flows. Even during these difficult times, we have never compromised quality and have maintained high satisfaction levels within both our customer base as well as our own workforce. Moving forward, our four-pillar growth strategy of revenue retention, diversification of our customer base, evolution of our service lines and sustaining our process improvement culture will provide a solid foun- dation on which we will continue to grow the division. We will continue to balance the challenges of the current market with the need to position for the future in order to achieve our long-term growth objectives. Kevin Ford VP and General Manager, Business & Technology Services Calian Technologies Ltd. 2013 Annual Report 5 Business of the Company We operate through two divisions that complement each other and that share the vision and key tenet upon which Calian has emerged as a business and technology services leader — effective and prudent management with a focus on controlled profitable growth in carefully selected markets. The diversity of our service offerings is at the heart of our success. By serving a number of customers in wide ranging and geographically varied markets, we benefit from a diversity that helps us weather the downturns experienced in any one market while at the same time positioning ourselves to take advantage of unique opportunities as they arise. This diversity is most evident when comparing the business of our two divisions. Systems Engineering designs and manufactures complex systems. Our focus is on two distinct markets. Our primary market is satellite communications sector where we serve satellite manufacturers, operators and service providers around the world. We also provide satellite operations services to government and com- mercial clients in the same market sector. Our other key market is in the defence/security and high-end telecommunications industry where we provide small to medium volume manufacturing services to major players. In both markets, we are a small niche player serving a handful of multi-national organizations working on large worldwide projects. More than 60% of our annual revenues are derived from exports. Custom Manufacturing Systems Engineering Our customers require sophisticated, custom-built infrastructure to meet their unique requirements. Our straightforward approach is to fulfill these requirements by integrating advanced commercial equipment pro- vided from reliable suppliers, our own commercial products, and where necessary, custom-built components. Our customers rely on our technical and management skills to deliver what we promised, on schedule and at the agreed price. We have a full-service approach helping our customers from design through to long-term oper- ations and support. Our customers reward our success in meeting their expectations with repeat business. Our core competencies make us stand out from our competitors — strong project management, systems engineer- ing know-how, expertise in high-throughput embedded logic and software development capabilities. We maintain a set of reusable hardware and software components to increase our competitive edge. These strengths have allowed us to establish long-term relationships with many of the industry’s leaders. We apply these same core competencies to the manufacturing services we provide to military prime con- tractors and equipment suppliers. The value added by our technical expertise and our focus on high-reliability, low-volume production of complex systems differentiate our services from those of our competitors. Business and Technology Services provides Training, IT and Healthcare delivery solutions as well as a national workforce management capability via strategic long-term outsourcing services, recruiting and place- ment services, and per-diem staffing services. The division provides ready access to an exceptional team of professionals in IT Professional Services, Healthcare, Operations and Maintenance and Training domains. The division currently caters mainly to the Canadian federal government, with a large presence in the Department of National Defence, and also has a well-established private sector customer base that is expanding across tar- geted sectors. With the evolution of the Health service line, the division now administers on behalf of Loblaw over 120 medical clinics across Canada and has recently opened Calian managed clinics providing healthcare services directly to patients. The services we offer allow our customers to focus their vital internal resources on key priorities. The value we add lies in the breadth of services we offer and our ability to source sufficient and appropriate resources 6 2013 Annual Report Calian Technologies Ltd. Health Services Workforce Management Training Information Technology Professional Services on a timely basis to meet our customers’ requirements. This is due to our exceptional program delivery capa- bility, recruiting capabilities, effective management of our employees in the field and competitive rates. A comparison of the business models and operating approaches of the two divisions further illustrates the diversity between them. Contracts in Systems Engineering are technically complex and are typically on a fixed-price basis with demanding requirements to meet delivery schedules. The division operates essentially under a fixed-cost struc- ture, requiring the careful management of labour utilization. The majority of revenues are derived from international sources and contracts are often denominated in foreign currencies. While the risks are high, the margins are commensurate. Contracts in Business and Technology Services are typically on a per-diem basis and can range from short-term assignments to multi-year operations and/or maintenance contracts. The cost structure of the division is vari- able as direct labour costs are scalable to match contract requirements. All of its revenues are derived from Canadian sources. With a reduced risk profile, margins are correspondingly lower. With the inclusion of health clinics in the BTS portfolio, revenue is also generated via direct billing to provincial health care organizations. Systems Engineering’s billings are based on achieving well defined project milestones. These can be in advance of, or subsequent to the recognition of revenues. Milestone profiles vary depending on factors such as the customer, competition and pricing. Accordingly, cash flows and working capital requirements can vary significantly from project to project and over the life of any one project. In Business and Technology Services, cash flows are very predictable as most contracts call for monthly billings of work performed. From the perspective of renewing business, Systems Engineering is awarded one project contract at a time, usually as a result of winning an open international competition. Constant marketing efforts are directed towards identifying and securing bid opportunities and a significant overhead effort is required to develop detailed proposals for new projects. The situation is similar for the short-term staffing component of the Business and Technology Services division, which requires ongoing marketing and sales efforts to maintain the backlog. However, the longer-term training, healthcare and workforce management component of this division enjoys the benefit of multi-year contracts that often contain provisions for extensions, offering long-term vis- ibility of future revenues. Overall, the diversity in markets, customers and business models provides Calian with an enviable balance in its consolidated business. Calian Technologies Ltd. 2013 Annual Report 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management Discussion and Analysis is dated December 5, 2013 and should be read in conjunction with the audited consolidated financial statements and notes included in this annual report. The Company’s accounting policies are in accordance with IFRS. As in the consolidated financial statements, all dollar amounts in this Management Discussion and Analysis are expressed in thousands of Canadian dollars unless otherwise noted. Forward Looking Statements The Company cautions that the forward-looking statements in the following Management Discussion and Analysis are based on certain assumptions made by the Company that may prove to be inaccurate. Forward-looking statements include those identified by the expressions “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and similar expressions to the extent that they relate to the Company or its management. These forward-looking statements are not historical facts, but reflect the Company’s current expectations and assumptions regarding future results or events. Assumptions made include customer demand for the Company’s services, the Company’s ability to maintain and enhance customer relationships, as well as the Company’s ability to bring to market it services. Furthermore, the Company cautions that the forward-looking statements in the following Management Discussion and Analysis are based on current expectations as at December 5, 2013 that are subject to change and to risks and uncertainties including those set out under the heading “Risk Factors” below. Actual results may differ due to facts such as customer demand, customer relationships, new service offerings, delivery schedules, revenue mix, competition, pricing pressure, foreign currency fluctuations and uncertainty in the markets in which the Company conducts business. Additional information identifying risks and uncertainties is contained in the Company’s filings with the various provincial securities regulators. Readers should not place undue reliance in the Company’s forward-looking statements. Business Overview and Strategic Direction Calian sells technology and other services to industry and government. For many years, industry and government have searched for and adopted new operating models and new technologies in an effort to improve the efficiency of their operations. Management expects that they will continue to do so, and in recognizing this trend, the Company has built a unique combination of specialized skills and available skilled resources in order to address the resulting market opportuni- ties. With these capable resources at the ready, Calian can quickly assemble and deploy teams of professionals with the requisite skills to promptly assist customers to implement their diverse operating and technology needs, whether it is the design and integration of a complex satellite ground system, low-volume high-quality contract manufacturing or the provision of spe- cialized personnel in the areas of IT, training, healthcare and workforce management services. Calian’s larger mainstream competitors often cannot duplicate the timeliness and reliability of Calian’s services. Furthermore, efficient and flexible operating processes, combined with a strong financial condition allow Calian to profitably address lower margin business without compromising quality or performance, and this further distinguishes the Company from its competitors. Due to the Company’s successful delivery and execution of projects, Calian experiences repeat business and a high percentage of contract renewals. Calian’s long-term direction is to expand its current service offerings with industry and government in specialized niche areas outside the mainstream market, avoiding competition with larger competitors. Calian will concentrate on those oppor- tunities that entail agility and flexibility in both resources and capabilities to address customer requirements, be it in our traditional markets or new ones with similar needs. Calian’s growth plans include building upon and expanding its current capabilities and addressing a wider range of cus- tomers with a broader range of services without compromising its commitment to quality and delivery. Calian plans to continue augmenting its service offerings and capitalizing on its reputation for delivery, building on its satisfied base of blue- chip customers. In addition, the Company plans to seek partnership opportunities or acquire specialized companies that have also had success in profitably addressing niche markets and whose operating philosophies align with those of Calian. With stable revenues, an efficient back office, and the realization of economies of scale, the Company’s objective is to enhance the returns to its shareholders and build an enterprise that excels in its selected markets. For existing operations, the key is controlled profitable growth. Management expects that growth will not only extract economies of scale and provide additional returns, but will also provide an environment for its people to grow and advance 8 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations within the Company. Calian’s strengths in delivering specialized services in niche markets have so far permitted the Company to excel in a difficult business environment where many mainstream competitors have faltered. With this backdrop of con- tinuing to play to our strengths, there are no plans to materially alter the business of the Company. Calian currently operates in two reportable segments, defined by their primary type of service offerings: Systems Engineering involves planning, designing and implementing solutions that meet a customer’s specific business and technical needs, primarily in the satellite communications sector. The Systems Engineering Division, also known as SED, has its principal office in Saskatoon, Saskatchewan. Business and Technology Services is a leading program delivery partner for public and private sector customers in a variety of industries, whereby we provide workforce augmentation as well as the long-term management of projects, facilities and customer business processes in the areas of IT professional services, training, health care and workforce management serv- ices. The Business and Technology Services division has its principal office in Ottawa, Ontario. As both of our divisions operate in very specific niche areas within large markets, there exists very little third party data to compare to the Company’s performance. Although referring to general market trends provides some insight into the health of those markets and some clarity on the opportunities within those markets, it is not indicative of the health, demand and funding of the individual customers of the Company. In order to compensate for this limited insight and to provide an indi- cation of revenue potential, this annual report provides a detailed rollout of the Company’s backlog by division showing both contracted backlog and option renewals by fiscal year. In addition, since referencing pricing or volumes of production are not applicable to our business to allow a proper under- standing of the level of revenue generated during the year or expected in the future, the following discussions that refer to the types of contracts performed by each of the two divisions will provide some insight into the level of customer specific demand for our services. Systems Engineering Division For over 48 years, SED’s core strength has been communications systems engineering. SED builds equipment, systems, and networks to maximize utilization, efficiency and throughput. Its primary market is the satellite industry, but it also applies its capabilities and expertise to broader adjacent markets with needs for similar systems and services. SED is a systems integrator and works with its customers on a project basis to develop custom systems tailored to their spe- cific operational requirements. From one project to the next, SED attempts to reuse system architecture, core software modules, and custom hardware designs to reduce development time, cost and technical risks. SED’s manufacturing capability, initially created to support its communication systems engineering group, now accounts for a substantial portion of divisional revenues and provides an on-going base of business that helps offset the ebb and flow of core project work. SED’s strengths are renowned around the world with exports typically accounting for more than 60% of annual sales. Customers often request deployment of our systems to other locations. We now have systems operating on six continents and we are well versed in the logistics associated with international installations. SED designs and manufactures equipment for the satellite ground-based infrastructure market and systems must be upgrad- ed or replaced on a regular basis. The introduction of HDTV, the wide acceptance of Digital Audio Radio and the move to higher frequency bands are also presenting opportunities for additional capacity and enhancements. With ongoing world events, demand for reliable mobile communications for disaster relief and satellite news gathering has now become center stage. Additional demands are being driven by mobile broadcast, military use of commercial satellites and the ongoing need to replace the existing capacity of satellites approaching end-of-life. Data intensive applications are also driving the need for high throughput satellite constellations. Overall, the business environment for the SED division is stable and sustainable. Inmarsat and some other operators are deploying next generation satellite constellations. This bodes well for integrators such as SED. Reduced credit availability con- tinues to hamper the ability of start-ups and certain existing players to get the funding or refinancing needed to drive their initiatives forward. Competition remains fierce as competing companies look to fill their available capacity. While the satellite communications sector has been the core of SED’s business, the contract manufacturing group continues Calian Technologies Ltd. 2013 Annual Report 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations to provide a solid base of revenues and ongoing level of work for SED which in turn provides the manufacturing group with respectable levels of utilization. We focus on opportunities requiring low volume and high reliability manufacturing—qualities that are well suited to defence applications. These attributes also provide effective differentiation from offshore competitors. In 2013, the SED division performed well, signing $47 million in new contracts and ending the year with a backlog of $50 million of which $37 million is expected to be earned during fiscal 2014. Fiscal 2013 had its share of challenges and accomplishments for SED. Manufacturing orders continued at reduced levels as customers such as KDS, General Dynamics and RIM reduced their demands for certain products. However, our flexible manufacturing work- force allowed us to address the uneven flow of work thereby ensuring the division continued to yield solid margins. SED's satellite earth station business was a significant contributor to revenue. The largest project in this area during Fiscal 2013 was ground station work done in Prince-Albert for the Canadian Center for Remote Sensing (CCRS). Our contract with CCRS calls for two additional ground stations to be designed and built in the coming years. This work helped to fill the gap left by the European Space Agency as work related to the third deep space antenna in Malargue, Argentina was completed early in the year. The Inmarsat I5 RF systems, a three year program which includes six 13m antenna systems installed at diverse locations around the globe, also provided a substantial source of revenues as we completed two stations in Europe and made significant progress on two others in North America. Other systems developed for the Inmarsat network included aeronautical systems, capacity planning systems and new Low Data Rate Gateways for Honeywell Global Tracking Solutions. Also the systems for the Mexsat RF Systems for Boeing are now being readied for operational use. Satellite Operations continued to provide a steady revenue stream. However the end of life of the Radarsat I spacecraft will necessitate a revamping of our operations team to accommodate a lower level of activity while continuing to meet the critical requirements of our other satellite operations commitments such as the SciSat Satellites under contract to CSA and the Radarsat II satellite for MDA. We continue to be the primary operations centre for the Ciel II satellite and are hosting the LightSquared communications gateway equipment. The loss of Radarsat I along with other reductions in the CSA’s operations budget and the ongoing bankruptcy protection of LightSquared may result in reduced revenue from this part of the business in the coming years. We continue to look for opportunities to replenish and expand our operations business. The markets in which SED operates are currently stable and we expect new opportunities to arise during the years ahead. In addition our manufacturing group, although with lower levels of activity at present, is expected to pick up with the com- mencement of manufacturing on certain Canadian defence capital programs. That being said, we do expect some volatility over the short term as customers assess their upcoming budgets and adjust to changing market conditions. In the Communication business sector, SED expects to work closely with Inmarsat as they continue to evolve and expand their service offerings, particularly as it relates to their new Ka Band Global Express Service. In the Digital Audio Broadcast market, we anticipate additional business with Sirius/XM Radio as they seek to gain commonality in their systems post-merger and also strive to enhance and expand their product offerings. In the test systems area, we will continue to pursue opportunities within our traditional test systems market for Communications Monitoring Systems and In-Orbit Test Systems as well as exploiting our Resource Management software. We expect that new enhancements to our family of ancillary satellite prod- ucts will generate increased sales and margins in the years ahead.. As worldwide competitors continue to vie for market share, margins are expected to remain under competitive pressure. Continued volatility of the Canadian dollar relative to other major currencies will also weaken our competitive position on international pursuits. Business and Technology Services Division BTS is a leading program delivery partner for public and private sector customers. We meet and anticipate our customers’ unique needs in the areas of IT professional services, training, healthcare and workforce management services. We have a workforce in excess of 2,100 individuals across Canada, in both full and part-time capacities. Currently our primary market is the Canadian federal government with an emphasis on the Department of National Defence (DND), but we also provide services to large multi-national companies as well as to other departments within the federal government. In addi- tion, during the year we opened two medical clinics that will provide medical services directly to the general public under provincial health care plans. 10 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations With over 30 years of experience, BTS provides custom solutions that help organizations manage complex workforce challenges by assuming responsibility for functional tasks, executing sophisticated engineering programs, or by providing workforce aug- mentation with flexible and skilled teams. The division’s success comes from its focus on delivering a quality service through careful attention to both customer and contractor needs. The end result is customers having access to Calian’s extensive expert- ise and pool of specialized talent so they are free to focus on their core business. BTS is a continuous improvement organization and is accredited to Level 4 under the Progressive Excellence Program of Excellence Canada. Over the past several years, we have continued to build and enhance our reputation as a very competent, high quality, but reasonably priced, supplier. We have consciously focused on niche markets that do not attract significant attention or large numbers of competitors. This strategy has allowed us to maintain our prices and effectively develop a capability that few of our competitors can match. Unfortunately the reduction in government and defence spending over the last year has created additional competition in our selected areas requiring the division to take a more aggressive response in terms of pricing. The major market for our BTS division continues to be DND. DND is one of the departments that is under severe pressure as part of the federal government’s quest to reduce spending. While DND capital programs were most affected, we have also experienced some reductions in the utilization of certain training contracts. Fortunately, DND’s focus on providing quality healthcare has resulted in an increased take-up on our health services contract. Overall the BTS division has the capability and the capacity to continue to service the government in the areas of health, training and operations support and has strate- gies in place to ensure that we are well-positioned when the current cost cutting initiatives have subsided. The overriding trends affecting our business are expected to be influenced by four factors: the rate of economic recovery in our markets; the transition from public sector stimulus spending to one of public sector deficit reduction and expenditure control; the continuing competitive landscape; and finally the pace of technology evolution and potential impact to our business. Demographics continue to work in our favour. Due to retirements, large corporations along with various federal government depart- ments and the military continue to lose large numbers of employees with in-depth knowledge of their internal workings. In many cases, the remaining employees are not yet able to assume additional responsibilities. This has created a necessity for these entities to re-acquire this lost knowledge. The BTS division has placed a special emphasis on attracting retirees who possess extensive cor- porate knowledge and expertise, and accordingly has been successful in assisting customers in bridging the knowledge gap while they train and mentor replacement staff. We continue to see the long term attractiveness for this solution and will continue to take advantage of this trend to provide “ready-made” support services to our customers. In order to cope with the backlog of procurement, federal government departments are implementing new processes and tools. In the Information Technology and Management (IT/IM) arena, the trend to larger, more complex ERP systems continues. New installations continue to provide opportunities, however, system upgrades, enhancements and migrations are assuming an ever increasing share of the IT/IM budgets and hence our business opportunities. This is particularly the case in many larger organizations where legacy system databases are being mandated to interface with these ERP systems. Government wide, there is a greater focus on developing and supporting wider web access coupled with the associated secu- rity concerns of protecting the users and their data. Accordingly, we continue to focus on related business development activities and the investment of internal resources to accommodate these new approaches. While government spending is under tight controls and has become unpredictable due to the implementation of previously announced budget reductions, profitable business does exist for companies who have the financial strength to accommodate these down periods and the discipline to adjust costs to declines in revenue. BTS’s strong back office capabilities, centered on an SAP based management information system, along with its emphasis on continuous improvement and business development ensures that it is able to identify and win new business opportunities and accommodate that new business in a scalable fashion. All in all, despite the current competitive landscape, we continue to believe that the long-term business environment for the services of the BTS division remains favorable. BTS results for 2013 were respectable considering a very difficult business environment. The federal government continued to implement spending constraints and DND, our main customer, was one of the departments most affected. With few new initiatives and cutting of costs on existing contracts, the BTS division realized a drop in revenues this year. However, we con- tinued to evolve our service offerings with enhanced capabilities in many areas. Also, we have been successful in the Calian Technologies Ltd. 2013 Annual Report 11 Management’s Discussion and Analysis of Financial Condition and Results of Operations broadening of our customer base with many new beachheads across service lines. The division continues to be very suc- cessful in managing existing contracts and has maintained high quality and client satisfaction levels. This will put us in good stead when these markets rebound. The Health Service Support Contract was spared from the spending constraints realizing a 10% growth this year. The Division was also awarded the remaining option year of the contract thereby securing revenues through to March 2015. The acquisi- tion of Primacy during 2012 was a key step in expanding our health service offerings allowing us to acquire not only a national civilian clinic presence but also a world-class customer with Loblaw. Primacy continued to grow this year with a net add-on of 16 clinics currently operating 126 clinics across Canada. In addition, through Primacy, Calian has built two company-managed clinics in Halifax and in Ottawa. These activities are key elements in Calian's health strategy which encom- passes a civilian healthcare footprint to augment our military offerings, thereby strengthening our national medical practitioner network and expanding our health service offerings to our clients. The IT Professional Services Line (ITPS) was significantly affected this year, as short-term requirements were the hardest hit by the federal government cost-cutting initiatives. This created ongoing market pressures that continue to commoditize and depress on-demand staffing rates resulting in a reduction in realized margins. Our training contracts continue to represent a solid base of revenues. Although pressures to reduce costs are felt by our customers, the nature of the services are at the core of our customers operations and as such have been less impacted from the severe cuts experienced in some other areas. The DLSE (Directorate of Synthetic Land Environments) contract was stable as DND understands the importance and cost-effectiveness of simulation-based training. Revenues on other programs within this service line were some- what depressed as other contracts were moderately affected by government cost cutting initiatives. Significant investments were made in past years to increase our sales and business development capability within the Health, Telecommunications and Aerospace & Defence sectors. At the same time, we continue to streamline our sales efforts to ensure that we are as efficient and cost effective as possible. The overall goal is the expansion of our knowledge and presence within selected sectors as part of the division's overall diversification strategy. The BTS division won several new contracts during the year which will provide additional revenue base for many years. Of note, two new contracts were secured within the e-learning market, helping the division expand into markets adjacent to its traditional training service line: Earlier in the year, BTS was awarded a two year contract with two additional option years for the Air Technical Training Renewal (ATTR) project from DND to provide instructional analysis, instructional design and instructional content develop- ment services. The goal is to modernize the existing Air Technician Training courses using electronic training delivery and blended learning solutions. The total value over the four year period is expected to be in the range of $8 million. And most recently, a 2.5 years contract valued at $14 million was awarded by DND for omnibus courseware production serv- ices. Calian will be developing and supporting courseware projects by providing e-learning production, distribution and related support services to the Army Learning Support Centre (ALSC). This contract is an extension and expansion of previ- ous contracts of similar nature provided by Calian since 2007. In summary, fiscal year 2013 was a year of challenges and required ongoing adjustments to an ever-changing federal govern- ment landscape. Although the division faced a difficult environment, it was able to adapt and leverage its diversity to continue delivering solid results, albeit at a reduced level from the prior year. The BTS division enters the new year with a strong backlog of work and a reasonable expectation of future prospects. In the coming year, we are expecting a mix of stability and potential volatility on our existing contracts. Revenue growth from new opportunities will be largely dependent on the issuance of the initial proposal request and the ultimate timing of the related contract award. A significant portion of BTS's contracts are not subject to renewal during the upcoming year. This provides for a stable and secure base of business for fiscal 2014 and allows delivery personnel to focus on increased contract performance, organic contract growth and support of new business development initiatives. In the long-term, BTS will continue to focus in areas where it has been successful in the past and will build on newly acquired expertise to branch out into additional adjacent markets. 12 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations Backlog The Company’s backlog at September 30, 2013 was $450 million with terms extending to fiscal 2018. This compares to $553 million reported at September 30, 2012. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers’ options to further extend existing contracts under similar terms and conditions. During 2013 the following contracts were the major contributors to the Company’s backlog. These contracts are further described in the business overview section of this Management Discussion and Analysis. • $14 million contract with VT iDirect Inc. for backup ground stations for Inmarsat’s new Global Express Ka band system extending to August 2014; • $22 million over several contracts with the Canada Centre for Remote Sensing (CCRS); • $8 million Air Technical Training Renewal (ATTR); • $14 million contract to the Army Learning Support Centre (ALSC) for the provision of e-learning production, distribution and related support services. There were no contracts which were cancelled unexpectedly that would have resulted in a significant decrease in our backlog. Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The fol- lowing table represents management’s best estimate of the backlog realization for 2014, 2015 and beyond based on management’s current visibility into customers’ existing requirements. Management’s estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $150 million. This amount relates to certain government contracts, such as the health services support contract, where the contract maximums exceed expected utilization rates. While the excess funding is still available to DND, this was considered an indication that this portion of the contracted backlog would not materialize. The Company’s policy is to reduce the reported contractual backlog once it receives confir- mation from the customer that indicates the utilization of the full contract value may not materialize. Backlog (dollars in millions) Contracted Backlog Option Renewals TOTAL Fiscal 2014 $ 150 10 $ 160 Business and Technology Services $ 123 Systems Engineering 37 TOTAL $ 160 $ 78 Fiscal 2015 Beyond 2015 $ $ $ 47 31 78 73 5 $ $ $ $ 12 50 62 54 8 62 Estimated realizable portion of Backlog Excess over estimated realizable portion $ 209 $ 116 91 $ 300 $ 250 50 $ $ 34 150 150 - TOTAL $ 325 125 $ 450 $ 400 50 $ 300 $ 150 $ 450 Calian Technologies Ltd. 2013 Annual Report 13 Management’s Discussion and Analysis of Financial Condition and Results of Operations Selected Annual Information (dollars in millions, except per share data) Revenues Net earnings Net earnings per share, basic Net earnings per share, diluted Total assets Dividends per share 2013 Results of Operations 2013 $ 232.5 $ $ $ $ $ 13.1 1.73 1.73 97.6 1.12 2012 235.9 14.1 1.84 1.84 103.7 1.06 $ $ $ $ $ $ 2011 226.7 13.2 1.71 1.71 90.6 0.97 $ $ $ $ $ $ Earnings before interest and income taxes were $17,444 in 2013 compared with $18,733 in 2012 and net earnings were $13,055 for the year compared with $14,108 in the previous year. The Company completed the year with $29,782 of cash compared to $31,998 at the end of 2012. Revenues SED revenues BTS revenues Consolidated revenues 2013 $ 70,434 $ 162,029 $ 232,463 2012 % change $ 67,515 $ 168,413 $ 235,928 4% (4)% (1)% The general business environment in 2013 continued to be very competitive. The Company began the year with $178 million of its backlog to be earned in 2013. This base of work combined with the win of several larger contracts during 2013 resulted in a solid revenue stream for the year. SED saw reasonable stability in most of its markets and although the contract mix continually changes, the overall level of activity was consistent with the previous year. It should be noted that due to the project nature of its business, the SED divi- sion is susceptible to significant variation in volumes of activity from period to period. With the exception of Health, the demand for services in all other BTS market segments continued to be negatively affected by the government spending cuts. The Company derives a significant portion of its revenues from the Government of Canada. During 2013 (2012), 66% (61%) of revenues were related to contracts with various departments and agencies of the Government of Canada with approxi- mately 52% (52%) directly with DND. Both of the Company’s divisions conduct business with the Government of Canada. However the increase in percentage of revenues derived from the government is mainly from work completed by SED in 2013 for the Canada Center for Remote Sensing contracts described earlier. Management expects that the marketplace for the near term will continue to be unsettled and very competitive. While the market conditions for SED are expected to be reasonable, the timing of new opportunities particularly in today’s volatile busi- ness environment is always subject to delay. Current BTS backlog provides a reasonable level of revenue assurance on existing contracts and new opportunities continue to arise. However, continued cuts in federal government spending could impact future revenues in certain segments. The nature and extent of future government spending constraints remain uncer- tain and therefore, future revenues ultimately will be determined by customer demand on existing contracts as well as the timing of future contract awards. 14 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cost of revenues and Gross profit SED gross profit As a percentage of SED revenues BTS gross profit As a percentage of BTS revenues Consolidated gross profit As a percentage of consolidated revenues 2013 $ 16,133 22.9% $ 26,067 16.1% $ 42,200 18.2% 2012 % change $ 16,422 24.3% $ 28,005 16.6% $ 44,427 18.8% (2%) (7%) (5%) The Company’s cost of revenues includes all direct costs incurred in the provision of its products and services. These costs include all expenses associated with direct full-time staff, contract staff and subcontractors. They also include other direct costs including the landed cost of hardware and software sold as components of a solution, travel and living expenses necessary in the delivery of the services, and warranty costs where applicable. The consolidated gross margin for 2013 was affected by competitive pressures. SED margin percentage was down for the year as it reflects cost increases experienced on a program earlier in the year. In general, SED continues to experience com- petitive margin pressure when bidding on new work. Gross margin in Business and Technology Services decreased due to competitive pressures on new business, particularly in the government and defence marketplace. As long as government cost cutting initiatives remain in place, competitive pressure on BTS margins will continue. Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. Management will continue to focus on execution and aggressive negotiation of supplier costs in order to maximize margins. However, increased competition is expected to maintain the pressure on margins in both divisions. The volatility of the Canadian dollar is always an influencing factor for margins on new work in the SED division when denominated in foreign currencies. Selling and marketing Selling and marketing As a percentage of consolidated revenues 2013 $ 3,889 1.7% 2012 $ 4,242 2.0% % change (8%) Selling and marketing expenses as a percentage of sales remain stable. Costs for 2014 may increase slightly over the 2013 level as the Company invests in its diversification. General and administration General and administration As a percentage of consolidated revenues 2013 $ 17,498 7.5% 2012 $ 18,245 7.5% % change (5%) General and administration costs as a percentage of sales remained unchanged. Looking ahead, management believes that general and administration costs will remain mostly in line with activity levels. Calian Technologies Ltd. 2013 Annual Report 15 Management’s Discussion and Analysis of Financial Condition and Results of Operations Facilities Facilities 2013 $ 3,369 2012 $ 3,344 % change - Facility expenses, which include costs associated with office space, have been relatively stable over the past several years. Overall facility costs are not expected to increase significantly in 2014. Sale of US subsidiary: On August 31, 2012, the Company sold its US division. The restrictive nature of foreign ownership of US based entities that perform services for the US and foreign militaries, impacted management’s pursuit of growth for this division and it became clear that this was not the most productive or profitable use of our valuable resources. Revenues from this division for the last nine months ended August 31, 2012 were $2,841 and the sale of the division did not have any material impact on the results of the Company. Interest income Interest income for 2013 is comprised mainly of interest earned on the Company’s cash balances and remained stable over the prior year. Income tax expense The Company reports its results on a fully taxed basis. The provision for income taxes for 2013 was $4,741 or 26.6% of earn- ings before income taxes compared to $4,953 or 26.0% of earnings before income taxes in 2012. The effective tax rate for 2014, prior to considering the impact of non-taxable transactions, is expected to be approximately 26.6% The Company reported net earnings of $13,055 or $1.73 per share basic and diluted for 2013 compared to $14,108 or $1.84 per share basic and diluted in 2012. Selected Quarterly Financial Data (dollars in millions, except per share data) Revenues Net earnings Net earnings per share Basic Diluted Q4/13 Q3/13 Q2/13 Q1/13 Q4/12 Q3/12 Q2/12 Q1/12 $ 57.5 $ 58.1 $ 58.9 $ 57.9 $ 58.1 $ 59.3 $ 61.6 $ 56.8 $ 3.0 $ 3.3 $ 3.4 $ 3.4 $ 3.4 $ 3.5 $ 3.7 $ 3.6 $ 0.41 $ 0.41 $ 0.43 $ 0.43 $ 0.44 $ 0.44 $ 0.45 $ 0.45 $ 0.44 $ 0.44 $ 0.45 $ 0.45 $ 0.48 $ 0.48 $ 0.47 $ 0.47 The Company’s operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company’s first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects. The full text of the Company’s fourth quarter management discussion and analysis can be found on SEDAR at www.SEDAR.com. 16 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Calian’s net cash position was $29,782 at September 30, 2013, compared to $31,998 at September 30, 2012. Cash flows from operating activities before changes in working capital Changes in working capital Cash flows from operating activities Cash flows used in financing activities Cash flows used in investing activities Currency translation Increase (decrease) in cash Operating activities 2013 14,825 (2,292) 12,533 (13,624) (1,125) - (2,216) $ $ 2012 20,172 (4,945) 15,227 (8,899) (5,018) (54) 1,256 $ $ Cash inflows from operating activities for the year ending September 30, 2013 were $12,533 compared to $15,227 in 2012. This year’s decrease is mainly as the result of working capital fluctuations in line with the ebbs and flows of the business and a decrease of $9,334 compared to an increase of $5,366 in 2012 in unearned revenues. The market for the Systems Engineering Division is characterized by contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance pay- ments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at September 30, 2013, the Company’s total unearned revenue amounted to $4,059. This compares to $13,392 at September 30, 2012, with the decrease primarily attributable to work progressing on certain contracts where advance milestone payments had previously been made. Financing activities Dividend As a result of continuing earnings and a strong cash position, the Company once again increased its dividend in 2013. The Company paid quarterly dividends totaling $8,472 or $1.12 cents per share compared to 2012 when the Company paid $8,137 in dividends or $1.06 cents per share. The Company intends to continue with its quarterly dividend policy for the foreseeable future. Shares During 2013 the Company repurchased 282,670 common shares through its normal course issuer bid at an average price of $19.82 and during 2012 the Company repurchased 98,000 common shares at an average price of $18.52 through its normal course issuer bids. At September 30, 2013 there were 240,000 options outstanding at an average price of $19.87 expiring at various dates between February 13, 2016 and August 12, 2017. At September 30, 2013 there were 7,396,333 common shares outstanding and as of the date of this Management Discussion and Analysis, there were 7,391,533 common shares outstanding. Calian Technologies Ltd. 2013 Annual Report 17 Management’s Discussion and Analysis of Financial Condition and Results of Operations Investing activities Equipment expenditures Calian acquired $725 in equipment, furniture and fixtures during 2013, compared to $1,054 during 2012. For 2014, expen- ditures are expected to increase somewhat as certain manufacturing related equipment at the SED division is due for upgrade. Capital expenditures are not expected to exceed $2,000. At September 30, 2013 there were no significant com- mitments to expend capital assets. Capital resources At September 30, 2013 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company. An amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. Management believes that the company has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend. Contractual obligations Payments due: Operating leases Purchase obligations Total contractual obligations Total $ 5,869 18,340 $ 24,209 <1 year $ 2,156 7,241 $ 9,397 1-3 years $ 2,685 11,099 $ 13,784 4-5 years $ 1,028 - $ 1,028 >5 years - $ - - $ Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding. They do not include agreements that are cancellable without penalty. Off-Balance Sheet Arrangements There were no off-balance sheet arrangements at September 30, 2013. Operating leases The Company leases various premises and office equipment through operating leases. Related party transactions There were no transactions with related parties during 2013 and 2012. Critical Accounting Estimates The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the Company’s financial condition and results of operations. On an on-going basis, management reviews its estimates and assumptions, including those related to revenue recognition on fixed-price projects, provisions and contingencies, estimated timing of reversals of income tax temporary differences, allowance for doubtful accounts, valuation of investment and impair- ment of goodwill. Management bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances; actual results could differ from those estimates. Revenue recognition The Business and Technology Services Division’s revenue is derived primarily from per-diem contracts where revenue is recognized when the services are provided. However, a significant portion of the Systems Engineering Division’s revenue is derived from fixed-price contracts. Revenue from these fixed-price projects is recognized using the percentage of completion method using management’s best estimate of the costs and related risks associated with completing the projects. The greatest risk on fixed-price contracts is the possibility of cost overruns. Management’s approach to revenue recognition is tightly linked to detailed project management processes and controls. The information provided by the project management system com- bined with a knowledgeable assessment of technical complexities and risks are used in estimating the percentage completion. 18 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations Contingencies From time to time the Company is involved in claims in the normal course of business. Management assesses such claims and where considered likely to result in a material exposure and, where the amount of the claim is quantifiable, provisions for loss are made based on management’s assessment of the likely outcome. The Company does not provide for claims that are considered unlikely to result in a significant loss, claims for which the outcome is not determinable or claims where the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when rea- sonably determinable. Income taxes The Company records future income tax assets and liabilities related to deductible temporary differences. The Company assesses the value of these assets and liabilities based on their probability of being realized given management assessments of future taxable income. Allowance for doubtful accounts The Company has extensive commercial history upon which to base its provision for doubtful accounts. Due to the nature of the industry in which the Company operates, the Company does not create a general provision for bad debts but rather determines bad debts on a specific account basis. Due to the blue-chip list of customers, the Company’s allowance for doubt- ful accounts at September 30, 2013 and 2012 was minimal. Goodwill Goodwill is tested for impairment annually or more frequently when events occur or circumstances arise that could indicate a reduction in its fair value. Testing for impairment is accomplished by determining whether the fair value of the cash gen- erating unit exceeds the net carrying value as of the assessment date. If the fair value is greater than the carrying amount, no impairment is necessary. The determination of fair value is based on management’s estimate of future results of operations of the reporting unit using reasonable assumptions relating to growth levels when considering the current and forecasted busi- ness environment and each cash-generating unit’s discount rate. For purpose of determining fair value, management considered a growth level range of 0% to 3% and a discount rate range of 13% to 16% for its BTS division excluding Primacy and a growth level range of 0% to 15% and a discount rate range of 25% to 30% for its Primacy division. Adoption of New Accounting Rules and Impact on Financial Results The Company did not adopt any new accounting policies this year. Impact of Accounting Pronouncements Not Yet Implemented There were no new accounting pronouncements issued in 2013 which would affect the Company's results of operations or financial conditions. Management’s Conclusion on the Effectiveness of Disclosure Controls The Chief Executive Officer and the Chief Financial Officer of the Company, after evaluating the effectiveness of the Company's disclosure controls and procedures as of September 30, 2013, have concluded that the Company's disclosure con- trols and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would have been known to them and that information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in the securities legislation. Management’s Conclusion on the Effectiveness of Internal Control over Financial Reporting The Chief Executive Officer and the Chief Financial Officer of the Company, after evaluating the effectiveness of the Company’s internal control over financial reporting as of September 30, 2013, have concluded that the Company’s internal controls over financial reporting provide reasonable assurance regarding the reliability of financial reporting for external pur- poses in accordance with IFRS. During the most recent interim quarter ended September 30, 2013, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. Calian Technologies Ltd. 2013 Annual Report 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations Risk Factors The Company is subject to a number of risks and uncertainties that could significantly affect the Company’s financial con- dition and future results of operations. Risk management is an integral part of how the Company plans and monitors the business strategies and results and we have embedded risk management activities in the operational responsibilities of man- agement and made them an integral part of our overall governance, organizational and accountability structure. The Systems Engineering and Business and Technology Services divisions face some or all of the following risks and uncertainties: Competition for contracts within key markets The markets for the Company’s services are intensely competitive, rapidly evolving and subject to technological changes. The principal competitive factors in the Company’s markets are quality, performance, price, timeliness, customer support and reputation. The Company has a disciplined approach to management of all aspects of its business. The Company is a propo- nent of quality management; SED is registered under ISO 9001-2008 standards and BTS is accredited at Level 4 of the Progressive Excellence Program by Excellence Canada. This approach to management was developed to help the Company ensure that its employees deliver services consistently according to the Company’s high standards and based on strong values underlying its client-focused culture. Concentration of Revenues The Company has certain ongoing contracts that account for a significant portion of revenues. Should these contracts not be renewed at expiry or should a competitor win the renewal the Company’s future revenue stream and overall profitability could be significantly reduced. While there is no indication that such contracts will be left to expire, there is a risk that a com- petitor could win the work at the next renewal point. Our strong historical performance and keen focus on customer requirements will put us in good stead, but winning the renewal is not assured. The availability of qualified professionals Competition from other firms has a two-fold impact on the Company. The Company must not only vie for qualified employees for its own operations but must have ready access to a large pool of qualified professionals to satisfy contractual arrangements with customers. The Company mitigates these factors through a number of means. The Company’s perform- ance driven remuneration policies and its favorable working environment are conducive to attracting ambitious, qualified professionals. As a supplier of professional employees through outsourcing contracts, the Company regularly establishes rela- tionships with a significant number of professionals in key markets. While SED revenues are usually predominately export, its labour costs are largely influenced by domestic and regional economic factors. Accordingly, labour costs could become significantly higher than those of foreign competitors, thereby eroding our competitive position. Performance on fixed-price contracts A large percentage of SED’s contracts are based on a fixed price for the provision of a specified service or system against an agreed delivery schedule. These fixed-price contracts at times involve the completion of large-scale system engineering projects. There is a risk in all fixed-price contracts that the Company will be unable to deliver the system within the time spec- ified and at the expected cost. The Company employs sophisticated design and testing processes and practices, which include a wide range of stringent factory and on-site acceptance tests with criteria and requirements jointly developed with the cus- tomer. However, non-performance could result in a customer being in a position to terminate the contract for default, or to demand repayments or penalties. Program management methodologies have been implemented to adequately manage each project and any customer change, and to identify and mitigate potential technical risks and related cost overruns. In addition, the Company employs procedures to ensure accurate estimating of costs and performs regular detailed reviews of progress on each project. Non-performance of a key supplier or contractor The Company’s business is often dependent on performance by third parties and subcontractors for completion of contracts for which the Company is the prime contractor. Subcontractors for large systems are selected in concurrence with the cus- tomer’s requirements, and if not directed by the customer, are selected through a competitive bid or negotiated process. Most major development subcontracts are established as fixed-price contracts. The Company believes that these subcontractors have an economic incentive to perform such subcontracts for the Company. However, no company can protect itself against all material breaches, particularly those related to financial insolvency of the subcontractors or to cost overruns by subcon- tractors. Risks include a significant price increase in those few subcontracts that are not fixed-price, delay in performance, failure of any major subcontractor to perform or the inability of the Company to obtain replacement subcontractors at a rea- sonable price. The performance of key subcontracts is closely monitored as part of the Company’s project management process to promptly identify potential issues and develop remedial actions. 20 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations Rapidly changing technologies and customer demands The markets in which the Company operates are characterized by changing technology and evolving industry standards. The Company keeps pace with developments in the industries it serves and actively monitors the evolution of these markets, thus ensuring that it can meet the evolving needs of its clients. The Company achieves this by continually recruiting professionals in high demand positions and providing regular training to ensure employee skills remain current. The Company’s ability to anticipate changes in technology, technical standards and service offerings will be a significant factor in the Company’s ability to compete or expand into new markets. Customer’s ability to retain their market share The Company performs manufacturing services for a number of customers, whereby we build their products to meet their market demands. While these relationships are long-standing, the Company is susceptible to overall shifts in market demand for such products as well as our customers’ share of such markets. While the Company has regular discussions with cus- tomers regarding upcoming requirements, an erosion of a customer’s market share for a particular product could have a direct impact on the Company’s revenues and profitability. Government contracts During 2013, approximately 66% of the Company’s total revenues were derived from contracts with the Canadian govern- ment and its agencies. The government may change its policies, priorities or funding levels through agency or program budget reductions or impose budgetary constraints. Furthermore, contracts with governments, including the Canadian government, may be terminated or suspended by the government at any time, with or without cause. Although in the past the Company has not experienced any significant cancellations of previously awarded contracts by the Canadian government, there can be no assurance that any contract with the government will not be terminated or suspended in the future. Backlog Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. At September 30, 2013 the Company’s backlog included $150 million of contract value in excess of the current estimated uti- lization levels. Should additional customer requirements for the Company’s services under these contracts not materialize, this excess will not be realized. Credit risk concentration with respect to accounts receivable As the Company grows, it monitors the concentration of its business in its various segments and with particular customers. In management’s opinion, the fact that the Company operates in two segments that provide some diversification of its cus- tomer base mitigates the potential impact on earnings and cash flow of problems related to an individual sector or customer. Insufficient or inappropriate mix of work for fixed labour resources Virtually all employees of SED are full time staff and represent a broad spectrum of unique skill sets. Accordingly, SED strives to secure sufficient labour sales that adequately match the skill sets. SED’s business development practices are designed to dynamically adjust pursuits of contracts to address the sufficiency and mix of available resources. Operational risk Operational risk is managed through the establishment of effective infrastructure and controls. Key elements of the infra- structure are qualified, well-trained personnel, clear authorization levels and reliable technology. Controls established by documented policies and procedures include the regular examination of internal controls by internal employees as well as our auditors, segregation of duties, and financial management and reporting. In addition, the Company maintains insurance coverage and contingency plans for systems failures or catastrophic events. Calian Technologies Ltd. 2013 Annual Report 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations Foreign currency risk The Company operates internationally with approximately 17% of its business derived from non-Canadian sources. A sub- stantial portion of this international business is denominated in major foreign currencies and therefore the Company’s results from operations are affected by exchange rate fluctuations of these currencies relative to the Canadian dollar. The Company uses financial instruments, principally in the form of forward exchange contracts, in its management of foreign currency exposures. At September 30, 2013 the Company had various forward exchange contracts, which are explained in Note 18 to the Company’s consolidated financial statements for the year ended September 30, 2013. The strengthening of the Canadian dollar relative to other foreign currencies may negatively impact the Company’s competitiveness and increase pressure on margins for new work. Sufficiency of insurance The Company carries various forms of insurance to protect itself from a variety of insurable risks. However, such coverage may not be sufficient in extreme circumstances and accordingly there exists a risk to the Company. While the Company cannot reasonably insure itself for all events, it regularly reviews the availability, scope and amounts of coverage with its pro- fessional advisors and implements an approach balancing both cost and risk. Medical malpractice As a result of the Company executing the health services support contract for the Department of National Defence and the operation of 2 clinics, the Company is subject to risks associated with the medical profession. In order to mitigate such risks to the degree possible, the Company has obtained medical malpractice and professional liability insurance in accordance with the terms of this contract. In addition, it is a condition of employment for doctors, dentists and other medical profes- sionals to maintain appropriate credentials, be in good standing with their medical associations and obtain medical malpractice insurance from their respective association. Political and trade barriers Revenues on certain projects are derived from customers in foreign jurisdictions and are subject to trade and political bar- riers relating to the protection of national interests. These barriers could have an adverse effect on our ability to win repeat business and attract new customers. Consolidation of customer base The satellite industry has experienced both restructuring and consolidation. As the newly formed entities focus on optimizing cash flows and gaining economies of scale, opportunities for systems integrators may be diminished thereby cre- ating a very competitive environment with commensurate pressure on margins. Long-term Outlook Management continues to believe that the Company is well positioned for sustained growth in the long term. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will continue to focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent and non-government markets. The Systems Engineering Division has been working within a relatively stable satellite sector and the division is expecting new opportunities to arise as systems adopting the latest technologies will be required by customers wishing to maintain and improve their service offerings. Custom manufacturing activity levels will continue to be directly dependent upon SED’s customers’ requirements and continuing volatility in orders is anticipated. Capital procurements by DND are expected to provide upcoming opportunities, although competition is expected to remain aggressive. Any volatility in the Canadian dollar could impact the Systems Engineering Division’s competitiveness when bidding against foreign competition on projects denominated in foreign currencies. 22 2013 Annual Report Calian Technologies Ltd. Management’s Discussion and Analysis of Financial Condition and Results of Operations The Business and Technology Services Division’s services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that in the long term, this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. However, current cost cutting initiatives in the federal government have already had a negative impact on traditional BTS revenue sources and it is anticipated that the con- tinued roll out of these initiatives could further impact demand, at least in the short term. Management believes that the types of service the division offers will continue to be attractive to government agencies in the long term and the division con- tinues to assess how it can address new markets and seek new opportunities outside of the federal government. The acquisition of Primacy Management has bolstered the division’s performance and it is expected that Primacy will continue to meet the financial targets established as part of the acquisition. Additional Information Additional information about the Company such as the Company’s 2013 Annual Information Form and Management Circular can be found on SEDAR at www.SEDAR.com Dated: December 5, 2013 Calian Technologies Ltd. 2013 Annual Report 23 Management’s Statement of Responsibility The accompanying consolidated financial statements of Calian Technologies Ltd. and its subsidiaries and all information in the annual report are the responsibility of management and have been approved by the Board of Directors. The financial statements include some amounts that are based on management’s best estimates that have been made using careful judgment. The financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada. Financial and operating data elsewhere in the annual report are consistent with the information contained in the financial statements. In fulfilling its responsibilities, management of Calian and its subsidiaries has developed and continues to maintain systems of internal accounting controls including written policies and procedures and segregation of duties and responsibilities. Although no cost-effective system of internal controls will prevent or detect all errors and irregularities, these systems are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, transactions are properly recorded and the financial records are reliable for preparing the financial statements. The Board of Directors carries out its responsibility for the financial statements in this report through its Audit Committee. The Audit Committee meets periodically with management to discuss the results of audit examinations with respect to the adequacy of internal controls and to review and discuss the financial statements and financial reporting matters. The Audit Committee also meets periodically with the external auditors to review and discuss the financial statements and financial reporting matters. The financial statements have been audited by Deloitte LLP, Chartered Professional Accountants, who have full access to the Audit Committee with and without the presence of management. Ray Basler President and CEO Ottawa, Ontario November 13, 2013 Jacqueline Gauthier Chief Financial Officer 24 2013 Annual Report Calian Technologies Ltd. Independent Auditor’s Report To the Shareholders of Calian Technologies Ltd. We have audited the accompanying consolidated financial statements of Calian Technologies Ltd., which comprise the con- solidated statements of financial position as at September 30, 2013 and September 30, 2012, and the consolidated statements of net profit, consolidated statements of comprehensive income, consolidated statements of changes in equity and consoli- dated statements of cash flows for the years then ended and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accor- dance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated finan- cial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assess- ments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appro- priateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Calian Technologies Ltd. as at September 30, 2013 and September 30, 2012, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Chartered Accountants Licensed Public Accountants November 13, 2013 Ottawa, Ontario Calian Technologies Ltd. 2013 Annual Report 25 Calian Technologies Ltd. Consolidated Statements of Financial Position As at September 30, 2013 and 2012 (Canadian dollars in thousands) NOTES September 30, 2013 September 30, 2012 ASSETS CURRENT ASSETS Cash Accounts receivable Work in process Prepaid expenses Derivative assets Total current assets NON-CURRENT ASSETS Equipment Application software Acquired intangible assets Goodwill Total non-current assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities Unearned contract revenue Share repurchase obligation Derivative liabilities Total current liabilities NON-CURRENT LIABILITIES Deferred tax liabilities Total non-current liabilities TOTAL LIABILITIES SHAREHOLDERS’ EQUITY Issued capital Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total shareholder’s equity 14 18 5 6 7 8 14 9 18 13 9 9 $ 29,782 37,903 9,764 1,346 89 78,884 3,514 585 3,808 10,781 18,688 $ 31,998 40,928 9,446 1,480 234 84,086 3,854 615 4,352 10,781 19,602 $ 97,572 $ 103,688 $ 24,634 4,059 947 14 29,654 1,121 1,121 30,775 19,746 216 47,089 (254) 66,797 $ 19,853 13,392 1,209 26 34,480 1,212 1,212 35,692 19,949 164 47,186 697 67,996 The accompanying notes are an integral part of the consolidated financial statements. $ 97,572 $ 103,688 Approved by the Board on November 13, 2013: 26 2013 Annual Report Calian Technologies Ltd. Kenneth Loeb Chairman Richard Vickers Director Calian Technologies Ltd. Consolidated Statements of Net Profit For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share data) Revenues Cost of revenues Gross profit Selling and marketing General and administration Facilities Gain on sale of US subsidiary Profit before interest income and income tax expense Interest income Profit before income tax expense Income tax expense – current Income tax expense – deferred Total income tax expense NET PROFIT Net profit per share: Basic Diluted NOTES $ 2013 232,463 190,263 $ 42,200 3,889 17,498 3,369 - 17,444 352 17,796 4,499 242 4,741 20 12 13 13 2012 235,928 191,501 44,427 4,242 18,245 3,344 (137) 18,733 328 19,061 4,810 143 4,953 $ 13,055 $ 14,108 11 11 $ $ 1.73 1.73 $ $ 1.84 1.84 Calian Technologies Ltd. 2013 Annual Report 27 Calian Technologies Ltd. Consolidated Statements of Comprehensive Income For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands) NET PROFIT Other comprehensive income, net of tax Unrealized loss on translating financial statements of an investment in a foreign operations, net of tax of nil (2012 – nil) Change in deferred gain (loss) on derivatives designated as cash flow hedges, net of tax of $346 (2012 - $349) Other comprehensive income (loss), net of tax COMPREHENSIVE INCOME NOTES 2013 2012 $ 13,055 $ 14,108 - (951) (951) (54) 945 891 $ 12,104 $ 14,999 28 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Consolidated Statements of Changes in Equity For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share data) Notes Issued Contributed Retained earnings surplus capital Foreign currency translation reserve Cash flow hedging reserve Total Balance October 1, 2012 Comprehensive income Dividend paid ($1.12 per share) Issue of shares under employee share purchase plan Issue of shares under stock option plan Share-based compensation expense Share repurchase Share repurchase obligation change 9,10 9,10 10 9 9 $ 19,949 $ 164 $ 47,186 $ - - 424 99 - (757) 31 - - - (6) 58 - - 13,055 (8,472) - - - (4,844) 164 Balance September 30, 2013 $ 19,746 $ 216 $ 47,089 $ - - - - - - - - - $ 697 $ 67,996 (951) - - - - - - 12,104 (8,472) 424 93 58 (5,601) 195 $ (254) $ 66,797 Notes Issued Contributed Retained earnings surplus capital Foreign currency translation reserve Cash flow hedging reserve Total $ 19,018 $ 219 $ 43,345 $ 22 $ (248) $ 62,356 Balance October 1, 2011 Comprehensive income Sale of US subsidiary Dividend paid ($1.06 per share) Issue of shares under employee share purchase plan Issue of shares under stock option plan Share-based compensation expense Share repurchase Share repurchase obligation change 9,10 9,10 10 9 9 - - 418 844 - (249) (82) - - - (142) 87 - - 14,108 (8,137) - - - (1,565) (565) Balance September 30, 2012 $ 19,949 $ 164 $ 47,186 $ (54) 32 - - - - - - - 945 14,999 32 (8,137) 418 702 87 (1,814) (647) - - - - - - $ 697 $ 67,996 Calian Technologies Ltd. 2013 Annual Report 29 Calian Technologies Ltd. Consolidated Statements of Cash Flows For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Profit Items not affecting cash: NOTES 2013 2012 $ 13,055 $ 14,108 Employee stock purchase plan and share-based compensation expense Amortization Interest income Income tax expense Gain on sale of US subsidiary Change in non-cash working capital Accounts receivable Work in process Prepaid expenses Accounts payable and accrued liabilities Unearned contract revenue Interest received Income tax paid CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Issuance of common shares Dividends Repurchase of shares CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Equipment and application software expenditures Acquisition of Primacy Management Inc. Sale of US subsidiary FOREIGN CURRENCY ADJUSTMENT NET CASH INFLOW (OUTFLOW) CASH, BEGINNING OF PERIOD CASH, END OF PERIOD 12 13 9,10 9 5,6 19 20 131 1,639 (352) 4,741 - 19,214 4,218 (318) (639) 3,777 (9,334) 16,918 380 (4,765) 12,533 449 (8,472) (5,601) (13,624) (725) (400) - (1,125) - (2,216) 31,998 158 1,418 (328) 4,953 (137) 20,172 (6,162) (2,612) 2,035 899 5,367 19,699 310 (4,782) 15,227 1,052 (8,137) (1,814) (8,899) (1,054) (4,112) 148 (5,018) (54) 1,256 30,742 $ 29,782 $ 31,998 30 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 1. Basis of preparation Calian Technologies Ltd. (“the Company”), incorporated under the Canada Business Corporations Act, and its wholly-owned subsidiaries provide technology services to industry and government. The address of its registered office and principal place of business is 340 Legget Drive, Ottawa, Ontario K2K 1Y6. The Company's capabilities include the provision of business and technology services to industry and government in the health, workforce management, IT services and training domains as well as the design, manufacturing and maintenance of complex systems to the communications and defence sectors. Statement of compliance These consolidated financial statements are expressed in Canadian dollars and have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standard Board ("IASB"). These consolidated financial statements were prepared using the accounting policies as described in Note 2 – Summary of significant accounting policies. These consolidated financial statements for the year ended September 30, 2013 were authorized for issuance by the Board of Directors on November 13, 2013. 2. Summary of significant accounting policies The accounting policies below have been applied consistently to all periods presented in these consolidated financial statements unless otherwise stated. Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Calian Ltd. located in Ottawa, Ontario and Primacy Management Inc. ("Primacy") located in Burlington, Ontario as well as Calian Technology (US) Ltd. until its date of sale August 31,2012 (Note 20). All transactions and balances between these companies have been eliminated on consolidation. Basis of presentation The consolidated financial statements are presented at historical cost unless otherwise noted. Historical cost is generally based on the fair value of the consideration given in exchange for the asset. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue from a contract to provide services is recog- nized by reference to the stage of completion of the contract. The stage of completion of the contract is determined as follows: Fixed price contracts Where the outcome of fixed-price construction contracts can be estimated reliably, revenue is recognized by reference to the completed activity of the contract as at each reporting period, measured based on the proportion of the costs incurred for work performed to date relative to the estimated total contract costs including warranty costs where applicable, except where this would not be representative of the stage of completion. As some contracts extend over more than one year, any revision in cost and profit estimates made during the course of the work is reflected in the accounting period in which the facts indicating a need for the revision become known. Variations in contract work, claims and incentive payments if any, are included to the extent that the amount can be measured reliably and its receipt is considered probable. Where the outcome of fixed-price construction contracts cannot be estimated reliably, contract revenue is recognized to the extent of contract costs incurred that is probable will be recoverable. Contract costs are recognized as expenses in the period they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. Where contract costs incurred to date plus recognized profits less recognized losses exceed progress billings, the surplus is shown as work in process. For contracts where progress billings exceed contract costs incurred to date plus recognized profits less recognized losses, the surplus is shown as unearned contract revenue. Amounts received before the related work is performed are included in the consolidated statement of financial position as a liability, as unearned contract revenue. Amounts billed for work performed but not yet paid by the customer are included in the consolidated statement of financial position under accounts receivable. Calian Technologies Ltd. 2013 Annual Report 31 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 2. Summary of significant accounting policies (continued) Time and material contracts Revenue derived from time and material contracts is recognized at the contractual rates as labour hours are delivered and direct expenses are incurred. Variations in revenue incentive payments if any are included to the extent that the amount can be measured reliably and its receipt is considered probable. Share-based compensation The Company has a stock option plan for executives and other key employees. The Company measures and recognizes compensation expense based on the grant date fair-value of the stock options issued using the Black-Scholes pricing model. The offsetting credit is recorded in contributed surplus. Compensation expense is recorded on a straight-line basis over the vesting period, based on the Company’s estimate of stock options that will ultimately vest. At each reporting period, the Company revises its estimate of the stock options expected to vest. The impact on the change in estimate, if any, is recognized over the remaining vesting period. Consideration paid by employees on the exercise of options and related amounts of contributed surplus is recorded as issued capital when the shares are issued. The Company has an employee stock purchase plan available to all employees of the Company. The plan provides for a discount to the fair market value at the date the shares are issued. Compensation expense representing the discount is recorded as general and administration costs with an offsetting amount to issued capital. Operating leases Leases entered into are classified as either finance or operating leases. Leases that transfer substantially all of the risks and rewards of own- ership of property to the Company are accounted for as finance leases. For leases which are classified as operating leases, lease payments are recognized as an expense on a straight-line basis over the lease term. In the event that lease incentives are received to enter into oper- ating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis. The Company does not have any finance leases. Current monetary assets and liabilities Cash is measured at fair value with changes in fair value recorded in net earnings. Accounts receivable and accounts payable and accrued liabilities are measured at amortized costs with interest accretion recorded in net earnings. Due to the short-term nature of these assets and liabilities, the carrying amounts approximate fair value. Income taxes Income tax expense comprises current and deferred tax. Income tax expense is recognized in net earnings, except when it relates to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a busi- ness combination, the tax effect is included in the accounting for the business combination. Current tax The tax currently payable is based on taxable income for the period using tax rates enacted or substantively enacted as at each reporting period and any adjustments to tax payable related to previous years. Taxable profit differs from profit as reported in the consolidated state- ment of net earnings because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Deferred tax Deferred tax is recognized using the balance sheet method, providing for differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding tax bases used for taxation purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible tem- porary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. 32 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 2. Summary of significant accounting policies (continued) Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only rec- ognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are meas- ured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates that have been enacted or substantively enacted at each reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the reporting date, to recover or settle the car- rying amount of its assets and liabilities. Equipment Equipment, comprising leasehold improvements, furniture and computer equipment is stated at cost less accumulated amortization and impairment losses, if any. The carrying value is net of related government assistance and investment tax credits. Amortization is recognized in net earnings on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight- line basis over the term of the leases. The estimated useful lives are as follows: • Leasehold improvements: over the term of each lease • Furniture: • Computer equipment: 10 years 5 years The estimated useful lives, residual values and depreciation methods are reviewed annually, with the effect of any changes in estimate accounted for on a prospective basis. Application software Application software is measured at cost less accumulated amortization and is amortized on a straight-line basis over its estimated useful life not exceeding five years. The amortization method and estimate of useful life is reviewed annually. Acquired intangible assets Acquired intangible assets are measured at cost less accumulated amortization. Amortization is recognized in net earnings on a straight- line basis over the estimated useful lives of the assets. The estimated useful lives are as follows: •Customer relationship: •Contract with customer: indefinite 5 years •Non-competition agreements: 7 years The customer relationship, representing expected renewals of the acquired contract, is considered to have an indefinite life based on the fact that the contract is renewable on an annual basis indefinitely. The amortization method and estimate of useful life is reviewed annually. Impairment of equipment and application software At each reporting period, management reviews the carrying amounts of its equipment and application software to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, management estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a rea- sonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Calian Technologies Ltd. 2013 Annual Report 33 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 2. Summary of significant accounting policies (continued) Impairment of goodwill Goodwill arising on the acquisition of a business represents the excess of the purchase price over the net fair value of identifiable assets, lia- bilities and contingent liabilities of the acquired businesses recognized at the date of the acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to the cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually or more frequently if events or changes in circumstances indicate that the unit might be impaired. When the recoverable amount of the cash-generating unit is less than the carrying amount of the cash-generating unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the cash-generating unit on pro-rata basis. An impairment loss recognized for goodwill is not reversed in a subsequent period. The Company performs its annual review of goodwill on September 30th each year. Business acquisition Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is meas- ured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities incurred by the Company to the former owners of the acquiree in exchange for control of the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that deferred tax assets or liabilities are recognised and measured in accordance with IAS 12 Income Taxes. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent con- sideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjust- ments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. Foreign currency translation Transactions in currencies other than the Company’s functional currency (foreign currencies) are recorded at the rates of exchange pre- vailing at the dates of the transactions. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. At each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at each reporting period. Non- monetary items which are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognized in net earnings in the period in which they arise except for exchange differences on transactions entered into in order to hedge certain foreign currencies (see note below for hedging policy). The functional currency of the parent company, Calian Ltd. and Primacy Management Inc., its subsidiaries, is the Canadian dollar. The functional currency of Calian Technology (US) Ltd., was the US dollar. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Company’s wholly-owned foreign operation until its sale (see Note 20) are expressed in Canadian dollars using US dollar exchange rates prevailing at each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising are classified in other comprehensive income and accumulated in equity in the Company’s foreign currency translation adjustment reserve. Such exchange differences are recognized in net earnings in the period in which the foreign operation is disposed. 34 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 2. Summary of significant accounting policies (continued) Financial instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immedi- ately in profit or loss. Financial assets The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recog- nition. The Company’s financial assets are classified as follows: Cash Fair value through profit or loss Accounts receivable Loans and receivables Derivative assets Fair value through profit or loss Financial assets at fair value through profit or loss (FVTPL) Financial assets are classified as at FVTPL if they are held for trading or are designated as such upon initial recognition. Financial assets at FVTPL are measured at fair value with changes in fair value recognized in net earnings. Loans and receivables Accounts receivable are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receiv- ables when the recognition of interest would be immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. Objective evidence of impairment could include significant finan- cial difficulty of the issuer or counterparty, default or delinquency in interest or principal payments or it becoming probable that the borrower will enter bankruptcy or financial re-organization. Accounts receivable are assessed for impairment individually. Objective evidence of impairment could include the Company’s past expe- rience of collecting payments and an increase in the number of delayed payments past the average credit period. For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. Impairment losses, if any, are recognized in net earnings. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of accounts receivable, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recov- eries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in net earnings, if any. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through net earnings to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Financial liabilities Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. The Company’s trade payables and share purchase obligations are classified as other financial liabilities and are initially measured at fair value and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. Derivative liabilities are classified as FVTPL. Calian Technologies Ltd. 2013 Annual Report 35 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 2. Summary of significant accounting policies (continued) Effective interest method The effective interest method is a method of calculating the amortized cost of a financial asset (or financial liability) and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (cash dis- bursements), including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts, through the expected life of the financial asset or financial liability, or, where appropriate, a shorter period. Fair value hierarchy The Company’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are: Level 1 values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2 values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3 values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. When the inputs used to measure fair value fall within more than one level of the hierarchy, the level within which the fair value measure- ment is categorized is based on the Company’s assessment of the lowest level input that is the most significant to the fair value measurement. Derivative financial instruments and risk management The Company enters into derivative financial instruments, mainly foreign exchange forward contracts to manage its foreign exchange rate risk. The Company’s policy does not allow management to enter into derivative financial instruments for trading or speculative purposes. Foreign exchange forward contracts are entered into to manage the foreign exchange rate risk on foreign denominated financial assets and liabilities and foreign denominated forecasted transactions. Derivatives are initially recognized at fair value at the date a derivative contract is entered into with transaction costs recognized in profit and loss. Derivatives are subsequently re-measured to their fair value at each reporting period. The resulting gain or loss is recognized in net earnings immediately unless the derivative is designated and effective as a hedging instrument, in which event the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income and is recognized in net earnings when the hedged item affects net earnings. The Company expenses transaction costs related to its foreign exchange contracts. Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place at the end of the period. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realized or settled within 12 months. Hedge accounting Management designates its foreign exchange forward contracts as either hedges of the fair value of recognized assets or liabilities (fair value hedges) or hedges of highly probable forecast transactions and firm commitments (cash flow hedges). At the inception of the hedge relationship, the Company documents the relationship between the hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Furthermore, both at the hedge’s inception and on an ongoing basis, the Company also assesses whether the derivatives that are used in hedging transactions are highly effec- tive in offsetting changes in fair values or cash flows of hedged items. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in net earnings immediately, together with any changes in the fair value of the hedged item that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in the line of the income statement relating to the hedged item. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognized immediately in net earnings, and is included in other gains and losses, if any. Amounts deferred in other comprehensive income are recycled in net earnings in the periods when the hedged item is recognized in net earnings, in the same line of the income statement as the recognized hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in other comprehensive income are transferred from other comprehensive income and included in the initial measurement of the cost of the asset or liability. 36 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 2. Summary of significant accounting policies (continued) Hedge accounting is discontinued when management revokes the hedging relationship; the hedging instrument is terminated or no longer qualifies for hedge accounting. For fair value hedges, the adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to net profit from that date. For cash flow hedges, any cumulative gain or loss deferred in other comprehensive income at that time remains in other comprehensive income and is recognized when the forecast transaction is ultimately recognized in net earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in other comprehensive income is rec- ognized immediately in net profit. Note 18 sets out details of the fair values of the derivative instruments used for hedging purposes. Movements in the hedging reserve in equity are also detailed in the statement of changes in equity. 3. Future changes in accounting policies IFRS 9 Financial instruments IFRS 9 was issued in November 2009 introducing new requirements for the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to include the requirements for the classification and measurement of financial liabilities and derecognition. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Company has not yet assessed the impact of the adoption of this standard on its consolidated financial statements. IFRS 10 Consolidated financial statements IFRS 10 establishes principles for the presentation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces IAS 27 – Consolidated and Separate Financial Statements and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company does not anticipate that the adoption of the new standard will have a significant impact on its consolidated financial statements. IFRS 12 Disclosure of interests in other entities IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrange- ments, associates, special purpose vehicles and other off-balance sheet vehicles. The standard requires an entity to disclose information regarding the nature and risks associated with its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 will be effective for the Company’s fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company does not anticipate that the adoption of the new standard will have a significant impact on its vconsolidated financial statements. IFRS 13 Fair value measurement IFRS 13 is intended to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The standard will be effective for the Company’s fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company does not anticipate that the adoption of the new standard will have a significant impact on its consolidated financial statements. IAS 1 Presentation of financial statements In June 2011, the IASB amended IAS 1 – Presentation of financial statements. The principal change resulting from the amendments to IAS 1 is a requirement to group together items within other comprehensive income that may be reclassified to the statement of income. The amendments also reaffirm existing requirements that items in other comprehensive income and net earnings should be presented as either a single statement or two consecutive statements. The amendment to IAS 1 will be effective for the Company’s fiscal years beginning on or after January 1, 2013, with earlier application permitted. The Company does not expect any changes to its consolidated financial statement presentation from this amendment as the items within other comprehensive income that may be reclassified to the statement of compre- hensive income are already grouped together. Calian Technologies Ltd. 2013 Annual Report 37 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 3. Future changes in accounting policies (continued) IAS 1Presentation of financial statements (as part of the Annual Improvements to IFRS issued in May 2012) In May 2012, the IASB amended IAS 1 – Presentation of financial statements. IAS1 requires an entity that changes accounting policies retrospectively or makes a retrospective restatement or reclassification to present a third statement of financial position as at the begin- ning of the preceding period. The amendments to IAS1 clarify that an entity is required to present a third statement of financial position only when the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position and that related notes are not required to accompany the third statement of financial position. The amendment to IAS 1 will be effective for the Company’s fiscal years beginning on or after January 1, 2013, with earlier application per- mitted. The Company does not expect any changes to its consolidated financial statement presentation from this amendment. IAS 28 Investments in associates and joint ventures IAS 28 was re-issued by the IASB in May 2011 in order to conform to changes as a result of the issuance of IFRS 10, IFRS11, and IFRS 12. IAS 28 continues to prescribe the accounting for investments in associates, but is now the only source of guidance describing the appli- cation of the equity method. The amended IAS 28 will be applied by all entities that are investors with joint control of, or significant influence over, an investee. The amended version of IAS 28 is effective for financial years beginning on or after January 1, 2013, with earlier application permitted. The Company does not anticipate that the adoption of the new standard will have a significant impact on its con- solidated financial statements. 4. Critical accounting judgments and key sources of estimation uncertainty Estimates: The preparation of financial statements in conformity with IFRS requires the Company’s management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contin- gent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from those estimates. Purchase Price allocation As described in Note 19 of these financial statements, the Company acquired Primacy Management Inc. on March 1, 2012. As a result of this acquisition, management was required to estimate the fair values of each identifiable asset and liability acquired through the acquisi- tion. Fair value of cash, accounts receivable, accounts payable and equipment were estimated to approximate their carrying values in Primacy's records at the date of the transaction. The fair values of the intangible assets were valued using the excess earnings method under the income approach. Percentage completion on revenue A significant portion of the Systems Engineering Division’s revenue is derived from fixed-price contracts. Revenue from these fixed-price contracts is recognized using the percentage of completion method using management’s best estimate of the costs and related risks asso- ciated with completing the projects. The greatest risk on fixed-price contracts is the possibility of cost overruns. Management’s approach to revenue recognition is tightly linked to detailed project management processes and controls. The information provided by the project management system combined with a knowledgeable assessment of technical complexities and risks are used in estimating the percentage complete. Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-gen- erating unit and a suitable discount rate in order to calculate present value. Income taxes The Company records deferred income tax assets and liabilities related to deductible or taxable temporary differences. The Company assesses the value of these assets and liabilities based on the likelihood of the realization as well as the timing of reversal given manage- ment assessments of future taxable income. 38 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 4. Critical accounting judgments and key sources of estimation uncertainty (continued) Contingent liabilities From time to time the Company is involved in claims in the normal course of business. Management assesses such claims and where con- sidered probable to result in a material exposure and, where the amount of the claim can be measured reliably, provisions for loss are made based on management’s assessment of the likely outcome. Allowance for doubtful accounts receivable The Company has extensive commercial history upon which to base its provision for doubtful accounts receivable. Due to the nature of the industry in which the Company operates, the Company does not create a general provision for bad debts but rather determines bad debts on a specific account basis. For the years ended September 30, 2013, September 30, 2012, no material changes in estimates have been made. Judgments: Financial instruments The Company's accounting policy with regards to financial instruments is described in Note 2. In applying this policy, judgments are made in applying the criteria set out in IAS 39 – Financial instruments: recognition and measurement, to record financial instruments at fair value through profit or loss, and the assessments of the classification of financial instruments and effectiveness of hedging relationships. Accounting policy for equipment and intangible assets Management makes judgments in determining the most appropriate methodology for amortizing assets over their useful lives. The method chosen is intended to mirror, to the best extent possible, the consumption of the asset. Deferred income taxes The Company's accounting policy with regards to income taxes is described in Note 2. In applying this policy, judgments are made in deter- mining the probability of whether deductions or tax credits can be utilized and related timing of such items. Determination of functional currency To enable translation of foreign currency transactions of foreign operations, IFRS require an assessment of the basis or unit of measure, or what is termed the “functional currency” under IFRS. IAS 21 – The Effects of Changes in Foreign Exchange Rates sets out factors to be con- sidered in determining whether the functional currency of a foreign operation is the same as that of the reporting entity of which it is a subsidiary, branch, associate or joint venture. The Company determined the functional currency of the parent company, its subsidiaries and divisions thereof, is Canadian dollars, with the exception of Calian Technology (U.S.) Ltd., whose functional currency was the US dollar until its sale in 2012. Percentage complete methodology The Company uses judgment in determining the most appropriate basis on which to determine percentage of completion. Options avail- able to the Company include the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, surveys of work performed and completion of a physical proportion of the contract work. While the Company considers the costs to complete, the stage of completion is assessed based upon the assessment of the proportion of the contract completed. Judgments are also made in determining what costs are project costs for determining the percentage complete. 5. Equipment Leasehold improvements Equipment and furniture September 30, 2013 September 30, 2012 Cost Accumulated Amortization $ 1,510 10,660 $ 12,170 $ 778 7,878 $ 8,656 Carrying Value $ 732 2,782 $ 3,514 Cost Accumulated Amortization Carrying Value $ 1,501 $ 632 $ 869 10,318 7,333 2,985 $ 11,819 $ 7,965 $ 3,854 Calian Technologies Ltd. 2013 Annual Report 39 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 6. Application software September 30, 2013 September 30, 2012 Cost Accumulated Amortization Carrying Value Cost Accumulated Amortization Carrying Value Application software $ 2,510 $ 1,925 $ 585 $ 2,423 $ 1,808 $ 615 7. Acquired intangible assets Acquired intangible assets are allocated to the Primacy cash-generating unit. September 30, 2013 Cost Accumulated Amortization Carrying Value September 30, 2012 Cost Accumulated Amortization $ 1,909 $ 2,574 187 - 815 47 $ 1,909 $ 1,909 1,759 140 2,574 187 $ 4,670 $ 862 $ 3,808 $ 4,670 $ $ - 301 17 318 Customer relationship Contract with customer Non-competition agreement 8. Goodwill September 30, 2013 Cost Impairment Business and Technology Services Primacy Goodwill $ 9,518 1,263 $ 10,781 $ $ - - - Annual test for impairment Carrying amount $ 9,518 1,263 $10,781 September 30, 2012 Cost Impairment $ 9,518 1,263 $ 10,781 $ $ - - - Carrying Value $ 1,909 2,273 170 $ 4,352 Carrying amount $ 9,518 1,263 $ 10,781 Goodwill recorded is allocated in its entirety to the Business and Technology Services division. At September 30, 2013 and 2012, manage- ment assessed the recoverable amount of goodwill and concluded that a goodwill impairment charge was not required. The recoverable amounts of the relevant cash-generating units were assessed by reference to value in use. For the years ended September 30, 2013 and 2012, the following key assumptions were used in arriving at value in use for each cash-generating unit. Outlooks for the next three years were used as the basis for the future cash flow estimates and the future estimated growth rates were validated by comparing to average growth levels for the previous 5 years. Business and Technology Services (excluding Primacy) Primacy Discount factors Growth rates 13% to 16% 25% to 30% 0 to 3% 0 to 15% 40 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 9. Issued capital and reserves Issued capital Authorized: Unlimited number of common shares, no par value Unlimited number of preferred shares issuable in series, no par value Issued: Common shares as follows: Balance, beginning of year Shares issued under stock option plan Shares issued under employee stock purchase plan Shares repurchased for cash Balance, end of year Share purchase obligation Issued capital Share repurchase September 30, 2013 September 30, 2012 Shares 7,650,657 5,000 23,346 (282,670) 7,396,333 - Amount $ 19,949 99 424 (757) $ 19,715 31 Shares 7,669,983 55,000 23,674 (98,000) 7,650,657 - Amount $ 19,018 844 418 (249) $ 20,031 (82) 7,396,333 $ 19,746 7,650,657 $ 19,949 During 2013 (2012), the Company acquired 282,670 (98,000) of its outstanding common shares at an average price of $19.82 ($18.52) per share for a total of $5,601 ($1,814) including related expenses, through normal course issuer bids in place during the periods. The excess of the purchase price over the stated capital of the shares has been charged to retained earnings. Subsequent to the date of the statement of financial position, on November 13, 2013, the date of issuance of these consolidated financial statements, the Company declared a dividend of $0.28 per common share payable on December 12, 2013. Share repurchase obligation The Company has an agreement with a third party which provides for automatic repurchases of the Company’s shares without the Company having the ability to influence the purchases. The financial liability is determined as the present value of the maximum redemp- tion amount at each of the reporting periods. The reclassification adjustment is made by reducing issued capital and retained earnings with an offsetting adjustment to the share repurchase obligation account. An income adjustment will result for any shares repurchased below the maximum amount per share. The amount of income recognized in each reporting period is insignificant. Contributed surplus Contributed surplus comprises the value of share-based compensation expense related to options granted that have not been exercised or have expired unexercised. Foreign currency translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of the Company’s US operations prior to its sale (Note 20). Cash flow hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to forecasted transactions. Calian Technologies Ltd. 2013 Annual Report 41 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 10. Share-based compensation Stock Options The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible direc- tors and employees. Under the plan, eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. The plan provides for a 10% rolling maximum number of options available for grant. As at September 30, 2013, a total of 739,683 common shares are reserved for issuance under the plan with 240,000 options currently outstanding of which 197,000 are exer- cisable. No options were issued during the period. No consideration is payable on the grant of an option. The following share-based payment arrangements were in existence during the current and comparative reporting periods: Option series: Number Grant date Expiry date price Exercise Fair value at grantdate (1) Issued February 14, 2011 (2) Issued August 13, 2012 95,000 155,000 February 14, 2011 February 13, 2016 August 13, 2012 August 12, 2017 $ 18.65 $ 20.54 $ $ 1.27 0.99 For the option issuance dated February 14, 2011, 28,000 options vested immediately with the remaining vesting through to February 14, 2013. For the option issuance dated August 13, 2012, 49,000 options vested immediately with the remaining vesting through to August 13, 2014. The weighted average fair value of options granted during the year ended September 30, 2012 was $0.99 per option calculated using the Black-Scholes option pricing model. Where relevant, the expected life of the options was based on historical data for similar issuance and adjusted based on management’s best estimate for the effects of non-transferability, exercises restrictions and behavioural considerations. Expected volatility is based on historical price volatility over the past 5 years. To allow for the effects of early exercise, it was assumed that options would be exercised on average 2.9 years after vesting. The following assumptions were used to determine the fair value of the options granted in 2012: Grant date share price Exercise price Expected price volatility Expected option life Expected dividend yield Risk-free interest rate Forfeiture rate $ 20.54 $ 20.54 15.1% 2.9 yrs 5.4% 1.2% 0% Outstanding, beginning of year Exercised Expired Granted Outstanding, end of year September 30, 2013 September 30, 2012 Options 245,000 (5,000) - - 240,000 Weighted Avg. Exercise Price $ $ $ $ $ 19.85 18.65 - - 19.87 Options 150,000 (55,000) (5,000) 155,000 245,000 Weighted Avg. Exercise Price $ $ $ $ $ 16.49 12.77 18.65 20.54 19.85 At September 30, 2013 (2012) there were 240,000 (245,000) options outstanding with a weighted average remaining contractual life of 3.5 years of which 197,000 were exercisable at a weighted average price of $19.72 ($19.85). 42 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 10. Share-based compensation (continued) Employee stock purchase plan The Company has an Employee Stock Purchase Plan ("ESPP") under which most full-time employees may register once a year to participate in one of two offering periods. Eligible employees may purchase common shares by payroll deduction throughout the year at a price of 80% of the fair market value at the beginning of the initial offering period or may purchase common shares at a price of 90% of the fair market value at the begin- ning of the interim offering period. Such shares are issued from treasury once a year at the end of the offering periods. A total of 500,000 common shares have been authorized for issuance under the plan. During 2013 (2012), the Company issued 23,346 (23,674) shares under the ESPP at an average price of $15.22 ($14.76) and employees subscribed to approximately 22,400 common shares, which will be issued during fiscal 2014 at an average price of $17.57. Since inception and including the issuance of shares in 2013, 367,458 shares have been issued under the plan. During 2013 (2012), the Company recorded compensation expense of $73 ($72) relating to its ESPP. 11. Net profit per share The diluted weighted average number of shares has been calculated as follows: Weighted average number of common shares – basic Additions to reflect the dilutive effect of employee stock options Weighted average number of common shares – diluted 2013 7,559,437 3,532 7,562,969 2012 7,655,092 7,004 7,662,096 Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not includ- ed in the computation of diluted earnings per share. For 2013 and 2012, 155,000 options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive. Net profit is the measure of profit or loss used to calculate earnings per share. 12. Interest income Interest income is comprised of the following amounts: Interest earned on cash balances Accreted interest on contingent consideration Interest income 2013 324 28 352 $ $ 2012 310 18 328 $ $ 13. Income taxes The following table reconciles the difference between the income taxes that would result solely by applying statutory tax rates to pre-tax income and the reported income tax expenses: Earnings before income taxes Tax provision at the combined basic Canadian federal and provincial income tax rate of 26.6% (2012: 27.0%) Increase (decrease) resulting from: Effect of expenses that are not deductible in determining taxable profits Impact of rate reductions on valuation of deferred income tax assets Other Income tax expense The effective income tax rate in the year was 26.6% compared to 27.0% in the prior year. 2013 $ 17,796 4,734 64 33 (90) 4,741 $ 2012 $ 19,061 5,146 36 (68) (161) 4,953 $ Calian Technologies Ltd. 2013 Annual Report 43 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2012 and 2011 (Canadian dollars in thousands, except per share amounts) 13. Income taxes (continued) The movements of deferred tax assets and liabilities are shown below: Deferred tax assets (liabilities) Tax Reserve Equipment and Software application Acquired intangible assets Hedging Total Deferred tax liability at September 30, 2012 Credited (Expensed) to income statement Credited (Expensed) to equity Deferred tax liability at September 30, 2013 $ $ 476 (370) - 106 $ $ (225) (15) - $ (1,153) $ (310) $ (1,212) 144 - - 332 22 (241) 332 $ (1,121) (240) $ (1,009) $ Deferred tax assets (liabilities) Tax Reserve Equipment and Software application Acquired intangible assets Deferred tax liability at September 30, 2011 $ 669 $ (215) $ - Hedging $ 26 $ Acquisitions of Primacy Credited (Expensed) to income statement Credited (Expensed) to equity - (193) - - (10) - (1,214) 61 - - - (336) Total 480 (1,214) (142) (336) Deferred tax liability at September 30, 2012 $ 476 $ (225) $ (1,153) $ (310) $ (1,212) 14. Construction contracts Construction contract revenues recorded during the period ended September 30, 2013 is $70,434 (2012: $67,515) all of which is from the Systems Engineering division. Contracts in progress at the balance sheet date: Construction costs incurred plus recognized profits less recognized Losses to date Less: progress billings Recognized and included in the financial statements as amounts due: Construction costs incurred plus recognized profits less recognized Losses to date Less: progress billings September 30, 2013 September 30, 2012 $ $ 154,326 (149,261) 5,065 $ 103,310 (107,726) (4,416) $ September 30, 2013 September 30, 2012 $ $ 9,124 (4,059) 5,065 $ $ 8,976 (13,392) (4,416) At September 30, 2013 (2012), advances received from customers for contract work amounted to $4,059 ($13,392). At September 30, 2013, the Company had $1,397 (2012: $230) in holdbacks receivable. Holdbacks are amount of progress billings that are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. The entire amount for 2013 is considered to be a short-term receivable (2012: $nil) 44 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 15. Commitments The Company has non-cancellable lease agreements for office space and equipment with terms extending to the year 2020. The aggregate minimum rental payments under these arrangements are as follows: 2014 2015 2016 2017 2018 thereafter Total $ $ 2,156 2,067 618 568 460 - 5,869 16. Contingencies In the normal course of business, the Company is party to business and employee related claims. The potential outcomes related to exist- ing matters faced by the Company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial condition. 17. Segmented information Operating segments are identified as components of an enterprise about which separate discrete financial information is available for eval- uation by the chief operating decision maker, regarding how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company operates in two reportable segments described below, defined by their primary type of service offering, namely Systems Engineering and Business and Technology Services. • Systems Engineering involves planning, designing and implementing solutions that meet a customer’s specific business and technical needs, primarily in the satellite communications sector. • Business and Technology Services involves short and long-term placements of personnel to augment customers’ workforces as well as the long-term management of projects, facilities and customer business processes. This segment includes the new acquisition, Primacy Management Inc. The Company evaluates performance and allocates resources based on earnings before interest and income taxes. The accounting poli- cies of the segments are the same as those described in Note 2. Revenues reported below represents revenue generated from external customers. There were no significant inter-segment sales in the year. For the year ended September 30, 2013 Systems Engineering Business and Technology Services Corporate Total Revenue Operating expenses Earnings before interest income and income tax expense Interest income (Note 12) Income tax expense (Note 13) Net profit Total assets other than cash and goodwill Goodwill Cash Total assets Equipment and application software expenditures $ $ $ $ 70,434 59,856 10,578 $ 162,029 153,014 9,015 19,909 - - 19,909 402 $ $ $ 37,001 10,781 - 47,782 323 $ $ $ $ - 2,149 (2,149) 99 - 29,782 29,881 - $ 232,463 215,019 17,444 352 (4,741) $ $ $ $ 13,055 57,009 10,781 29,782 97,572 725 Calian Technologies Ltd. 2013 Annual Report 45 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 17. Segmented information (continued) For the year ended September 30, 2012 Revenue Operating expenses Gain on sale of US subsidiary Earnings before interest income and income tax expense Interest income (Note 12) Income tax expense (Note 13) Net profit Total assets other than cash and goodwill Goodwill Cash Total assets Equipment and application software expenditures Acquired intangibles (Note 19) Acquired goodwill (Note 19) Systems Engineering $ $ $ $ $ $ 67,515 56,635 - 10,880 23,753 - - 23,753 529 - - Business and Technology Services $ 168,413 157,734 137 10,816 $ $ $ $ $ 36,277 10,781 - 47,058 525 4,670 1,263 Corporate Total $ $ $ $ $ $ - 2,963 - (2,963) 879 - 31,998 32,877 - - - $ 235,928 217,332 137 18,733 328 (4,953) 14,108 $ 60,909 10,781 31,998 $ 103,688 $ $ $ 1,054 4,670 1,263 The Company operates in Canada but provides services to customers in various countries. Revenues from external customers are attrib- uted as follows: 2013 2012 Canada United States Europe 82% 11% 6% 78% 13% 9% Revenues are attributed to foreign countries based on the location of the customer. No assets are held outside of Canada. Revenues from various departments and agencies of the Canadian federal government for the year ended September 30, 2013 and 2012 represented 66% (62%) of the Company’s total revenues. Both operating segments conduct business with this major customer. 46 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 18. Financial instruments and risk management Capital Risk Management The Company’s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business and provide the ability to continue as a going concern. Management defines capital as the Company’s shareholders’ equity excluding accumulated other comprehensive income relating to cash flow hedges. The Company does not have any debt and therefore net earnings generated from operations are available for reinvestment in the Company or distribution to the Company’s shareholders. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company’s shareholders and monitors the share repurchase program activities. The Company does not have a defined share repurchase plan and buy and sell decisions are made on a specific transaction basis and depend on market prices and regulatory restrictions. There were no changes in the Company’s approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements. Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company’s income or the value of its holding of financial instruments. Foreign currency risk related to contracts The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company uti- lizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company’s objective is to manage and control exposures and secure the Company’s profitability on existing contracts and therefore, the Company’s policy is to hedge 100% of its foreign currency exposure excluding its exposure arising from the Company’s US subsidiary. The Company does not utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge trans- actions. This process includes linking all derivatives to specific firm contractually related commitments on projects. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge ineffectiveness has historically been insignificant. The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At September 30, 2013, the Company had the following forward foreign exchange contracts: Type Notional Currency Maturity Equivalent Cdn. Dollars Fair Value September 30, 2013 SELL SELL SELL SELL BUY Derivative assets BUY SELL Derivative liabilities 1,000 1,000 1,000 21,947 918 12,493 3,822 USD September 2015 $ USD September 2016 USD September 2017 USD EURO October 2013 October 2013 USD EURO October 2013 October 2013 1,057 1,057 1,057 22,617 1,277 12,875 5,316 $ $ $ 27 27 27 5 3 89 3 11 14 Calian Technologies Ltd. 2013 Annual Report 47 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 18. Financial instruments and risk management (continued) At September 30, 2012, the Company had the following forward foreign exchange contracts: Type Notional Currency Maturity Equivalent Cdn. Dollars Fair Value September 30, 2012 SELL SELL BUY BUY BUY BUY Derivative assets SELL SELL Derivative liabilities 1,000 1,000 1,000 17,565 1,977 38 36,790 5,158 USD September 2015 $ USD September 2016 USD September 2017 USD EURO GPB October 2012 October 2012 October 2012 1,057 1,057 1,057 17,258 2,497 60 USD EURO October 2012 October 2012 $ 36,148 6,517 $ 74 74 74 12 - - $ 234 24 2 26 $ A 10% strengthening of the Canadian dollar against the following currency at September 30, 2013 would have decreased (increased) other comprehensive income by the amounts shown below. USD EURO September 30, 2013 $ $ 1,283 405 1,688 Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s accounts receivable and its foreign exchange contracts. The Company’s exposure to credit risk with its customers is influenced mainly by the individual characteristics of each customer. The Company’s customers are for the most part, federal and provincial government departments and large private companies. A significant portion of the Company’s accounts receivable is from long-time customers. At September 30, 2013 (2012), 66% (59%) of its accounts receivable were due from the Government of Canada. Over the last five years, with the exception of the loss recognized with regards to Nortel, the Company has not suffered any significant credit related losses. The Company limits its exposure to credit risks from counter-parties to derivative financial instruments by dealing only with major Canadian financial institutions. Management does not expect any counter-parties to fail to meet their obligations. 48 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2012 and 2011 (Canadian dollars in thousands, except per share amounts) 18. Financial instruments and risk management (continued) The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Cash Trade receivable Derivative assets September 30, 2013 September 30, 2012 $ 29,782 $ 31,998 37,903 89 40,928 234 $ 67,774 $ 73,160 The aging of trade receivable at the reporting date was: Current Past due (61-120 days) Past due (> 120 days) September 30, 2013 September 30, 2012 $ 36,048 $ 39,971 1,831 24 829 128 $ 37,903 $ 40,928 Based on historic default rates, the Company believes that there are minimal requirements for an allowance for doubtful accounts. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At September 30, 2013 the Company has a cash balance of $29,782 and has an unsecured credit facility, subject to annual renewal. The credit facility permits the Company to borrow funds up to an aggregate of $10,000. As at September 30, 2013 an amount of $612 was drawn to issue a letter of credit to meet customer contractual requirements. All of the Company’s financial liabilities have contractual maturities of less than 30 days. Fair Value The fair value of accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity. Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place on September 30, 2013. Calian Technologies Ltd. 2013 Annual Report 49 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 18. Financial instruments and risk management (continued) The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 of the fair value hierarchy based on the degree to which the fair value is observable: • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Cash Derivative financial assets Derivative financial liabilities Total Cash Derivative financial assets Derivative financial liabilities Total 2013 Level 1 29,782 - - 29,782 2012 Level 1 31,998 - - 31,998 $ $ $ $ $ $ $ $ 2013 Level 2 - 89 (14) 75 2012 Level 2 - 234 (26) 208 $ $ $ $ $ $ $ $ 19.Acquisition On March 1, 2012, the Company acquired all of the outstanding shares of Primacy Management Inc. consideration of $5,244 of which $4,000 was paid on the date of closing, $300 was paid during fiscal 2012 and $944 is payable contingently as described below. Primacy's principal business activity relates to the management of medical clinics. Primacy was acquired so as to expand the Company's health service offerings. The acquisition is a business combination to which IFRS 3 Business Combination applies. Consideration: Cash Contingent consideration (i) Total $ $ 4,300 944 5,244 (i) Under the contingent consideration arrangement, the Company is required to pay the former shareholders of Primacy an additional $400 and $600 if Primacy attains specified levels of earnings before interest, taxes, depreciation and amortization (EBITDA) for the years ending February 28, 2013 and 2014 respectively. Primacy achieved the target for its first year earn-out and the Company paid the full $400 related to the first year earn-out. With the continuing growing number of clinics operated by Primacy, management believes that Primacy can achieve its earn-out target in the second period. Therefore, the amount of $944 represents the estimated fair value of the Company's obligation at the acquisition date. Acquisition-related costs amounting to $120 have been excluded from the consideration and have been recognized as an expense in the current year, within the general and administration line item in the consolidated statement of net profit. 50 2013 Annual Report Calian Technologies Ltd. Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 19. Acquisition (continued) The following are the assets acquired and liabilities recognized at the date of the acquisition: Current assets: Cash Accounts receivable Prepaid expenses Non-current assets: Equipment Intangibles recognized at time of acquisition Current liabilities: Accounts payable and accrued liabilities Deferred tax liability recognized at time of acquisition Net assets acquired Goodwill arising on acquisition: Total consideration Less: fair value of identifiable net assets acquired Goodwill acquired on acquisition $ $ $ $ $ $ $ $ 188 410 7 605 25 4,670 4,695 (105) (1,214) (1,319) 3,981 5,244 (3,981) 1,263 Substantially all of the goodwill that arose on the acquisition of Primacy relates to the value of the taxable temporary differences attribut- able to the acquired intangible assets. None of the goodwill arising on the acquisition is expected to be deductible for tax purposes. Net cash outflow related to the acquisition of Primacy: Consideration paid in cash Less:cash balances acquired 2013 400 400 $ $ 2012 4,300 (188) 4,112 $ $ Impact of the acquisition on the consolidated result of the Company: Had this business combination been effected at October 1, 2011, the revenue and net earnings of the Company for the year ended September 30, 2012 would have been higher by $1,367 and $168 respectively. Management considers these 'pro-forma' numbers to rep- resent an approximate measure of the performance of the combined group for the year ending September 30, 2012 and provide a reference point for comparison in future periods. 20. Sale of US subsidiary On August 31, 2012, the Company sold its US division. The restrictive nature of foreign ownership of US entities that perform services for the US military impacted management’s pursuit of growth for this division. Revenues from this division from October 1, 2011 to the date of sale were $2,841. The sale of the division is not expected to have any material impact on the results of the Company. 21. Pension Plan The Company sponsors a defined contribution pension plan for certain of its employees. Required contributions have been fully funded to September 30, 2013. For the year 2013 (2012), an amount of $755 ($712) was expensed related to this pension plan. Calian Technologies Ltd. 2013 Annual Report 51 Calian Technologies Ltd. Notes to the Consolidated Financial Statements For the years ended September 30, 2013 and 2012 (Canadian dollars in thousands, except per share amounts) 22. Related Party Transactions Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Other than transactions related to the compensation of key management personnel as described below, there have been no other transactions between the Company and other related parties. Compensation of key management personnel: The compensation for directors and other members of key management during the year was as follows. The compensation of directors and key executives is determined by the compensation committee having regards to the performance of individuals and market trends. The key executives are the Chief Executive Officer, the Chief Financial Officer, the Vice-President, Business and Technology Services Division and the Vice-President, Systems Engineering Division. September 30, 2013 September 30, 2012 Short-term benefits Retirement allowance Share-based payments $ 2,228 - 39 $ 2,267 $ $ 2,390 388 139 2,917 52 2013 Annual Report Calian Technologies Ltd. Common Share Information The Company’s common shares are listed for trading on the Toronto Stock Exchange under the symbol CTY. Dividend Policy The Company intends to continue to declare a quar- terly dividend in line with its overall financial performance and cash flow generation. Decisions on dividend payments are made on a quarterly basis by the Board of Directors. There can be no assurance as to the amount of such dividends in the future. Annual Meeting of Shareholders The Annual General Meeting of the Shareholders of Calian will be held on February 7, 2014 at 2:00 p.m. at the Brookstreet Hotel, Ottawa, Ontario, Canada. All shareholders are invited to attend. The telephone number of the Brookstreet Hotel is 613.271.1800. Corporate Information Corporate & Business and Technology Services 340 Legget Drive, Suite 101, Ottawa, Ontario, Canada K2K 1Y6 Phone: 613.599.8600 Fax: 613.599.8650 Web: www.calian.com Systems Engineering (SED) 18 Innovation Blvd. Saskatoon, Saskatchewan, Canada S7N 3R1 Phone: 306.931.3425 Fax: 306.933.1486 Web: www.sedsystems.ca Primacy Management Inc. 2321 Fairview Street, Suite 100 Burlington, Ontario L7R 2E3 Phone: 905.637.2888 Board of Directors Kenneth J. Loeb Chief E xecutive Officer, Loeb Packaging Ltd. Chairman, Calian Technologies Ltd. Chair of the Nominating Committee Major General (retired) C. William Hewson Consultant Chair of the Governance Committee David Tkachuk Senator Chair of the Compensation Committee Richard Vickers, FCA Consultant Chair of the Audit Committee Ray Basler President and CEO, Calian Technologies Ltd. George Weber President and CEO, Royal Ottawa Health Care Group Calian Technologies Ltd. 2013 Annual Report 53 

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