Continental Resources
Annual Report 2013

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annual report Clearwater Seafoods Incorporated 2013 clearwater overview Leading Global Provider of Wild-Caught Shellfish Clearwater is North America’s largest vertically integrated harvester, processor and distributor of premium shellfish with more than 81 million pounds sold in 2013. Clearwater is recognized for its consistent quality, wide diversity, and reliable delivery of premium, wild, eco-labeled seafood, including scallops, lobster, clams, coldwater shrimp, crab and groundfish. Powerful Industry Fundamentals Global demand for premium wild caught seafood among aging boomers and a rising middle class in the Asian-Pacific region is outpacing resource supply. This in combination with conservatively managing seafood fisheries to protect the long term health of the industry is creating new opportunities from the rising demand for high-quality sustainable seafood. Clearwater’s vertical integration creates barriers to entry and sustainable competitive advantage Clearwater is the largest holder of shellfish quotas and licenses within Canada and maintains the widest selection of MSC-certified species of any shellfish harvester worldwide. These quotas are a key barrier to entry as regulatory authorities strictly control access and rarely grant new licenses. In addition, the financial resources required to acquire and harvest fishing quotas create barriers to entry. For example, Clearwater’s fleet and licenses have an estimated value of more than $500 million. 1 | Page “Loblaw is proud of our commitment to selling only sustainably sourced seafood and by partnering with suppliers like Clearwater we are confident that Canada can have a thriving, sustainable fishing industry that sets standards for the world.” Galen Weston, Executive Chairman, Loblaw Companies Limited Clearwater has a number of other competitive advantages including our innovations and intellectual property such as state-of-the-art factory vessels and advanced onshore processing and storage and distribution capabilities. Clearwater maintains a global, direct sales force that is capable of interacting with and selling directly to diverse markets worldwide. Our channel mix in food service, retail and other food industries ensures a diverse community of customers and in addition, we have a diverse customer mix with no single customer representing more than 7% of total sales. Proven and Experienced Leadership Team Clearwater continues to build upon our world class leadership with best in class programs for quality control and food safety, operations and new product development. In addition over the past few years Clearwater has added a number of key personnel to complement its existing team to continue to support strong financial and operational growth. 2 | Page highlights in 2013… • Continued strong growth in sales and adjusted EBITDA of 10.9% to $388.7 million and 9.5% to $79.1 million, respectively • Achieved growth of 50.6% in free cash flows to $26.1 million • Reduced leverage to 2.7x driven by higher adjusted EBITDA • Made improvements to capital structure to provide for future growth and investment opportunities by: - refinancing approximately $350.0 million in new term debt facilities; and - completing a $34 million equity transaction in early 2014 • Initiated an annual dividend of $0.10 per share, payable in quarterly installments of $0.025 per share • Announced the planned investment of approximately $45 million in a third vessel for clam business to expand access to supply by 60% • Continued to win in the marketplace as new enrobed value added format, Scallops & Sauce, was selected as one of the Top New Products of 2013 by the editors of Seafood International. 3 | Page “After 16 years, we continue to be amazed by Clearwater’s commitment to food safety, high-quality products and consistent worldwide delivery. Their R&D efforts and ability to innovate based on a rapidly changing global market are simply extraordinary.” Richard Ng, Managing Director, Sun Wah Marine Products, Hong Kong 4 | Page leverage free cash flow 30 25 20 15 10 5 0 ) s d n a s u o h t ( 2011 2012 2013 2011 2012 2013 sales free cash flow 14% 13% 12% 11% 10% 9% 8% return on assets 2011 2012 2013 key performance indicators 3.2 3.8 3.6 3.4 3.0 2013 FINANCIAL ACHIEVEMENTS AND 2014 TARGETS In 2013 Clearwater grew sales and adjusted EBITDA1 by growth of 10.9% and 9.5%, respectively. This included sales of $388.7 million and adjusted EBITDA of $79.1 million in 2013 versus 2012 comparative figures of $350.3 million and $72.2 million, respectively. Gross margins improved 1.8 percentage points, to 22.5% as compared with 2012. Free cash flows2 grew by 50.6% to $26.1 million in 2013 versus $17.3 million in 2012. Growth in adjusted EBITDA and free cash flows were due to a strong and growing market demand that improved sales prices for scallops, clams and snow crab and yielded strong sales volumes for scallops, both of which increased margins. This was partially offset by higher clam, scallops and shrimp harvest costs. Improvements in free cash flows were partially offset by higher capital expenditures including scheduled refits and vessel conversions and higher payments to minority interest partners, due to timing. 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 450 400 350 300 250 200 150 85 80 75 70 65 60 55 leverage 2.8 2.6 2.4 2.2 2.0 450 30 400 25 350 20 300 15 250 10 200 5 ) s d n a s u o h t ( ) s d n a s u o h t ( 2011 2012 2013 Profitability 150 0 2011 2011 2012 2012 2013 2013 sales adjusted EBITDA ) s d n a s u o h t ( 2011 2012 2013 ) s d n a s u o h t ( 85 80 75 70 65 60 14% 13% 55 12% return on assets 2011 2012 2013 adjusted EBITDA Sales 2013 2012 2011 ) s d n a s u o h t ( Sales Growth 2013 2012 2011 Target 388,659 350,302 332,785 10.9% 5.3% 5.5% 5% 11% 10% 9% 8% Adjusted EBITDA 2013 2012 2011 79,103 72,243 61,188 2012 Adjusted EBITDA as a % of sales 2011 2013 2012 2011 Target 2013 20.4% 20.6% 18.4% 18% or greater 2011 2012 2013 For 2014 Clearwater has set the following targets: • sales growth – 5% or greater, • adjusted EBITDA margins – 18% or greater, • free cash flows growth – 5% or greater • leverage – 3.0x or less • return on assets - 12% or higher Clearwater’s strong financial performance in 2013 and Clearwater successfully met expectations for 2014 have the Company on track to achieve its its annual 2013 profitability and five year plan of $500 million in sales and $100 million in adjusted financial performance targets. EBITDA in five years, which is 2016. 5 | Page leverage free cash flow 30 25 20 15 10 5 0 ) s d n a s u o h t ( 2011 2012 2013 2011 2012 2013 sales Free Cash Flows, Leverage and Returns 300 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 450 400 350 300 250 200 150 85 80 75 70 65 60 55 ) s d n a s u o h t ( ) s d n a s u o h t ( leverage free cash flow 30 25 20 15 10 5 0 ) s d n a s u o h t ( 2011 2012 2013 2011 2012 2013 sales Free Cash Flows 2013 2012 2011 26,121 17,347 2,197 return on assets 2011 2012 2013 adjusted EBITDA 14% 13% 12% 11% In 2014, we will continue to make 10% progress against our five year 9% plan and lay the groundwork for the next phase of growth 8% 2013 through substantial capital 2012 2011 expenditures of approximately $85 million. Key initiatives include increasing available supply 2011 2012 2013 leverage free cash flow return on assets 2011 2012 2013 adjusted EBITDA 14% 30 13% 25 12% 20 15 11% 10% 10 5 9% 0 8% ) s d n a s u o h t ( 2011 2012 2013 2011 2011 2012 2012 2013 2013 ) s d n a s u o h t ( sales 2012 2.7 2.9 3.8 3.0 or lower 2013 Return on Assets 2013 2012 2011 Target 13.3% 12.1% 10.7% 12% or greater Leverage 2013 2012 2011 Target 2011 ) s d n a s u o h t ( 2011 2012 2013 Five-year plan adjusted EBITDA 85 through investments such as 80 the expansion of our lobster business and the construction 75 which is expected to begin 65 operating in 2015. In addition 60 the implementation of a new enterprise resource planning 55 2011 2012 2013 return on assets 14% 13% 12% 11% system (“ERP”) in late 2014 10% will support improved decision 9% making capabilities and we will 2011 2012 2013 bay scallop fishery, commencing operations in mid 2014. 1 Refer to definition of Adjusted EBITDA 2 Refer to definition of free cash flow of a new clam harvesting vessel 70 replace our oldest vessel in the 8% 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 450 400 350 250 200 3.8 3.6 150 3.4 3.2 3.0 85 2.8 2.6 80 2.4 75 2.2 2.0 70 65 60 450 400 55 350 300 250 200 150 ) s d n a s u o h t ( ) s d n a s u o h t ( 6 | Page growing distribution channels and product lines “It’s rare to find a supplier like Clearwater who exhibits the same philosophies and standards as Publix. Whether we’re talking about product quality, food safety, sustainability or customer service – Clearwater leads in all of these areas. And it’s attributes like these that contribute to the success and longevity of our relationship.” Guy Pizzuti, Seafood Category Manager, Publix Super Markets 7 | Page Clearwater’s worldwide distribution presence combined with local sales and marketing teams in each market create a competitive advantage and position Expansion of distribution and retail lines In 2013 our value added products achieved Clearwater for growth in both mature and distribution with a number of national emerging markets. This worldwide distribution presence is fundamental to Clearwater’s strategy to target growing markets, channels and customers. retailers across Canada and the United States in both branded and private label formats. Utilizing specialized enrobing technology, Clearwater’s innovative Scallops and Sauce were launched in three unique flavors. We’ve also augmented our value added launches with new retail During 2013 Clearwater made considerable packaging for some of our core species progress in advancing this strategy across broadening the selection of Clearwater all channels, distribution and retail lines including new product development and culinary achievements. products for retail consumers. Growth and Diversity in our customer base In 2013 Clearwater made major strides in the North American retail market. We gained distribution at several major Canadian and US retailers and have had success with sales being driven by customers who desire convenience, nutrition and high quality products. continued on next page... 8 | Page With a rising middle class in China, we had a trend of increasing demand for and consumption of imported seafood in 2013. During the year, we began our expansion from a solely foodservice focus to launching a branded range for Chinese retail. Lack of available supply limited growth to 3% in 2013 but in the future we fully expect the Asia-Pacific region to be a significant growth market as we increase available supply through investments such as the expansion of our lobster business and the construction of a new clam harvesting vessel which is expected to begin operating in 2015. Culinary achievements Our industry-leading culinary team offered value to our foodservice partners through customer visits and custom ideation sessions throughout 2013. We also increased our presence at tradeshows in Asia, Europe and North America helping to build company awareness and strengthen our existing relationships with our customers around the world and initiate new customer relationships. “We’ve found a partner in Clearwater. A company we share values with. A company we can trust and rely on, so that we’re able to provide our customers with high quality and sustainable seafood for generations to come.” Abe Ng, President, Founder and CEO, Sushi Maki 9 | Page awards/achievements in the marketplace Top 10 Winner 2013 • Canada’s Passion Capitalist Award Atlantic Business Magazine • Atlantic Canada’s Top Employers 2013 Atlantic Business Magazine • 2013 Top 50 CEO Award Winner, Ian Smith Progress Magazine • Top 101 Companies in Atlantic Canada 2013 Seafood International • Best New Products of 2013 Scallops & Sauce 10 | Page Table of Contents Page # Chairmen’s letter to shareholders CEO’s letter to shareholders Management’s Discussion and Analysis Selected annual information Mission, value proposition and strategies Capability to deliver results Explanation of 2013 earnings Capital structure Liquidity Explanation of fourth quarter 2013 earnings Outlook Risks and uncertainties Critical accounting policies Related party transactions Commitments Seasonality Summary of quarterly results Definitions and reconciliations Clearwater Seafoods Incorporated – 2013 financial statements Quarterly and share information Selected annual information Corporate Information 12 14 15 16 16 19 22 36 40 46 57 58 62 66 68 69 71 73 79 135 136 137 Letter from the Chairman of Clearwater Seafoods Incorporated To our Shareholders, I am happy to report another outstanding year for Clearwater Seafoods Incorporated. The Board is very pleased with the results the management team has achieved in growing the company’s sales by 11%, and adjusted EBITDA by 10% to $79.1 million and in particular the significant increases in free cash flows and strong shareholder returns. This has resulted in top quartile financial performance for the third year in a row versus our seafood industry peers. As Chairman, I am also extremely pleased with the work of your Directors over the past year and how closely they have worked in supporting and enabling the management team to create sustainable long-term value for our shareholders. The following examples will give you a fuller appreciation of the some of the areas the four Committees have focused on in 2013: • Governance – Chaired by Jim Dickson with members Larry Hood, Tom Traves and Stan Spavold. This Committee worked actively with the Board Committee Chairs and their related mandates creating a Finance Committee and forming separate Governance and Human Resource Development and Compensation Committees to allow for more focused work at the Committee level. The Committee has also been active in reviewing developments in governance practices in Canada and as a result in 2013 Clearwater adopted a policy of individual voting of its’ directors. • Finance - Chaired by Stan Spavold with members John Risley, Jim Dickson and Brendan Paddick. This Committee had a busy year and was active in the review of some significant investments including a new clam vessel, a new information system and several other investments in plants and vessels as well as working with management on external development policies. The Committee members also worked closely with management in making continued improvements to the capital structure of the business – from eliminating high cost convertible debentures, to putting in place more flexible and lower cost term debt facilities to completing an equity offering in early 2014. These changes served to further strengthen Clearwater’s capital structure and position it for further growth. • Audit - Chaired by Larry Hood with members Tom Traves, Stan Spavold and Jim Dickson. The Audit Committee spent a lot of time early in the year working with management to ensure that key performance indicators were communicated well to investors including targets and the performance achieved. The Committee continues to invest time in understanding and ensuring the key risks and opportunities are communicated to investors in disclosure documents as well as ensuring that management maintains the required controls to produce timely and accurate information for Clearwater’s shareholders. • Human Resources Development and Compensation - Chaired by Harold Giles with members Tom Traves, Mickey MacDonald and Brendan Paddick. This Committee continues to invest time to ensure the management team has well articulated talent management and development plans. In addition, over the past year they have continued to ensure that compensation practices are aligned with shareholder interests by linking annual and long-term incentive plans to the creation of free cash flows. 12 | Page It is through this team approach that Clearwater’s management group with the support and direction from very active Board members was able to excel in creating sustainable long-term value for our shareholders. Finally, I am pleased that in 2013 we were able to begin expressing the Board’s confidence in the future through the payment of a dividend to our shareholders. The Board put a lot of thought into the dividend decision giving consideration to a number of key principles including the expected future earnings and the amount of free cash flows that should be retained to reinvest in the business, the assurance that all obligations can be met with respect to existing loan agreements and the desire to provide room for the dividend to increase in the future as the business continues to grow and expand. We will review these same factors regularly and at a minimum, annually we will review the opportunity to adjust or increase the dividend. Looking to 2014 and beyond, the industry fundamentals continue to be encouraging with global demand for seafood outstripping supply and creating favorable market dynamics for vertically integrated producers such as Clearwater. Since John Risley and I founded the company in 1976, the company has invested in science, people and technological innovation as well as resource ownership and management to sustain and grow our seafood resource. At Clearwater, we remain focused on our commitment and in our mission to build the world’s most extraordinary, wild seafood company and we are pleased to offer our shareholders the opportunity to participate in this exciting sector of the food industry and in Clearwater’s passionate pursuit of excellence. Yours truly, Colin MacDonald Chairman Clearwater Seafoods Incorporated 13 | Page Letter from the Chief Executive Officer of Clearwater Seafoods Incorporated To our shareholders, Wow! What a year! In 2013, Clearwater surpassed all previous records for sales revenue and adjusted EBITDA. We posted strong results across our portfolio of sustainably harvested, wild caught seafood with six out of seven core species showing increased revenues, margins or both. We also made significant improvements to our capital structure and advanced several major capital projects - activities critical to sustaining our long term growth, profitability and competitive advantage. Our performance in 2013 marks four years of top and bottom line growth. In fact, since 2009, we’ve increased sales revenue by over $100 million and adjusted EBITDA by over $35 million. This level of performance can only be achieved and sustained when you have a high performing team and culture. At Clearwater, we call it “winning in the workplace, the marketplace and in the communities in which we live”. In 2013, we did just that and received local, national and international recognition for our efforts. This included recognition as one of Canada’s top 10 companies for “Passion Capital” and being ranked as one of the top companies to work for in Atlantic Canada. We even won a Seafood International “best new product award” for our new value-added seafood line in its first full year of retail distribution. We’re also proud of the big and little things our people do every day at sea on our vessels, in our communities and with our customers around the world. At sea, not only do our state of the art vessels and highly trained crew sustainably harvest some of the finest seafood in the world, they were also recently recognized for mounting a search and rescue effort that saved the lives of three local fishermen after their vessel capsized in heavy seas more than 75 miles from shore. In rural communities in Nova Scotia and Newfoundland and Labrador, we have invested in our facilities and people to create well-paying and sustainable employment. We believe we can create good jobs in Atlantic Canada and we’ve been doing it for more than 35 years. What many of our customers will tell you, several of whom are quoted in this annual report, is that Clearwater is unique, that we believe in building long term partnerships and that we treat their success as our own. In fact, many of our largest global customers have also been with us for 15 years or longer. As we enter 2014, we are confident that we are on track to achieve our stated 5 year goals of $500 million in sales revenue and $100 million in adjusted EBITDA by the end of 2016 or earlier. That confidence comes from the knowledge that we are building world class capabilities and competency. Clearwater has spent the last three years investing in our people, innovation and best in class programs and practices across the company. In 2014, and over the course of the next three years, we will complement these investments with the roll-out of a new ERP system, two new state of the art vessels, proprietary harvest, storage and distribution technology and a host of innovative new culinary solutions and products for our customers. Together these investments will enable our next phase of growth and productivity as we ramp to our 5-1-5 goal. In 2013, we demonstrated that we can sustain and even accelerate our performance. Going forward, we believe that we have the strategy, business plans, people, processes and financial resources to continue to execute with excellence to produce top quartile results and long term shareholder value. We look forward to sharing our progress throughout 2014. Sincerely, Ian D. Smith Chief Executive Officer Clearwater Seafoods Incorporated 14 | Page MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (“MD&A”) was prepared effective February 26, 2014. The Audit Committee and the Board of Directors of Clearwater Seafoods Incorporated (“Clearwater”) have reviewed and approved the contents of this MD&A, the financial statements and the 2013 fourth quarter news release. This MD&A should be read in conjunction with the 2013 annual financial statements and the 2013 Annual Information Form, which are available on Sedar at www.sedar.com as well as Clearwater’s website, www.clearwater.ca. COMMENTARY REGARDING FORWARD-LOOKING STATEMENTS This Report may contain forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors outside management’s control including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs that could cause actual results to differ materially from those expressed in the forward-looking statements. Clearwater does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances other than as required under applicable securities laws. 15 | Page SELECTED ANNUAL INFORMATION (In 000’s except per share amounts) For the year ended December 31 Sales Gross Margin Net earnings Basic and diluted earnings per share Adjusted EBITDA1 Total assets Long-term debt 1 Refer to definition of adjusted EBITDA 2013 2012 2011 $ 388,659 $ 350,302 $ 332,785 87,368 72,525 69,565 15,298 22,704 22,955 0.12 0.29 0.32 79,103 72,243 61,188 414,582 410,789 386,405 257,325 253,791 247,100 CLEARWATER’S MISSION, VALUE PROPOSITION AND STRATEGIES Mission Clearwater’s mission is to build the world’s most extraordinary, wild seafood company, dedicated to sustainable seafood excellence. We define: (cid:131) (cid:131) (cid:131) “extraordinary” as sustainable, profitable growth in revenue, margins, adjusted EBITDA, free cash flows and the creation of long term shareholder value; “wild seafood” as premium wild shellfish. Including our core species – (scallops, lobster, clams and coldwater shrimp); and “sustainable seafood excellence” as delivering best in class, quality, food safety, traceability and certified sustainability. We believe that the fulfillment of this mission will result in extraordinary value creation for shareholders, customers, employees and for the communities in which we work and live. Over the last three years, Clearwater has made significant progress in all aspects of its mission. Revenues have increased 16.8% since 2011 despite a weakened global economy. Gross margins have increased more than 1.6 percentage points from 20.9% in 2011 to 22.5% in 2013. Adjusted EBITDA1 has grown at a 13.7% cumulative average growth rate over the last three years. 16 | Page With this improved performance Clearwater has been able to improve its capital structure, increase shareholder value and reduce leverage1 to 2.7x adjusted EBITDA at December 31, 2013 versus 3.8x at December 31, 2011. 1-Refer to definitions Value Proposition At Clearwater, we have a passion for wild seafood and strive to deliver a highly differentiated and competitively advantaged value proposition to a global customer base. Key elements of Clearwater’s unique value proposition are: (cid:131) Great tasting, nutritious, highest quality, frozen-at-sea, premium shellfish. (cid:131) Expertise in premium shellfish science, harvesting, processing and logistics technology ensuring quality and safety from “ocean to plate”. (cid:131) Marine Stewardship Council (“MSC”) certification for sustainability of species ensuring both the traceability and long term health of our wild resource. (cid:131) Competitively advantaged global customer service with local market understanding and insight. (cid:131) Scale in license and quota ownership guaranteeing exclusive and stable supply to even the largest global retail and food service customers. Strategies Clearwater’s six core strategies are designed to strengthen a competitive and differentiated value proposition. They are: 1. Expand access to supply of core species through procurement, acquisitions, partnerships, joint ventures, and yield-improving harvesting and processing technology. At Clearwater, we strive to sell everything we catch at a premium. But, being a sustainable harvester in a world of rapidly growing global demand and limited supply of wild seafood means that we must act responsibly, with agility and creativity to increase supply. 2. Target profitable and growing markets, channels and customers on the basis of size, profitability, demand for sustainable seafood and Clearwater’s ability to win. The increase in global demand for premium shellfish and per capita consumption can be explained by general population growth, the shift to healthier eating choices among aging boomers and by rising incomes and purchasing power of middle class consumers in emerging economies –especially in Asia. 17 | Page Clearwater’s worldwide distribution presence combined with local sales and marketing teams creates a competitive advantage and positions Clearwater for growth in both mature and emerging markets. Clearwater has sales offices in all major geographies including the United States, Canada, Europe, as well as four representative offices in China. 3. Innovate and position products to deliver superior customer satisfaction and value. The value of Clearwater’s premium seafood is primarily differentiated on the dimensions of taste, nutrition, quality, safety and sustainability. Clearwater is best known in the industry for pioneering innovative harvesting technologies and processing practices that enhance this positioning. Going forward, Clearwater will continue to lever these strengths and its vertical integration to win in existing segments while capturing a growing share of the seafood value chain through the introduction of value-added new products in core species. 4. Increase margins by improving price realization and cost management, exercising price influence to maximize revenue and profit while managing supply. In addition Clearwater will continue to invest in R&D, introducing state-of-the-art harvesting, processing, storage and delivery systems that minimize per pound cost, reduce waste, increase yield and improve quality and reliability of supply. 5. Pursue and preserve the long term sustainability of resources on land and sea. Our fishing licences and quotas are the cornerstone of Clearwater’s business. From the beginning, Clearwater has invested in licences and quota in rights based fisheries to guarantee access to supply, as well as to create a defensible position in the market place. Clearwater’s licences and quotas provide not only the security of supply, but also the scale needed to invest in leading edge science and innovative harvesting, processing and marketing efforts. Our strategy of investing in secure access to the resource depends on ensuring sustainable harvesting through responsible resource management. Clearwater works in partnership with the Department of Fisheries and Oceans (“DFO”) to lead research and development of sustainable harvesting practices, ensuring long term health of the resource and value for the licenses and total allowable catch (“TAC”). 6. Build organizational capability, capacity and engagement. To ensure the fulfillment of its mission, value proposition and strategies, Clearwater must continue to attract, develop, recognize, reward and retain the best global talent. Clearwater’s investment into training and development of its employees is just one of the reasons we were recognized again as one of the top companies in Atlantic Canada. 18 | Page CAPABILITY TO DELIVER RESULTS Clearwater's revenues and earnings are dependent primarily on its ability to harvest and purchase shellfish. This in turn is dependent to a large extent on the annual total allowable catch (“TAC”) for each species. The annual TAC is related to the health of the stock of the particular species. The primary shellfish stocks that Clearwater harvests are sea and Argentine scallops, clams, lobster and coldwater shrimp, which are harvested in offshore fisheries that have a limited number of participants. Clearwater harvests sea and Argentine scallops and clams with its own vessels. Clearwater obtains its lobster and coldwater shrimp through harvesting with its own vessels and through purchases from independent fishermen. (cid:131) The sea scallop resource has been stable over the last number of years. Clearwater lands virtually all its’ sea scallop quota each year and harvests quotas for other industry participants under harvesting contracts to improve the utilization of its fleet. (cid:131) The Arctic surf clam resource is stable. Clearwater has the Banquereau Bank and the Grand Banks quotas available for harvesting. Total annual landings are currently based upon the harvesting capacity of our two vessels. (cid:131) The Argentine scallop resource has stabilized after a period of growth and expansion of the fishery. Argentina, is the first scallop fishery in the world to have earned independent rigorous Marine Stewardship Council certification. Clearwater lands virtually all its scallop quota each year (“MSC”) the (cid:131) Coldwater shrimp - Clearwater expects the offshore Northern shrimp TAC to decline slightly over the next several years from historically high levels. Clearwater holds access to quotas directly through licences and through long term harvesting agreements that exceed its harvesting capacity and will serve to offset any mid to long term declines in the TAC for northern shrimp. Clearwater does procure shrimp from the inshore for its cooked and peeled business and supplements this with raw material from its offshore vessels (cid:131) The offshore lobster resource is strong with a consistent offshore TAC and the inshore resource is strong with abundant catches. Clearwater harvests virtually all its lobster quota each year. During 2013, Clearwater purchased approximately 80% of its total pounds from inshore lobster fishermen. Clearwater maintains the largest, most modern, fleet of factory freezer vessels in Canada together with vessels that are used to harvest Clearwater's offshore lobster and complete research and development. 19 | Page The condition and operating capability of these vessels is paramount for Clearwater to successfully operate in its fisheries. In the past three years Clearwater has invested approximately $58.2 million on its fleet. Clearwater typically replaces vessels as a result of its focus on innovation and the adoption of new and leading edge technology. These additional investments typically provide greater efficiencies, lower costs and, in some cases, create new product forms. The following schedule sets out Clearwater’s capital expenditures and harvesting license investments for the past three years and clearly shows that Clearwater is both investing sufficiently to maintain its existing fleet and plants and is also investing for growth: (In 000’s) For the years ended December 31 Vessels Plants and other Return on investments capital Maintenance capital Maintenance capital Repairs and maintenance 2013 17,025 6,788 23,813 $ 2012 11,780 4,792 16,572 $ 2011 17,595 3,642 21,237 $ TOTAL 58,180 20,014 78,194 $ 6,346 17,467 23,813 $ 2,774 13,798 16,572 $ 6,850 14,387 21,237 $ 18,744 59,450 78,194 $ 17,467 13,144 30,611 $ 13,800 12,837 26,637 $ 14,387 14,466 28,853 $ 59,454 53,283 112,737 $ Depreciation/Amortization Maintenance spending as a % of depreciation $ 24,167 126.7% $ 22,475 120.9% $ 19,503 147.9% $ 88,620 127.2% During 2013, Clearwater invested $9.3 million to complete refits on a number of its vessels. Capital expenditures also included interim payments of $2.7 million related to the construction of a new clam harvesting vessel that is expected to have a total cost of $45 million and is expected to be operating in 2015 and $5.0 million related to the conversion of a scallop vessel to harvest bay scallops which has a total cost of $15 million and is expected to be in operation in mid 2014. This investment in a new clam harvesting vessel will drive growth in Clearwater’s clam business by expanding access to clam supply by approximately 60% when the customer distribution chain is fully in place by 2017, at which time Clearwater expects to earn incremental gross margins of approximately $8 million per year. In 2012, Clearwater completed refits on its vessels of $11.8 million. Capital expenditures for the year also included $2.0 million in relation to new vessel based processing technologies. 20 | Page In 2011, Clearwater completed a refit program, of $11.4 million, on the scallop, clam, shrimp and lobster factory vessels. Capital expenditures for the year also included $2.1 million in relation to new vessel based processing technologies and $4.1 million on the purchase of the remaining 40% share in a scallop vessel. In addition to the annual amounts capitalized above, Clearwater historically has spent and expensed on average about $13.5 million a year on the maintenance of its fleet and processing plants. This reflects Clearwater’s commitment to ensuring that the assets are kept in top condition, enabling it to harvest and process its allowable catch efficiently and providing sufficient capacity. Clearwater’s largest fleet investments are in its ten factory vessels. These vessels are used in the harvesting of Canadian scallops, Argentine scallops, shrimp and clams. Of the ten factory vessels: (cid:131) Two are used to harvest shrimp and are on average 20 years old. These vessels have a capacity to harvest 14,000 to 18,000 metric tons of our 22,000 metric ton quota and our entire 1,900 metric ton turbot quota in a ready for market form. One of the vessels was built in 1985 and in 2014 we will complete a late-life refit on it, thereby extending its useful life. Four are used to harvest sea and bay scallops with the sea scallop vessels being on average 16 years old and the bay scallop vessels being on average 33 years old. In 2012, Clearwater completed the conversion to automated processing factories on its sea scallop vessels using proprietary technology and as result of the related improvement in harvesting and processing capabilities, had two idle sea scallop vessels. One vessel is being converted from harvesting sea scallops to bay scallops which is expected to be in operation in mid 2014. When this is complete one of the older bay scallop vessels will be retired. (cid:131) Two of Clearwater’s vessels are used to harvest clams and are on average 20 years old. Both of these vessels are harvesting at capacity. In 2013 Clearwater began the construction of a new clam harvesting vessel which will increase access to available supply in 2015. In 2014 Clearwater expects significant growth investments of approximately $83 million in capital assets, of which $36 million relates to the construction of the clam vessel, $15 million relates to the late life extension of a shrimp vessel, $10 million relates to the conversion of a vessel to harvest bay scallops, $17.3 million relates to maintenance capital investments and $4.7 million relates to various investments to improve operational efficiencies. 21 | Page EXPLANATION OF 2013 ANNUAL EARNINGS Overview The statements reflect the earnings of Clearwater for the years ended December 31, 2013 and 2012 In 000's of Canadian dollars Year ended December 31 Sales Cost of goods sold Gross margin Administrative and selling Finance costs Other income Research and development 2013 2012 $ 388,659 301,291 87,368 22.5% $ 350,302 277,777 72,525 20.7% 39,005 42,747 (3,240) 1,659 80,171 32,536 24,387 (3,399) 1,759 55,283 Earnings before income taxes Income tax recovery Earnings 7,197 (8,101) 15,298 $ 17,242 (5,462) 22,704 $ Earnings attributable to: Non-controlling interests Shareholders of Clearwater $ $ 8,965 6,333 15,298 $ $ 7,695 15,009 22,704 22 | Page 2013 Annual Earnings Clearwater reported strong results including sales of $388.7 million and adjusted EBITDA1 of $79.1 million, versus 2012 comparative figures of $350.3 million and $72.2 million, respectively. For 2013, operations improved earnings $12.6 million primarily as a result of an improvement in gross margin of $14.8 million and lower interest expense of $4.2 million. Gross margin as a percentage of sales improved from 20.7% in 2012 to 22.5% in 2013 due primarily to strong demand that provided higher sales prices for the majority of species. Strengthening foreign exchange rates for the US dollar and the Euro against the Canadian dollar impacted positively on margins. Higher catch rates for scallops increased available supply and contributed to the increase in total gross margin dollars. Improvements to operations were partially offset by an increase in administrative and selling expense from higher employee compensation Non-operational items of $19.9 million (refer to the following table), included non-cash unrealized foreign exchange losses, refinancing and debt settlement costs, and realized foreign exchange losses on forward contracts that hedge our future sales, partially offset by non-cash gains on the fair value adjustment on long term debt and an increase in deferred income tax recoveries from loss carry forwards. Including these non- operational items the earnings declined by $7.4 million to $15.3 million for the year. 1 – Refer to definition of Adjusted EBITDA 23 | Page In 000’s of Canadian dollars Year ended December 31 2013 2012 Change Earnings $ 15,298 $ 22,704 $ (7,406) Explanation of changes in earnings related to operational items: Higher gross margin Higher administrative and selling Lower interest expense Explanation of changes in earnings related to non-operational items: Higher unrealized foreign exchange losses Higher realized foreign exchange losses Lower fair value adjustments on convertible debentures and embedded derivative Higher debt settlement costs Higher gain from from a deferred income tax asset valuation All other 14,843 (6,469) 4,194 12,568 (14,969) (8,970) 4,608 (3,223) 2,639 (19,915) (59) (7,406) $ 24 | Page Sales by region In 000's of Canadian dollars Year ended December 31 Europe United States Canada North America China Japan Other Asia Other 2013 133,752 $ 2012 122,884 $ Change 10,868 $ 76,945 55,923 132,868 61,622 38,712 18,711 119,045 54,157 47,408 101,565 59,624 46,366 17,693 123,683 22,788 8,515 31,303 1,998 (7,654) 1,018 (4,638) 2,994 388,659 $ 2,170 350,302 $ 824 38,357 $ % 8.8 42.1 18.0 30.8 3.4 (16.5) 5.8 (3.7) 38.0 10.9 Europe Europe is Clearwater’s largest scallop market and it is an important market for coldwater shrimp and lobster products. European sales increased $10.9 million to $133.8 million for 2013 primarily as a result of strong market demand that increased sales volumes for Argentine scallops and shrimp. Higher sales prices for sea scallops contributed to the increase in sales. Market demand for cooked and peeled shrimp slowed during 2013 which partially offset the increase in sales for the region. Finally, sales, which are primarily transacted in the Euro1 and the UK Pound, were positively impacted by $6.6 million, as the Euro improved 8.1% relative to the Canadian dollar from 1.28 in 2012 to 1.38 in 2013, and the UK pound improved 2.9% from 1.58 in 2012 to 1.63 in 2013. 25 | Page Canada Canada is a large market for lobster, scallops and coldwater shrimp. Sales within Canada increased $8.5 million, or 18.0% primarily as a result of higher sales volumes and prices for scallops. Higher sales prices for snow crab contributed to the increase in sales. The increase in sales volumes for sea scallops were a result of higher landings from an increase in total allowable catch for the year. Poor weather conditions late in 2013 reduced available supply of lobster and changes in product mix weighted towards product with lower sales prices partially offset the increase in sales. China China is a growing market for clams, coldwater shrimp, lobster, turbot and scallops. China is our largest market segment in Asia. Sales to customers in China increased $2.0 million, or 3.4%, to $61.6 million as a result of an increase in sales volumes for shrimp and lobster. Strong demand and sales prices for shrimp also contributed to the increase in sales. is an United States The United States important market for scallops, coldwater shrimp, lobster and clams. It is our most diverse market, where a wide variety of products are sold. Sales in the United States increased $22.8 million, or 42.1%, to $76.9 million primarily as a result of an increase in available supply as well as strong demand for both Argentine and sea scallops. Higher sales prices for sea scallops and an increase in sales volumes for shrimp, lobster and snow crab contributed to the increase in sales. Lower sales prices for Argentine scallops and shrimp partially offset the increase in sales. Sales were also positively impacted by $2.5 million in 2013 as a result of foreign exchange rates as average rates for the the US dollar strengthened against Canadian dollar. foreign the US dollar rates exchange increased by 3.3% to 1.03 in 2013. Average for 26 | Page for supply Available shrimp declined as a Clearwater moving supply markets that had stronger demand. frozen-at-sea result of to other Improvements for lobster partially offset the decline of other species. in sales volumes Average foreign exchange rates for the Yen declined during the year by 15.8% to 0.011 for 2013 contributing to the decline in sales. 1 – Refer to risks and uncertainties Weather related disruptions reduced the available supply for clams partially offsetting the increase in sales. Chinese sales are almost exclusively transacted in US dollars. The US dollar the Canadian strengthened against dollar during 2013 contributing to the increase in sales within the region as average foreign exchange rates for the the US dollar strengthened against Canadian dollar by 3.3% to 1.03 in 2013. Japan Japan is an important market for clams, lobster, coldwater shrimp and turbot. Sales to customers in Japan declined 16.5% or $7.7 million primarily as a result of a lack of available supply for clams and shrimp. Lower catch rates for related disruptions) resulted in a reduction in available supply. (from weather clams 27 | Page Sales by species* In 000's of Canadian dollars Year ended December 31 Scallops Coldwater shrimp Lobster Clams Crab Ground fish and other *Refer to risks and uncertainties $ $ 2013 147,637 81,592 66,452 60,780 18,271 13,927 388,659 2012 109,754 77,497 61,458 71,894 15,628 14,071 350,302 Change 37,883 4,095 4,994 (11,114) 2,643 (144) 38,357 $ % 34.5 5.3 8.1 (15.5) 16.9 (1.0) 10.9 $ $ Sales increased $38.4 million, or 10.9%, for 2013 as a result of strong sales volumes for scallops, and snow crab. Higher total allowable catch levels increased catch rates for scallops which increased available supply. In addition strong market demand increased sales prices for sea scallops, shrimp, snow crab and offshore lobster also contributed to the increase in sales. Lower catch rates for clams and lower sales prices for Argentine scallops, partially offset the increase in sales for 2013. 28 | Page Cost of Goods Sold In 000's of Canadian dollars Year ended December 31 Harvesting and procurement Manufacturing Freight, customs and other transport Depreciation Administrative $ $ $ 2013 207,057 35,275 22,826 23,733 12,400 301,291 2012 190,731 32,542 21,254 22,251 10,999 277,777 Change 16,326 2,733 1,572 1,482 1,401 23,514 $ $ $ % 8.6 8.4 7.4 6.7 12.7 8.5 Cost of goods sold increased $23.5 million or 8.5% to $301.2 million primarily as a result of higher sales volumes, and higher harvesting and manufacturing costs including labour. Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and maintenance, fishing gear supplies, other costs and fees plus procured raw material costs for lobster, shrimp, scallops and crab. Excluding the increase in costs due to higher sales volumes from an increase in pounds landed for scallops, higher harvesting costs per pound, resulted from poor harvesting conditions caused by weather for clams and higher costs in Argentina due to inflation. Higher catch rates for scallops that reduced costs per pound and lower shore prices for cooked and peeled shrimp partially offset the increase in harvesting costs. Fuel costs for our vessels increased $0.9 million for 2013 to $24.7 million. The increase was a result of an increase in the litres consumed from higher total allowable catch levels for sea scallops, partially offset by a decline in the average price per litre of fuel of $0.02. Clearwater’s vessels used approximately 29.5 million litres of fuel in 2013 versus 27.8 million litres of fuel in 2012. Based on 2013 fuel consumption, a one-cent per litre change in the price of fuel would impact harvesting costs by approximately $0.3 million. Manufacturing includes labour costs related to the production of goods, plant utilities and supplies. Labour costs increased for the year as a result of higher production levels and scheduled increases in wages, salaries and benefits. Transportation costs include freight, customs and duties, related to the transfer of goods to market. The increase in costs of $1.6 million was the result of increased sales volumes. Depreciation from assets used in the harvesting and production of goods increased $1.5 million to $23.7 million as a result of vessel refits and other additions that were completed during the second half of 2012 and throughout 2013 and are now being depreciated. 29 | Page Administrative overheads include salaries and benefits, professional and consulting fees and management fees attributable to the harvesting and production of goods. Refer to administrative and selling for further information. Gross margin Gross margin as a percentage of sales improved from 20.7% in 2012 to 22.5% in 2013 due to higher prices, favourable exchange rates and lower harvest costs per pound. Strong demand provided higher sales prices for the majority of species and strengthening foreign exchange rates for the US dollar and the Euro against the Canadian dollar impacted positively on margins. Higher catch rates for scallops increased available supply and reduced costs per pound which also contributed to the increase in total gross margin. A reduction in sales volumes for clams from a lack of available supply due to lower catch rates for clams partially offset the increase in margins. In addition reductions in sales price for Argentine scallops and higher costs for labour partially offset the improvements in gross margin. Gross margin was positively impacted by higher average foreign exchange rates1. Both the US dollar and the Euro strengthened against the Canadian dollar but were partially offset by lower rates for the Yen. The net impact on sales from all foreign exchange volatility was an increase in sales and gross margins of $7.2 million. Year ended December 31 2013 2012 Average rate Currency % sales realized % sales US dollars Euros Japanese Yen Danish Kroner UK pounds Canadian dollar and other 49.1% 21.5% 8.0% 3.5% 3.1% 14.8% 100.0% 1.033 1.383 0.011 0.182 1.627 45.4% 22.1% 12.5% 4.2% 3.3% 12.5% 100.0% Average rate realized Change in rate 0.999 1.280 0.013 0.179 1.580 3.3% 8.1% -15.8% 1.9% 2.9% 1 – Refer to risks and uncertainties for further information 30 | Page Administration and selling In 000's of Canadian dollars Year ended December 31 Salaries and benefits Share-based incentive compensation Employee compensation Consulting and professional fees Other Selling costs Travel Occupancy Allocation to cost of goods sold $ 2013 28,708 5,861 34,569 $ 2012 25,996 2,331 28,327 $ Change 2,712 3,530 6,242 5,549 4,442 2,893 2,274 1,385 (12,107) 39,005 $ 5,030 4,866 1,871 2,035 1,398 (10,991) 32,536 $ 519 (424) 1,022 239 (13) (1,116) 6,469 $ % 10.4 151.4 22.0 10.3 (8.7) 54.6 11.7 (0.9) 10.2 19.9 Administration and selling increased approximately $6.5 million, or 19.9%, to $39.0 million for 2013 primarily as a result of an increase in employee compensation including share based incentive compensation. Salaries and benefits increased $2.7 million from 2012 primarily due to increases in senior management and other staff and a short term incentive program that is accrued based on Company performance. Share-based incentive compensation increased $3.5 million from 2012 primarily due to increases in Clearwater’s share price and to a lesser extent the issue of additional share based incentive units during the first quarter of 2013 for executives and directors. Consulting and professional fees include operations management, legal, audit and accounting, insurance and other specialized consulting services. Costs vary year over year based upon business requirements. Other includes a variety of administrative expenses such as communication, computing, service fees, depreciation, gains or losses and write downs of assets, all of which will vary from year to year. Selling costs development and bad debt expenses. include advertising, marketing, trade shows, samples, product The allocation to cost of goods sold reflects costs that are attributable to the production of goods and are allocated on a proportionate basis based on production volumes. 31 | Page Finance costs In 000’s of Canadian dollars Year ended December 31 Interest and bank charges Amortization of deferred financing charges and accretion Interest $ 2013 16,317 993 17,310 $ 2012 20,346 1,158 21,504 Fair value adjustment on convertible debentures and embedded derivative Foreign exchange and derivative contracts Debt settlement and refinancing fees (1,710) 17,831 9,316 42,747 $ 2,898 (6,108) 6,093 24,387 $ Interest declined $4.2 million for 2013 due to lower average interest rates on Clearwater’s debt facilities. Clearwater redeemed its 10.5% Class C convertible debentures in the third quarter of 2012 and its 7.25% Class D convertible debentures in the third quarter of 2013 and replaced them with new facilities that carry a lower average annual floating interest rate that is under 5%. The fair value adjustment on the convertible debentures represents the change in value of the convertible debentures. The reduction in the fair value adjustment primarily relates to the redemption of the 10.5% Class C convertible debentures that occurred in July 2012 and the redemption of the 7.25% Class D convertible debentures that occurred in July 2013. 32 | Page Foreign exchange and derivative contracts In 000’s of Canadian dollars Year ended December 31 Realized loss (gain) Foreign exchange contracts and interest rate swap Working capital, long-term debt, and other Unrealized loss (gain) Foreign exchange on long term debt and other assets Mark-to-market on foreign exchange contracts Mark-to-market on interest swap 2013 2012 $ 2,752 3,586 6,338 $ (3,991) 1,359 (2,632) 5,427 6,060 6 11,493 (3,013) (663) 200 (3,476) $ 17,831 $ (6,108) Foreign exchange and derivative (gains) losses1 changed by $23.9 million from a gain of $6.1 million for 2012 to a loss of $17.8 million for 2013. The foreign exchange losses of $17.8 million for 2013, include $11.5 million in non-cash unrealized foreign exchange losses related to foreign exchange contracts and the translation of US dollar $200.0 million denominated debt as the US dollar and Euro strengthened against the Canadian dollar by 7.0% and 12.1%, respectively during 2013. In addition the strengthening foreign exchange rates resulted in an increase in realized losses of $3.6 million from $1.4 million in 2012. Realized losses on foreign exchange contracts were $2.8 million as the US dollar and the Euro strengthened against the Canadian dollar, partially offset by a reduction in the value of the Yen against the Canadian dollar. Unrealized losses occur because spot rates are higher than contract rates. Higher spot rates are net positive to the business over a longer period of time. Foreign exchange contracts are used as part of Clearwater’s foreign exchange management program (refer the Liquidity section for further details). The purpose of these contracts is to give certainty to Clearwater on the exchange rates that it expects to receive on foreign currency sales. The foreign exchange contracts effectively adjust the cash proceeds received on sales receipts to the rates that Clearwater planned for and contracted for as part of its annual planning cycle and its foreign exchange management program. When spot exchange rates are above contract rates at the date of maturity of the contracts Clearwater realizes a loss and conversely, when spot exchange rates are lower it realizes a gain. At the same time, given that Clearwater only hedges to 75% of its net exposures and that higher or lower spot exchange rates are reflected in sales, any losses or gains on contracts are more than offset by the impact on sales. 33 | Page Debt settlement and refinancing fees represent fees incurred for the settlement or refinancing of long term debt and will vary year to year depending on refinancing activities. Debt settlement and refinancing fees for 2013 include a $5.1 million non-cash charge related to financing charges incurred in 2012 that had been deferred and were being amortized and $4.2 million in refinancing fees incurred in 2013. Clearwater does not have any material near term maturing debt facilities and believes the current facilities are sufficient to execute the five year plan. 1 – Refer to risks and uncertainties Other income In 000's of Canadian dollars Year ended December 31 Royalties, interest, and other fees Share of earnings of equity-accounted investee Other fees 2013 2012 92 (2,082) (1,250) (3,240) $ (1,712) (1,054) (633) (3,399) $ Royalties, interest and other fees includes income related to quota rental, commissions, processing fees and other miscellaneous income and expense that vary based upon the operations of the business. For 2013, royalties, interest and other fees include a non- recurring export rebate cost from the termination of a rebate program within Argentina. As a result of the adoption of IFRS 11 – Joint Arrangements, effective January 1, 2013 a company that has certain scallop harvesting operations that was previously proportionately consolidated, is now accounted for using the equity method. There was no impact to earnings or adjusted EBITDA related to the change in accounting. There was an increase in earnings from the equity accounted investee for 2013 as a result of an increase in total allowable catch for scallops and an increase in sales prices. Research and Development Research and development relates to new technology and research into ocean habitats and fishing grounds. Research and development can vary year to year depending on the scope, timing and volume of research completed. Clearwater’s business plans expect an increase in investment in research and development. Income taxes Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the United Kingdom and Canada. 34 | Page In 2013 the deferred tax asset increased $9.9 million tax asset, the majority of which relates to previously unrecognized non-capital losses in CSI. These deferred tax assets are being recognized based on management’s estimate that Clearwater will earn sufficient taxable profit to utilities these losses. Non-controlling interest Non-controlling interest relates to earnings from Clearwater’s investment in subsidiaries in Argentina, Nova Scotia and Newfoundland and Labrador. 35 | Page Capital Structure Clearwater’s capital structure includes a combination of equity and various types of debt facilities. Clearwater’s objective when managing its capital structure is to obtain the lowest cost of capital available, while maintaining flexibility and reducing exchange risk by borrowing when appropriate in currencies other than the Canadian dollar. Clearwater uses leverage, in particular revolving and term debt to lower its cost of capital. The amount of debt available to Clearwater is a function of earnings that can be impacted by known and unknown risks, uncertainties, and other factors outside Clearwater’s control including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. Clearwater maintains flexibility in its capital structure by regularly reviewing forecasts and multi-year business plans and making any required changes to its debt and equity facilities on a proactive basis. These changes can include early repayment of debt, issuing or repurchasing shares, issuing new debt or equity, utilizing surplus cash, extending the term of existing debt facilities, selling assets to repay debt and if required, limiting debt paid. Clearwater’s capital structure is as follows as at December 31, 2013 and 2012: 36 | Page In 000’s of Canadian dollars As at December 31 Equity Common shares Retained earnings Cumulative translation account Non-controlling interest Long term debt Subordinated debt 2014 convertible debentures, redeemed in July 2013 Senior debt, non-amortizing Revolving debt, due in 2018 Term loan, due in 2014 Term loan, due in 2091 Senior debt, amortizing Term Loan A, due 2018 Delayed Draw term Loan A, due 2018 (net of deferred financing charges of $0.6 million) Term Loan B, due 2019 (including embedded derivative) Marine mortgage, due in 2017 Other loans Term Loan A, repaid in June 2013 Term Loan B, (including embedded derivative), repaid in June 2013 Total long term debt Total capital 2013 2012 $ 64,780 19,762 (5,470) 79,072 28,455 107,527 $ 64,867 14,616 (3,866) 75,617 30,904 106,521 - - 44,722 44,722 - 10,642 3,500 14,142 - - 3,500 3,500 29,700 - (608) 211,901 1,785 405 - - 243,183 - - 2,697 627 72,259 129,986 205,569 257,325 253,791 $ 364,852 $ 360,312 There are 50,948,698 shares outstanding as of December 31, 2013 (December 31, 2012 - 50,948,698). On February 4, 2014, Clearwater completed the issuance to the public, on a bought deal basis, of 4,029,400 common shares from the treasury of the Company. The shares were offered at a price of $8.50 per Share, for gross proceeds to Clearwater of approximately $34 million. The proceeds of the offering will be used to fund growth opportunities and general working capital. On June 26, 2013, Clearwater completed an approximately $350.0 million refinancing to further enhance and strengthen its capital structure and liquidity and provide for 37 | Page investment in a new vessel for clam harvesting operations. The refinancing reduces Clearwater’s annual interest costs by 1.75 percentage points to 4.75% or approximately $2.6 million annually. The refinancing included the redemption and repayment of: (cid:131) Canadian $44.4 million of 7.25% convertible debentures, as of July 29, 2013 upon payment of a redemption amount of $1,000 for each $1,000 principal amount of Debentures plus accrued and unpaid interest thereon to but excluding the redemption date; (cid:131) Canadian $69.7 million in existing term debt; (cid:131) USD $126.0 million in existing term debt; and (cid:131) the existing asset based revolving credit facility. Long term debt consists of non-amortizing and amortizing senior debt. Clearwater has several amortizing senior debt facilities including: (cid:131) Term loan A due June 2018, (cid:131) Term loan B due June 2019, (cid:131) Delayed Term Loan draw due June 2018, (cid:131) Revolving loan due June 2018, and (cid:131) A marine mortgage that matures in June 2017. The revolving loan allows Clearwater to borrow a maximum of CDN $75.0 million (denominated in either Canadian or the US dollar equivalent) and it matures in June 2018. The balance was nil at both December 31, 2013 and 2012. The CDN balances bear interest at the banker’s acceptance rate plus 3.25%. The USD balances bear interest at the US Libor rate plus 3.25%. The loan has a provision that, subject to certain conditions, allows Clearwater to expand the facility by a maximum of CDN $25.0 million. The availability on this loan is reduced by the amount outstanding on the US $10 million non-amortizing term loan and as such the availability as at December 31, 2013 was $64.4 million. The term loan A has principal outstanding as at December 31, 2013 of CDN $29.7 million. The loan is repayable in quarterly instalments of $0.2 million to June 2015, $0.4 million from September 2015 to June 2017, and $0.8 million from September 2017 to March 2018 with the balance due at maturity in June 2018. It bears interest at the applicable banker’s acceptance rate plus 3.25%. As at September 28, 2013 this resulted in an effective rate of approximately 4.45%. The delayed draw term loan A has a principal outstanding as at December 31, 2013 of CDN $nil and can be drawn upon any time up to December 26, 2014. The balance is shown net of deferred financing charges of CDN $0.6 million. The loan is repayable in quarterly instalments of 1.25% of the principal amount drawn under the facility with repayment to begin in the first quarter after the facility is fully drawn or closed out. The 38 | Page facility matures in June 2018 and bears interest payable monthly at the banker’s acceptance rate plus 3.25%. Clearwater has entered into swap arrangements whereby CDN $12 million of this loan is subject to a fixed interest rate of 5.38% until December 31, 2015 after which it is subject to an interest rate that is the lessor of the floating rate of interest on the loan or a maximum fixed rate of interest of 6%. Clearwater accounts for these swap arrangements and the change in market value through profit and loss. The principal outstanding on the term loan B as at December 31, 2013 was USD $199.0 million. The loan is repayable in quarterly instalments of USD $0.5 million with the balance due at maturity in June 2019 and bears interest payable monthly at the US Libor plus 3.5% with a Libor interest rate floor of 1.25%. As of December 31, 2013 this resulted in an effective rate of 4.75%. The loan has a provision that, subject to certain conditions allows Clearwater to expand the facility by a maximum of USD $100.0 million. The embedded derivative represents the fair market value of the Libor interest rate floor of 1.25%. The change in fair market value of the embedded derivative is recorded through profit or loss. During the third quarter of 2013 Clearwater’s Argentine subsidiary borrowed USD $10.0 million to fund conversion of a vessel for use in the Argentine scallop fishery. This loan bears interest at 6% per year with interest payable monthly and the principal is due at maturity in 2014. The revolver, term loan A, delayed draw and term loan B are secured by a first charge on cash and cash equivalents, accounts receivable, inventory, marine vessels, licenses and quotas, and Clearwater’s investments in certain subsidiaries. Clearwater’s debt facilities have covenants that include, but are not limited to, a leverage ratio (for which debt, net of certain cash balances, is compared to EBITDA, excluding most significant non-cash and non-recurring items) as well as a number of non-financial covenants. Clearwater is in compliance with all covenants associated with its debt facilities. Some public entities provide information on debt to equity ratios. We do not believe that this ratio would provide useful information about Clearwater and its capital structure because a significant amount of assets (harvesting licenses and quotas in particular) are recorded at historical cost rather than at fair value. Instead, we believe that leverage measured in relation to adjusted EBITDA is a better measure to evaluate our capital structure and we have provided that information in the liquidity section. 39 | Page Liquidity Over the past several years Clearwater has formalized a number of its treasury management policies and goals so as to promote strong liquidity and continued access to capital to fund its growth. These include policies and strategies with respect to liquidity, leverage, foreign exchange management free cash flows and dividends. Management continuously evaluates its capital structure in light of these policies and strategies and a summary of the results of its most recent evaluation is as follows: • Liquidity - As of December 31, 2013 Clearwater had $46.8 million in cash, and a $75 million revolving loan, of which $64.4 million was available. The cash balance, together with available credit on the revolving loan, is used to manage seasonal working capital demands, capital expenditures, and other commitments. Clearwater’s operations experience a predictable seasonal pattern in which sales, margins and adjusted EBITDA are higher in the second half of the year whereas investments in capital expenditures and working capital are lower, resulting in higher free cash flows and lower leverage in the second half of the year. This typically results in lower free cash flow, higher debt balances and higher leverage in the first half of the year. Clearwater is satisfied that it has ample liquidity to execute its business plan. • Leverage1 - Clearwater has a long-term leverage target of 3.0x or lower of net debt to adjusted EBITDA. Periodically, the ratio may be higher due to planned investments, or lower due to seasonally but over time Clearwater intends to manage to this ratio. As of December 31, 2013 leverage decreased to 2.7x adjusted EBITDA from 2.9x as of December 31, 2012. During the second quarter of 2013 Clearwater successfully completed a refinancing of substantially all of its senior debt facilities. The new capital structure provides financing for $45 million investment in a new vessel for the Company’s clam harvesting operations. Although this financing and the investment in a third clam vessel will result in an increase in total leverage for the next 2 years, management remains committed to a long-term leverage goal of 3x adjusted EBITDA or lower. 40 | Page In 000's of Canadian dollars As at December 31 Adjusted EBITDA1 Debt (net of deferred financing charges of $0.6 million (December 31, 2012 - $4.4 million)) Less cash Net debt Leverage December 31 2013 79,103 $ December 31 2012 72,243 $ 257,325 (46,793) 210,532 253,791 (41,504) 212,287 2.7 2.9 • Foreign Exchange Management2 – Strengthening foreign exchange rates for US dollar and the Euro against the Canadian dollar resulting in an increase in sales and gross margins of $12.4 million for 2013. Lower average foreign exchange rates for the Yen partially offset the improvement in foreign exchange. The net impact from foreign exchange was an improvement of sales and gross margin of $7.2 million for 2013. Clearwater’s response to foreign exchange risk is as follows: (1) Diversify sales geographically, which reduces the impact of any country- specific economic risks on its business. (2) Execute on pricing strategies so as to offset the impact of exchange rates (3) Limit the amount of long-term sales contracts – Clearwater has very few long- term sales contracts with any customers. Contracts are typically less than 6 months and are based on list prices that provide a margin for exchange rate fluctuations. (4) Use conservative exchange estimates in business plans – Clearwater regularly reviews economist estimates of future exchange rates and uses conservative estimates when preparing its’ business plans. (5) Foreign exchange hedging program - Clearwater has a targeted foreign exchange program. This program focuses on using forward contracts to lock in exchange rates up to 18 months for sales currencies (the US dollar, Euro, Yen and Sterling) thereby lowering the potential volatility in cash flows. As of February 26th, 2014 Clearwater had forward exchange contracts to be settled in 2014 of: (cid:131) US dollar $108.0 million at an average rate of 1.0481; (cid:131) 2.5 billion Yen at an average rate of .011; and (cid:131) 50.0 million Euro at an average rate of 1.37. 41 | Page The US dollar forwards include US dollars $34.5 million of participating forwards which provide that to the extent spot rates are higher than the contracted rates, the contract rate will be adjusted by approximately to 50.0% of the excess. The purpose of these contracts is to give certainty to Clearwater on the exchange rates that it expects to receive on foreign currency sales. The foreign exchange contracts effectively adjust the cash proceeds received on sales receipts to the rates that Clearwater planned for and contracted for as part of this annual planning cycle and its foreign exchange management program. When spot exchanges rates are above contract rates at the date of maturity of the contracts Clearwater realizes a loss and conversely, when spot exchange rates are lower it realizes a gain. At the same time, given that Clearwater only hedges to 75% of its net exposures and that higher or lower spot exchange rates are reflected in sales, any losses or gains on contracts are more than offset by the impact on sales. • Free cash flows1- Clearwater has a goal to generate strong cash flows from operations in order to fund interest, scheduled loan payments and capital expenditures and in turn to use this free cash flow to reduce debt, and to invest in growth investments. Clearwater’s goal is to grow free cash flows such that it can fund growth, reduce debt and pay a sustainable dividend to its shareholders. 1 - Refer to definitions 2 – Refer to risks and uncertainties 42 | Page Free cash flows Adjusted EBITDA Less: 13 weeks ended Year Ended December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 22,347 18,812 79,103 72,243 Cash interest Cash taxes Other income and expense items Operating cash flow before changes in working capital Change in working capital Cash flows from operating activities Uses of cash: Purchase of property, plant, equipment, quota and other assets Disposal of fixed assets Less: Designated borrowings Scheduled payments on long-term debt Dividends received from joint venture Distributions to non-controlling interests (3,657) (270) 514 18,933 29,816 48,749 (11,182) - 6,231 (1,366) - (3,707) (4,471) (453) (1,531) 12,357 32,334 44,691 (4,219) - - (1,629) 1,740 (2,780) (16,317) (1,812) (863) 60,110 (5,448) 54,662 (23,813) 978 7,700 (3,233) 1,240 (11,414) (20,346) (1,693) (12,448) 37,756 8,184 45,940 (16,572) - 2,056 (6,327) 1,740 (9,491) Free cash flows Add/(less): 38,725 37,803 26,121 17,347 Other debt borrowings (repayments) of debt Other investing activities Other financing activities Change in cash flows for the period (7,505) (386) - 30,834 (10,597) (459) - 26,747 (20,759) (717) - 4,645 13,584 1,358 - 32,288 Cash flows generated by Clearwater’s operations along with cash on deposit and available credit on the revolving loan are used to fund current operations, seasonal working capital demands, capital expenditures, and other commitments. Free cash flow for 2013 increased 51%, from $17.3 million at December 31, 2012 to $26.1 million at December 31, 2013 as a result of strong improvements in cash flows from operating activities before changes in working capital. Improvements were a result of a strong and growing market demand that improved sales prices for scallops, clams and snow crab and strong sales volumes for scallops. Margins were partially offset by higher clam, scallops and shrimp harvest costs. Improvements in free cash flow were partially offset by changes in working capital, higher capital expenditures (net of designated borrowings) from scheduled refits and vessel conversions, and the timing of payments to minority interest partners. In addition certain large investments in longer term assets, for example vessel conversion/acquisitions, are funded with long term capital such as amoritizing term 43 | Page loans. As a result Clearwater does not deduct such capital expenditures in the determination of free cash flows but rather deducts the related debt payments. Changes in working capital In 000's of Canadian dollars As at December 31 Decreases in inventory (Decreases) increases in accounts payable Decreases (increases) in accounts receivable (Increases) decrease in prepaids 13 weeks ended Year Ended December 31 December 31 December 31 December 31 2012 9,657 3,078 (2,274) (2,277) 8,184 2012 16,228 12,155 4,373 (422) 32,334 2013 18,056 (3,550) 16,377 (1,067) 29,816 2013 2,745 (8,342) (470) 619 (5,448) $ $ $ $ For 2013, the net investment in working capital declined to a use of cash of $5.4 million from an increase in cash of $8.2 million primarily as a result of a timing in payments in accounts payable. An increase in total pounds sold for 2013 partially offset the use of working capital for the year. Working capital as a percentage of sales declined to 14.3% from 16.3% in 2012, as Clearwater continues to manage its working capital and investment in inventories. Investments in capital expenditures in 2013 of $23.8 million primarily resulted from planned vessel refits and conversions. From free cash flows Clearwater makes a number of discretionary payments or creates additional cash flows including repayments and draws on its revolving debt facility and discretionary financing and investing activities (such as payments under normal course issuer bids, sales of non-core assets, etc). Clearwater is focused on managing its free cash flows through: • Managing working capital - Clearwater manages its investment in trade receivables through a combination of tight collection terms and when appropriate, discounting. Clearwater limits its investment in inventories through tight review of any slow moving items, regular review and through continuous improvements in the integration of its fleet and sales force. • Capital spending - Clearwater grades investments in property, plant, equipment and licences as either return on investment (“ROI”) or maintenance capital and tracks each project. Significant expenditures that are expected to have a return in excess of the cost of capital are classified as ROI, and all refits and expenditures that are expected to return less than the average cost of capital are classified as maintenance. On average, Clearwater expects to invest $15-20 million a year in maintaining its fixed assets with a further $10-15 million of repairs and maintenance expensed and included in the cost of goods sold. 44 | Page In June 2013 the Company announced the planned investment in a third vessel for its clam business. This investment is estimated at $45 million. A suitable hull has been sourced and a yard is being commissioned to commence the work in the first quarter of 2014. Management expects to complete conversion work and enter the new vessel into service in 2015. This investment will drive growth in Clearwater’s clam business by expanding access to clam supply by approximately 60% when the customer distribution chain is fully in place by 2017, at which time Clearwater expects to earn incremental gross margins of approximately $8 million per year. In 2014 Clearwater expects significant growth investments of approximately $83 million in capital assets, of which $36 million relates to the construction of the clam vessel, $15 million relates to the late life extension of a shrimp vessel, $10 million relates to the conversion of a vessel to harvest bay scallops, $17.3 million relates to maintenance capital investments and $4.7 million relates to various investments to improve operational efficiencies. • Dividends – On November 1, 2013 Clearwater announced the initiation of an annual dividend of $0.10 per share, payable in quarterly installments of $0.025 per share and on December 13, 2013 it made the first quarterly dividend payment. Consistent with that announcement, today the Board of Directors approved a quarterly dividend of CAD$0.025 per share payable on March 24, 2014 to shareholders of record on March 10, 2014. In making consideration to a number of key principles including: the determination of dividend levels Clearwater’s Board gives • • • • the expected future earnings; the amount of free cash flows that should be retained to reinvest in the business; the assurance that all obligations can be met with respect to existing loan agreements; and the desire to provide room for the dividend to increase in the future as the business continues to grow and expand. The Board is satisfied with current dividend levels These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends. As a result of its continued focus on increasing gross margin and managing its investments in working capital and capital assets, Clearwater believes that it has sufficient liquidity and financial resources to execute on its strategy and business plan. 45 | Page EXPLANATION OF FOURTH QUARTER EARNINGS Overview The statements of earnings reflect the earnings of Clearwater for the 13 weeks ended December 31, 2013 and 2012. In 000's of Canadian dollars 13 weeks ended December 31 Sales Cost of goods sold Gross margin Administrative and selling Finance costs Other income Research and development Earnings before income taxes Income tax expense (recovery) (Loss) earnings (Loss) earnings attributable to: Non-controlling interests Shareholders of Clearwater 2013 2012 $ 111,012 85,384 25,628 23.1% $ 92,945 74,406 18,539 19.9% 13,295 12,678 (1,664) 630 24,939 9,765 5,500 (1,205) 824 14,884 689 987 (298) $ 3,655 (6,863) 10,518 $ $ $ 2,804 (3,102) (298) 2,038 8,480 10,518 $ $ 46 | Page Fourth Quarter Earnings Clearwater reported strong results for the fourth quarter of 2013 that included sales of $111.0 million and adjusted EBITDA1 of $22.3 million versus 2012 comparative figures of $92.9 million and $18.8 million, respectively. In the fourth quarter of 2013, operations improved earnings $5.0 million primarily as a result of an improvement in gross margin of $7.1 million and lower interest expense of $1.0 million. Gross margins were 23.1%, an improvement of 3.2 percentage points from 19.9% realized in the fourth quarter of 2012 due primarily to a strong market demand that improved sales prices for the majority of species and improvements in foreign exchange as the US dollar and Euro strengthened against the Canadian dollar. Margins were partially offset by higher scallop and shrimp harvest costs. An increase in sales volumes for scallops and shrimp contributed to the increase in total gross margin dollars for the fourth quarter of 2013. Non-operational items of $15.9 million (refer to the following table) included unrealized foreign exchange losses from the US dollar and Euro strengthening against the Canadian dollar, and lower deferred income tax recoveries from loss carry forwards. Including these non-operational items the earnings declined by $10.8 million to a loss of $0.3 million In 000’s of Canadian dollars 13 weeks ended December 31 2013 2012 Change (Loss) earnings $ (298) $ 10,518 $ (10,816) Explanation of changes in (loss) earnings related to operational items: Higher gross margin Higher administrative and selling Lower interest expense Higher other income Explanation of changes in (loss) earnings related to non-operational items: Lower deferred income tax asset valuation Higher unrealized foreign exchange losses Higher realized foreign exchange losses Lower fair value adjustments on convertible debentures and embedded derivative All other 1 – Refer to the definition s 7,089 (3,530) 976 459 4,994 (7,850) (7,724) (1,206) 881 (15,899) 89 (10,816) $ 47 | Page Sales by region In 000's of Canadian dollars 13 weeks ended December 31 Europe China Japan Other Asia Asia United States Canada North America Other 2013 45,956 $ 2012 35,478 $ Change 10,478 $ 18,513 10,552 4,502 33,567 17,373 13,194 30,567 20,573 10,355 4,391 35,319 10,914 10,740 21,654 (2,060) 197 111 (1,752) 6,459 2,454 8,913 922 111,012 $ 494 92,945 $ 428 18,067 $ % 29.5 (10.0) 1.9 2.5 (5.0) 59.2 22.8 41.2 86.6 19.4 Europe Europe is Clearwater’s largest scallop region and it is an important market for coldwater shrimp and lobster products. European sales increased $10.5 million to $46.0 million in the fourth quarter of 2013 as a result of strong sales volumes for Argentine scallops and shrimp. The increase in sales volumes resulted from for an increase scallops and for shrimp. in overall demand landings timing of Sales prices for bay scallops declined during fourth quarter partially offsetting the increase in sales. the Foreign exchange rates1 for sales to Europe, which are primarily transacted in Euros and UK Pounds, increased by $3.1 million for the region as the Euro improved the Canadian dollar from 1.29 in the fourth quarter of 2012 to 1.44 in 2013, and the relative 12.3% to UK Pound improved 7.5% to 1.71 over the same period. Asia China China is a growing market for clams, coldwater shrimp, lobster and turbot. Sales to China declined $2.1 million, or 10.0%, to $18.5 million for the fourth quarter primarily as a result of the timing 48 | Page of landings for turbot as all available supply was sold at the end of the third quarter of 2013 versus the fourth quarter of 2012. Strong sales prices for sea scallops, shrimp and clams partially offset the decline in sales for the quarter. Chinese sales are almost exclusively transacted in US dollars. The US dollar the Canadian strengthened against dollar improving sales. Average foreign exchange the US dollar for increased by 5.9% from 0.991 in the fourth quarter of 2012 to 1.05 in 2013, increasing sales by $1.0 million for the region. rates Japan Japan is an important market for clams, lobster, coldwater shrimp and turbot. Sales to Japan remain consistent for the fourth quarter of 2013 versus 2012 as lower available supply for clams from lower catch rates and turbot from the timing of landings, offset the increase in sales volumes from shrimp. impacted In addition, sales were negatively by foreign exchange as the Yen weakened against the Canadian dollar, by 14.1% to 0.010. reductions in is an United States The United States important market for scallops, coldwater shrimp, lobster and clams. It is our most diverse market, where a wide variety of products are sold. Sales in the United States increased by $6.5 million, to $17.4 million in the fourth quarter as a result of an increase in sales volumes for scallops, shrimp and lobster. The increase in sales volumes for sea scallops were a result of strong catch rates for 2013 and demand, which resulted in an increase in sales price. Reductions in sales price for offshore lobster and shrimp from a change in product mix weighted towards product with lower sales prices partially offset the increase in sales. For the fourth quarter, the US dollar the Canadian strengthened against dollar, impacting sales by $1.0 million. Average foreign exchange rates for the US dollar increased by 5.9% from 0.991 in the fourth quarter of 2012 to 1.05 in 2013. 49 | Page Canada Canada is a large market for lobster, scallops and coldwater shrimp. Sales within Canada increased $2.5 million, or 22.8% primarily as a result of an increase in market demand that increased sales volumes and price for scallops for 2013. 1 – Refer to risks and uncertainties for further information 50 | Page Sales by species* In 000's of Canadian dollars 13 weeks ended December 31 Scallops Coldwater shrimp Clams Lobster Ground fish and other Crab *Refer to risks and uncertainties $ $ 2013 45,998 27,653 18,805 18,102 436 18 111,012 2012 33,955 19,460 18,949 13,542 7,039 - 92,945 Change 12,043 8,193 (144) 4,560 (6,603) 18 18,067 $ % 35.5 42.1 (0.8) 33.7 (93.8) - 19.4 $ $ Improvements in sales were a result of increases in sales volumes for scallops, lobster and shrimp. Higher sales prices for the majority of species also contributed to the increase in sales. In addition foreign exchange positively impacted sales as the US dollar and Euro strengthened against the Canadian dollar. The increase in sales was partially offset by lower available supply volumes for turbot from the timing of landings and lower catch rates for clams. 51 | Page Cost of Goods Sold In 000's of Canadian dollars 13 weeks ended December 31 Harvesting and procurement Manufacturing Freight, customs and other transport Depreciation Administrative $ $ $ 2013 60,419 8,267 5,548 7,161 3,989 85,384 2012 51,850 7,606 5,442 6,348 3,160 74,406 Change 8,569 661 106 813 829 10,978 $ $ $ % 16.5 8.7 1.9 12.8 26.2 14.8 Cost of goods sold increased $11.0 million or 14.8% to $85.4 million primarily as a result of higher sales volumes, higher harvesting costs per pound for Argentine scallops and shrimp, and higher labour. Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and maintenance, fishing gear supplies, and other costs and fees plus procured raw material costs for lobster, shrimp, scallops and crab. Excluding the impact of higher sales volumes, harvesting costs per pound for both Argentine scallops and shrimp increased as a result of higher labour. In addition higher shore prices for lobster increased procurement costs for the fourth quarter. Fuel costs for our vessels declined $0.5 million from $6.6 million in the fourth quarter of 2012 to $6.1 million in the fourth quarter of 2013. The decline was primarily a result of a reduction in litres consumed combined with a reduction in fuel cost of $0.03 per litre. Depreciation from assets used in the harvesting and production of goods increased $0.8 million to $7.2 million as a result of vessel refits and other additions that were completed during the first half of 2013 and began depreciating. Administrative overheads include salaries and benefits, professional and consulting fees and management fees attributable to the harvesting and production of goods. Refer to Administrative and selling for further information. 52 | Page Gross margin Gross margins as a percentage of total sales improved, 3.1 percentage points from 19.9% in the fourth quarter of 2012 to 23.1% in 2013 due primarily to a strong market demand that improved sales prices for the majority of species and an improvement in foreign exchange for the US and Euro against the Canadian dollar. An increase in sales volumes for scallops and shrimp contributed to the increase in total gross margin dollars of $7.1 million to $25.7 million for the fourth quarter of 2013. Increases in sales volumes were a result of higher catch rates and strong demand for scallops and timing of landings for shrimp. Higher harvesting costs for Argentine scallops and shrimp partially offset the improvement in gross margin. In addition higher shore prices for lobster increased procurement costs for the fourth quarter. Margins were positively impacted by higher average foreign exchange rates1 for the US dollar and Euro, partially offset by lower foreign exchange rates for the Yen. The net impact on sales from all foreign exchange volatility was an increase in sales and gross margins of $4.9 million. 13 weeks ended December 31 2013 2012 Average rate Currency % sales realized % sales US dollars Euros Japanese Yen Danish Kroner UK pounds Canadian dollar and other 44.0% 25.8% 8.3% 2.8% 3.3% 15.8% 100.0% 1.050 1.443 0.010 0.192 1.710 43.0% 24.5% 9.8% 3.7% 4.8% 14.2% 100.0% Average rate realized Change in rate 0.991 1.286 0.012 0.172 1.592 5.9% 12.3% -14.1% 11.4% 7.5% 1 – Refer to risks and uncertainties for further information 53 | Page Administration and selling In 000's of Canadian dollars 13 weeks ended December 31 Salaries and benefits Share-based incentive compensation Employee compensation Consulting and professional fees Other Selling costs Travel Occupancy Allocation to cost of goods sold $ 2013 8,151 2,913 11,064 $ 2012 6,382 1,517 7,899 $ Change 1,769 1,396 3,165 1,526 1,619 1,111 665 363 (3,053) 13,295 $ 1,254 1,732 586 604 378 (2,688) 9,765 $ 272 (113) 525 61 (15) (365) 3,530 $ % 27.7 92.0 40.1 21.7 (6.5) 89.6 10.1 (4.0) 13.6 36.1 Administration and selling costs increased $3.5 million from $9.8 million to $13.3 million in the fourth quarter of 2013 versus the same period in 2012. This was due to higher employee compensation costs including share based incentive compensation. Salaries and benefits increased $1.8 million from 2012 primarily due to increases in senior management and other staff and a short term incentive program that is accrued based on Company performance. Share-based incentive compensation increased $1.4 million from the fourth quarter of 2012 due primarily to increases in Clearwater’s share price and to a lesser extent the issue of additional share based incentive units during the first quarter of 2013 for executives and directors. Other include a variety of administrative expenses such as communication, computing, service fees, depreciation, gains or losses and write downs of assets, all of which will vary from year to year. Selling costs development and bad debt expenses. include advertising, marketing, trade shows, samples, product The allocation to cost of goods sold reflects costs that are attributable to the production and sale of goods and are allocated based on production volumes. 54 | Page Finance costs In 000’s of Canadian dollars 13 weeks ended December 31 Interest and bank charges Amortization of deferred financing charges and accretion Interest Fair value adjustment on embedded derivative Foreign exchange and derivative contracts Debt settlement and refinancing fees $ 2013 3,657 195 3,852 $ 2012 4,471 357 4,828 (1,009) 9,835 - 12,678 $ (128) 905 (105) 5,500 $ Interest declined $1.0 million for the fourth quarter as Clearwater replaced other higher cost debt facilities with new facilities that carry a lower average annual interest rate. The fair value adjustment on the embedded derivative relates to an interest rate floor on the term loan B facility that is recorded at fair value through profit and loss. The gain of $1.0 million in the fourth quarter relates to a reduction in the credit spread for the fourth quarter. Foreign exchange and derivative contracts In 000’s of Canadian dollars 13 weeks ended December 31 Realized loss (gain) Foreign exchange contracts and interest rate swap Working capital, long-term debt, and other Unrealized loss Foreign exchange on long term debt and other assets Mark-to-market on foreign exchange contracts Mark-to-market on interest swap 2013 2012 $ 1,431 (2,449) (1,018) $ (1,416) (808) (2,224) 7,898 2,949 6 10,853 1,626 1,303 200 3,129 $ 9,835 $ 905 Foreign exchange and derivative contracts1 losses increased by $8.9 million from $0.9 million in the fourth quarter of 2012 to $9.8 million in 2013. The foreign exchange losses of $9.8 million in for fourth quarter of 2013, include $10.8 million in non-cash unrealized foreign exchange losses related to foreign exchange contracts and the translation of US dollar $200.0 million denominated debt as the US and Euro 55 | Page strengthened against the Canadian dollar by 5.9% and 12.3% during 2013, respectively. In June 2013, Clearwater increased the total amount of USD denominated debt from USD $124.0 million at June 30, 2012 to USD $200 million. Should the US dollar strengthen against the Canadian dollar, unrealized foreign exchange losses could occur. Realized foreign exchange losses of $1.4 million were a result of strengthening foreign exchange rates for the US dollar and the Euro against the Canadian dollar. 1 – Refer to risks and uncertainties for further information Other income In 000's of Canadian dollars 13 weeks ended December 31 Royalties, interest, and other fees Share of (earnings) loss of equity-accounted investee Other fees 2013 2012 (226) (528) (910) (1,664) $ (749) 99 (555) (1,205) $ Royalties and fees and other includes income related to quota rental, commissions, processing fees and other miscellaneous income and expense that varies based upon the operations of the business. As a result of the adoption of IFRS 11 – Joint Arrangements, effective January 1, 2013 a company that has certain scallop harvesting operations that was previously proportionately consolidated, is now accounted for using the equity method. There was no impact to earnings or adjusted EBITDA related the change in accounting. Research and Development Research and development relates to new technology and research into ocean habitats and fishing grounds. Research and development can vary year to year depending on the scope, timing and volume of research completed. Clearwater’s business plans call for increased investment in research and development in 2013 and subsequent years. Income taxes Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the United Kingdom and Canada. Non-controlling interest Non-controlling interest relates to earnings from Clearwater’s investment in subsidiaries in Argentina, Nova Scotia and Newfoundland and Labrador. 56 | Page OUTLOOK Global demand for seafood is outpacing supply, creating favorable market dynamics for vertically integrated producers such as Clearwater which have strong resource access. Demand has been driven by growing worldwide population, shifting consumer tastes towards healthier diets, and rising purchasing power of middle class consumers in emerging economies. The supply of wild seafood is limited and is expected to continue to lag behind the growing global demand. This supply-demand imbalance has created a market place in which purchasers of seafood are increasingly willing to pay a premium to suppliers that can provide consistent quality and food safety, wide diversity and reliable delivery of premium, wild, sustainably harvested seafood. Clearwater, like other vertically integrated seafood companies, is well positioned to take advantage of this opportunity because of its licenses, premium product quality, diversity of species, global sales footprint, and year-round harvest and delivery capability. In 2013 Clearwater surpassed all previous records for sales revenue and adjusted EBITDA. We posted strong results across our portfolio of sustainably harvested, wild caught seafood with six out of seven core species showing increased revenues, margins or both. We also made significant improvements to our capital structure and advanced several major capital projects - activities critical to sustaining our long term growth, profitability and competitive advantage. For 2014 Clearwater set the following targets: (cid:131) sales growth – 5% or greater, (cid:131) adjusted EBITDA margins – 18% or greater, (cid:131) Free cash flow growth – 5% or greater (cid:131) return on assets - 12% or higher 57 | Page RISKS AND UNCERTAINTIES The performance of Clearwater’s business is susceptible to a number of risks which affect income, liquidity and cash flow, including risks related to resource supply, food processing and product liability, suppliers, customers, competition and foreign exchange exposure and lawsuits in the normal course of business. For further disclosure of additional risk factors please refer to the Annual Information Form. Foreign exchange risk Our financial results are subject to volatility as a result of foreign exchange rate fluctuations. The majority of Clearwater’s sales are to locations outside Canada and are transacted in currencies other than the Canadian dollar whereas the majority of our expenses are in Canadian dollars. As a result, fluctuations in the foreign exchange rates of these currencies can have a material impact on our financial condition and operating results. In addition Clearwater has a subsidiary which operates in the offshore scallop fishery in Argentina which exposes Clearwater to changes in the value of the Argentine Peso. Risks associated with foreign exchange are partially mitigated by the following strategies: (1) Diversify sales internationally which reduces the impact of any country- specific economic risks. (2) Execute on pricing strategies so as to offset the impact of exchange rates. (3) Limit the amount of long-term sales contracts – Clearwater has very few long- term sales contracts with any customers. Contracts are typically less than 6 months and are based on list prices that provide a margin for exchange rate fluctuations. (4) Plan conservatively - Clearwater regularly reviews economist estimates of future exchange rates and uses conservative estimates when preparing its’ business plans, and (5) Foreign exchange hedging program - that focuses on using forward contracts to enable Clearwater to lock in exchange rates up to 18 months for key sales currencies (the US dollar, Euro, Yen and Sterling) thereby lowering the potential volatility in cash flows through derivative contracts. In 2013 approximately 49.1% of Clearwater’s sales were denominated in US dollars. Based on 2013 sales, a change of 0.01 in the U.S. dollar rate converted to Canadian dollars would result in a $1.8 million change in sales and gross profit. Approximately 21.5% of 2013 sales were denominated in Euros, based on 2013 sales, a change of 58 | Page 0.01 in the Euro rate as converted to Canadian dollars would result in a $0.6 million change in sales and gross profit. Also, 8.0% of sales in 2013 were denominated in Japanese Yen, based on 2013 annual sales, a change of 0.001 in the Yen rate as converted to Canadian dollars would result in a change of $3.0 million in sales and gross profit. As of February 26, 2014 Clearwater had approximately 81% of its US Dollar, Euro and Yen exposures for 2014 hedged at rates of 1.05, 1.37 and 0.011 respectively. A foreign exchange hedging program provides short-term risk management for foreign exchange risk. Strengthening of the Canadian dollar relative to the currencies of our sales markets will result in lower sales prices and receipts when converted into Canadian dollars and will have an adverse impact on our profitability to the extent we are not able to adjust prices and costs to offset this variability. Political risk Our Argentine and other international operations are subject to economic and political risks, which could materially and adversely affect our business. including fluctuations Our Argentine and other foreign operations and investments are subject to numerous foreign currency, exchange rates and controls, risks, forced divestiture, expropriation of our assets, nationalization, modification or nullification of our contracts and changes in Argentine or other foreign laws or other regulatory policies of foreign governments and having to submit to the jurisdiction of a foreign court or arbitration panel or having to enforce the judgment of a foreign court or arbitration panel against a sovereign nation within its own territory. renegotiation, in For a period of time during 2012 Clearwater was unable to repatriate dividends from Argentina. However, Clearwater received approvals and paid approximately $4.8 million in dividends in December 2012 and has since paid dividends of approximately $12.0 million Canadian in 2013. There can be no assurances that Clearwater will continue to be able to repatriate dividends from Argentina in the future. To compensate for the potential restriction on dividend payouts Clearwater put in place domestic loan financing in Argentina related to the purchase of a replacement vessel. The replacement of this vessel will necessitate that some funds be used for the related loan domestic payments, thus alleviating the need for any material dividend payments for the short term. Our operations in Argentina and elsewhere may be negatively affected by both foreign exchange and expropriation losses as well as the increased cost and risks of doing business in developing markets. We mitigate this risk through maintaining a policy of repatriating our share of the earnings from Argentina through dividends and we do not maintain any material 59 | Page financial assets that are surplus to our needs to operate the business outside of Canada. We do not carry financial assets in Pesos to mitigate exchange risk. In addition we have structured our operations in Argentina with an Argentine partner who owns 20% of the Argentine business and who is resident in Argentina and is actively managing the business. No assurance can be given that our operations will not be adversely impacted as a result of existing or future legislation. Resource supply risk A material change in the population and biomass of scallop, lobster, clam, or coldwater shrimp stocks in the fisheries in which we operate would materially and adversely affect our business. Clearwater's business is dependent on our allocated quotas of the annual Total Allowable Catch (TAC) for the species of seafood we harvest. The annual TAC is generally related to the health of the stock of the particular species as measured by a scientific survey of the resource. The population and biomass of shellfish stocks are subject to natural fluctuations some of which are beyond our control and which may be exacerbated by factors such as water temperatures, food availability, the presence of predators, disease, disruption in the food chain, reproductive problems or other biological issues. We are unable to fully predict the timing and extent of fluctuations in the population and biomass of the shellfish stocks we harvest and process, and we therefore may not be able to engage in effective measures to alleviate the adverse effects of these fluctuations. In addition, the population models utilized by scientists evaluating the fisheries in which we operate are constantly evolving. Certain changes in the population models could negatively impact future biomass estimates. Any material reduction in the population and biomass or TAC of the stocks from which we source seafood would materially and adversely affect our business. Any material increase in the population and biomass or TAC could dramatically reduce the market price of any of our products. The governments of Canada and Argentina set the annual TAC for each species by reviewing scientific studies of the resource and then consulting with key stakeholders including us and our competitors to determine acceptable catch levels. The potentially differing interests of our competitors may result in conflicting opinions on issues around resource management, including the establishment of TACs and other management measures potentially limiting our ability to grow, to fully capitalize on our investments in harvesting capacity, or to achieve targeted yields from the resource, which may adversely affect our financial condition and results of operations. Resource supply risk is managed through adherence with government policies and regulations related to fishing in Canada and Argentina and Clearwater’s investment in science and technology, which enables Clearwater to understand the species that it harvests. Clearwater has invested in projects with the scientific community, such as ocean floor mapping and the resource assessment surveys to ensure access to the best 60 | Page available science information. Resource management plans, developed by DFO, are developed through an open and transparent process with strong input from industry participants. Clearwater engages in these processes to promote best in class, robust, and sustainable management of the resource. The Marine Stewardship Council certification of all of our core species demonstrates that the resources that Clearwater harvests meet the leading global standard for sustainable fisheries management practice. Clearwater further mitigates the risk associated with resource supply and competition through the diversification across species. Capital availability and liquidity risk There are risks associated with capital availability and liquidity including: 1. The ability of Clearwater to obtain sufficient financing for working capital, capital expenditures or acquisitions in the future or to repay loans as they become due; 2. Certain borrowings are at variable rates of interest, which exposes Clearwater to the risk of increased interest rates; and 3. Clearwater may be more vulnerable to economic downturns and be limited in its ability to withstand competitive pressures if it has high leverage, debt coverage and limited liquidity. Clearwater’s ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, interest rate levels, and financial, competitive, business and other factors, many of which are beyond its control. Clearwater’s credit facilities contain restrictive covenants of a customary nature, including covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, the ability of Clearwater to incur additional indebtedness, to pay dividends or make certain payments and to sell or otherwise dispose of assets. In addition, they contain a number of financial covenants that require Clearwater to meet certain financial ratios and financial condition tests. A failure to comply with the covenants could result in an event of default, which, if not cured or waived, could permit acceleration of the relevant indebtedness. If indebtedness under the credit facilities was to be accelerated, there can be no assurance that the assets of Clearwater would be sufficient to repay in full that indebtedness. There can also be no assurance that the credit facilities would be able to be refinanced. As of February 26, 2014 Clearwater is not in violation of the restrictive covenants. Clearwater mitigates capital availability and liquidity risk through a number of its treasury management policies and goals which promote strong liquidity and continued access to capital to fund its business. These include policies and goals with respect to 61 | Page leverage, foreign exchange, lending arrangements and free cash flows. See the Capital structure and liquidity sections for further information. Other risks Clearwater plans to invest approximately $4.7 million in 2014 as part of a $9 million project related to in the implementation of a new enterprise resource planning system (“ERP”) to support improved decision making capabilities. We recognize that the integrity and reliability of information in all its forms are critical. Inaccurate, incomplete or unavailable information could lead to incorrect financial reporting, and poor decision making. The implementation of the ERP and all major information technology projects are managed by a change management and governance process. Clearwater has an ERP team staffed with knowledgeable internal and external resources that is responsible for implementing the various key initiatives. For further disclosure of additional risk factors please refer to the Annual Information Form. CRITICAL ACCOUNTING POLICIES Clearwater’s critical accounting policies are those that are important to the portrayal of Clearwater’s financial position and operations and may require management to make judgments based on underlying estimates and assumptions about future events and their effects. These estimates can include but are not limited to estimates regarding inventory valuation, accounts receivable valuation allowances, estimates of expected useful lives of vessels and plant facilities, and estimates of future cash flows for impairment tests. Underlying estimates and assumptions are based on historical experience and other factors that are believed by management to be reasonable under the circumstances. These estimates and assumptions are subject to change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Clearwater has considered recent market conditions including changes to its cost of capital in making these estimates. Refer to the notes to the annual financial statements for a complete listing of critical accounting policies and estimates used in the preparation of the consolidated financial statements. Financial Reporting Controls and Procedures Clearwater has established and maintains disclosure controls and procedures over financial reporting, as defined under the rules adopted by the Canadian Securities Regulators in instrument 52-109. The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the design and effectiveness of Clearwater’s disclosure controls and procedures as of December 31, 2013 and have concluded that such procedures are adequate and effective to provide reasonable assurance that material information relating to Clearwater and its consolidated subsidiaries would be made known to them by others within those entities to allow for accurate and complete disclosures in annual filings. 62 | Page The Management of Clearwater, with the participation of the CEO and the CFO (collectively “Management”), is responsible for establishing and maintaining adequate internal controls over financial reporting. Clearwater’s internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of in accordance with financial reporting and preparation of International Financial Reporting Standards (“IFRS”). financial statements Management evaluated the design and effectiveness of Clearwater’s internal controls over financial reporting as at December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its report “Internal Control – Integrated Framework (2013)”. This evaluation included reviewing controls in key risk areas, assessing the design of these controls, testing these controls to determine their effectiveness, reviewing the results and then developing an overall conclusion. Based on management’s evaluation, the CEO and the CFO have concluded that, as at December 31, 2013, Clearwater’s internal controls over financial reporting are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. There have been no significant changes in Clearwater’s internal controls over financial reporting or other factors that occurred during the period from September 29, 2013 to December 31, 2013, that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting. Adoption of new and revised standards The following IFRS standards have been recently issued by the IASB: IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 13 Fair Value Measurement Arrangements that have an effective date for annual periods beginning on or after January 1, 2013. Clearwater has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2013. These changes were made in accordance with the applicable transitional provisions. IFRS 10 - Consolidated Financial Statements replaces the guidance on control and consolidation in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation-Special Purpose Entities. IFRS 10 provides additional guidance on determining control for the purposes of consolidation. Clearwater determined that the adoption of IFRS 10 did not result in any change to the consolidation of its subsidiaries. IFRS 11 - Joint Arrangements, replaces IAS 31 Interests in Joint Ventures, and requires joint arrangements to be classified either as joint operations or joint ventures depending on the contractual rights and obligations of each investor that jointly controls the arrangement. 63 | Page Clearwater’s adoption of IFRS 11 changed the classification of an entity from a joint operation proportionately consolidated to a joint venture. An investment in a joint venture is accounted for using the equity method as set out in IAS 28 Investments in Associates and Joint Ventures. This change in accounting as at January 1, 2012 resulted in the aggregation of Clearwater’s proportionate share of the entity’s net assets and items of profit and loss into single line items. The adjustments to the consolidated statements of financial position, statements of earnings and cash flows are as follows: As a result of the adoption of IFRS 11 – Joint Arrangements, effective January 1, 2013 a company that has certain scallop harvesting operations that was previously proportionately consolidated, is now accounted for using the equity method. There was no impact to earnings or adjusted EBITDA related the change in accounting. Impact of application of IFRS 11 – joint arrangements to Consolidated Statements of Financial Position In thousands of Canadian dollars ASSETS Current assets Non-current assets TOTAL ASSETS LIABILITIES Current liabilities Non-current liabilities SHAREHOLDERS' EQUITY Non-controlling interest As at December 31, 2012 (Previously stated) Elimination of carrying values of entity proportionately consolidated Presentation of entity using equity method As at December 31, 2012 (Restated) 148,758 263,392 $ 412,150 64,169 241,460 75,617 30,904 106,521 (1,127) (4,102) (5,229) (129) (1,232) - - - - 3,868 147,631 263,158 3,868 $ 410,789 - - - - - 64,040 240,228 75,617 30,904 106,521 $ 410,789 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 412,150 (1,361) 64 | Page In thousands of Canadian dollars ASSETS Current assets Non-current assets TOTAL ASSETS LIABILITIES Current liabilities Non-current liabilities SHAREHOLDERS' EQUITY Non-controlling interest As at January 1, 2012 (Previously stated) Elimination of carrying values of entity proportionately consolidated Presentation of entity using equity method As at January 1, 2012 (Restated) 125,823 262,069 $ 387,892 86,614 207,226 61,352 32,700 94,052 (1,930) (4,123) (6,053) (258) (1,229) - - - - 4,566 123,893 262,512 4,566 $ 386,405 - - - - - 86,356 205,997 61,352 32,700 94,052 $ 386,405 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 387,892 (1,487) Impact of application of IFRS 11 to Consolidated Statements of Earnings In thousands of Canadian dollars December 31, 2012 (Previously stated) Elimination of entity proptionately consolidated Presentation of entity using equity method December 31, 2012 (Restated) Sales Cost of goods sold Administrative and selling Net finance costs Other income Research and development Earnings before income taxes Income tax expense $ 350,447 276,190 74,257 32,837 24,388 (2,412) 1,759 56,572 17,685 (5,019) (145) 1,587 (1,732) (301) (1) 67 - (235) (1,497) (443) - - - $ 350,302 277,777 72,525 - - (1,054) - (1,054) - - 32,536 24,387 (3,399) 1,759 55,283 17,242 (5,462) Earnings for the period $ 22,704 $ (1,054) $ - $ 22,704 65 | Page For the consolidated statements of cash flows the net cash flows adjusted were $0.3 million. Related Party Transactions Clearwater often transacts in the normal course of business with other related parties. The details are as follows for the year ended December 31, 2013 and 2012: Key management personnel Clearwater has defined key management personnel as senior executive officers, as well as the Board of Directors, as they have the collective authority and responsibility for planning, directing and controlling the activities of the Corporation. The following table outlines the total compensation expense for key management personnel for the years ended December 31, 2013 and 2012. Year ended December 31 Wages and salaries Share-based compensation Bonuses Other benefits $ $ 2013 3,792 5,861 1,290 606 11,549 2012 3,023 2,331 1,380 371 7,105 $ $ Transactions with other related parties Clearwater rents office space to CFFI (the controlling shareholder of Clearwater) and provides computer network support services to CFFI. Clearwater charges CFFI management and other fees for finance and administration services provided to CFFI by certain Clearwater staff. CFFI previously charged management fees to Clearwater for legal, finance, and administration services provided to Clearwater by certain CFFI staff. These fees apportion the salaries of the individuals providing the services based on estimated time spent. CFFI charges Clearwater for its use of CFFI aircraft at market rates per hour of use. Clearwater had the following transactions and balances with CFFI, for the year ended December 31, 2013 and December 31, 2012: 66 | Page Opening balance due from CFFI Management and other fees charged to (from) CFFI Rent and IT service fees charged to CFFI Interest on intercompany account Guarantee fee charged from CFFI Aircraft charges from CFFI Payments from CFFI Advances to CFFI Other charges to CFFI $ $ December 31, December 31, 2012 2,111 (198) 184 103 (62) (38) (925) 166 255 1,596 2013 1,596 122 184 78 - - (466) - 10 1,524 $ $ The amount due from CFFI is unsecured and due on demand. As such the account has been classified as a current asset included in prepaids and other. The balance bears interest at a rate of 5%. Fees amounting to 1% of the guarantees were charged to Clearwater. With the debt refinancing in 2012 and 2013 CFFI no longer provides a guarantee on the senior debt facilities for Clearwater. In addition, Clearwater expensed approximately $0.07 million for vehicle leases in 2013 (2012 - $0.11 million) and approximately $0.11 million for other services in 2013 (2012 - $0.17 million) by companies related to its parent. The transactions are recorded at the exchange amount and the balance due to these companies was $0.01 million as at December 31, 2013 (December 31, 2012 - $0.02 million). Clearwater recorded sales, sales commissions and storage fees to a non-controlling interest in a consolidated partnership. These sales, sales commissions, and storage fees are at prevailing market prices and are settled on normal trade terms. Sales to the non-controlling interest for 2013 are $1.2 million (2012 - $1.0 million). Sales commissions in 2013 are $2.0 million (2012 - $1.9 million). Storage fees for 2013 are $1.7 million (2012 - $2.1 million). Clearwater recorded legal expense for services provided by a Director of the corporation for 2013 of $0.03 million (2012 - $ nil). At December 31, 2013 Clearwater had a balance of $8.8 million (December 31, 2012 - $7.7 million), included in long term receivables, for interest and non interest bearing advances and loans made to a non-controlling interest shareholder in a subsidiary (refer to Note 8). 67 | Page Commitments The following are the contractual maturities of non-derivative financial liabilities, derivative financial instruments, operating lease and other commitments at December 31, 2013. The table includes undiscounted cash flows of financial liabilities, operating lease and other commitments, interest and principal cash flows based on the earliest date on which Clearwater is required to pay. December 31, 2013 Carrying Amount Contractual Cash Flow 2014 2015 2016 2017 2018 >2019 Interest - long-term debt Principal repayments - long-term debt 79,519 257,769 11,899 14,297 11,132 3,762 10,963 3,985 10,788 3,784 10,072 27,234 24,665 204,707 Total long-term debt 257,325 337,288 26,196 14,894 14,948 14,572 37,306 229,372 Trade and other payables 40,760 40,760 40,760 - - - - - Operating leases and other - 48,954 31,522 3,115 2,034 1,990 1,845 8,448 Derivative financial instruments - asset (1,466) (1,466) (1,466) Derivative financial instruments - liability 6,869 6,869 6,869 - - - - - - - - - - $ 303,488 $ 432,405 $ 103,881 $ 18,009 $ 16,982 $ 16,562 $ 39,151 $ 237,820 68 | Page leverage leverage free cash flow free cash flow seasonality Clearwater’s operations experience a predictable seasonal pattern in which sales, margins and adjusted EBITDA are higher in the second half of the year and investments in capital expenditures and working capital are lower, resulting in higher free cash flows and lower leverage in the second half of the year. This typically results in lower free cash flow, higher debt balances and higher leverage in the first half of the year. 5.0 5.0 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0 0 125 125 100 100 75 75 50 50 25 25 0 0 30 25 30 20 25 15 20 10 15 5 10 5 0 0 ) s d n a s u o ) h s t d ( n a s u o h t ( ) s d n a s u o ) h s t d ( n a s u o h t ( 2012 2013 Q1 2012 2013 Q1 Profitability 2012 2013 Q3 2012 2013 Q2 2012 2013 Q2 sales 2012 2013 Q3 2012 2013 Q4 2012 2013 Q4 sales 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 2012 2013 Q1 adjusted EBITDA 2012 2013 Q3 2012 2013 Q2 2012 2013 Q4 adjusted EBITDA 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 ) s d n a s u o ) h s t d ( n a s u o h t ( ) s d n a s u o ) h s t d ( n a s u o h t ( 50 50 40 40 30 30 20 20 10 10 0 0 (10) (10) (20) (20) (30) (30) 50 50 40 40 30 30 20 20 10 10 0 0 (10) (10) (20) (20) (30) (30) 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 2012 2013 2012 2013 2012 2013 2012 2013 Q2 Q3 Q4 2012 2013 2012 2013 2012 2013 2012 2013 Q2 Q3 Q4 2012 2013 2012 2013 2012 2013 2012 2013 Q2 Q3 Q4 Q1 Q1 working capital working capital 2012 2013 2012 2013 2012 2013 2012 2013 Q2 Q3 Q4 Q1 Q1 69 | Page leverage 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 2012 2013 Q4 sales 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 2012 2013 Q4 adjusted EBITDA 125 100 ) s d n a s u o h t ( 75 50 5.0 4.0 3.0 2.0 1.0 0 25 0 30 25 20 15 10 5 0 ) s d n a s u o h t ( 5.0 4.0 3.0 2.0 1.0 0 125 100 ) s d n a s u o h t ( 75 50 50 40 30 20 10 0 (10) ) s d n a s u o h t ( ) s d n a s u o h t ( 25 0 30 25 20 15 10 (20) 5 (30) 0 leverage free cash flow ) s d n a s u o h t ( 50 40 30 20 10 0 (10) (20) (30) 2012 2013 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 Q4 sales 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 Free Cash Flows, Leverage and Working Capital free cash flow working capital 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 adjusted EBITDA ) s d n a s u o h t ( 50 40 30 20 10 0 (10) (20) (30) 2012 2013 Q1 2012 2013 Q1 2012 2013 Q2 2012 2013 Q2 2012 2013 Q3 2012 2013 Q3 2012 2013 Q4 2012 2013 Q4 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 leverage free cash flow working capital 5.0 ) s d n a s u o h t ( 50 40 30 20 10 0 (10) (20) (30) 4.0 3.0 2.0 1.0 0 125 100 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 sales 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 2012 2013 Q4 2012 2013 Q1 2012 2013 Q2 2012 2013 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 Q4 adjusted EBITDA ) s d n a s u o h t ( ) s d n a s u o h t ( 2012 2013 Q3 75 2012 2013 Q4 50 25 0 30 25 20 15 10 5 0 ) s d n a s u o h t ( ) s d n a s u o h t ( 50 40 30 20 10 0 (10) (20) (30) 50 40 30 20 10 0 (10) (20) (30) 2012 2013 Q1 2012 2013 Q2 2012 2013 Q3 2012 2013 Q4 working capital 2012 2013 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 Q4 2012 2013 2012 2013 2012 2013 2012 2013 Q1 Q2 Q3 Q4 70 | Page SUMMARY OF QUARTERLY RESULTS The following table provides historical data for the twelve most recently completed quarters. In 000's of Canadian dollars Fiscal 2013 Sales Earnings (loss) Earnings (loss) per share ("EPS") Diluted earnings (loss) per share2 Fiscal 2012 Sales Earnings (loss) Earnings (loss) per share ("EPS") Diluted earnings (loss) per share2 Fiscal 2011 Sales Earnings (loss) Earnings (loss) per share ("EPS")1 Diluted earnings (loss) per share2 First Quarter Second Quarter Third Quarter Fourth Quarter $ 68,297 (1,762) (0.06) (0.06) $ 95,368 (9,866) (0.24) (0.24) $ 113,982 27,224 0.48 0.47 111,012 (298) (0.06) (0.06) $ 70,878 (2,927) (0.09) $ 84,926 (2,505) (0.08) $ 101,553 17,618 0.30 $ 92,945 10,518 0.17 (0.09) (0.08) 0.27 0.15 $ 69,235 1,832 0.01 $ 78,820 (327) (0.02) $ 97,590 5,058 0.05 $ 87,140 16,390 0.28 0.01 (0.02) 0.05 0.23 1 – On October 2, 2011, Clearwater Seafoods Income Fund (“the Fund”) was reorganized into a publicly traded corporation, “Clearwater Seafoods Incorporated”, (“Clearwater”). The 2011 comparative results have been adjusted to reflect the conversion of the Fund to the corporation to provide a meaningful comparison. Earnings per share (“EPS”) for 2011 was calculated using these comparatives. 2 - Diluted earnings (loss) per share are anti-dilutive for all periods except September 28, 2013, September 29, 2012, December 31, 2011 and December 31, 2012. For a more detailed analysis of each quarter’s results, please refer to our quarterly reports and our annual reports. In general, sales increased with each successive quarter with the largest increase in the third quarter of each year. The third quarter has the highest sales revenue each year. In addition, volatility in exchange rates can have a significant impact on earnings. The volatility is partially offset by Clearwater’s foreign exchange management program. Earnings for the second quarter of 2013 include $3.3 million in future tax recovery, $9.2 million in debt settlement fees and writedowns on deferred financing charges related to the June 2013 refinancing. 71 | Page Earnings for the fourth quarter of 2012 included an $8 million future tax recovery. Changes made effective January 1, 2011, to the management agreement that governs Clearwater’s frozen-at-sea shrimp and turbot harvesting operations, resulted in Clearwater fully consolidating these operations in 2011 incurring a non-cash gain of $11.6 million in the first quarter of 2011. The settlement of the Glitnir transaction during the fourth quarter of 2011 resulted in a non-cash gain of $12.4 million. 72 | Page DEFINITIONS AND RECONCILIATIONS Gross margin Gross margin consists of sales less harvesting, distribution, direct manufacturing costs, manufacturing overhead, certain administration expenses and depreciation related to manufacturing operations. Adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”) Adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”) is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes that in addition to net earnings and cash provided by operating activities, adjusted EBITDA is a useful supplemental measure from which to determine Clearwater’s ability to generate cash available for debt service, working capital, capital expenditures, income taxes and dividends. In addition, as adjusted EBITDA is a measure frequently analyzed for public companies, Clearwater has calculated adjusted EBITDA in order to assist readers in this review. Adjusted EBITDA should not be construed as an alternative to net earnings determined in accordance with IFRS as a measure of liquidity, or as a measure of cash. Adjusted EBITDA is defined as EBITDA excluding one-time non-recurring items such as severance charges, gains or losses on property, plant and equipment, gains or losses on quota sales, refinancing and reorganization costs. In addition recurring accounting gains and losses on foreign exchange (other than realized gains and losses on forward exchange contracts), and adjustments to stock based compensation, have been excluded from the calculation of adjusted EBITDA due to the variability in these gains and losses. In the fourth quarter of 2012 Clearwater began to exclude amounts related to stock based compensation from the calculation of adjusted EBITDA due to the variability in these gains and losses in the liability related to its cash settled share-based payment programs. It has restated all prior periods for this change. 73 | Page Reconciliation of earnings to adjusted EBITDA for the 13 weeks ended, and the year ended December 31, 2013 and 2012 is as follows: Earnings Add (deduct): Income taxes Taxes and depreciation for equity investment Depreciation and amortization Interest on long-term debt and bank charges 13 weeks ended Year Ended December 31 December 31 December 31 December 31 $ 2013 (298) 2012 2013 2012 $ 10,518 $ 15,298 $ 22,704 987 237 7,261 3,852 12,039 (6,916) - 6,587 4,829 15,018 (8,101) 951 24,171 17,310 49,629 (5,019) - 22,976 21,506 62,167 Add (deduct) other non-routine items: Unrealized foreign exchange and derivative income Fair market value on long term debt Realized foreign exchange on working capital Restructuring and refinancing costs Stock based compensation (Gain)/Loss on disposal of assets and quota Gain on settlement of debt Adjusted EBITDA 10,853 (1,009) (2,449) - 2,913 - - 22,347 $ 3,129 (128) (808) 84 1,517 - - 18,812 $ 11,493 (1,710) 3,586 10,642 5,861 (398) - 79,103 $ (3,476) 2,898 1,359 6,964 2,331 - - 72,243 $ Adjusted EBITDA attributable to: Non-controlling interests Shareholders of Clearwater $ $ $ $ 3,847 18,500 22,347 3,397 15,415 18,812 14,021 65,082 79,103 12,848 59,395 72,243 $ $ $ $ Note 1: The impact to earnings and adjusted EBITDA related to an entity previously proportionately consolidated was $nil. As a result no changes were made to the calculation of adjusted EBITDA per above. 74 | Page Leverage Leverage is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes leverage to be a useful term when discussing liquidity and does monitor and manage leverage. In addition, as leverage is a measure frequently analyzed for public companies, Clearwater has calculated the amount in order to assist readers in this review. Leverage should not be construed as a measure of liquidity or as a measure of cash flows. Leverage is calculated by dividing the current and preceding annual adjusted EBITDA by the total debt on the balance sheet adjusted for cash reserves. Leverage for banking purposes differs from the below calculations as agreements require the exclusion of certain cash from the calculation and EBITDA excludes non- controlling interests and most significant non-cash and non-recurring items. Clearwater is in compliance with all of the non-financial and financial covenants associated with its debt facilities. Reconciliation of adjusted EBITDA to debt (net of deferred financing charges) for the year ended December 31, 2013 and 2012 is as follows: In 000's of Canadian dollars As at December 31 Adjusted EBITDA1 Debt (net of deferred financing charges of $0.6 million (December 31, 2012 - $4.4 million)) Less cash Net debt Leverage December 31 2013 79,103 $ December 31 2012 72,243 $ 257,325 (46,793) 210,532 253,791 (41,504) 212,287 2.7 2.9 75 | Page Free cash flows Free cash flow is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes that in addition to net earnings and cash provided by operating activities, free cash flow is a useful supplemental measure from which to determine Clearwater’s ability to generate cash available for debt service, working capital, capital expenditures and distributions. Free cash flow should not be construed as an alternative to net earnings determined in accordance with IFRS, as a measure of liquidity, or as a measure of cash flows. Free cash flow is defined as cash flows from operating activities, less planned capital expenditures (net of any borrowings of debt designated to fund such expenditures), scheduled payments on long term debt and distributions to non-controlling interests. Items excluded from the free cash flow include discretionary items such as debt refinancing and repayments changes in the revolving loan and discretionary financing and investing activities. Reconciliation for the 13 weeks ended and the year ended December 31, 2013 and 2012 is as follows: 76 | Page Free cash flows Adjusted EBITDA Less: 13 weeks ended Year Ended December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 22,347 18,812 79,103 72,243 Cash interest Cash taxes Other income and expense items Operating cash flow before changes in working capital Change in working capital Cash flows from operating activities Uses of cash: Purchase of property, plant, equipment, quota and other assets Disposal of fixed assets Less: Designated borrowings Scheduled payments on long-term debt Dividends received from joint venture Distributions to non-controlling interests (3,657) (270) 514 18,933 29,816 48,749 (11,182) - 6,231 (1,366) - (3,707) (4,471) (453) (1,531) 12,357 32,334 44,691 (4,219) - - (1,629) 1,740 (2,780) (16,317) (1,812) (863) 60,110 (5,448) 54,662 (23,813) 978 7,700 (3,233) 1,240 (11,414) (20,346) (1,693) (12,448) 37,756 8,184 45,940 (16,572) - 2,056 (6,327) 1,740 (9,491) Free cash flows Add/(less): 38,725 37,803 26,121 17,347 Other debt borrowings (repayments) of debt Other investing activities Other financing activities Change in cash flows for the period (7,505) (386) - 30,834 (10,597) (459) - 26,747 (20,759) (717) - 4,645 13,584 1,358 - 32,288 77 | Page Return on Assets Return on assets is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes that return on assets measures the efficiency of the use of total assets to generate income. Return on assets should not be construed as an alternative to net earnings determined in accordance with IFRS. Return on assets is defined as the ratio of adjusted earnings before interest and taxes (“EBIT”) to average total assets including all working capital assets. The calculation of adjusted earnings before interest and taxes to total assets for the year ended December 31, 2013 and 2012 is as follows: In (000's) of Canadian dollars As at Return on Assets Adjusted earnings before interest and taxes Total Assets December 31, 2013 December 31, 2012 54,936 414,582 49,768 410,789 13.3% 12.1% 78 | Page KPMG LLP 1959 Upper Water Street Suite 1500 Purdy’s Wharf Tower 1 Halifax NS B3J 3N2 Canada Telephone (902) 492-6000 (902) 492-1307 Fax www.kpmg.ca Internet INDEPENDENT AUDITORS’ REPORT To the Shareholders of Clearwater Seafoods Incorporated the accompanying consolidated financial statements of Clearwater Seafoods We have audited Incorporated, which comprise the consolidated statements of financial position as at December 31, 2013, December 31, 2012, and January 1, 2012 the consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for the years ended December 31, 2013 and December 31, 2012, and notes, comprising 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 accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Clearwater Seafoods Incorporated as at December 31, 2013, December 31, 2012, and January 1, 2012 and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards. Chartered Accountants February 26, 2014 Halifax, Canada KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Canada. KPMG Canada provides services to KPMG LLP KPMG Confidential 79 | Page Clearwater Seafoods Incorporated Management’s Statement of Responsibility for Financial Reporting The consolidated financial statements and all related financial information contained in the annual report, including Management’s Discussion and Analysis, are the responsibility of the Management of Clearwater Seafoods Incorporated. They have been prepared in accordance with generally accepted accounting principles, using management's best estimates and judgments, where appropriate. Management is responsible for the reliability and integrity of the consolidated financial statements, the notes to the consolidated financial statements, and other financial information contained in the annual report. In the preparation of these statements, estimates are sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on careful judgments and have been properly reflected in the accompanying consolidated financial statements. Management is also responsible for maintaining a system of internal control designed to provide reasonable assurance that assets are safeguarded and that accounting systems provide timely, accurate and reliable financial information. The Board of Directors of Clearwater Seafoods Incorporated is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board is assisted in exercising its responsibilities through the Audit Committee of the Board, which is composed of non-management directors. The Committee meets periodically with management and the auditors to satisfy itself that management's responsibilities are properly discharged, to review the consolidated financial statements and to recommend approval of the consolidated financial statements to the Board. KPMG LLP, the independent auditors appointed by the Board, have audited Clearwater Seafoods Incorporated’s consolidated financial statements in accordance with generally accepted auditing standards and their report follows. The independent auditors have full and unrestricted access to the Audit committee to discuss their audit and their related findings as to the integrity of the financial reporting process. February 26, 2014 Ian Smith Chief Executive Officer Robert Wight Vice-President, Finance and Chief Financial Officer 80 | Page CLEARWATER SEAFOODS INCORPORATED Consolidated Statements of Financial Position (In thousands of Canadian dollars) ASSETS Current assets Cash Trade and other receivables (Note 5) Inventories (Note 6) Prepaids and other (Note 7) Derivative financial instruments (Note 13) Non-current assets Long term receivables (Note 8) Other assets (Note 9) Property, plant and equipment (Note 10) Licences and fishing rights (Note 11) Investment in equity investee (Notes 3(o) and 22) Deferred tax assets (Note 18) Goodwill (Note 11) TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Income tax payable (Note 18) Current portion of long-term debt (Note 12) Derivative financial instruments (Note 13) Non-current liabilities Long-term debt (Note 12) Deferred tax liabilities (Note 18) SHAREHOLDERS' EQUITY Share capital (Note 14) Retained earnings (deficit) Cumulative translation account Non-controlling interest TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES Subsequent event (Note 14) 2013 December 31, December 31, 2012 (Restated) (Note 3(o)) January 1, 2012 (Restated) (Note 3(o)) $ 46,793 43,702 46,987 6,291 1,466 145,239 $ 41,504 43,168 51,793 6,981 4,185 147,631 $ 9,216 41,681 61,714 10,207 1,075 123,893 10,442 296 126,451 101,467 4,701 18,943 7,043 269,343 10,647 1,245 126,580 104,568 3,868 9,207 7,043 263,158 10,293 2,066 129,225 107,725 4,566 1,594 7,043 262,512 $ 414,582 $ 410,789 $ 386,405 $ 40,760 648 14,297 6,869 62,574 $ 44,564 310 15,527 3,639 64,040 $ 40,838 1,655 42,766 1,097 86,356 243,028 1,453 244,481 64,780 19,762 (5,470) 79,072 28,455 107,527 238,264 1,964 240,228 64,867 14,616 (3,866) 75,617 30,904 106,521 204,334 1,663 205,997 65,309 (835) (3,122) 61,352 32,700 94,052 $ 414,582 $ 410,789 $ 386,405 See accompanying notes to consolidated financial statements Approved by the Board: John Risley Director Colin MacDonald Chairman 81 | Page CLEARWATER SEAFOODS INCORPORATED Consolidated Statements of Earnings (In thousands of Canadian dollars) Year ended December 31 Sales Cost of goods sold Administrative and selling Net finance costs (Note 15) Other income (Note 16) Research and development Earnings before income taxes 2013 2012 (Restated) (Note 3(o)) $ 388,659 301,291 87,368 $ 350,302 277,777 72,525 39,005 42,747 (3,240) 1,659 80,171 7,197 32,536 24,387 (3,399) 1,759 55,283 17,242 Income tax recovery (Note 18) (8,101) (5,462) Earnings for the year $ 15,298 $ 22,704 Earnings attributable to: Non-controlling interest Shareholders of Clearwater $ $ 8,965 6,333 15,298 $ $ 7,695 15,009 22,704 Basic earnings per share (Note 17) Diluted earnings per share (Note 17) $ $ 0.12 0.12 $ $ 0.29 0.29 See accompanying notes to consolidated financial statements 82 | Page CLEARWATER SEAFOODS INCORPORATED Consolidated Statements of Comprehensive Income (In thousands of Canadian dollars) Year ended December 31 2013 2012 Earnings for the year $ 15,298 $ 22,704 Other comprehensive loss - Items that may be reclassified subsequently to earnings: Foreign currency translation differences of foreign operations (1,604) (744) Total comprehensive income $ 13,694 $ 21,960 Total comprehensive income attributable to: Non-controlling interest Shareholders of Clearwater $ $ 8,965 4,729 13,694 7,695 14,265 21,960 $ $ See accompanying notes to consolidated financial statements 83 | Page CLEARWATER SEAFOODS INCORPORATED Consolidated Statements of Shareholders' Equity (In thousands of Canadian dollars) Common Shares Retained earnings (deficit) Cumulative Translation Account Non- controlling interest Total Balance at January 1, 2012 $ 65,309 $ (835) $ (3,122) $ 32,700 $ 94,052 Total comprehensive income for the year - 15,009 (744) 7,695 21,960 Transactions recorded directly in equity Distributions to non-controlling interest Redemption of 2013 convertible debentures (Note 14) Total transactions with owners - (442) (442) - 442 442 - - - (9,491) - (9,491) (9,491) - (9,491) Balance at December 31, 2012 $ 64,867 $ 14,616 $ (3,866) $ 30,904 $ 106,521 Total comprehensive income for the year - 6,333 (1,604) 8,965 13,694 Transactions recorded directly in equity Distributions to non-controlling interest Dividends declared on common shares Redemption of 2014 convertible debentures (Note 14) Total transactions with owners - - (87) (87) - (1,274) 87 (1,187) - - - - (11,414) - - (11,414) (11,414) (1,274) - (12,688) Balance at December 31, 2013 $ 64,780 $ 19,762 $ (5,470) $ 28,455 $ 107,527 See accompanying notes to consolidated financial statements 84 | Page CLEARWATER SEAFOODS INCORPORATED Consolidated Statements of Cash Flows (In thousands of Canadian dollars) Year ended December 31 Operating Earnings for the year Adjustments for: Depreciation and amortization Net finance costs Income tax recovery Share-based compensation Gain on disposal of property, plant, and equipment, and other Earnings in equity investee (Note 22) Foreign exchange and other Change in operating working capital (Note 25) Interest paid Income tax paid Financing Repayment of long-term debt Net proceeds from long-term debt Repayment of revolving credit facility Distributions to non-controlling interest Dividends paid on common shares Government assistance received (Note 10) Investing Purchase of property, plant, equipment, quota and other Proceeds on disposal of property, plant, equipment, quota and other Dividends received from joint venture Purchase of other assets Net (advances) receipts in long term receivables INCREASE IN CASH CASH, BEGINNING OF YEAR Effect of foreign exchange rate changes on cash CASH, END OF YEAR 2013 2012 (Restated) (Note 3(o)) $ 15,298 $ 22,704 24,167 36,409 (8,101) 5,861 (747) (2,082) 6,239 22,475 23,714 (5,462) 2,332 (478) (1,054) 42 77,044 64,273 (1,297) 2,728 (20,464) (621) 54,662 $ (17,137) (3,924) 45,940 $ $ $ (260,320) 245,288 - (11,414) (1,274) 15 (27,705) (23,813) 978 1,240 (83) (634) (22,312) 4,645 41,504 644 46,793 $ $ $ $ $ $ $ $ $ $ (189,256) 216,084 (17,515) (9,491) - - (178) (16,572) 509 1,740 - 849 (13,474) 32,288 9,216 - 41,504 See accompanying notes to consolidated financial statements 85 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 1. DESCRIPTION OF THE BUSINESS Clearwater Seafoods Incorporated (“Clearwater”) was incorporated on July 7, 2011 and is domiciled at 757 Bedford Highway, Bedford, Nova Scotia, Canada. Clearwater’s sole investment is the ownership of 100% of the units of Clearwater Seafoods Limited Partnership (“CSLP”). The consolidated financial statements of Clearwater as at and for the years ended December 31, 2013 and 2012 comprise the company, its subsidiaries and joint venture. Clearwater’s business includes the ownership and operation of assets and property in connection with the harvesting, processing, distribution and marketing of seafood. 2. BASIS OF PREPARATION (a) Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board. The financial statements were authorized for issue by Clearwater’s Board of Directors on February 26, 2014. (b) Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items measured at fair value through profit or loss: • Derivative financial instruments • Financial instruments • Liabilities for cash settled share-based compensation arrangements The fair value measurements have been described in the notes. (c) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is Clearwater’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand except as otherwise noted. 86 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (d) Critical judgments and estimates in applying accounting policies The preparation of financial statements requires management to make estimates, judgments and assumptions that materially affect the amounts reported in the consolidated financial statements and accompanying notes. Management bases assumptions, estimates and judgments on historical experience, current trends and events, and all available information that management believes is relevant at the time it prepares the financial statements. Actual results could ultimately differ materially from these estimates. The following are the most important accounting policies subject to such judgment and sources of key estimation uncertainty that Clearwater believes could have the most significant impact on the reported results and financial position: The information in this note is grouped by accounting policy to include: • Key sources of estimation uncertainty • Judgments management made in the process of applying Clearwater’s accounting policies i. Income taxes Key sources of estimation uncertainty Accounting for income taxes is based upon evaluation of income tax rules in all jurisdictions where Clearwater performs activities. In determining the provision for current and deferred income taxes, Clearwater makes assumptions about temporary and permanent differences between accounting and taxable income, and substantively enacted income tax rates. Changes in tax law and the level and geographical mix of earnings will impact the effective tax rate. With respect to deferred taxes, Clearwater makes assumptions about when deferred tax assets are likely to reverse, the extent to which it is probable that temporary differences will reverse and whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. Clearwater recognizes deferred tax assets only to the extent that it considers it probable that those assets will be recoverable. Judgments made in relation to accounting policies applied Clearwater makes judgments about whether to recognize the benefit of deferred tax assets. In making this judgment Clearwater continually evaluates all positive and negative evidence. Clearwater’s evaluation includes the magnitude and duration of any past losses, current profitability and whether it is sustainable, and earnings forecasts. For further discussion on deferred income taxes refer to note 18. 87 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) ii. Goodwill and intangible assets Key sources of estimation uncertainty Clearwater conducts impairment testing on its goodwill and intangible assets annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Clearwater determines the fair value of each CGU to which goodwill and intangible assets are allocated using the value in use method, which estimates fair value using a discounted five-year forecasted cash flow estimate with a terminal value. The determination of the recoverable amount involves estimates and assumptions for future sales, product margins, market conditions, allowable catch rates, and appropriate discount rates. Judgments made in relation to accounting policies applied In performing its impairment testing, Clearwater makes judgments in determining its cash generating units, and the allocation of working capital assets and liabilities and corporate assets to the cash generating units. For further discussion on goodwill and intangible assets, refer to note 11. iii. Share-based compensation Key sources of estimation uncertainty Clearwater determines compensation expense for share-based compensation using market- based valuation techniques. Clearwater determines the fair value of the market-based and performance-based non-vested share awards at the date of grant using black-scholes and Monte Carlo simulation valuation models. Certain performance-based share awards require Clearwater to make estimates of the likelihood of achieving company and corporate peer group performance goals. Clearwater makes assumptions in applying valuation techniques including estimating the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee shared based plan option exercise behaviors and corporate performance. Such assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates. For further discussion on share-based compensation, refer to note 24. iv. Derivative financial instruments Key sources of estimation uncertainty Clearwater records the fair value of certain financial liabilities using valuation models where the fair value cannot be determined in active markets. 88 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) The inputs used in the fair value models contain inherent uncertainties, estimates and use of judgment. Fair value is taken from observable markets where possible and estimated as necessary. Assumptions underlying the valuations require estimation of costs and prices over time, discount rates, inflation rates, defaults and other relevant variables such as foreign exchange volatility. For further discussion on derivative financial instruments, refer to note 13. 3. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation i) Business Combinations Clearwater measures goodwill as the excess of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Clearwater elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that Clearwater incurs in connection with a business combination are expensed as incurred. ii) Subsidiaries Subsidiaries are entities controlled by Clearwater. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. iii) Joint venture A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The results and assets and liabilities of the joint venture are incorporated into these consolidated financial statements using the equity method of accounting. Under the equity method a joint venture is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize Clearwater’s share of the profit or loss and other comprehensive income of the joint venture. 89 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) iv) Transactions eliminated on consolidation Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Inventories Inventories consist primarily of finished goods and are stated at the lower of cost and net realizable value. Cost includes the cost of materials plus direct labour applied to the product and the applicable share of manufacturing overheads, administration and depreciation, determined on a first-in, first-out basis. Net realizable value is estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. (c) Property, plant and equipment Property, plant and equipment is measured at cost, less government assistance received, accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use and location, and borrowing costs. Additions are depreciated commencing in the month that they are available for use. Vessel refits are capitalized when incurred and amortized over the period between scheduled refits. Construction in progress assets are capitalized during the construction period and depreciation commences when the asset is available for use. Depreciation is provided on a straight line basis to depreciate the cost of each of the components of an item of property, plant and equipment over their estimated useful lives. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Estimated useful lives are the following: Asset Component Buildings and wharves Plant equipment Vessels Vessel equipment Rate 10 to 40 years 3 to 20 years 15 to 30 years 1 to 7 years The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to Clearwater and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. 90 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Gains and losses on disposal of an item of property, plant and equipment are determined as the difference between the proceeds from disposal and the carrying amount of property, plant and equipment, and are recognized net within other income in profit or loss. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted prospectively if appropriate. (d) Intangible assets i) Goodwill Goodwill is the residual amount that results when the purchase of a business exceeds the sum of the amounts allocated to the net assets acquired based on their fair values. Goodwill is allocated to Clearwater’s cash generating units that are expected to benefit from the acquisition synergies. Goodwill is measured at cost less impairment losses. ii) Licenses and fishing rights Licenses represent intangible assets acquired directly or in a business combination that meet the specified criteria for recognition apart from goodwill and are recorded at their fair value at the date of acquisition and are subsequently carried at cost. Licenses that have indefinite lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Fishing rights arise from contractual rights to fish quotas, have definite lives and are amortized over the term of the related operating agreement. (e) Revenue recognition Clearwater sells seafood in a fresh or frozen state to customers. These sales are evidenced by purchase orders/invoices, which set out the terms of the sale, including pricing and shipping terms. Revenue is recognized when persuasive evidence exists that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of the goods can be estimated reliably, there is no continuing managerial involvement with the goods, and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, net of allowance for returns and discounts. (f) Government assistance Government assistance received by Clearwater relates to items of property, plant and equipment. 91 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Government assistance is deducted from the carrying amount of the related asset and amortized over the same estimated useful life of the particular asset to which it relates. Clearwater does not have any government assistance that could potentially be required to be repaid, nor are there any forgivable loans. (g) Financial instruments Clearwater has the following non-derivative and derivative financial assets and liabilities that are classified into the following categories: Financial instrument Cash Trade and other receivables Long term receivables Trade and other payables Long-term debt Category Fair value through profit or loss Loans and receivables Loans and receivables Non-derivative financial liabilities Non-derivative financial liabilities Measurement Method Fair value Initial: Fair value Subsequent: Amortized cost through profit or loss Derviative financial instruments Derivative financial instruments Fair value Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognized at their fair values plus any attributable transaction costs, and are subsequently measured at amortized cost using the effective interest rate method, with gains and losses recognized in profit or loss in the period in which they arise. Non-derivative liabilities Non-derivative liabilities are debt securities and subordinated liabilities that are initially measured at fair value plus attributable transaction costs, and subsequently measured at amortized cost, with gains and losses recognized in profit or loss in the period in which they arise. Derivative financial instruments Clearwater enters into a variety of derivative financial instruments to manage its exposure to foreign exchange and interest rate risks, including foreign exchange forward contracts, interest rate swaps, caps, and floors. Embedded derivatives are contained in non-derivative host contracts and are treated as separate derivatives when they meet the definition of a derivative, and their risks and characteristics are not closely related to those of the host contracts. Derivative financial instruments and embedded derivatives are recorded at fair value with mark to market adjustments recorded in profit or loss. 92 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (h) Impairment i) Financial assets Financial assets are assessed at each reporting date to determine whether there is objective evidence of impairment. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to Clearwater on terms that Clearwater would not consider otherwise or indications that a debtor will enter bankruptcy. Clearwater considers evidence of impairment for receivables on a specific customer basis. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. ii) Non-financial assets Clearwater reviews non-financial assets at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. In addition, for goodwill and intangible assets that have indefinite useful lives an annual impairment test is performed. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal. 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 the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash- generating unit” or “CGU”). Goodwill and the intangible assets acquired in a business combination are allocated to the CGU, or the group of CGUs, that are expected to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which that asset is monitored for internal reporting purposes. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGUs, and then to reduce the carrying amounts of the other assets in the unit on a pro rata basis. 93 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates and assumptions used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (i) Translation of foreign currency i) Foreign currency transactions Transactions in foreign currencies are translated to an entity’s functional currency at the exchange rate at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the entity’s functional currency at the exchange rate at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. ii) Foreign operations The assets and liabilities for foreign operations with a functional currency different from Clearwater’s presentation currency, including goodwill, other intangible assets and fair value adjustments arising on acquisition, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at average exchange rates. Foreign currency differences are recognized in other comprehensive income in the cumulative translation account. When a foreign operation is disposed of, all relevant amounts in the cumulative translation account are transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that does not result in loss of control the relevant proportion of such cumulative translation account is reattributed to non-controlling interest and not recognized in profit or loss. (j) Income taxes Income tax expense is comprised of current and deferred income tax. Current tax and deferred income tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to tax payable in respect of previous years. Taxable earnings differs from earnings as reported in the consolidated income statement because of items of income or expense that are taxable or 94 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) deductible in years other than the current reporting period or items that are never taxable or deductible. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: differences relating to investments in subsidiaries and joint venture to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (k) Borrowing costs Clearwater capitalizes borrowing costs attributable to the acquisition, or construction of its qualifying assets, which are assets that necessarily take a substantial period of time to ready for their intended use, as they are being constructed. Other borrowing costs are recognized as an expense of the period in which they are incurred. (l) Finance costs Finance costs comprise interest expense on borrowings, changes in the fair value of financial assets and liabilities measured at fair value through profit or loss, impairment losses recognized on derivative financial assets and liabilities and gains and losses on financial instruments that are recognized in profit or loss. Borrowing costs determined to be period costs, or the amortization of such costs are recorded through profit or loss. Foreign currency gains and losses are reported on a net basis. (m) Share-based compensation Clearwater has share-based compensation plans, which are described below. Share Appreciation Rights (“SARs”) The share appreciation rights plan is a phantom share plan that provides the holder a cash payment equal to the fair market value of Clearwater’s shares less the grant price. SARs vest over a three year period and have no expiry. 95 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Deferred Share Units (“DSUs”) There are two deferred share unit plans (“DSUs”) that provide the holder a cash payment equal to the fair market value of Clearwater’s shares on the date of settlement. The retention DSU plan awards vest once the holder reaches the age of 65 with continued employment by Clearwater, or death. The director DSU plan allows non-employee directors to receive, in the form of deferred share units, all or a percentage of director’s fees, which would be otherwise payable in cash. Each director DSU vests at grant date. Performance Share Units (“PSUs”) The performance share unit plan (“PSUs”) provides the holder with the opportunity to receive a cash payment based upon the relative performance of Clearwater shares to its pre-defined peer group. Performance is based on the total return to shareholders over the defined period. Vested units will be settled in cash at the end of the performance period. All plans are cash settled and are recorded as liabilities at fair market value at each reporting period with changes in fair value recorded to profit and loss. The fair value of the SAR and DSU plans are calculated using a black-scholes valuation model and the PSU plan is calculated using a Monte Carlo simulation model. Compensation expense is recognized based on the fair value of the awards that are expected to vest and remain outstanding at the end of the reporting period. The share-based compensation liability is included in trade and other payables in the consolidated statement of financial position and the related compensation expense in administrative expense in the statement of earnings. (n) Earnings per share Basic earnings per share is calculated by dividing earnings for the year attributable to the shareholders of Clearwater by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing earnings for the year attributable to the shareholders of Clearwater by the weighted average number of common shares outstanding and the voting rights attributable to the convertible debentures outstanding during the year. The calculation of the potential dilutive common shares assumes the exercise of all convertible debentures outstanding. (o) Application of new and revised International Financial Reporting Standards (IFRSs) Clearwater has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2013. These changes were made in accordance with the applicable transitional provisions. 96 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) IFRS 10 Consolidated Financial Statements IFRS 10 Consolidated Financial Statements replaces the guidance on control and consolidation in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation-Special Purpose Entities. IFRS 10 provides additional guidance on determining control for the purposes of consolidation. Clearwater determined that the adoption of IFRS 10 did not result in any change to the consolidation of its subsidiaries. IFRS 11 Joint Arrangements IFRS 11 Joint Arrangements, replaces IAS 31 Interests in Joint Ventures, and requires joint arrangements to be classified either as joint operations or joint ventures depending on the contractual rights and obligations of each investor that jointly controls the arrangement. Clearwater’s adoption of IFRS 11 changed the classification of an entity from a joint operation which was previously proportionately consolidated to a joint venture. An investment in a joint venture is accounted for using the equity method as set out in IAS 28 Investments in Associates and Joint Ventures (amended in 2011). This change in accounting as at January 1, 2012 resulted in the aggregation of Clearwater’s proportionate share of the entity’s net assets and items of profit and loss into single line items. The adjustments to the consolidated statements of financial position, statements of earnings and cash flows are as follows: Impact of application of IFRS 11 to Consolidated Statements of Financial Position In thousands of Canadian dollars ASSETS Current assets Non-current assets TOTAL ASSETS LIABILITIES Current liabilities Non-current liabilities SHAREHOLDERS' EQUITY Non-controlling interest As at December 31, 2012 (Previously stated) Elimination of carrying values of entity proportionately consolidated Presentation of entity using equity method As at December 31, 2012 (Restated) 148,758 263,392 $ 412,150 64,169 241,460 75,617 30,904 106,521 (1,127) (4,102) (5,229) (129) (1,232) - - - - 3,868 147,631 263,158 3,868 $ 410,789 - - - - - 64,040 240,228 75,617 30,904 106,521 $ 410,789 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 412,150 (1,361) 97 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) In thousands of Canadian dollars ASSETS Current assets Non-current assets TOTAL ASSETS LIABILITIES Current liabilities Non-current liabilities SHAREHOLDERS' EQUITY Non-controlling interest As at January 1, 2012 (Previously stated) Elimination of carrying values of entity proportionately consolidated Presentation of entity using equity method As at January 1, 2012 (Restated) 125,823 262,069 $ 387,892 86,614 207,226 61,352 32,700 94,052 (1,930) (4,123) (6,053) (258) (1,229) - - - - 4,566 123,893 262,512 4,566 $ 386,405 - - - - - 86,356 205,997 61,352 32,700 94,052 $ 386,405 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 387,892 (1,487) Impact of application of IFRS 11 to Consolidated Statements of Earnings In thousands of Canadian dollars December 31, 2012 (Previously stated) Elimination of entity proptionately consolidated Presentation of entity using equity method December 31, 2012 (Restated) Sales Cost of goods sold Administrative and selling Net finance costs Other income Research and development Earnings before income taxes Income tax expense $ 350,447 276,190 74,257 32,837 24,388 (2,412) 1,759 56,572 17,685 (5,019) (145) 1,587 (1,732) (301) (1) 67 - (235) (1,497) (443) - - - $ 350,302 277,777 72,525 - - (1,054) - (1,054) - - 32,536 24,387 (3,399) 1,759 55,283 17,242 (5,462) Earnings for the period $ 22,704 $ (1,054) $ - $ 22,704 98 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) IFRS 12 Disclosure of Interests in Other Entities IFRS 12 Disclosure of Interests in Other Entities provides a comprehensive disclosure standard to address the requirements for subsidiaries, joint arrangements and associates including the reporting entity’s involvement with other entities. It also includes the requirements for unconsolidated structured entities (i.e. special purpose entities). Clearwater has adopted IFRS 12 effective January 1, 2013. The adoption of IFRS 12 has resulted in incremental disclosures in Notes 21 and 22. IFRS 13 Fair Value Measurement IFRS 13, Fair value measurement, provides a single framework for measuring fair value. The measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. Clearwater adopted IFRS 13 on January 1, 2013 on a prospective basis. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used to measure fair value and did not result in any measurement adjustments as at January 1, 2013. Clearwater added additional disclosures on fair value measurement in note 13(i). 99 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (p) New accounting standards and interpretations The IASB and International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards that have not been applied in preparing these consolidated financial statements as their effective dates fall within annual periods beginning subsequent to the current reporting period. Effective date (i) Proposed standards 2014 January 1, 2014, applied retrospectively Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets January 1, 2014, applied retrospectively 2015 Pending IASB decision Description Impact The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of 'currently has a legally enforceable right of set-off' and 'simultaneous realization and settlement'. Amendments were issued that clarify disclosure requirements for the recoverable amount of an asset or cash-generating unit Clearwater is reviewing the standard to determine the potential impact, if any; however no significant impact is anticipated. Clearwater is reviewing the standard to determine the potential impact, if any; however no significant impact is anticipated. Clearwater is reviewing the standard to determine the potential impact, if any. IFRS 9 – Financial Instruments Initially issued guidance on the classification and measurement of financial assets. Additional guidance was issued on the classification and measurement of financial liabilities. Further, amendments were issued which modify the requirements for transition from IAS 39 to IFRS 9. Further announced as part of the Limited Amendments to IFRS 9 project, the IASB tentatively decided to defer the mandatory effective date pending the finalization of the impairment and classification and measurement requirements. (i) Effective for annual periods on or after the stated date 100 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 4. EMPLOYEE COMPENSATION Employee compensation is classified in the consolidated statement of earnings based on the related nature of the service performed. The following table reconciles Clearwater's compensation expense items to where the amounts are presented on the consolidated statement of earnings: Year ended December 31 2013 Salaries and benefits Share-based compensation Cost of goods sold Administrative and selling 5. TRADE AND OTHER RECEIVABLES Trade receivables Other receivables 2012 (Restated) (Note 3(o)) 86,151 2,332 88,483 $ 96,610 5,861 102,471 $ $ 70,798 31,673 102,471 $ $ $ $ $ 62,649 25,834 88,483 2013 December 31 December 31 2012 (Restated) (Note 3(o)) 35,453 7,715 43,168 37,187 6,515 43,702 $ $ $ $ Included in other receivables is $4.3 million (December 31, 2012 - $5.5 million) of input tax receivables and $2.2 million (December 31, 2012 - $2.3 million) of other receivables. 101 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 6. INVENTORIES Goods for resale Supplies and other 2013 December 31 December 31 2012 (Restated) (Note 3(o)) 41,960 9,833 51,793 36,550 10,437 46,987 $ $ $ $ In 2013 inventory costs of $281.6 million (2012 - $255.4 million) were recognized in cost of goods sold. Clearwater incurred $1.7 million (2012 - $0.7 million) in inventory write-downs included in cost of goods sold. Refer to note 12 for assets pledged as security for long term debt. 7. PREPAIDS AND OTHER Prepaids Due from related parties (Note 20) 8. LONG TERM RECEIVABLES 2013 December 31 December 31 2012 (Restated) (Note 3(o)) 5,385 1,596 6,981 4,767 1,524 6,291 $ $ $ $ December 31 December 31 2012 Notes receivable from non-controlling interest holder in subsidiary $ 5,893 $ 4,630 2,895 3,022 Advances to non-controlling interest holder in subsidiary 1,654 2,995 Advances to fishermen $ 10,442 $ 10,647 2013 Notes receivable and advances to non-controlling interest consists of funds that are advanced to a shareholder in an incorporated subsidiary. The advances are non interest bearing and unsecured and have a value of $2.9 million at December 31, 2013 (2012 - $3.0 million). The notes bear interest at 0% - 12% (2012 – 10% - 12%) are unsecured and have no set terms of repayment. Advances to fishermen are payable from proceeds of the related catches. Certain of the advances bear interest at prime plus 2% - 3% (2012- prime plus 2% - 3%), are due on demand, and are secured by an assignment of catch, a marine mortgage on the related vessels, equipment and licenses. They are presented as non-current as the entire balances are not expected to be repaid in the current year 102 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) and it is not Clearwater’s intention to demand payment unless the terms of the advance agreements are not met. 9. OTHER ASSETS Other Income taxes receivable $ December 31 December 31 2012 398 847 $ 1,245 2013 296 - $ 296 $ 103 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 10. PROPERTY, PLANT AND EQUIPMENT (“PPE”) Cost Balance at January 1, 2013 Additions Disposals Reclassifications and other adjustments Effect of movements in exchange rates Balance at December 31, 2013 Depreciation and impairment losses Balance at January 1, 2013 Depreciation for the year Disposals Reclassifications and other adjustments Effect of movements in exchange rates Balance at December 31, 2013 Carrying amounts At January 1, 2013 At December 31, 2013 Building and wharves Land Equipment Vessels Construction in progress Total PPE Deferred Gov't Assistance Total 211 2,837 20,743 23,813 $ 2,790 $ 65,696 $ 77,303 $ 204,131 $ 5,831 $ 355,751 $ (9,667) $346,084 (15) $ 23,798 - 22 $(10,015) - (24) (3,016) (6,940) (35) (10,015) - $ (7,698) - 351 2,686 (7,201) (4,254) (8,418) 720 (7) (23) (114) (1,751) (430) (2,325) - $ (2,325) $ 2,783 $ 66,022 $ 77,070 $ 191,076 $ 21,855 $ 358,806 $ (8,962) $349,844 $ 995 $ 49,020 $ 68,769 $ 108,008 $ - $ 226,792 $ (7,288) $219,504 (392) 22,173 11 1,592 2,143 18,819 (9,893) - (24) (3,015) (6,854) - (9,893) - (7,145) - - - (7,544) - (7,544) 399 (1,246) - (10) (105) (1,131) - (1,246) - $ 1,006 $ 50,578 $ 67,792 $ 111,298 $ - $ 230,674 $ (7,281) $223,393 - 22,565 $ 1,795 $ 16,676 $ 8,534 $ 1,777 $ 15,444 $ 9,278 $ 96,123 $ 5,831 $ 128,959 $ (2,379) $126,580 $ 79,778 $ 21,855 $ 128,132 $ (1,681) $126,451 Building and wharves Land Equipment Vessels Construction in progress Total PPE Deferred Gov't Assistance Total Cost Balance at January 1, 2012 (Restated) (Note 3(o)) $ 2,772 $ 63,220 $ 74,594 $ 200,709 $ 4,129 $ 345,424 $ (9,667) $335,757 16,572 Additions (Restated) (Note 3(o)) - 20 94 (7,407) Disposals (7,407) - - - (439) (6,948) 1,861 Reclassifications and replacement assets - 2,389 2,406 9,457 1,861 - (2) (7) (32) (453) (205) (699) - Effect of movements in exchange rates (699) $ 2,790 $ 65,696 $ 77,303 $ 204,131 $ 5,831 $ 355,751 $ (9,667) $346,084 Balance at December 31, 2012 774 1,366 14,318 16,572 (20) (12,391) Depreciation and impairment losses Balance at January 1, 2012 (Restated) (Note 3(o)) $ 984 $ 47,482 $ 67,369 $ 97,579 $ - $ 213,414 $ (6,882) $206,532 (406) 20,623 Depreciation for the year (Restated) (Note 3(o)) 11 1,541 1,846 17,631 (7,387) Disposals - - (439) (6,948) - (7,387) - - (3) (7) (254) - (264) - Effect of movements in exchange rates (264) $ 995 $ 49,020 $ 68,769 $ 108,008 $ - $ 226,792 $ (7,288) $219,504 Balance at December 31, 2012 - 21,029 Carrying amounts At January 1, 2012 At December 31, 2012 $ 1,788 $ 15,738 $ 7,225 $ 1,795 $ 16,676 $ 8,534 $ 103,130 $ 4,129 $ 132,010 $ (2,785) $129,225 $ 96,123 $ 5,831 $ 128,959 $ (2,379) $126,580 Total depreciation and amortization expense related to property, plant and equipment and definite- life intangible assets for 2013 was $24.2 million (2012 - $22.5 million). In 2013 $23.7 million (2012 - $21.8 million) of depreciation and amortization expense for assets used in the harvesting and production of goods was classified as cost of goods sold and $0.4 million (2012 – $0.7 million) was recorded in administrative and selling for assets used in administrative activities. Refer to note 12 for assets pledged as security for long term debt. 104 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 11. INTANGIBLE ASSETS AND GOODWILL Indefinite life Goodwill licenses Fishing rights Total Cost Balance at January 1, 2012 (Restated) (Note 3(o)) Disposal Foreign currency exchange translation $ 7,043 $ 85,380 $ 24,094 - (910) - - (445) - $ 116,517 (910) (445) Balance at December 31, 2012 Foreign currency exchange translation Balance at December 31, 2013 7,043 84,025 24,094 115,162 - (1,299) - (1,299) $ 7,043 $ 82,726 $ 24,094 $ 113,863 Accumulated amortization Balance at January 1, 2012 Amortization expense Balance at December 31, 2012 Amortization expense Balance at December 31, 2013 Carrying amounts As at December 31, 2012 As at December 31, 2013 $ 1,749 $ - $ - - - 1,802 $ 1,749 1,802 - - 3,551 3,551 - - 1,802 1,802 $ 5,353 $ 5,353 $ - $ - $ 7,043 $ 84,025 $ 20,543 $ 111,611 $ 7,043 $ 82,726 $ 18,741 $ 108,510 Clearwater maintains fishing licenses and rights to ensure continued access to the underlying resource. Except for fishing rights, licenses have an indefinite life as they have nominal annual renewal fees, which are expensed as incurred, and the underlying species are healthy. The licenses and goodwill are tested for impairment annually and when circumstances indicate the carrying value may be impaired. Indefinite life licenses and Goodwill Annual impairment testing for each cash generating unit (“CGU”) was performed using a value in use approach as of September 28, 2013. The recoverable amounts for all CGU’s were determined to be higher than their carrying amounts and no impairments were recorded during 2013 or 2012. The value in use approach was determined by discounting the projected future cash flows generated from the continuing earnings from operations for the applicable CGU. Unless otherwise indicated in notes i – iii (below), the assumptions used in the value in use approach for 2013 were determined in a consistent manner to 2012. 105 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) The carrying value of the intangible assets and goodwill by CGU was as follows: Scallops Goodwill - $ nil (December 31, 2012 $ nil) Indefinite life licenses - $56.5 million (December 31, 2012 $57.8 million) All other CGU's individually without significant carrying value Goodwill - $7.0 million (December 31, 2012 $7.0 million) Indefinite life licenses - $26.1 million (December 31, 2012 $26.2 million) December 31, December 31, 2012 2013 56,599 57,849 33,170 89,769 33,219 91,068 The discounted cash flows used in determining the recoverable amounts for the Scallops and other CGU’s were based on the following key assumptions: i) Cash flows from operations were projected for a period of five years based on a combination of past experience, actual operating results and Board approved 2014 forecasted earnings. Terminal values and forecasts for future periods were extrapolated using inflation rates of 1.0% (2012: 1.0%). Gross margins for all future periods were determined using a combination of forecasted and historical margins. ii) Pre-tax discount rates ranging from 13% - 18% (2012: 12% - 17%) were applied in determining the recoverable amount of the CGU’s. The discount rates were estimated based upon weighted average cost of capital, and associated risk for the CGU. iii) Cash flow adjustments for capital expenditures were based upon the Board approved capital expenditure forecast, and terminal year capital expenditures were based on required refits over the period of the fishing license. The values assigned to the key assumptions represent management’s assessment of future trends in the industry and are based on both internal and external sources. The estimated recoverable amount of the cooked and peeled CGU exceeded its carrying amount by approximately $4.6 million (2012: $4.3 million). Clearwater has identified a key assumption for which a possible change could cause the carrying amount to exceed the recoverable amount. The forecasted gross margin percentage would need to decrease by 3% in order for the CGU’s recoverable amount to approximate the carrying value. Definite life fishing rights Amortization relates to fishing rights. Amortization is allocated to the cost of inventory and is recognized in cost of goods sold as inventory is sold. 106 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) In 2013 there have been no additions or disposals. In 2012 Clearwater disposed of non-core groundfish and snow crab fishing quotas with a net book value of $0.9 million for proceeds of $2.0 million resulting in a gain of $1.1 million. Refer to note 12 for assets pledged as security for long term debt. 12. LONG-TERM DEBT Term loans (b) Term loan A, due June 2018 Delayed draw term loan A, due June 2018 Term loan B, due June 2019 Term loan B, embedded derivative Term loan, due in 2014 (c) Marine mortgage, due in 2017 (d) Term loan, due in 2091 (e) Other loans December 31, December 31, 2012 2013 $ 29,700 $ - (608) - 207,197 - 4,704 - 10,642 - 1,785 2,697 3,500 3,500 405 627 Term loan A, repaid in June 2013 (f) Term loan B, repaid in June 2013 (f) Term loan B, embedded derivative, extinguished in June 2013 (f) 72,259 - - 125,781 - 4,205 2014 Convertible debentures - redeemed in July 2013 (g) Less: current portion 44,722 - 257,325 253,791 (14,297) (15,527) $ 243,028 $ 238,264 (a) Clearwater has a CDN $75.0 million revolving facility that matures in June 2018. The facility can be denominated in Canadian and US dollars. As at December 31, 2013 the balances are CDN $ nil (December 31, 2012 - $ nil) and USD of $ nil (December 31, 2012 - $ nil). The CDN balances bear interest at the banker’s acceptance rate plus 3.25%. The USD balances bear interest at the US Libor rate plus 3.25%. As of December 31, 2013 this results in effective rates of 4.45% for CDN balances and 3.50% for USD balances. The facility has a provision that, subject to certain conditions, allows Clearwater to expand the facility by a maximum of CDN $25.0 million. The availability of this facility is reduced by the term loan outstanding in note (c), as such the balance available as at December 31, 2013 is $64.4 million. (b) Term loans consist of a CDN $30.0 million Term Loan A facility, a CDN $45.0 million Delayed Draw Term Loan A facility, and a USD $200.0 million Term Loan B facility. Term Loan A - The principal outstanding as at December 31, 2013 is CDN $29.7 million. The loan is repayable in quarterly installments of $0.2 million to June 2015, $0.4 million from 107 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) September 2015 to June 2017, and $0.8 million from September 2017 to March 2018 with the balance due at maturity in June 2018. Bears interest payable monthly at the banker’s acceptance rate plus 3.25%. As at December 31, 2013 this resulted in an effective rate of 4.45%. Delayed Draw Term Loan A - The principal outstanding as at December 31, 2013 is CDN $ nil. The balance is shown net of deferred financing charges of CDN $0.6 million. The facility is repayable in quarterly installments of 1.25% of the principal amount drawn under the facility with repayment to begin in the first quarter after the final draw on the facility. The facility matures in June 2018 and bears interest payable monthly at the banker’s acceptance rate plus 3.25%. Term Loan B - The principal outstanding as at December 31, 2013 is USD $199.0 million. The loan is repayable in quarterly installments of USD $0.5 million with the balance due at maturity in June 2019 and bears interest payable monthly at the US Libor plus 3.50% with a Libor interest rate floor of 1.25%. As of December 31, 2013 this resulted in an effective rate of 4.75%. The facility has a provision that, subject to certain conditions allows Clearwater to expand the facility by a maximum of USD $100.0 million. The embedded derivative represents the fair market value of the Libor interest rate floor of 1.25%. The change in fair market value of the embedded derivative is recorded through profit or loss. The revolving loan, term loan A, delayed draw term loan A, and Term Loan B are secured by a first charge on cash and cash equivalents, accounts receivable, inventory, marine vessels, licenses and quotas, and Clearwater’s investments in certain subsidiaries. Clearwater’s debt facilities have covenants that include, but are not limited to, a leverage ratio (for which debt, net of certain cash balances, is compared to EBITDA, excluding non controlling interests in EBITDA and most significant non-cash and non-recurring items) as well as a number of non-financial covenants. In addition to the minimum principal payments for Term Loan A and B, the loan agreement requires between 25% and 50% of excess cash flow (defined in the loan agreement as EBITDA, excluding non controlling interest in EBITDA and most significant non-cash and non-recurring items less certain scheduled principal payments, certain capital expenditures and certain cash taxes) be repaid starting for the year ended December 31, 2014 based on the previous fiscal year’s results upon approval of the annual financial statements. Payments are allocated amongst the term loans on a pro rata basis. (c) Term Loan - The principal outstanding as at December 31, 2013 is USD $10.0 million. The loan is held through a Clearwater subsidiary. The loan is non amortizing, repayable at maturity in August 2014 and bears interest payable monthly at 6.0%. The loan is secured by a marine vessel. Clearwater provides a guarantee on the term loan. 108 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (d) Marine mortgage - The mortgage is payable in the principal amount of: YEN DKK CDN December 31, December 31, 2012 128,991 6,044 154 2013 99,224 3,957 - The mortgage bears interest at UNIBOR plus 1.0% payable semi-annually. Principal payments are required annually as follows: YEN DKK CDN 2014 29,767 2,087 - 2015 29,767 1,870 - 2016 29,767 - - 2017 9,923 - - The loan matures in 2017 and is secured by a first mortgage over the related vessel. (e) Term Loan - due in 2091. In connection with this loan, Clearwater makes a royalty payment of $0.3 million per annum in lieu of interest. This equates to an effective interest rate of approximately 8.0%. (f) On June 26, 2013 Clearwater completed a refinancing of its debt facilities and used the proceeds to repay senior debt facilities that totaled CDN $69.7 million, USD $126.0 million, convertible debentures of CDN $44.4 million and reduce the balance owing on the revolving credit facility. (g) The 2014 Convertible debentures accrued interest at 7.25% and were convertible at a price of $5.90 per share at the option of the holder. The debentures paid interest semi annually in arrears on March 31 and September 30. The outstanding principal balance of $44.4 million was repaid on July 29, 2013. 109 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 13. FINANCIAL INSTRUMENTS Summary of derivative financial instrument position Derivative financial assets Forward foreign exchange contracts Interest rate cap contract Derivative financial liabilities Forward foreign exchange contracts Interest rate swap contract December 31, December 31, 2012 2013 $ 1,297 169 $ 1,466 $ 4,185 - $ 4,185 (6,694) (3,439) (175) (200) $ (6,869) $ (3,639) (a) At December 31, 2013 Clearwater had outstanding forward contracts as follows: Currency Notional Amount (in 000's) Average Contract Exchange Amount Average months to maturity Fair Value Asset (Liability) Yen 2,670,000 0.011 1 - 12 $ $ 1,297 1,297 USD Euro 113,000 52,000 1.046 1.372 1 - 12 1 - 12 $ $ (1,598) (5,096) (6,694) Certain of the USD (2013 - $39.5 million) and Euro (2013 - $2.0 million) forward contracts contain provisions that subject to the spot rate being greater than the contract rate adjust the contract rate by 50% of the excess of the spot rate over the contract rate at maturity. At December 31, 2012, Clearwater had outstanding forward contracts as follows: Currency Notional Amount (in 000's) Average Contract Exchange Amount Average months to maturity Fair Value Asset (Liability) Yen 2,705,000 0.013 1 - 12 $ 4,185 USD Euro 82,500 56,100 0.988 1.270 $ 1 - 12 (640) 1 - 12 (2,799) $ (3,439) 110 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (b) At December 31, 2013 Clearwater had an interest rate swap and interest rate cap contract outstanding as follows: Contracted fixed interest rate Notional Amount (in 000's) Fair Value Asset (Liability) Term Loan A - Interest rate swap 5.38% 12,000 $ (175) The interest rate swap expires December 2015. Contracted fixed interest rate Notional Amount (in 000's) Fair Value Asset (Liability) Term Loan A - Interest rate cap 6.25% 12,000 $ 169 The interest rate cap is effective December 2015 and expires in June 2018. Refer to note (g) for additional detail. (c) At December 31, 2012 Clearwater had an interest rate swap outstanding as follows: Contracted fixed interest rate Notional Amount (in 000's) Fair Value Asset (Liability) Term Loan A - Interest rate swap 6.29% 30,000 $ (200) On June 28, 2013 Clearwater settled the swap as part of its refinancing with gain recorded in profit or loss of $0.2 million. 111 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (d) Foreign exchange and derivative contract gains and losses: Year ended December 31 Realized loss (gain) Foreign exchange contracts and interest rate swap Working capital, long-term debt, and other Unrealized loss (gain) Foreign exchange on long term debt and other assets Mark-to-market on foreign exchange contracts Mark-to-market on interest rate swap and cap (Note 15) (e) Credit risk: 2013 2012 $ 2,752 3,586 6,338 $ (3,991) 1,359 (2,632) 5,427 6,060 6 11,493 (3,013) (663) 200 (3,476) $ 17,831 $ (6,108) Credit risk refers to the risk of losses due to failure of Clearwater’s customers or other counterparties to meet their contractual obligations. Clearwater is exposed to credit risk in the event of non-performance by counter parties to its derivative financial instruments but does not anticipate non-performance of any of the counter parties as Clearwater only deals with highly rated financial institutions. Clearwater has significant accounts receivable from customers operating in Canada, United States, Europe and Asia. Significant portions of Clearwater’s customers from a sales dollar perspective have been transacting with Clearwater in excess of five years and bad debt losses have been minimal. Clearwater has a policy of utilizing a combination of credit reporting agencies, credit insurance, letters of credit and secured forms of payment to mitigate customer specific credit risk and country specific credit risk. As a result Clearwater does not have any significant concentration of credit risk. As at December 31, 2013, Clearwater’s trade accounts receivable aging based on the invoice due date is as follows: 98.5% 0-30 days, 0.5% 31-60 days, and 1.0% over 60 days. As at December 31, 2012, Clearwater’s trade accounts receivable aging based on the invoice due date is as follows: 99.0% 0-30 days, 0.2% 31-60 days, and 0.8% over 60 days. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts of $0.4 million (2012 - $0.5 million). Clearwater reviews accounts past due on a regular basis and provides an allowance on a specific account basis. Accounts are only written off completely when it becomes virtually certain that collection will not occur. Changes in the allowance for doubtful accounts are summarized in the table below: 112 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) December 31 Balance at January 1 Allowance recognized Amounts recovered Amounts written off as uncollectible Foreign exchange revaluation Foreign exchange translation Balance at December 31 (f) Foreign currency exchange rate risk 2013 2012 $ 459 $ 838 814 (808) (105) 7 26 393 $ 381 (728) (15) (10) (7) 459 $ Foreign exchange risk refers to the risk that the value of financial instruments or cash flows associated with the instruments will fluctuate due to changes in foreign exchange rates. Approximately 80% of Clearwater's sales are in currencies other than Canadian dollars, whereas the majority of expenses are in Canadian dollars. As a result fluctuations in foreign exchange rates may have a material impact on Clearwater's financial results. Risks associated with foreign exchange are partially mitigated by the fact that Clearwater (i) diversifies sales internationally which reduces the impact of any country-specific economic risks; (ii) executes on pricing strategies so as to offset the impact of exchange rates; (iii) limits the amount of long term sales contracts; (iv) regularly reviews economist estimates of future exchange rates; and (v) has implemented a foreign exchange program that focuses on using forward contracts to lock in exchange rates up to 18 months. The carrying amounts of Clearwater’s foreign currency denominated monetary assets and monetary liabilities (excluding derivative financial instruments) as at December 31, 2013 and December 31, 2012 was as follows (as converted to Canadian dollars): December 31 Cash Trade receivables Other receivables Long term receivables Trade and other payables Long-term debt Net balance sheet exposure 2013 2012 $ 22,993 $ 17,596 30,770 4,944 7,577 (19,421) (132,529) $ (165,000) $ (91,063) 30,667 3,341 8,704 (6,377) (224,328) The components of this net exposure by currency are as follows (in local currency ‘000’s) at December 31, 2013: 113 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) December 31, 2013 GBP USD Yen Euros RMB NOK DKK Argentine Peso Cash Trade receivables Other receivables Long term receivables Trade and other payables Long-term debt Net balance sheet exposure 177,338 12,451 495 - 35,810 180 628 10,727 15 2,247 308 560 - - 6,719 9,027 (5) 159 - 897 - - 9 11,405 - 5,482 - - - - - 17,589 (64) (3,294) (18,411) (245) (913) - (891) 1 - (209,157) (99,224) - - - (3,957) - 35,287 11,071 938 (181,251) 78,129 11,280 496 (64) The components of this net exposure by currency are as follows (in local currency ‘000’s) at December 31, 2012: December 31, 2012 GBP USD Yen Euros RMB NOK DKK Argentine Peso Cash Trade receivables Other receivables Long term receivables Trade and other payables Long-term debt Net balance sheet exposure 249,273 13,138 86 11,058 48,445 157 343 - 31,958 92 24 679 8,728 (76) 159 - 2,028 8,743 - - - - - 14,798 - 4,606 (149) (3,549) (204) (1,132) - (9) (2,245) (67,960) - (130,652) (128,991) - - - (6,044) - 343 (9) 38,667 (44,303) 540 (105,240) 168,523 9,781 - - 12,404 - - 2,594 The following table details Clearwater’s sensitivity to a 10% change in the exchange rates against the Canadian dollar. The sensitivity analysis includes outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The change below is calculated based on the net balance sheet exposure. GBP USD Yen Euros RMB NOK DKK Argentine Peso (g) Interest rate risk 2013 165 (19,285) 79 1,658 9 (1) 696 181 2012 87 (10,470) 193 1,283 5 (0) 680 (897) Interest rate risk refers to the risk that the value of a financial instrument or cash flow associated with the instrument fluctuate due to changes in market interest rates. Clearwater’s interest rate risk arises from long term borrowings issued at fixed rates that create fair value interest rate risk and variable rate borrowings that create cash flow interest rate risk. Clearwater’s debt is carried at amortized cost with the exception of the embedded interest rate floor in Term Loan B. The interest rate floor is a derivative instrument and is recorded at fair value through profit and loss. Clearwater manages its interest rate risk exposure by using a mix of fixed and variable rate debt. At December 31, 2013, excluding the interest rate swap, approximately 5.5% (2012 – 19.0%) of 114 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) the $257.3 million (2012 - $253.8 million) of Clearwater’s debt was fixed rate debt with a weighted average interest rate of 4.8% (2012 – 6.5%). A 1% change in interest rates for variable rate borrowings would result in $2.3 million increase (or decrease) in interest expense. Clearwater has two arrangements to hedge interest rate risk. The first arrangement is an interest rate swap with a December 2015 expiration to effectively swap the variable interest rate for a fixed rate for 40% or $12 million of the outstanding Term Loan A debt facility. This interest rate swap effectively locks in the interest rate on $12.0 million of the Term Loan A facility at an effective interest rate of 5.38%. The second arrangement is an interest rate cap effective December 2015 with a June 2018 expiration to limit the variable interest rate for 40% or $12.0 million of the outstanding Term Loan A debt facility at 6.25%. The fair value of interest rate swap and interest rate cap at the end of the reporting period is determined by discounting the future cash flows using the yield curves at the end of the reporting period. (h) Liquidity risk Liquidity risk is the risk that Clearwater will encounter difficulty in meeting obligations associated with financial liabilities. Clearwater manages liquidity risk by monitoring forecasted and actual cash flows, minimizing reliance on any single source of credit, maintaining sufficient undrawn committed credit facilities and matching the maturity profiles of financial assets and financial liabilities. The following are the contractual maturities of non-derivative financial liabilities, derivative financial instruments, operating lease and other commitments. The table includes undiscounted cash flows of financial liabilities, operating lease and other commitments, interest and principal cash flows based on the earliest date on which Clearwater is required to pay. December 31, 2013 Carrying Amount Contractual Cash Flow 2014 2015 2016 2017 2018 >2019 Interest - long-term debt Principal repayments - long-term debt 79,519 257,769 11,899 14,297 11,132 3,762 10,963 3,985 10,788 3,784 10,072 27,234 24,665 204,707 Total long-term debt 257,325 337,288 26,196 14,894 14,948 14,572 37,306 229,372 Trade and other payables 40,760 40,760 40,760 - - - - - Operating leases and other - 48,954 31,522 3,115 2,034 1,990 1,845 8,448 Derivative financial instruments - asset (1,466) (1,466) (1,466) Derivative financial instruments - liability 6,869 6,869 6,869 - - - - - - - - - - $ 303,488 $ 432,405 $ 103,881 $ 18,009 $ 16,982 $ 16,562 $ 39,151 $ 237,820 Included in the above commitments for operating leases and other are amounts that Clearwater is committed directly and indirectly through its partnerships for various licenses and lease agreements, office, machinery and vehicle leases, and vessel and equipment commitments. These commitments require approximate minimum annual payments in each of the next five years as shown above. 115 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Also included in commitments for operating leases and other are amounts to be paid to a company controlled by a director of Clearwater over a period of years ending in 2016 for vehicle and office leases, which aggregate approximately $0.2 million (2012 - $0.04 million). Fair value of financial instruments The following tables set out Clearwater’s classification and carrying amount, together with fair value, for each type of non-derivative and derivative financial asset and liability: December 31, 2013 Asset : Cash Trade and other receivables Long term receivables Forward foreign exchange contracts Interest rate cap Liabilities: Trade and other payables (1) Long-term debt Forward foreign exchange contracts Embedded derivative Interest rate swap December 31, 2012 Asset : Cash Trade and other receivables Long term receivables Forward foreign exchange contracts Liabilities: Trade and other payables (1) Long-term debt Forward foreign exchange contracts Embedded derivative Interest rate swap Fair Value Amortized cost Total Through profit or loss Derivatives Loans and receivables Non-derivative financial liabilities Carrying amount Fair value $ $ 46,793 - - - - 46,793 - $ - - 1,297 169 1,466 $ - $ 43,702 10,442 - - 54,144 $ - $ - - - - $ - $ $ 46,793 43,702 10,442 1,297 169 102,403 46,793 43,702 10,442 1,297 169 102,403 $ $ - $ - - - - $ - - $ - (6,694) (4,704) (175) (11,573) $ - $ - - - - $ - $ $ $ (33,766) (252,621) - - - (286,387) (33,766) (252,621) (6,694) (4,704) (175) (297,960) (33,766) (252,621) (6,694) (4,704) (175) (297,960) $ $ $ Fair Value Amortized cost Total Through profit or loss Derivatives Loans and receivables Non-derivative financial liabilities Carrying amount Fair value $ $ 41,504 - - - 41,504 - $ - - 4,185 4,185 $ - $ 43,168 10,647 - 53,815 $ - $ - - - $ - $ $ 41,504 43,168 10,647 4,185 99,504 41,504 43,168 10,647 4,185 99,504 $ $ - $ (44,722) - - - (44,722) $ - $ - (3,439) (4,205) (200) (7,844) $ - $ - - - - $ - $ $ $ (40,925) (204,864) - - - (245,789) (40,925) (249,586) (3,439) (4,205) (200) (298,355) (40,925) (254,384) (3,439) (4,205) (200) (303,153) $ $ $ (1) Trade and other payables excludes the liability for share based compensation of $7.0 million at December 31 2013 (December 31, 2012 $3.6 million). 116 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (i) Fair Value Hierarchy Assets and liabilities carried at fair value must be classified using a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. The levels are defined as follows: • Level 1: Fair value measurements derived from quoted prices (unadjusted) in active markets for identical assets or liabilities • Level 2: Fair value measurements 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) • Level 3: Fair value measurements derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs) The table below sets out fair value measurements of financial instruments using the fair value hierarchy: December 31, 2013 Recurring measurements Financial Assets: Cash Forward foreign exchange contracts Interest rate cap Financial Liabilities: Forward foreign exchange contracts Embedded derivative Interest rate swap December 31, 2012 Recurring measurements Financial Assets: Cash Forward foreign exchange contracts Financial Liabilities: Forward foreign exchange contracts Convertible debentures Embedded derivative Interest rate swap Level 1 Level 2 Level 3 46,793 - - 46,793 $ - 1,297 169 1,466 $ - - - $ - (6,694) (4,704) (175) (11,573) $ - - - $ - - - - $ - Level 1 Level 2 Level 3 41,504 - 41,504 $ $ 4,185 4,185 - $ - - (44,722) - - (44,722) $ (3,439) - (4,205) (200) (7,844) $ - - - - $ - 117 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Clearwater used the following techniques to value financial instruments categorized in Level 2: • Forward foreign exchange contracts are measured using present value techniques. Future cash flows are estimated based on forward exchange rates (from observable exchange rates at the end of the reporting period) and contract forward rates, discounted at a rate that reflects the credit risk of the various counterparties. • The embedded derivative, interest rate swap and interest rate cap are measured using present value techniques that utilize a variety of inputs that are a combination of quoted prices and market-corroborated inputs. The fair value estimates are not necessarily indicative of the amounts that Clearwater will receive or pay at the settlement of the contracts. There were no transfers between levels during the periods ended December 31, 2013 and December 31, 2012. Fair value of financial instruments carried at amortized cost: Except as detailed below Clearwater considers that the carrying amounts of financial assets and financial liabilities recognized in the consolidated financial statements materially approximate their fair values: The estimated fair value of Clearwater’s long term debt whose carrying value does not approximate fair value at December 31, 2013 is $16.3 million (December 31, 2012 - $7.2 million) and the carrying value is $16.3 million (December 31, 2012 – $6.6 million). The fair value of long term debt has been classified as level 2 in the fair value hierarchy and was estimated based on discounted cash flows using current rates for similar financial instruments subject to similar risks and maturities. 118 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 14. SHARE CAPITAL Authorized: Clearwater is authorized to issue an unlimited number of common shares. Share capital movement: Share capital: Balance at January 1 Redemption of 2013 and 2014 convertible debentures Balance at December 31 December 31, 2013 December 31, 2012 # 50,948,698 - 50,948,698 $ 64,867 (87) 64,780 # 50,948,698 - 50,948,698 $ 65,309 (442) 64,867 The conversion option on the 2013 and 2014 convertible debentures remained unexercised on redemption in July 2012 and 2013 and the balance of $0.09 million (2012 - $0.4 million) was transferred from share capital to retained earnings. During 2013 a dividend of $0.025 cents per share (total dividend $1.3 million) was declared and paid. Subsequent to December 31, 2013 Clearwater issued 4,029,400 common shares at $8.50 per common share for gross proceeds of approximately $34.2 million. On February 26, 2014, Clearwater declared a quarterly dividend of $0.025 per share, payment to be made on March 24, 2014 to shareholders of record as of March 10, 2014. 15. FINANCE COSTS Year ended December 31 Interest expense on financial liabilities Amortization of deferred financing charges and accretion 2013 2012 (Restated) (Note 3(o)) $ 16,317 $ 20,346 993 1,158 17,310 21,504 Fair value adjustment on convertible debentures and embedded derivative Foreign exchange and derivative contracts (Note 13(d)) Debt settlement and refinancing fees Finance costs 2,898 (1,710) 17,831 (6,108) 9,316 6,093 $ 42,747 $ 24,387 119 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 16. OTHER INCOME Year ended December 31 Royalties, interest, and other fees Share of earnings of equity-accounted investee Other fees Other income 17. EARNINGS PER SHARE 2013 2012 (Restated) (Note 3(o)) (1,712) 92 (2,082) (1,054) (1,250) (633) $ (3,240) $ (3,399) The earnings and weighted average number of shares used in the calculation of basic and diluted earnings per share is as follows: (in thousands except per share data): 2013 2012 Basic Earnings for the year attributable to equity holders of Clearwater Weighted average number of shares outstanding Earnings per share Diluted Earnings for the year attributable to equity holders of Clearwater Weighted average number of shares oustanding Earnings per share $ 6,333 50,948,698 0.12 $ $ 6,333 50,948,698 0.12 $ $ 15,009 50,948,698 0.29 $ $ 15,009 50,948,698 0.29 $ The interest on the 2013 and 2014 convertible debentures results in anti-dilutive earnings per share for December 31, 2013 and December 31, 2012. As a result 7,523,559 potential ordinary shares (December 31, 2012 - 20,882,942) were not included in the calculation of the weighted average number of ordinary shares for the purpose of diluted earnings per share. Refer to Note 14 for details on common shares issued subsequent to December 31, 2013. 120 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 18. INCOME TAXES (a) Reconciliation of current income tax The effective rate on Clearwater's earnings before income taxes differs from the expected amount that would arise using the combined Canadian federal and provincial statutory income tax rates. A reconciliation of the difference is as follows: Year ended December 31 Earnings before income taxes Combined tax rates Income tax provision at statutory rates Add (deduct): Recognition of previously unrecorded deferred tax assets Permanent differences Income of partnership distributed directly to partners Other Income of foreign subsidiary not subject to tax Actual provision (b) Income tax expense 2013 7,197 30.5% 2,195 (9,938) 2,819 (2,811) (357) (9) (8,101) 2012 (Restated) (Note 3(o)) 17,242 30.5% 5,259 (8,498) 766 (2,085) 875 (1,779) (5,462) The components of the income tax expense (recovery) for the year are as follows: Year ended December 31 2013 Current Deferred recovery 2012 (Restated) (Note 3(o)) 1,693 (7,155) (5,462) $ $ $ $ 1,812 (9,913) (8,101) 121 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (c) Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Deferred tax asset: Non-capital loss carry-forwards Long-term debt Reserve for unpaid share-based compensation Foreign exchange Inventory Other Deferred tax liability: Licenses Property, plant and equipment Other December 31 2013 December 31 2012 (Restated) (Note 3(o)) $ 18,537 3,150 1,785 1,648 625 294 $ 8,010 - - - 1,193 - (5,316) (3,233) - 17,490 $ (1,442) (403) (115) 7,243 $ Classified in the consolidated statement of financial position as: Deferred tax asset - non-current Deferred tax liability - non-current (Restated) (Note 3(o)) 9,207 (1,964) 7,243 $ 18,943 (1,453) 17,490 $ The net change in deferred income taxes is reflected in deferred income tax recovery of $9.9 million (2012 - $7.2 million) plus the foreign exchange effect of deferred taxes of foreign subsidiaries totaling $0.3 million (2012 - $0.1 million), the effect of which was recorded through foreign exchange. Recognized deferred tax assets Clearwater has recognized deferred tax assets of $17.5 million (December 31, 2012 - $7.2 million) relating primarily to its non capital loss carry-forward balances. The deferred tax asset represents losses of $60.8 million (December 31, 2012 - $26.3 million). The total losses available for recognition as at December 31, 2013 were $67.0 million (December 31, 2012 - $67.2 million). These losses expire from 2026 – 2032. These deferred tax assets are recognized based on Clearwater's estimate that it will earn sufficient taxable profits to utilize these losses before they expire. 122 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Unrecognized deferred tax assets Clearwater has the following investment tax credits and loss carryforwards for which no deferred tax asset is recognized in the statements of financial position. Non-capital losses Investment tax credits Capital losses Unrecognized deferred tax liabilities $ Clearwater Seafoods Inc 6,249 5,885 12,087 Subsidiary Corporations 6,659 $ 113 380 Total $ $ $ 12,908 5,998 12,467 Expiry 2014 - 2033 2023 - 2033 No expiry Deferred tax is not recognized on the unremitted earnings of subsidiaries and other investments as the Company is in a position to control the reversal of the temporary difference and it is probable that such differences will not reverse in the foreseeable future. The unrecognized temporary difference at December 31, 2013 for the Company's subsidiaries was $72.2 million (December 31, 2012 - $68.0 million). 123 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 19. SEGMENTED INFORMATION Clearwater has one reportable segment which includes its’ integrated operations for harvesting, processing and distribution of seafood products. (a) Sales by Species Year ended December 31 2013 (b) Sales by Geographic Region Year ended December 31 2013 Scallops Coldwater shrimp Lobster Clams Crab Ground fish and other France UK Russia Other Europe United States Canada North America China Japan Other Asia Other $ $ 2012 (Restated) (Note 3(o)) 109,754 77,497 61,458 71,894 15,628 14,071 350,302 147,637 81,592 66,452 60,780 18,271 13,927 388,659 $ $ $ 2012 (Restated) (Note 3(o)) 41,363 16,631 11,759 53,131 122,884 54,157 47,408 101,565 59,624 46,366 17,693 123,683 $ 50,969 15,839 15,777 51,167 133,752 76,945 55,923 132,868 61,622 38,712 18,711 119,045 2,994 388,659 $ $ 2,170 350,302 124 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (c) Property, plant and equipment, licenses, fishing rights and goodwill by geographic region 2013 December 31, December 31, 2012 (Restated) (Note 3(o)) Property, plant and equipment, licences, fishing rights and goodwill Canada Argentina Other $ 212,625 22,115 221 234,961 $ 225,048 12,886 257 238,191 $ $ 125 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 20. RELATED PARTY TRANSACTIONS (a) Subsidiaries, partnerships, and joint venture Clearwater’s consolidated financial statements include the accounts of the Corporation and its material subsidiaries, partnerships and joint venture, as follows: Entity Clearwater Seafoods Limited Partnership Clearwater Ocean Prawns Venture St. Anthony Seafoods Limited Partnership Adams and Knickle Limited Clearwater Seafoods Holdings Incorporated Clearwater Fine Foods Europe Limited Clearwater Fine Foods USA Incorporated Glaciar Pesquera S.A. (b) Key management personnel Accounts Consolidated Consolidated Consolidated Equity method Consolidated Consolidated Consolidated Consolidated Clearwater has defined key management personnel as senior executive officers, as well as the Board of Directors, as they have the collective authority and responsibility for planning, directing and controlling the activities of the Corporation. The following table outlines the total compensation expense for key management personnel for the years ended December 31, 2013 and 2012. Year ended December 31 Wages and salaries Share-based compensation Bonuses Other benefits $ $ 2013 3,792 5,861 1,290 606 11,549 2012 3,023 2,332 1,380 371 7,106 $ $ (c) Transactions with other related parties Clearwater rents office space to Clearwater Fine Foods Incorporated (“CFFI”) (the controlling shareholder of Clearwater) and provides computer network support services to CFFI. Clearwater charges CFFI management and other fees for finance and administration services provided to CFFI by certain Clearwater staff. CFFI previously charged management fees to Clearwater for legal, finance, and administration services provided to Clearwater by certain CFFI staff. These fees apportion the salaries of the individuals providing the services based on estimated time spent. CFFI charges Clearwater for its use of CFFI aircraft at market rates per hour of use. 126 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) Clearwater had the following transactions and balances with CFFI, for the year ended December 31, 2013 and December 31, 2012: Opening balance due from CFFI Management and other fees charged to (from) CFFI Rent and IT service fees charged to CFFI Interest on intercompany account Guarantee fee charged from CFFI Aircraft charges from CFFI Payments from CFFI Advances to CFFI Other charges to CFFI $ $ December 31, December 31, 2012 2,111 (198) 184 103 (62) (38) (925) 166 255 1,596 2013 1,596 122 184 78 - - (466) - 10 1,524 $ $ The amount due from CFFI is unsecured and due on demand. As such the account has been classified as a current asset included in prepaids and other. The balance bears interest at a rate of 5%. Fees amounting to 1% of the guarantees were charged to Clearwater. With the debt refinancing in 2012 and 2013 CFFI no longer provides a guarantee on the senior debt facilities for Clearwater. In addition, Clearwater expensed approximately $0.07 million for vehicle leases in 2013 (2012 - $0.11 million) and approximately $0.11 million for other services in 2013 (2012 - $0.17 million) by companies related to its parent. The transactions are recorded at the exchange amount and the balance due to these companies was $0.01 million as at December 31, 2013 (December 31, 2012 - $0.02 million) Clearwater recorded sales, sales commissions and storage fees to a non-controlling interest in a consolidated partnership. These sales, sales commissions, and storage fees are at prevailing market prices and are settled on normal trade terms. Sales to the non-controlling interest for 2013 are $1.2 million (2012 - $1.0 million). Sales commissions in 2013 are $2.0 million (2012 - $1.9 million). Storage fees for 2013 are $1.7 million (2012 - $2.1 million). Clearwater recorded legal expense for services provided by a law firm in which a Director of the corporation is a partner for 2013 of $0.03 million (2012 - $ nil). At December 31, 2013 Clearwater had a balance of $8.8 million (December 31, 2012 - $7.7 million), included in long term receivables, for interest and non interest bearing advances and loans made to a non-controlling interest shareholder in a subsidiary (refer to Note 8). 127 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 21. INTERESTS IN OTHER ENTITIES Summarized financial information in respect of Clearwater’s subsidiary and partnership that have non controlling interests (“NCI”) is set out below. (a) Summarized statements of financial position Year ended December 31 NCI Percentage Current assets Current liabilities Non-current assets Non-current liabilities Net assets Coldwater shrimp 2013 46.34% 2012 46.34% $ 30,872 $ 28,275 (8,194) (8,731) 22,678 19,544 36,475 44,865 (1,072) (1,835) 35,403 43,030 58,081 62,574 Accumulated non-controlling interests 24,630 27,541 Year ended December 31 NCI Percentage Current assets Current liabilities Non-current assets Non-current liabilities Net assets Scallops 2013 20% 2012 20% $ 5,629 $ 5,075 (27,112) (15,545) (21,483) (10,470) 23,972 13,001 (186) (403) 23,786 12,598 2,303 2,128 Accumulated non-controlling interests (78) (582) 128 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) (b) Summarized statements of earnings Year ended December 31 Sales Earnings Total comprehensive income Earnings allocated to non-controlling interest Dividends paid to non-controlling interest Year ended December 31 Sales Earnings Other comprehensive income Total comprehensive income Coldwater shrimp 2013 2012 $ 77,866 $ 70,186 15,047 15,047 19,998 19,998 8,438 6,471 6,488 11,349 Scallops 2013 2012 $ 30,916 $ 32,876 6,966 437 7,403 1,138 634 1,772 Earnings allocated to non-controlling interest Dividends paid to non-controlling interest 569 1,459 3,004 66 (c) Summarized statements of cash flows Year ended December 31 Cash flow from operating activities Cash flow used in financing activities Cash flow used in investing activities Year ended December 31 Cash flow from operating activities Cash flow from (used in) financing activities Cash flow used in investing activities Coldwater shrimp 2013 2012 $ 27,403 $ 25,383 (25,342) (15,524) (13) (2,920) Scallops 2013 2012 $ 3,534 $ 16,624 10,339 (15,018) (13,863) (1,597) 129 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 22. JOINT VENTURE The following table summarizes the financial information of Clearwater’s joint venture accounted for using the equity method: Year ended December 31 2013 2012 Carrying amount of interest in joint venture 4,701 3,868 Share of: Earnings for the year Dividends from joint venture 2,082 1,054 1,240 1,740 Commissions paid to joint venture 6,905 4,311 23. CAPITAL MANAGEMENT Clearwater’s objectives when managing capital are as follows: • Ensure liquidity • Minimize cost of capital • Support business functions and corporate strategy Clearwater’s capital structure includes a combination of equity and various types of debt facilities. Clearwater’s objective when managing its capital structure is to obtain the lowest cost of capital available, while maintaining flexibility and reducing exchange risk by borrowing when appropriate in currencies other than the Canadian dollar. Clearwater uses leverage, in particular revolving and term debt to lower its cost of capital. The amount of debt available to Clearwater is a function of earnings that can be impacted by known and unknown risks, uncertainties, and other factors outside Clearwater’s control including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. Clearwater maintains flexibility in its capital structure by regularly reviewing forecasts and multi- year business plans and making any required changes to its debt and equity facilities on a proactive basis. These changes can include early repayment of debt, issuing or repurchasing shares, issuing new debt or equity, utilizing surplus cash, extending the term of existing debt facilities, selling assets to repay debt and if required, limiting debt paid. 130 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) The capital structure is as follows: In 000’s of Canadian dollars As at December 31 Equity Common shares Retained earnings Cumulative translation account Non-controlling interest Long term debt Subordinated debt 2014 convertible debentures, redeemed in July 2013 Senior debt, non-amortizing Revolving debt, due in 2018 Term loan, due in 2014 Term loan, due in 2091 Senior debt, amortizing Term Loan A, due 2018 Delayed Draw term Loan A, due 2018 (net of deferred financing charges of $0.6 million) Term Loan B, due 2019 (including embedded derivative) Marine mortgage, due in 2017 Other loans Term Loan A, repaid in June 2013 Term Loan B, (including embedded derivative), repaid in June 2013 Total long term debt Total capital 2013 2012 $ 64,780 19,762 (5,470) 79,072 28,455 107,527 $ 64,867 14,616 (3,866) 75,617 30,904 106,521 - - - 10,642 3,500 14,142 29,700 (608) 211,901 1,785 405 - - 243,183 257,325 44,722 44,722 - - 3,500 3,500 - - - 2,697 627 72,259 129,986 205,569 253,791 $ 364,852 $ 360,312 See Note 14 for details on common shares issued subsequent to December 31, 2013. 131 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 24. SHARE-BASED COMPENSATION Clearwater’s share-based compensation plans are detailed in Note 3(m). The number of share-based awards outstanding and vested as of December 31, 2013 and December 31, 2012 were as follows: Grant price 0.80 1.00 N/A N/A N/A N/A Grant price 0.01 0.80 1.00 N/A N/A N/A SARS PSU - Tranche 1 PSU - Tranche 2 DSU Total SARS PSU - Tranche 1 DSU Total As at December 31, 2013 In thousands Number vested 83 67 Number outstanding 83 67 Grant Date May 2010 May 2010 May 2012 March 2013 - - 100 September 2012 67 June 2012 - December 2013 317 434 218 375 67 1,244 As at December 31, 2012 In thousands Number vested 255 167 133 Number outstanding 255 250 200 423 375 26 1,529 - 100 26 681 Grant Date May 2010 May 2010 May 2010 May 2012 September 2012 June - December 2012 There is no limit to the number of awards that can be issued as awards are expected to be cash settled. Fair value of share based plans Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). 132 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) 2013 Weighted average fair value per option Weighted average risk-free interest rate Weighted average expected volatility Expected life of options (years) Weighted average dividend yield Weighted average share price Weighted average fair value per option Weighted average risk-free interest rate Weighted average expected volatility Expected life of options (years) Weighted average dividend yield Weighted average share price PSU Tranche 1 12.09 PSU Tranche 2 11.41 $ $ SARS 7.83 DSU 8.22 2.15% 1.49% - 3.38% 1.39% - 3.82% 1.13% - 2.12% 72.47% 22.65% - 64.39% 21.62% - 58.90% 58.60% - 77.22% 5.5 - 12.3 Nil 8.22 2 Nil 11.41 1 Nil 12.09 0 Nil 8.22 $ $ $ $ $ $ 2012 $ $ SARS 3.68 PSU Tranche 1 DSU 4.00 5.22 1.59% 0.37% - 2.65% 1.32% - 1.50% 69.99% 31.5% - 67.9% 50.79% - 83.70% 4.3 - 6.8 Nil 4.00 2 Nil 5.22 0.5 Nil 4.00 $ $ $ $ The following reconciles the share based awards outstanding at the beginning and end of the year: In thousands Balance at January 1 Granted Exercised Balance at December 31 Vested at January 1 Vested Exercised Vested at December 31 2013 1,529 270 (555) 1,244 681 191 (555) 317 2012 705 824 - 1,529 405 276 - 681 133 | Page CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars) The following share based awards were exercised during the year: Grant price 0.01 0.80 1.00 SARS Total As at December 31, 2013 In thousands Number exercised 255 167 133 555 Exercise date March 2013 March 2013 March 2013 Share price at exercise date 5.00 5.00 5.00 $ $ $ The total cash payment for share based awards exercised during the year were $2.5 million (December 31, 2012 - $ nil) Share-based compensation expense included in the income statement for the year ended December 31, 2013 is $5.9 million (December 31, 2012 - $2.3 million). The liability for share based compensation is $7.0 million at December 31, 2013 (December 31, 2012 - $3.6 million). The vested portion of the liability for share based compensation is $2.5 million at December 31, 2013 (December 31, 2012 – $2.5 million) 25. ADDITIONAL CASH FLOW INFORMATION Changes in operating working capital (excludes change in accrued interest) Decreases in inventories Decreases in trade and other payables Increases in trade and other receivables Decrease (increase) in prepaids 26. CONTINGENT LIABILITIES December 31, December 31, 2012 (Restated) (Note 3(o)) 2013 2,745 (4,191) (470) 619 (1,297) $ 9,657 (2,464) (2,188) (2,277) 2,728 $ From time to time, Clearwater is subject to claims and lawsuits arising in the ordinary course of operations. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material effect on Clearwater’s consolidated financial position. 134 | Page Quarterly and share information Clearwater Seafoods Incorporated ($000's except per share amounts Sales Net earnings (loss) Per share data Basic net earnings (loss) Diluted net earnings (loss) Trading information, Clearwater Seafoods Incorporated, symbol CLR Trading price range of shares (board lots) High Low Close Tranding volumes (000's) Total Average daily Q4 Q3 2013 Q2 Q1 Q4 Q3 Q2 Q1 2012 111,012 (298) 113,982 27,224 95,368 (9,866) 68,297 (1,762) 92,945 10,518 101,553 17,618 84,926 (2,505) 70,878 (2,927) (0.06) (0.06) 0.48 0.47 (0.24) (0.24) (0.06) (0.06) 0.17 0.15 0.30 0.27 (0.08) (0.08) (0.09) (0.09) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 8.50 5.37 8.22 2,635 41 5.82 4.86 5.68 2,416 39 4.98 4.10 4.92 1,930 30 5.30 4.00 4.85 6,709 110 4.15 2.50 4.00 1,906 31 2.90 2.36 2.50 1,265 21 2.70 2.02 2.48 1,350 22 2.40 1.85 2.27 1,089 18 Shares outstanding at end of quarter 50,948,698 50,948,698 50,948,698 50,948,698 50,948,698 50,948,698 50,948,698 50,948,698 135 | Page Selected Annual Information Sales Cost of goods sold Gross margin Administrative and selling Net finance costs Other income Research and development Gain on settlement of Glitnir transaction Gain on change in control of joint venture Foreign exchange income Interest on long-term debt and bank charges Depreciation and amortization Reduction in foreign currency translation account 2013 (Audited) 2012 (Audited) 2011 (Audited)* 2010 (Audited) 2009 (Audited) $ 388,659 301,291 $ 350,302 277,777 $ 332,785 263,220 $ 291,116 234,854 $ 284,066 240,215 87,368 72,525 69,565 56,262 43,851 39,005 42,747 (3,240) 1,659 - - - - - - 80,171 32,536 24,387 (3,399) 1,759 - - - - - - 55,283 33,345 38,604 (5,893) 707 (12,445) (11,571) - - - - 42,747 28,557 42,482 (2,477) 1,623 - - - - - - 70,185 25,724 - (6,567) - - - (30,642) 25,342 236 703 14,796 Earnings before income taxes 7,197 17,242 26,818 (13,923) 29,055 Income taxes (recovery) expense (8,101) (5,462) 3,863 3,564 1,868 Earnings before non-controlling interest 15,298 22,704 22,955 (17,487) 27,187 Non-controlling interest 8,965 7,695 6,619 1,704 1,039 Earnings attributable to shareholders $ 6,333 $ 15,009 $ 16,336 $ (19,191) $ 26,148 * 2011 results have been adjusted to reflect International Financial Reporting Standards ("IFRS") and the conversion to a Corporation. 136 | Page CORPORATE INFORMATION DIRECTORS OF CLEARWATER SEAFOODS INCORPORATED EXECUTIVE OF CLEARWATER SEAFODS INCORPORATED Colin E. MacDonald, Chairman of the Board Ian Smith Chief Executive Officer John C. Risley President, Clearwater Fine Foods Inc. Eric R. Roe Vice-President, Chief Operating Officer Harold Giles, Chair of Corporate Governance and Compensation Committee Independent Consultant Robert D. Wight Vice-President, Finance and Chief Financial Officer Larry Hood, Chair of Audit Committee Director, Former Partner, KPMG Thomas D. Traves President Emeritus, Dalhousie University Mickey MacDonald President, Micco Companies Brendan Paddick Chief Executive Officer, Columbus International Inc. Stan Spavold Executive Vice President, Clearwater Fine Foods Inc. Jim Dickson Partner, Stewart McKelvey Michael D. Pittman Vice-President, Fleet Greg Morency Chief Commercial Officer & Executive Vice-President David Rathbun Vice-President, Chief Talent Officer Christine Penney Vice-President, Sustainability & Public Affairs Paul Broderick Vice-President of International Sales David Kavanagh Vice-President and General Counsel John Burwash Vice-President, Chief Information Officer INVESTOR RELATIONS Tyrone D. Cotie, CA Treasurer (902) 457-8181 tcotie@clearwater.ca AUDITORS KPMG LLP Halifax, Nova Scotia SHARES LISTED Toronto Stock Exchange SHARE Symbol: CLR TRANSFER AGENT Computershare Investor Services Inc. 137 | Page Clearwater Seafoods Incorporated 757 Bedford Highway, Bedford, Nova Scotia, Canada, B4A 3Z7 Tel. (902) 443-0550 Fax. (902) 443-7797 www.clearwater.ca

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