THE WESTAIM CORPORATION
ANNUAL REPORT 2012
THE WESTAIM CORPORATION
ANNUAL REPORT 2012
Contents
Letter to Shareholders
Management’s Discussion and Analysis
Management’s Responsibility for Financial Information
Independent Auditor’s Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Board of Directors
Shareholder and Corporate Information
All figures are in Canadian dollars, unless otherwise stated.
1
2
16
17
18
22
38
38
LETTER TO SHAREHOLDERS
Dear Shareholders:
The Board of Directors and the management team of The Westaim Corporation are pleased to have
successfully completed the sale of Jevco Insurance Company in September 2012 for a gain of $107
million. Jevco’s operations in 2012 prior to the sale contributed an additional $30 million to the profitability
of the Company. As a result, Westaim’s book value per share increased by 23% during the first nine
months of the year, from $0.65 per share at December 31, 2011 to $0.80 per share at September 28,
2012. On September 28, 2012, Westaim made a return of capital to its shareholders in the form of a cash
distribution of $0.75 per share. At December 31, 2012, book value per share was $0.05.
Between the acquisition of Jevco in March 2010 and the sale of Jevco in September 2012, Westaim’s
book value per share appreciated by approximately 60%. Your Westaim board and management team
continue to look for opportunities to maximize value for our shareholders.
On behalf of the Board of Directors, I want to thank all of the Westaim employees and stakeholders for
their hard work and support over the past year and look forward to a successful 2013.
Sincerely,
J. Cameron MacDonald,
President and Chief Executive Officer
- 1 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
TABLE OF CONTENTS
1.
THE COMPANY
2. OVERVIEW OF PERFORMANCE
3.
4.
5.
SALE OF JEVCO
ANALYSIS OF FINANCIAL RESULTS
ANALYSIS OF FINANCIAL POSITION
6. OUTLOOK
7.
LIQUIDITY AND CAPITAL RESOURCES
8. RISKS
9. RELATED PARTY TRANSACTIONS
10. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
11. ACCOUNTING ESTIMATES
12. ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
13. FUTURE ACCOUNTING PRONOUNCEMENTS
14. QUARTERLY FINANCIAL INFORMATION
15. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION
“Westaim” or the “Company” in this Management’s Discussion and Analysis (“MD&A”) refers to The Westaim Corporation on a consolidated basis. This
MD&A, which has been approved by the Westaim Board of Directors, should be read in conjunction with Westaim’s audited annual consolidated
financial statements including notes for the year ended December 31, 2012 and 2011 as set out on pages 18 to 37 of this annual report. Financial data
in this MD&A has been derived from the audited annual consolidated financial statements for the year ended December 31, 2012 and 2011 and is
intended to enable the reader to assess Westaim’s results of operations for the three months and year ended December 31, 2012 and financial
condition as at December 31, 2012. The Company reports its consolidated financial statements using accounting policies consistent with International
Financial Reporting Standards (“IFRS”). All amounts are in Canadian dollars unless otherwise indicated. The following commentary is current as of
February 28, 2013. Additional information relating to Westaim is available on SEDAR at www.sedar.com. Certain totals, subtotals and percentages
may not reconcile due to rounding.
Non-GAAP measures
Westaim uses both IFRS and non-generally accepted accounting principles (“non-GAAP”) measures to assess performance. The Company cautions
readers about non-GAAP measures that do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures used
by other companies. Book value per share represents shareholders’ equity at the end of the period, determined on an IFRS basis, divided by the total
number of common shares plus preferred shares outstanding on the same date.
Future Oriented Financial Information
This MD&A may contain forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from
these forward-looking statements as a result of various factors, including those discussed hereinafter or in the Company’s 2012 Annual Information
Form. Please refer to the cautionary note in Section 15 of this MD&A.
- 2 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
1.
THE COMPANY
Westaim is a publicly traded Canadian-based holding company that invests directly and indirectly through acquisitions, joint ventures and other
arrangements, with the objective of providing its shareholders with capital appreciation and real wealth preservation. Westaim’s strategy is to
pursue investment opportunities to grow shareholder value (as measured by book value per share) over the long term.
Until September 4, 2012, the Company held all the issued and outstanding shares of Jevco Insurance Company (“Jevco”). Jevco is a leading
Canadian property and casualty (“P&C”) insurer that sells P&C products through a distribution network of over 2,000 independent brokers.
Section 3, Sale of Jevco of this MD&A provides details of the disposition of Jevco on September 4, 2012.
2. OVERVIEW OF PERFORMANCE
Highlights
(millions except per share data)
Three months ended December 31
2012
2011
Year ended December 31
2011
2012
Continuing operations
Revenue
Corporate costs excluding share-based compensation
Share-based compensation
Loss from continuing operations
$
$
0.1
(0.9)
(0.2)
(1.0)
Discontinued operations
Post-tax gain on sale of Jevco
Post-tax profit of discontinued operations
Profit from discontinued operations
-
-
-
$
0.1
(1.3)
(3.0)
(4.2)
-
15.8
15.8
$
0.3
(13.2)
(20.5)
(33.4)
106.7
29.7
136.4
Profit or loss
$
(1.0)
$
11.6
$
103.0
$
2.9
(4.9)
(7.5)
(9.5)
-
49.3
49.3
39.8
Earnings per share – basic and diluted
- Loss from continuing operations
- Profit from discontinued operations
- Profit or loss
$
$
$
0.00
0.00
0.00
$
$
$
(0.01)
0.02
0.02
Book value per share
- at December 31
- return of capital to shareholders on September 28,
2012
Consolidated Results – Three months ended December 31, 2012
$
$
$
$
$
(0.05)
0.20
0.15
$
$
$
(0.01)
0.07
0.06
0.05
$
0.65
0.75
For the three months ended December 31, 2012, the Company reported a consolidated loss of $1.0 million which comprised a loss from
continuing operations of $1.0 million, compared to a consolidated profit for the three months ended December 31, 2011 of $11.6 million which
comprised a loss from continuing operations of $4.2 million and a profit of discontinued operations of $15.8 million.
Consolidated Results – Year ended December 31, 2012
For the year ended December 31, 2012, the Company reported a consolidated profit of $103.0 million which comprised a loss from continuing
operations of $33.4 million, a post-tax gain on the sale of Jevco of $106.7 million and a profit of discontinued operations of $29.7 million,
compared to a consolidated profit for the year ended December 31, 2011 of $39.8 million which comprised a loss from continuing operations of
$9.5 million and a profit of discontinued operations of $49.3 million.
- 3 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
3.
SALE OF JEVCO
On May 2, 2012 the Company announced that it had entered into a definitive agreement (the "Agreement") with Intact Financial Corporation
("Intact") pursuant to which, subject to the terms and conditions of the Agreement, Intact agreed to purchase from the Company all of the issued
and outstanding shares in the capital of Jevco for $530.0 million in cash (the "Transaction").
Shareholder approval for the Transaction was received at a special shareholder meeting on June 28, 2012. All regulatory approvals were
received and other conditions of the Agreement were met during the third quarter and the Transaction closed on September 4, 2012. The
Transaction was reflected in Westaim’s statements of financial position, profit or loss and other comprehensive income, equity and cash flow for
the year ended December 31, 2012.
For the year ended December 31, 2012, a pre-tax gain of $108.2 million was realized on the sale of Jevco, after deducting the carrying value of
Jevco of $414.3 million and costs related to the sale of $7.5 million. The post-tax gain on the sale was $106.7 million.
In connection with the Transaction and as approved by the shareholders at a special meeting on June 28, 2012, Westaim completed a cash
distribution by way of a return of capital to its common shareholders (the “Cash Distribution”). The Cash Distribution was made on September 28,
2012 to common shareholders of record on September 21, 2012 at $0.75 per common share. The amount was determined by the Board of
Directors based on the present and contingent liabilities of Westaim, as well as its future business objectives. The total amount of the Cash
Distribution of $521.4 million was recorded as a reduction of stated common share capital.
4. ANALYSIS OF FINANCIAL RESULTS
The Company’s operating results include the results from continuing operations, the gain on sale of Jevco and the profit of discontinued insurance
operations.
4.1 Continuing Operations
Details of continuing operations are as follows:
Continuing operations
(millions)
Revenue
Three months ended December 31
2012
2011
Year ended December 31
2011
2012
$
0.1
$
0.1
$
0.3
$
2.9
Expenses
Salaries and benefits
Management services
Office expenses
Professional fees
Site restoration provision (recovery)
Corporate costs
Share-based compensation
Total expenses
0.2
-
0.2
0.3
0.2
0.9
0.2
1.1
-
0.6
0.4
0.3
-
1.3
3.0
4.3
0.6
8.4
0.6
3.3
0.3
13.2
20.5
33.7
0.1
3.3
0.9
0.7
(0.1)
4.9
7.5
12.4
Loss from continuing operations
$
(1.0)
$
(4.2)
$
(33.4)
$
(9.5)
Revenue of Continuing Operations
Revenue of continuing operations for the three months and year ended December 31, 2012 was $0.1 and $0.3 million (2011 - $0.1 million and
$2.9 million). In the year ended December 31, 2012, interest income of $0.7 million was offset by an investment write-down of $0.4 million. In the
year ended December 31, 2011, the Company realized a gain on sale of an investment of $0.5 million, interest income of $0.1 million and an
additional gain of $2.3 million in connection with its acquisition of Jevco in 2010. In 2010, the Company paid an amount of $20.0 million to be held
in escrow in respect of the claims reserve for Jevco’s insurance business existing at the time of closing. In the event that the related claims
reserve development from December 31, 2009 until December 31, 2012 was adverse to Jevco, the purchase price would have been reduced, to a
maximum amount of $20.0 million. In March 2011, this escrow amount was released upon agreement between the parties in exchange for a
payment of $2.3 million to the Company.
- 4 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
4. ANALYSIS OF FINANCIAL RESULTS (continued)
Corporate Costs
Corporate costs, excluding share-based compensation, for the three months and year ended December 31, 2012 were $0.9 million and $13.2
million (2011 - $1.3 million and $4.9 million). Corporate costs include fees for management services provided by Goodwood Management Inc.
(“GMI”), as discussed in Section 9, Related Party Transactions of this MD&A. Corporate costs for the year ended December 31, 2012 included an
accounting charge of $5.0 million arising from the extinguishment of the management services contract upon the windup of GMI following the
acquisition of GMI by the Company. Corporate costs were $8.3 million higher in the year ended December 31, 2012 compared to the year ended
December 31, 2011 mainly due to this $5.0 million charge and $2.6 million in professional fees and other costs incurred to investigate an
investment opportunity which Westaim ultimately decided not to pursue.
Share-based Compensation
Share-based compensation expense for the three months and year ended December 31, 2012 was $0.2 million and $20.5 million (2011 - $3.0
million and $7.5 million). Share-based compensation expense relates to the revaluation of the Company’s outstanding restricted share units
(“RSUs”) granted to GMI and outstanding deferred share units (“DSUs”) granted to directors and officers of the Company. Share-based
compensation costs were $13.0 million higher in the year ended December 31, 2012 when compared to the year ended December 31, 2011
mainly due to the recognition of an expense of $9.1 million to reflect the value of RSUs which were extinguished as a result of the windup of GMI
on September 4, 2012 and from the increase in the Company’s share price.
4.2 Gain on Sale of Discontinued Operations
On September 4, 2012, the Company sold its investment in Jevco. Included in the Company’s profit for the year ended December 31, 2012 is the
Company’s gain on sale of Jevco. Details of the gain are as follows:
Discontinued operations
(millions)
Proceeds on sale
Carrying value of Jevco
Transaction costs
Pre-tax gain on sale
Income tax expense
Post-tax gain on sale
Year ended
December 31, 2012
$
$
530.0
(414.3)
(7.5)
108.2
(1.5)
106.7
The post-tax gain on sale of Jevco is $106.7 million for the year ended December 31, 2012. Cash proceeds of $530.0 million were received on
September 4, 2012. The carrying value of Jevco on the date of sale was $414.3 million. Transaction costs of $7.5 million include financial, legal
and consulting fees.
The Company utilized capital loss carryforwards and non-capital loss carryforwards to offset the taxable income arising from the sale of Jevco.
The benefit of these tax loss carryforwards had not previously been recognized in the statement of financial position. Corporate minimum tax of
$1.5 million, computed based on income determined under IFRS, has been accrued as a result of the sale.
4.3 Profit of Discontinued Operations
The results of Jevco’s operations prior to the sale of Jevco on September 4, 2012 are included in profit of discontinued operations. The profit of
discontinued operations is summarized as follows:
Discontinued operations
(millions)
Revenue
Expenses
Pre-tax profit of discontinued operations
Income tax expense
Post-tax profit of discontinued operations
Three months ended December 31
2012
-
-
-
-
-
$
$
2011
86.3
69.1
17.2
1.4
15.8
$
$
$
$
- 5 -
$
Year ended December 31
2011
2012
375.5
275.7
312.3
236.9
63.2
38.8
13.9
9.1
49.3
29.7
$
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
4. ANALYSIS OF FINANCIAL RESULTS (continued)
Results for the year ended December 31, 2012 included Jevco’s results to the date of sale on September 4, 2012. Revenue of discontinued
operations includes unrealized gains and losses on available-for-sale investments as unrealized gains and losses of a subsidiary are considered
realized and included in profit or loss upon the sale of a subsidiary. Income tax expense includes income tax previously deducted to determine
profit or loss and income tax on unrealized gains previously included in other comprehensive income.
5. ANALYSIS OF FINANCIAL POSITION
The Company’s assets, liabilities and shareholders’ equity comprised the following:
(millions)
Assets of continuing operations
Cash and cash equivalents
Other assets
Total assets of continuing operations
Assets of insurance segment
Total assets
Liabilities of continuing operations
Liabilities of insurance segment
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
5.1 Cash and Cash Equivalents
December 31, 2012
December 31, 2011
$
$
$
$
39.2
0.2
39.4
-
39.4
4.8
-
4.8
34.6
39.4
$
$
$
$
14.7
1.9
16.6
1,279.5
1,296.1
14.9
863.9
878.8
417.3
1,296.1
At December 31, 2012, the Company had cash and cash equivalents related to continuing operations of $39.2 million compared to $14.7 million at
December 31, 2011. See further discussion in Section 7, Liquidity and Capital Resources of this MD&A.
5.2 Assets of Insurance Segment
At December 31, 2011, the Company held $1,279.5 million in assets of the discontinued insurance operations which were sold in 2012. These
assets included cash of $9.7 million, investments plus investment income due and accrued of $1,023.6 million, insurance policy related assets of
$183.4 million, accounts receivable of $26.0 million, income tax assets of $10.2 million, property and equipment of $22.8 million, and intangible
assets of $3.8 million.
5.3 Liabilities of Continuing Operations
Liabilities of continuing operations were $4.8 million at December 31, 2012 compared to $14.9 million at December 31, 2011. The decrease of
$10.1 million is due to a $10.8 million decrease in share-based compensation liabilities partially offset by additional accruals for other expenses.
Included in liabilities of continuing operations at December 31, 2012 is $2.7 million (December 31, 2011 - $2.4 million) related to the provision for
site restoration. The provision for site restoration relates to costs associated with soil and groundwater reclamation and remediation costs. The
Company conducts periodic reviews of the underlying assumptions supporting the provision, including remediation costs and regulatory
requirements. Reimbursements of costs resulting from indemnifications provided by previous owners of the industrial sites have not been
recognized in these consolidated financial statements. Future reimbursements will be recorded when received.
- 6 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
5. ANALYSIS OF FINANCIAL POSITION (continued)
5.4 Liabilities of Insurance Segment
Liabilities of operations sold in 2012 of $863.9 million at December 31, 2011 relate to the discontinued insurance operations and comprised
liabilities related to insurance policies of $839.6 million, leasehold inducement of $2.6 million and payables and accruals of $21.7 million.
5.5 Shareholders’ Equity
The details of shareholders’ equity are as follows:
(millions)
Common shares
Preferred shares
Warrants
Contributed surplus
Deficit
Shareholders’ equity
December 31, 2012
$
$
203.6
-
-
12.9
(181.9)
34.6
December 31, 2011
$
656.6
30.8
1.9
12.9
(284.9)
417.3
$
The decrease in common shares from December 31, 2011 to December 31, 2012 of $453.0 million is due to the return of capital to the common
shareholders of $521.4 million, offset by $30.8 million from the conversion of preferred shares outstanding at December 31, 2011 into common
shares, $6.9 million from the exercise of all outstanding warrants, $27.4 million for shares issued upon the acquisition of GMI and $3.3 million of
proceeds on the issuance of common shares in connection with elections exercised under share-based compensation plans. The changes in
share capital are further discussed under Share Capital and Share-based Compensation Plans in Section 7, Liquidity and Capital Resources of
this MD&A. The decrease in deficit of $103.0 million from December 31, 2011 to December 31, 2012 is due to the profit for the year ended
December 31, 2012.
6. OUTLOOK
Westaim completed a positive 2012 year, allowing the Company’s book value per share to appreciate by 23% from $0.65 at December 31, 2011
to $0.80 immediately prior to the cash distribution of $0.75 per share to shareholders on September 28, 2012. At December 31, 2012 the book
value per share was $0.05 and the Company’s shareholders’ equity was $34.6 million.
Westaim’s management is continuing to pursue the Company’s business strategy, by searching for and investigating potential investment
opportunities to grow shareholder value (as measured by book value per share) over the long term.
7.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management Objectives
The Company’s guiding principles for capital management are to maintain the stability and safety of the Company for its stakeholders through
optimal capital mix and an adequate level of capital, maintain a strong balance sheet, ensure the return on capital meets the Board of Directors’
expectations relative to the risk taken, and minimize the after-tax cost of capital.
Towards achieving these objectives, the Company employs a strong and efficient capital base and manages capital in accordance with policies
established by the Board of Directors. These policies relate to capital strength and capital mix. The Company has a capital management process
in place to measure, deploy and monitor its available capital to assess its adequacy on a continuous basis. Management develops the capital
strategy and oversees the capital management processes of the Company. The Company’s capital consists of its shareholders’ equity.
- 7 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
7.
LIQUIDITY AND CAPITAL RESOURCES (continued)
Share Capital
The Company’s authorized share capital consists of an unlimited number of common shares, Class A preferred shares and Class B preferred
shares. At December 31, 2012 and February 28, 2013, the Company had 695,209,711 common shares and 372,800 stock options outstanding.
At those dates, there were no Class A or Class B preferred shares outstanding.
On September 4, 2012, 36,514,902 common shares were issued as partial consideration for the acquisition of GMI. In the year ended December
31, 2012, 27,200 common shares were issued upon the exercise of 27,200 stock options. DSUs vested upon the sale of Jevco, and certain
directors of Westaim and Jevco and certain officers of Jevco elected to exercise their right to apply the cash compensation received to purchase
common shares of Westaim. The Company issued 4,470,737 common shares as a result of these elected subscriptions. 10,000,000 warrants
were exercised for 10,000,000 Series 1 Class A preferred shares and the resulting preferred shares totaling 73,852,912 were converted into
common shares on a one for one basis.
The Series 1 Class A preferred shares are entitled to dividends as the directors may declare, provided that an equal dividend is declared on the
common shares, and rank equally with the common shares with respect to liquidation proceeds. The Series 1 Class A non-voting preferred
shares are convertible into common shares, on a one to one basis, subject to any adjustments resulting from subdivision or consolidation of the
common shares.
As of September 11, 2012, Westaim had 63,852,912 non-voting Series 1 Class A preferred shares issued and outstanding (“Non-Voting Shares”)
registered in the name of 1523488 Alberta Ltd., a holding company with an investment portfolio managed by Alberta Investment Management
Corporation. 1523488 Alberta Ltd. was also, as of September 11, 2012, the registered and beneficial owner of 232,147,088 common shares of
the Company, being 37.4% of the outstanding common shares, and of warrants to acquire an additional 10,000,000 Non-Voting Shares. Any
holder of Non-Voting Shares may convert any or all Non-Voting Shares held by such holder into common shares based on the then applicable
exercise number (which at the date hereof is one common share for each Non-Voting Share). The terms of the Series 1 Class A preferred shares
initially prohibited conversion of such shares if such conversion would result in the holder, together with such holder’s “associates” and “affiliates”
(as such terms are defined in the Securities Act (Alberta)), and any person or company acting jointly or in concert with such parties: (i) being the
registered holder of; (ii) being the beneficial owner of; and/or (iii) exercising control or direction over, greater than 40% of the issued and
outstanding common shares. On September 11, 2012, in order to enable 1523488 Alberta Ltd. to participate in the Cash Distribution in respect of
its Non-Voting Shares on the same basis as the common shareholders, Westaim effected an amendment to the terms of the Non-Voting Shares to
remove the conversion restrictions, as approved by the common shareholders at the special meeting on June 28, 2012. This allowed 1523488
Alberta Ltd. to convert the Non-Voting Shares held by it (including the Non-Voting Shares acquired pursuant to the exercise of the Warrants) into
common shares prior to the Cash Distribution.
Cash Distribution and Stated Share Capital Reduction
In connection with the Transaction and as approved by the shareholders at the special meeting on June 28, 2012, Westaim completed the Cash
Distribution to its common shareholders in the form of a return of capital. The Cash Distribution was made on September 28, 2012 to common
shareholders of record on September 21, 2012 at $0.75 per common share. The amount was determined by the Board of Directors based on the
present and contingent liabilities of Westaim, as well as its future business objectives. The total amount of the Cash Distribution of $521.4 million
was recorded as a reduction of stated common share capital.
Dividends
No dividends were paid in the years ended December 31, 2012 and 2011.
Share-based Compensation Plans
On April 12, 2010, the Board of Directors of the Company approved the adoption of a comprehensive long-term equity incentive plan (the
“Incentive Plan”), ratified at the Company’s annual general meeting of shareholders held on May 12, 2010, designed to combine the Company’s
prior equity incentive plans, being the Employee and Director Stock Option Plan, the Directors and Officers Share Purchase Program, the
Restricted Share Unit Plan, and the Deferred Share Unit Plan, collectively, the “Prior Plans”. All awards granted under the Prior Plans remain in
full force and effect in accordance with their terms, however, no additional grants will be made under the Prior Plans. See Note 11 to the audited
consolidated financial statements for the year ended December 31, 2012.
- 8 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
7.
LIQUIDITY AND CAPITAL RESOURCES (continued)
On September 4, 2012, the Company purchased all the issued and outstanding shares of GMI for $4.2 million cash and 36,514,902 common
shares of the Company. GMI was the holder of all of the outstanding RSUs and Westaim had accrued a liability in respect of the RSUs. The
share consideration paid for GMI reflected the fair value of the RSUs held by GMI at the time of the acquisition. Immediately following Westaim’s
acquisition of GMI, GMI was wound up into Westaim and an additional expense of $9.1 million was recognized to reflect the additional value of the
RSUs which were extinguished as a result of the windup of GMI.
DSUs are granted at the market value of the Company’s shares at the date of grant to non-executive directors of the Company in lieu of fees, and
prior to the sale of Jevco, to non-executive directors, officers and employees of Jevco. Vested DSUs are paid out in cash when the participant
ceases to be a director, officer or employee. All DSUs vested and were exercised upon the sale of Jevco. As determined by Westaim’s Board of
Directors, in connection with the completion of the sale of Jevco, each holder of DSUs was entitled to receive a cash payment in consideration for
relinquishing their rights in respect of each such DSU equal to the “market price” of the common shares (as determined in accordance with the
terms of the Incentive Plan) immediately prior to the completion of the sale (being $0.75) less any required withholdings, and could elect to apply
all or a part of such cash payment to a subscription for common shares at the same price per share. An aggregate of 4,470,737 common shares
were issued to former DSU holders in connection with the entitlements.
In July 2012, 27,200 stock options were exercised at $0.22 per share. At December 31, 2012 and February 28, 2013, the Company had 372,800
stock options outstanding.
Volatility of Share Price
The price of the common shares may be volatile even though there have been no material changes in the Company’s business or finances. In the
past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities.
Whether or not meritorious, litigation brought against the Company could result in substantial costs, divert management's attention and resources
and harm the Company's financial condition and results of operations.
Market for Securities
On January 9, 2013, Westaim’s common shares commenced trading on the TSX Venture Exchange (“TSX-V”) under the symbol “WED”. Until
January 8, 2013, the common shares of Westaim were listed on the Toronto Stock Exchange (the “TSX”) under the symbol “WED”. The Westaim
Board of Directors has determined that a listing with the TSX-V better suits the needs of the Company while providing continued trading liquidity
for the Company’s shareholders. The Company received approval of its listing on the TSX-V prior to voluntarily de-listing from the TSX.
Normal Course Issuer Bid
On August 24, 2011, Westaim announced that the TSX had approved a notice of the Company’s intention to make a normal course issuer bid. In
the third and fourth quarters of 2011, pursuant to the terms of the bid, Westaim purchased 6,455,000 of its own common shares for cancellation
through the facilities of the TSX at the prevailing market price of the common shares.
Cash Flow Objectives
The Company manages its liquidity to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The
Company believes its liquidity requirements for the next year will be met with the cash and cash equivalents on hand. Although the Company
currently does not have any operating assets that generate revenue, the Company has sufficient funds to meet its financial obligations and pursue
other opportunities. As part of pursuing one or more new opportunities, the Company may from time to time issue shares from treasury.
- 9 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
7.
LIQUIDITY AND CAPITAL RESOURCES (continued)
The following tables illustrate the duration of the financial assets of the Company compared to its financial obligations:
December 31, 2012 (millions)
Financial assets:
Cash and cash equivalents
Other assets
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Income taxes, due and accrued
Site restoration provision
Total financial obligations
One year
or less
1 to 3
years
4 to 5
Years
More than 5
years
No specific
date
$
$
39.2
0.2
39.4
0.6
1.5
-
2.1
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
$
Total
39.2
0.2
39.4
0.6
1.5
2.7
4.8
$
-
-
-
-
-
2.7
2.7
Financial assets net of financial obligations
$
37.3
$
$
(2.7)
$
34.6
December 31, 2011 (millions)
Financial assets:
Cash and cash equivalents
Investment income due and accrued
Investments available-for-sale
Investments held-to-maturity
Instalment premiums
Accounts receivable and other assets
Recoverable from reinsurers
Claims recoverable from other insurers
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Income taxes, due and accrued
Unearned premiums
Unpaid claims and adjustment expenses
Lease commitments
Site restoration provision
Total financial obligations
One year
or less
1 to 3
years
4 to 5
years
More than 5
years
No specific
date
$
24.3
5.6
183.6
-
62.8
27.4
11.7
17.6
333.0
25.5
0.8
164.4
231.7
3.0
-
425.4
$
-
-
343.6
-
-
-
12.9
19.4
375.9
5.3
-
-
257.5
5.5
-
$
$
-
-
189.3
-
-
-
6.0
8.9
204.2
-
-
-
117.8
5.4
-
268.3
123.2
-
-
87.6
97.5
-
-
3.4
5.1
193.6
-
-
-
68.1
24.9
-
93.0
$
-
-
116.5
-
-
0.5
-
-
117.0
2.7
-
-
-
-
2.4
5.1
$
Total
24.3
5.6
920.6
97.5
62.8
27.9
34.0
51.0
1,223.7
33.5
0.8
164.4
675.1
38.8
2.4
915.0
Financial assets net of financial obligations
$
(92.4)
$ 107.6
$ 81.0
$ 100.6
$ 111.9
$
308.7
The Company’s investment guidelines stress preservation of capital and market liquidity to support payment of liabilities. The matching of the
duration of financial assets and liabilities is monitored to ensure that all obligations will be met.
Indemnification
In connection with the sale of the operations and assets of a subsidiary, the subsidiary provided an indemnity to the purchaser against certain
losses to an aggregate maximum of US$11 million. The Company also agreed to indemnify the directors, officers and employees of the
purchaser, for an indefinite period, from certain potential environmental costs relating to premises formerly leased by the subsidiary.
- 10 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
8. RISKS
Westaim is subject to a number of risks, including the risks described below. The risks and uncertainties described below are those believed to be
material, but they may not be the only ones faced by Westaim. If any of these risks, or any other risks and uncertainties that have not yet been
identified by Westaim or that Westaim currently considers not to be material, actually occur or become material risks, the business, prospects,
financial condition, results of operations and cash flows of Westaim could be materially and adversely affected.
The Company has no current business activities from which it earns revenues
Following the completion of the sale of Jevco, the Company has no operations which generate revenues and its main assets are cash and cash
equivalents. Accordingly, the Company does not anticipate that it will generate any significant earnings until such time as it deploys its cash and
cash equivalents through one or more acquisitions, mergers, or other transactions. There is no guarantee that the Company will make such an
investment or that any investment made will be profitable and will provide dividends to shareholders. Westaim has no current intention of paying
dividends in the near future. There is no assurance that the Company will be able to obtain adequate financing needed for its future business or
projects or if the terms of such financing will be favourable. Failure to obtain such additional financing could result in a delay in the future
development of the Company.
The Company is relying solely on the past business success of its directors and officers to identify acquisitions. The success of the Company is
dependent upon the efforts and abilities of its management team. The loss of certain members of the management team could have an adverse
effect on the business and prospects of the Company. In such event, the Company will seek satisfactory replacements but there can be no
guarantee that appropriate personnel can be found.
A single shareholder may be able to exert significant influence over Westaim’s affairs
Her Majesty the Queen in Right of the Province of Alberta (“HMQ”), acting for and on behalf of certain Alberta public sector pension plans,
endowments and government funds, holds a significant number of common shares of the Company. Accordingly, HMQ has significant influence
over the business and affairs of Westaim and has the ability to take shareholder actions irrespective of the vote of any other shareholders,
including the ability to prevent certain transactions that it does not believe are in its best interest. This significant influence may discourage
transactions involving a change of control of Westaim, including transactions in which minority shareholders of Westaim might otherwise receive a
premium for their shares over the then-current market price.
Furthermore, HMQ generally has the right (subject to applicable securities laws) at any time to sell the shares of Westaim held by it or to sell its
interest in Westaim to a third party without the approval of the minority shareholders and without providing for a purchase of such shareholders’
shares. Accordingly, shares of Westaim held by minority shareholders may be less liquid and worth less than they would be if HMQ did not have
the ability to influence matters affecting Westaim.
Risks inherent in acquisitions
The Company intends to actively pursue the acquisition of companies or businesses in Canada and/or internationally and may seek to acquire
securities or other interests in other companies consistent with its investment and growth strategy. Such acquisitions involve inherent risks
including but not limited to (a) unanticipated costs; (b) potential loss of key employees of the Company or the business acquired; (c) unanticipated
changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition; and (d) decline in the value of
the acquired business or assets. Any one or more of these factors could cause the Company to not realize the anticipated benefits of the
acquisition in question. In addition, the Company may be required to use available cash, incur debt, issue securities, or a combination of these in
order to complete an acquisition. This could affect the Company’s future flexibility and ability to raise capital, operate or develop its business and
could dilute its existing shareholders’ holdings as well as decrease the trading price of its common shares. There is no assurance that when
evaluating a possible acquisition, the Company will correctly identify and manage the risks and costs inherent in the business or asset to be
acquired.
Volatile stock price
The price of Westaim’s common shares is expected to be highly volatile and will be drastically affected by various factors. Westaim cannot predict
the timing of future acquisitions or other developments expected to take place in the future which will likely trigger major changes in the trading
price of the common shares.
- 11 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
8. RISKS (continued)
Liquidity and financing risks
As Westaim will have limited interest income from its cash and cash equivalents, its ability to continue its acquisition efforts will be largely reliant
on its continued attractiveness to equity investors. Westaim will incur operating losses as it continues to expend funds to explore and develop
future business. There is no guarantee that Westaim will be able to develop a profitable business that it may acquire as general economic
conditions, regulatory requirements and other factors affect Westaim’s operations and future performance. Many of these factors are beyond
Westaim’s control. Additionally, should Westaim require additional capital to continue its activities, failure to raise such capital could result in the
Company going out of business. From time to time, Westaim may enter into transactions to acquire assets or the shares of other corporations.
These transactions may be financed wholly or partially with debt, which may temporarily increase Westaim’s debt levels above industry standards.
Westaim cannot assure investors that it will be able to generate sufficient cash flow to pay the interest on any debt or that future working capital,
borrowings or equity financing will be available to pay or refinance such debt.
Income taxes
The calculation of income taxes requires the use of estimates and judgment. The validity and measurement of tax benefits associated with various
tax positions taken or expected to be taken in Westaim’s tax filings are a matter of tax law and are subject to interpretation. The impact of the final
determination of tax audits, appeals of decisions of a taxing authority, or tax litigation may be materially different from that reflected in our financial
statements. The assessment of additional taxes, interest and penalties could be materially adverse to Westaim’s future results of operations and
financial position.
9. RELATED PARTY TRANSACTIONS
Management services agreement
Prior to September 4, 2012, the Company had a management services agreement (“MSA”) with GMI to manage the day-to-day affairs of the
Company and to present strategic investment opportunities for the Board of Directors to consider. GMI was required to provide certain services to
the Company including the services of two directors, one of whom was also President and Chief Executive Officer, and a Chief Financial Officer.
The MSA provided that GMI was paid an annual service fee designed to compensate GMI for the time and attention of its officers and employees
incurred in furtherance of the Company’s business as well as for the office space, equipment, supplies and other facilities made available by GMI
to the Company. The amount of the services fee was based on a report prepared by an independent compensation consultant. GMI was also
entitled to participate in an annual incentive bonus plan for the purpose of recognizing the contribution of GMI to the Company’s business.
Prior to the purchase of GMI by the Company on September 4, 2012, GMI was controlled by corporations controlled by two directors of the
Company. For the three months and year ended December 31, 2012, GMI fee expense, inclusive of harmonized sales tax, was $nil and $3.4
million (2011 - $0.6 million and $3.3 million). At December 31, 2012, fees of $nil (December 31, 2011 - $0.2 million) were included in accounts
payable and accrued liabilities. Upon the extinguishment of the MSA, an expense of $5.0 million was recognized in the statement of profit or loss
and other comprehensive income.
All RSUs previously outstanding were held by GMI (details discussed under Share-based Compensation Plans in Section 7, Liquidity and Capital
Resources of this MD&A).
Acquisition of GMI
On September 4, 2012, the Company purchased all the issued and outstanding shares of GMI for $4.2 million in cash and 36,514,902 common
shares of the Company. The consideration paid reflected the fair value of the assets and liabilities of GMI. As the fair value of the consideration
paid was determined to be equal to the fair value of the assets and liabilities of GMI, no goodwill was recorded. Immediately following the
acquisition, GMI was wound up into the Company.
Former employees of GMI who are now employees of the Company are considered key management personnel for related party disclosure
purposes beginning on September 4, 2012.
- 12 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
9. RELATED PARTY TRANSACTIONS (continued)
Transactions with key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Company, directly or indirectly, including directors of the Company.
Compensation expenses related to key management personnel, including non-executive directors, are as follows:
(millions)
Salaries and other benefits
Share-based payments
Three months ended December 31
Year ended December 31
2012
2011
2012
2011
$
$
0.2
0.2
0.4
$
$
0.1
0.4
0.5
$
$
0.6
1.3
1.9
$
$
0.1
0.3
0.4
10. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure Controls and Procedures (“DC&P”)
DC&P are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed with or submitted
to various securities regulators is recorded, processed, summarized and reported within the time periods specified. This information is gathered
and reported to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), so that timely
decisions can be made regarding disclosure.
The Company’s management, under the supervision of, and with the participation of, the CEO and CFO, have designed and evaluated the
Company’s DC&P, as required in Canada by “National Instrument – 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings”.
Based on this evaluation, the CEO and CFO have concluded that, as of December 31, 2012, the Company’s DC&P were effective.
Internal Control over Financial Reporting (“ICFR”)
Designing, establishing and maintaining adequate ICFR is the responsibility of the Company’s management. ICFR is a process designed by, or
under the supervision of, senior management, and affected by the Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and preparation of the Company’s consolidated financial statements in accordance with
IFRS. Management is responsible for establishing and maintaining ICFR and has designed such controls to ensure that the required objectives of
these internal controls have been met. Management uses the Internal Control – Integrated Framework to evaluate the effectiveness of internal
control over financial reporting, which is a recognized and suitable framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company regularly reviews and enhances its systems of controls and procedures. However, because of
the inherent limitations in all control systems, management acknowledges that ICFR will not prevent or detect all misstatements due to error or
fraud. Prior to its release, this annual report to shareholders was reviewed by the Audit Committee and, on the Audit Committee’s
recommendation, approved by the Company’s Board of Directors, similar to prior quarters.
There were no changes in the Company’s ICFR that occurred during the year ended December 31, 2012 that have materially affected, or are
reasonably likely to materially affect, ICFR.
As of December 31, 2012, the CEO and the CFO of the Company have evaluated the effectiveness of the Company’s ICFR. Based on those
evaluations, the CEO and CFO have concluded that at December 31, 2012, the controls and procedures were operating effectively. There are no
material weaknesses that have been identified by management in this regard.
11. ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with IFRS requires management to make estimates, some of which relate to matters that are
uncertain. As more information becomes known, these estimates and assumptions could change and thus have a material impact on the
Company’s financial condition and results of operations in the future. The Company has established detailed policies and control procedures that
are intended to ensure that management’s judgments and estimates are well controlled, independently reviewed and consistently applied from
period to period. Management believes that its estimates for determining the valuation of the Company's assets and liabilities are appropriate.
The Company’s accounting estimates are discussed in Note 2(b) to the audited consolidated financial statements for the year ended December
31, 2012.
- 13 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
12. ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
As required for publicly accountable enterprises, the Company reported in accordance with IFRS commencing with the fiscal year beginning on
January 1, 2011. Prior to the adoption of IFRS, the Company prepared its financial statements in accordance with Canadian generally accepted
accounting principles (“CGAAP”). The Company’s accounting policies are disclosed in Note 2 to the audited consolidated financial statements for
the year ended December 31, 2012.
13. FUTURE ACCOUNTING PRONOUNCEMENTS
IFRS 9 “Financial Instruments” (“IFRS 9”) was issued in November 2009 and contained requirements for financial assets. This standard
addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 “Financial
Instruments – Recognition and Measurement” (“IAS 39”), for debt instruments with a new mixed measurement model having only two categories:
“amortized cost” and “fair value through profit or loss”. IFRS 9 also replaces the models for measuring equity instruments, and such instruments
will either be categorized as “fair value through profit or loss” or at “fair value through other comprehensive income”. Requirements for financial
liabilities were added to IFRS 9 in October 2010 and largely carried forward existing requirements in IAS 39, except that fair value changes due to
credit risk for liabilities designated at fair value through profit and loss will generally be recorded in other comprehensive income. IFRS 9 is
effective for annual periods beginning on or after January 1, 2015. The Company has not yet determined the impact of the standard.
IFRS 10 “Consolidated Financial Statements” (“IFRS 10”), issued in May 2011, replaces IAS 27 “Consolidated and Separate Financial
Statements” and SIC-12 “Consolidation – Special Purpose Entities”. The Company does not currently apply SIC-12 as it does not have special
purpose entities. IFRS 10 defines the principle of control and establishes control as the basis for determining which entities are consolidated in
the consolidated financial statements. IFRS 10 also sets out the accounting requirements for the preparation of consolidated financial statements.
The three elements of control identified in IFRS 10 are power over the investee, exposure or rights to variable returns from involvement with the
investee and investor ability to use power over the investee to affect the amount of the investor’s returns. The Company expects that the adoption
of IFRS 10 will not have a material impact on its financial statements.
IFRS 12 “Disclosure of Interests in Other Entities” (“IFRS 12”) requires a company to disclose information that enables users of financial
statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial
position, financial performance and cash flows. IFRS 12 is required to be applied by an entity that has an interest in subsidiaries. The Company
expects that the adoption of IFRS 12 will not have a material impact on its financial statements.
IFRS 13 “Fair Value Measurement” (“IFRS 13”), issued in May 2011, establishes a single source of guidance for fair value measurement under
IFRS. IFRS 13 defines fair value, provides guidance on its determination and introduces consistent requirements for disclosures on fair value
measurements. IFRS 13 does not include requirements on when fair value measurement is required; it prescribes how fair value is to be
measured if another IFRS or IAS requires it. IFRS 13 should be applied prospectively from the beginning of the annual period in which it is
adopted. The Company expects that the adoption of IFRS 13 will not have a material impact on its financial statements.
IFRS 10, IFRS 12 and IFRS 13 are effective for annual periods beginning on or after January 1, 2013.
14. QUARTERLY FINANCIAL INFORMATION
(millions)
Revenue of continuing operations
Expenses of continuing operations
Gain on sale of discontinued operations
Profit of discontinued operations
Profit or loss
Q4
2012
$ 0.1
1.1
-
-
(1.0)
Q3
2012
$ 0.1
16.5
108.1
3.7
95.4
Q2
2012
$ 0.1
9.6
(1.4)
12.8
1.9
$
Q1
2012
-
6.5
-
13.2
6.7
Q4
2011
$ 0.1
4.3
-
15.8
11.6
$
Q3
2011
-
2.1
-
15.6
13.5
Q2
2011
$ 0.5
3.1
-
14.1
11.5
Q1
2011
$ 2.3
2.9
-
3.8
3.2
Quarterly revenue from continuing operations includes miscellaneous investment income. In the first quarter of 2011, the Company realized an
additional gain of $2.3 million in connection with its acquisition of Jevco in 2010. In the second quarter of 2011, the Company realized a gain on
sale of an investment of $0.5 million. Expenses of continuing operations vary from quarter to quarter mainly due to the stock-based compensation
expense which varies according to the market price of Westaim’s common shares. In addition, costs of $1.3 million were incurred in each of the
first and second quarters of 2012 to investigate an acquisition which Westaim ultimately did not pursue.
Gain on sale of discontinued operations is the gain from the sale of Jevco. Expenses of $1.4 million related to the sale were recorded in the
second quarter of 2012.
- 14 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2012
14. QUARTERLY FINANCIAL INFORMATION (continued)
Profit of discontinued operations for the third quarter of 2012 included two months of operating results from the Company’s insurance business to
the date of sale of Jevco on September 4, 2012. Profit of discontinued operations in the fourth quarter of 2011 included $2.9 million relating to the
recognition of deferred income tax assets for non-capital losses which were expected to be realized following an internal corporate reorganization.
15. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION
Certain portions of this MD&A, as well as other public statements by the Company, contain forward-looking statements. In particular, the words "strategy", "may",
"will", "continue", "developed", "objective", "potential", "exploring", "could", "expect", "expected", "expects", “tends”, "indicates", and words and expressions of similar
import, are intended to identify forward-looking statements. Such forward-looking statements include but are not limited to statements concerning: strategies,
alternatives and objectives to maximize value for shareholders; expectations and assumptions relating to the Company’s business plan; the effect of adverse
changes in equity markets or the Company’s operations; expectations regarding the Company’s assets and liabilities; the Company’s ability to retain key employees,
management’s belief that its estimates for determining the valuation of the Company’s assets and liabilities are appropriate; the Company’s views regarding potential
future remediation costs; the effect of changes to interpretations of tax legislation on income tax provisions in future periods; and the Company’s determination that
the adoption of new accounting standards will not have a material impact on its consolidated financial statements.
These statements are based on current expectations that are subject to risks, uncertainties and assumptions and the Company can give no assurance that these
expectations are correct. By their nature, these statements are subject to inherent risks and uncertainties that may be general or specific. A variety of material
factors, many of which are beyond the Company’s control, may affect the operations, performance and results of the Company and its business, and could cause
actual results to differ materially from the expectations expressed in any of these forward-looking statements.
The Company's actual results could differ materially from those anticipated by these forward-looking statements for various reasons generally beyond the
Company’s control, including but not limited to: (i) difficult economic conditions or a prolonged economic downturn may adversely affect the Company’s business; (ii)
the Company may not be able to realize its investment objectives or its liquid assets may prove to be insufficient to meet future obligations; (iii) the Company may
have undisclosed liabilities; (iv) the Company may require significant additional funding; and (v) other risk factors set forth herein or in the Company's Annual Report
or the Management Information Circular. The Company disclaims any intention or obligation, except as required by law, to revise forward-looking statements,
whether as a result of new information, future developments, or otherwise. All forward-looking statements are expressly qualified in their entirety by this cautionary
statement.
- 15 -
February 28, 2013
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL INFORMATION
The accompanying consolidated financial statements including the notes thereto have been prepared by,
and are the responsibility of, the management of The Westaim Corporation. This responsibility includes
selecting appropriate accounting policies and making estimates and informed judgments based on the
anticipated impact of current transactions, events and trends, consistent with International Financial
Reporting Standards. The Board of Directors is responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control. In meeting our responsibility for the reliability and
timeliness of financial information, the Company maintains and relies upon a comprehensive system of
internal controls including organizational, procedural and disclosure controls. The Audit Committee,
which is comprised of three Directors, a majority of whom are independent, meets with management as
well as the external auditors to satisfy itself that management is properly discharging its financial reporting
responsibilities and to review the consolidated financial statements and the report of the auditors. It
reports its findings to the Board of Directors who approve the consolidated financial statements.
The accompanying consolidated financial statements have been audited by Deloitte LLP, the independent
auditors, in accordance with generally accepted auditing standards. The auditors have full and
unrestricted access to the Audit Committee.
J. Cameron MacDonald
President and Chief Executive Officer
Jeffrey A. Sarfin
Chief Financial Officer
- 16 -
Independent Auditor’s Report
TO THE SHAREHOLDERS OF
THE WESTAIM CORPORATION
We have audited the accompanying consolidated financial statements of The Westaim Corporation, which
comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011,
and the consolidated statements of profit and loss and other comprehensive income, consolidated statements
of changes in equity and consolidated statements of cash flows for the years then ended and a summary of
significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in 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.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of The Westaim Corporation as at December 31, 2012 and December 31, 2011 and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
February 28, 2013
Toronto, Ontario
- 17 -
The Westaim Corporation
Consolidated Statements of Financial Position
(thousands of Canadian dollars)
ASSETS
Cash and cash equivalents
Investment income due and accrued
Investments (note 4)
Instalment premiums
Income taxes recoverable
Accounts receivable and other assets
Recoverable from reinsurers
Claims recoverable from other insurers
Deferred policy acquisition expenses
Deferred income taxes (note 13)
Property and equipment (note 5)
Intangible assets (note 6)
LIABILITIES
Accounts payable and accrued liabilities
Income taxes due and accrued (note 13)
Unearned premiums
Unpaid claims and adjustment expenses (note 7)
Leasehold inducements
Site restoration provision (note 8)
Commitments and contingent liabilities (note 9)
SHAREHOLDERS' EQUITY
Share capital (note 10)
Warrants (note 10)
Contributed surplus (notes 2r and 10)
Deficit
$
$
$
December 31
2012
December 31
2011
$
39,164
-
-
-
-
202
-
-
-
-
-
-
24,347
5,567
1,018,059
62,781
115
27,954
33,970
50,969
35,601
10,108
22,818
3,844
39,366
$
1,296,133
$
561
1,530
-
-
-
2,663
4,754
203,640
-
12,890
(181,918)
34,612
33,523
821
164,437
675,094
2,594
2,401
878,870
687,402
1,900
12,890
(284,929)
417,263
The accompanying notes are an integral part of these consolidated financial statements
$
39,366
$
1,296,133
Approved on behalf of the Board
Ian W. Delaney
Director
John W. Gildner
Director
- 18 -
The Westaim Corporation
Consolidated Statements of Profit or Loss and Other Comprehensive Income
(thousands of Canadian dollars except share and per share data)
Year Ended December 31
2011
2012
Revenue
Investment income
Realized gains and losses on sale of investments
Other income
Expenses
Management services
Salaries and benefits
Office expenses
Share-based compensation (note 11)
Professional fees
Site restoration provision expense (recovery) (note 8)
Loss from continuing operations
Gain on sale of discontinued operations (note 18)
Proceeds on sale of subsidiary
Carrying value of subisdiary
Transaction costs
Gain on sale of discontinued operations
Income tax expense (note 13)
Post-tax gain on sale of discontinued operations
Discontinued operations (note 18)
Revenue
Expenses
Pre-tax profit of discontinued operations
Income tax expense
Post-tax profit of discontinued operations
Profit from discontinued operations
Profit or loss and other comprehensive income
Earnings per share (note 14)
Loss from continuing operations - basic and diluted
Profit from discontinued operations - basic and diluted
Profit or loss and other comprehensive income - basic and diluted
Weighted average number of common and
Series 1 Class A preferred shares outstanding (in thousands)
Basic
Diluted
$
$
$
$
$
$
747
(442)
-
305
8,439
564
628
20,467
3,284
262
33,644
(33,339)
530,000
(414,289)
(7,498)
108,213
1,530
106,683
275,740
236,903
38,837
9,170
29,667
136,350
116
515
2,250
2,881
3,274
106
871
7,503
743
(95)
12,402
(9,521)
-
-
-
-
-
-
375,522
312,268
63,254
13,917
49,337
49,337
103,011
$
39,816
(0.05)
0.20
0.15
$
$
$
(0.01)
0.07
0.06
660,500
670,374
646,774
656,893
The accompanying notes are an integral part of these consolidated financial statements
- 19 -
The Westaim Corporation
Consolidated Statements of Changes in Equity
Year ended December 31, 2012
(thousands of Canadian dollars)
Share
Capital
Warrants
Contributed
Surplus
Deficit
Total
Equity
Balance at January 1, 2012
$
687,402
$
1,900
$
12,890
$
(284,929)
$
417,263
Profit or loss and other comprehensive income
Share capital issued and paid (note 10)
Exercise of warrants (note 10)
Return of capital (note 10)
-
30,745
6,900
(521,407)
-
-
(1,900)
-
-
-
-
-
103,011
-
-
-
103,011
30,745
5,000
(521,407)
Balance at December 31, 2012
$
203,640
$
-
$
12,890
$
(181,918)
$
34,612
Year ended December 31, 2011
(thousands of Canadian dollars)
Share
Capital
Warrants
Contributed
Surplus
Deficit
Total
Equity
Balance at January 1, 2011
$
691,435
$
1,900
$
8,734
$
(324,745)
$
377,324
Profit or loss and other comprehensive income
Share capital issued and paid (note 10)
Repurchase of shares (note 10)
-
3,270
(7,303)
-
-
-
-
-
4,156
39,816
-
-
39,816
3,270
(3,147)
Balance at December 31, 2011
$
687,402
$
1,900
$
12,890
$
(284,929)
$
417,263
The accompanying notes are an integral part of these consolidated financial statements
- 20 -
The Westaim Corporation
Consolidated Cash Flow Statements
(thousands of Canadian dollars)
Operating activities
Loss from continuing operations
Items not affecting cash
Net realized loss (gain) on investments
Share-based compensation
Extinguishment of management contract (note 12)
Net change in other non-cash balances
Cash used in operating activities of continuing operations
Discontinued operations operating activities
Cash provided from operating activities
Investing activities
Purchase of subsidiary, net of cash acquired (note 12)
Proceeds from sale of investments
Cash (used in) provided from investing activities of continuing operations
Proceeds from sale of discontinued operations
Cash of discontinued operations
Transaction costs incurred upon sale of discontinued operations
Discontinued operations investing activities
Cash provided from (used in) investing activities
Financing activities (note 10)
Issuance of share capital, net of cash issuance costs
Normal course issuer bid
Return of capital to common shareholders
Cash (used in) provided from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash and cash equivalents is comprised of:
Cash
The accompanying notes are an integral part of these consolidated financial statements
Year Ended December 31
2011
2012
$
(33,339)
$
(9,521)
442
20,467
4,966
(4,185)
(11,649)
34,120
22,471
(4,155)
-
(4,155)
530,000
(22,551)
(7,498)
9,598
505,394
8,359
-
(521,407)
(513,048)
14,817
24,347
39,164
$
(515)
2,967
-
(756)
(7,825)
19,551
11,726
-
515
515
-
-
-
(20,914)
(20,399)
3,270
(3,147)
-
123
(8,550)
32,897
24,347
39,164
$
24,347
$
$
- 21 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
1
Nature of Operations and Basis of Preparation
The Westaim Corporation (the “Company”) was incorporated on May 7, 1996 by articles of incorporation under the Business Corporations
Act (Alberta). The Company’s registered office is located at 201-212 King Street West, Toronto, Ontario, Canada. These financial
statements were authorized for issue by the Board of Directors of the Company on February 28, 2013.
On January 9, 2013, the Company’s common shares commenced trading on the TSX Venture Exchange under the symbol WED. Until
January 8, 2013, the Company’s common shares were traded on the Toronto Stock Exchange under the symbol WED. Concurrent with the
commencement of trading on the TSX Venture Exchange, the Company’s common shares were voluntarily delisted from the Toronto Stock
Exchange.
Until September 4, 2012, the Company operated in the insurance industry in Canada through its wholly-owned subsidiary, Jevco Insurance
Company (“Jevco”). Jevco was sold on September 4, 2012. Note 18 Sale of Subsidiary provides information regarding the sale of the
Company’s investment in Jevco and Jevco’s results of operations to the date of sale.
These financial statements also include, on a consolidated basis, the accounts of wholly-owned subsidiaries, Westaim Holdings Limited
(“WHL”), 1685740 Alberta Ltd., 1685753 Alberta Ltd. and 1686581 Alberta Ltd. The Company amalgamated with WHL, 1685740 Alberta Ltd.
and 1685753 Alberta Ltd. on July 1, 2012, and with 1686581 Alberta Ltd. on January 1, 2013.
These financial statements are prepared in compliance with International Financial Reporting Standards (“IFRS”).
All currency amounts are expressed in thousands of Canadian dollars except earnings per share data, unless otherwise noted.
2
Summary of Significant Accounting Policies
The significant accounting policies used to prepare these financial statements are as follows:
(a) Principles of consolidation
The financial statements of entities which are controlled by the Company through voting equity interests, referred to as subsidiaries, are
consolidated. The financial results of subsidiaries are included in the consolidated financial statements from the date that control
commences until the date that control ceases. Intercompany balances and transactions are eliminated upon consolidation.
(b) Use of estimates
The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the
reporting period in which they are determined. Key estimates are discussed in the following accounting policies and applicable notes.
(c) Judgments made by management
Key areas where management has made difficult, complex or subjective judgments in the process of applying the Company’s accounting
policies, often as a result of matters that are inherently uncertain, include: valuation techniques for fair value determination of investments,
investment impairment, provision for unpaid claims and adjustment expenses, site restoration provision and income taxes. For additional
information on these judgments, see note 4 for investments, note 7 for unpaid claims and adjustment expenses, note 8 for site restoration
provision and note 13 for income taxes.
(d) Foreign currency translation
The Canadian dollar is the functional and presentation currency of the Company. Transactions in foreign currencies are translated into
Canadian dollars at rates of exchange prevailing at the time of such transactions. Monetary assets and liabilities are translated at current
rates of exchange. Translation differences on available-for-sale investments are classified as relating either to the amortized cost of the
investment or to other changes in the carrying value of the investment.
(e) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid short-term investments with original maturities of 90 days or less, with
the exception of cash equivalents designated as a component of the investment portfolio which are classified as investments.
- 22 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
Cash and cash equivalents which are not designated as a component of the investment portfolio are classified in the financial instrument
category of loans and receivables for purposes of measurement. Cash and cash equivalents are valued at fair value at the issuance date
and subsequently at amortized cost using the effective interest method. Carrying value is a reasonable approximation of fair value.
(f) Investments and investment income
Investments are classified according to four accounting models: available-for-sale, fair value through profit or loss (“FVTPL”), held-to-
maturity and cost. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial
recognition.
Available-for-sale investments are carried at their fair value whereby the unrealized gains and losses are included in accumulated other
comprehensive income (“AOCI”) until sale or impairment is recognized, at which time cumulative unrealized gains or losses are transferred
to profit or loss. Realized gains and losses on sale, determined on an average cost basis, and write-downs to reflect objective evidence of
impairment in value are included in ‘realized gains and losses on sale of investments’. Changes in the fair value of investments designated
as FVTPL are charged or credited to investment income for the current reporting period. Held-to-maturity investments are carried at
amortized cost using the effective interest method. When a reliable estimate of the fair value of unquoted equity investments cannot be
determined, the equity investment is reported at cost.
The Company accounts for investments using settlement date accounting. Transaction costs for FVTPL investments are expensed as
incurred. Transaction costs for all other categories of investments are capitalized and, when applicable, amortized over the expected life of
the investment using the effective interest method.
The Company conducts quarterly reviews to identify and evaluate investments that show objective indications of possible impairment. For
debt investments, impairment exists when there is objective evidence that, as a result of one or more events occurring after initial
recognition, the estimated future cash flows of the investment have been affected. For available-for-sale equity investments, a significant or
prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.
(g) Instalment premiums
The instalment premiums asset represents the premiums related to the unexpired portion of the period of risk.
(h) Recoverable from reinsurers
Estimates of amounts recoverable from reinsurers on unpaid claims and adjustment expenses are reported separately from related
estimated amounts payable to policyholders. Unearned premiums and deferred policy acquisition expenses are also reported before
reduction for amounts ceded to reinsurers and the reinsurer’s portion is classified with amounts recoverable from reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with liabilities associated with the reinsured policy. Amounts recoverable
from reinsurers are assessed for indicators of impairment at the end of each reporting period. An impairment loss is recognized and the
amount recoverable from reinsurers is reduced by the amount by which the carrying value exceeds the expected recoverable amount under
the impairment analysis.
(i) Claims recoverable from other insurers
The expected recoveries from other insurers on claims paid to policyholders are recognized as amounts recoverable at the same time as the
related liability is recognized using principles consistent with the Company’s method for establishing the related liability. Claims recoverable
from other insurers are assessed for indicators of impairment at the end of each reporting period. An impairment loss is recognized and the
amount of claims recoverable from other insurers is reduced by the amount by which the carrying value exceeds the expected recoverable
amount under the impairment analysis.
(j) Deferred policy acquisition expenses
The Company defers brokers’ commissions, premium taxes and other underwriting and marketing expenses relating to premiums written to
the extent the expenses are considered recoverable. These costs are expensed as the related premiums are earned. Changes in estimates
are reported as expenses in the reporting period in which they are determined. Anticipated future claims, expenses and investment income
are considered in determining the recoverability of the carrying value of the deferred policy acquisition expenses.
- 23 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(k) Income taxes
Income tax expense is recognized in the statement of profit or loss and other comprehensive income. Current tax is based on taxable
income which differs from profit or loss and other comprehensive income because of items of income or expense that are taxable or
deductible in other years and items that are never taxable or deductible.
Deferred tax assets are generally recognized for all deductible temporary income tax differences to the extent that it is probable that taxable
profits will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are generally
recognized for all taxable temporary differences. Deferred tax assets and liabilities are determined based on the enacted or substantively
enacted tax laws and rates that are anticipated to apply in the year of realization. The measurement of deferred tax assets and liabilities
reflects the tax consequences that would follow from the manner in which the Company expects to recover or settle the carrying amount of
the related assets and liabilities. The carrying amount of the deferred tax asset is reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Income tax assets and liabilities are offset when the Company intends to settle on a net basis and there is a legally enforceable right to
offset.
(l) Property and equipment
Property and equipment are reported at cost less accumulated depreciation. Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives of such assets. The useful lives are 19 to 43 years for buildings, 5 to 15 years for
leasehold improvements, 5 to 7 years for furniture and equipment, and 3 to 5 years for computers and automobiles. At the end of each
reporting period, management reviews the carrying amounts of property and equipment for indication of impairment. An impairment loss is
recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher
of fair value less cost to sell and value in use.
(m) Intangible assets
Intangible assets are reported at amortized cost and consist of purchased software and internally developed software. Amortization of
intangible assets is provided using the straight-line method over estimated useful lives of 3 to 5 years. At the end of each reporting period,
management reviews the carrying amounts of intangible assets for indication of impairment. An impairment loss is recognized for the
amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of fair value less
cost to sell and value in use.
(n) Unearned premiums
Unearned premiums reported in the statement of financial position represent the portion of premiums written related to the unexpired risk
portion of the policy at the end of the reporting period.
The reinsurers’ share of unearned premiums is recognized as amounts recoverable from reinsurers using principles consistent with the
Company’s method for determining the unearned premiums liability.
(o) Unpaid claims and adjustment expenses
The provision for unpaid claims and adjustment expenses includes an estimate of the cost of projected final settlements of insurance claims
incurred on or before the statement of financial position date, including claims incurred but not reported (“IBNR”) by policyholders and an
estimate of the full amount of all expected expenses. The provision takes into consideration the time value of money using discount rates
based on projected investment income from the assets supporting the provisions and includes an explicit provision for adverse deviation.
Expected recoveries on unpaid claims and adjustment expenses are recognized as amounts recoverable from other insurers or reinsurers at
the same time using principles consistent with the Company’s method for establishing the related liability.
These estimates of future claims payments and adjustment expenses are subject to uncertainty and are selected from a wide range of
possible outcomes. All provisions are periodically reviewed and evaluated in light of emerging claims experience and changing
circumstances. The resulting changes in estimates of the ultimate liability are reported as net claims and adjustment expenses in the
reporting period in which they are determined.
As the carrying value of the unpaid claims and adjustment expenses is based on the present value of future cash flows with provisions for
adverse deviation, it is considered to be an indicator of fair value as there is no ready market for trading insurance policy liabilities.
- 24 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(p) Leasehold inducements
Leasehold inducements are liabilities associated with the initial benefits received by the Company related to the rental of office premises.
Leasehold inducements are amortized over the term of the lease on a straight-line basis.
(q) Site restoration provision
Future site restoration costs relate to industrial sites previously owned by the Company and are estimated taking into consideration the
anticipated method and extent of the remediation consistent with regulatory requirements, industry practices, current technology and
possible uses of the site. The estimated amount of future restoration costs is reviewed periodically based on available information. The
amount of the provision is the present value of the estimated future restoration costs discounted using the rate of interest of a high quality
government bond.
Recoveries of costs resulting from indemnifications provided by previous owners of the Company’s industrial sites have not been recognized
in these financial statements. Future recoveries of site restoration costs will be recorded when received.
(r) Contributed surplus
The cost of stock options is recognized over the period from the issue date to the vesting date and recorded as contributed surplus. When
share capital of the Company is repurchased by the Company, the amount by which the average carrying value of the shares exceeds the
cost to repurchase the shares is removed from share capital and included in contributed surplus.
(s) Share-based compensation
The Company maintains share-based compensation plans, which are described in note 11. Any consideration paid by stock option holders
for the purchase of stock is credited to share capital. The cost of stock options is recognized over the period from the issue date to the
vesting date and recorded as a component of equity in contributed surplus.
Obligations related to Deferred Share Units (“DSUs”) and Restricted Share Units (”RSUs”) are accrued as liabilities when a change in value
occurs and recognized in compensation expense over the applicable vesting period.
(t) Discontinued operations
Results of discontinued operations are presented in the statement of profit or loss and other comprehensive income as profit from
discontinued operations and comprise the revenues and expenses of Jevco and the gain on sale of Jevco, net of related income tax
expense. In accordance with IAS 27 “Consolidated and Separate Financial Statements”, gains and losses on available-for-sale investments
are included in revenue from discontinued operations as these are considered realized due to the sale of Jevco. Income tax on unrealized
gains and losses has been reclassified as income taxes on profit of discontinued operations. In accordance with IFRS 5 “Non-current Assets
Held for Sale and Discontinued Operations”, the statement of profit or loss and other comprehensive income for the year ended December
31, 2011 presents the discontinued operations of Jevco reclassified for consistent presentation with the year ended December 31, 2012.
(u) Earnings per share
Basic earnings per share is calculated by dividing profit or loss by the total of the weighted average number of common shares outstanding
during the reporting period plus the weighted average number of preferred shares outstanding during the reporting period. Profit or loss
equals profit or loss and other comprehensive income for the years ended December 31, 2012 and 2011. The preferred shares are
considered in substance common shares.
Diluted earnings per share is calculated on the basis of the weighted average number of shares outstanding during the reporting period plus
an estimate of the additional common shares that would have been outstanding if potentially dilutive common shares had been issued using
the “treasury stock” method. No adjustments to profit or loss are required for dividends, interest or other changes in income for purposes of
calculating diluted earnings per share.
- 25 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
3
Accounting Standards Issued But Not Yet Applied
IFRS 9 “Financial instruments” (“IFRS 9”) was issued in November 2009 and will replace IAS 39 “Financial Instruments: Recognition and
Measurement” (“IAS 39”). IFRS 9 prescribes a single approach to determine whether a financial asset is measured at amortized cost or fair
value, replacing the multiple rules permissible under IAS 39. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 also requires a
single impairment method to be used, replacing the multiple impairment methods permissible under IAS 39. The Company has not yet
determined the impact of IFRS 9 on its financial statements. IFRS 9 is effective for years beginning on or after January 1, 2015.
IFRS 10 “Consolidated Financial Statements” (“IFRS 10”), issued in May 2011, replaces IAS 27 “Consolidated and Separate Financial
Statements” and SIC-12 “Consolidation - Special Purpose Entities”. The Company does not currently apply SIC-12 as it does not have
special purpose entities. IFRS 10 defines the principle of control and establishes control as the basis for determining which entities are
consolidated in the consolidated financial statements. IFRS 10 also sets out the accounting requirements for the preparation of consolidated
financial statements. The three elements of control identified in IFRS 10 are power over the investee, exposure or rights to variable returns
from involvement with the investee and investor ability to use power over the investee to affect the amount of the investor’s returns. The
Company expects that the adoption of IFRS 10 will not have a material impact on its financial statements.
IFRS 12 “Disclosure of Interests in Other Entities” (“IFRS 12”) requires a company to disclose information that enables users of financial
statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial
position, financial performance and cash flows. IFRS 12 is required to be applied by an entity that has an interest in subsidiaries. The
Company expects that the adoption of IFRS 12 will not have a material impact on its financial statements.
IFRS 13 “Fair Value Measurement” (“IFRS 13”), issued in May 2011, establishes a single source of guidance for fair value measurement
under IFRS. IFRS 13 defines fair value, provides guidance on its determination and introduces consistent requirements for disclosures on
fair value measurements. IFRS 13 does not include requirements on when fair value measurement is required; it prescribes how fair value is
to be measured if another IFRS or IAS requires it. IFRS 13 should be applied prospectively from the beginning of the year in which it is
adopted. The Company expects that the adoption of IFRS 13 will not have a material impact on its financial statements.
IFRS 10, IFRS 12 and IFRS 13 are effective for years beginning on or after January 1, 2013.
4
Investments
The table below provides details of the investments classified by measurement category:
Category of investments:
Available-for-sale - carried at fair value
Held-to-maturity - carried at amortized cost
December 31, 2012
$
-
-
-
December 31, 2011
920,591
$
97,468
1,018,059
$
$
The following table provides details of the amortized cost and fair value of available-for-sale investments, carried at fair value:
Short-term investments
Canadian bonds - Government
Canadian bonds - Corporate
Canadian bonds - Mortgage backed
Canadian bonds - Other asset backed
United States bonds - Corporate
Common shares - Canadian
Preferred shares - Canadian
Amortized cost
84,780
$
187,681
371,600
40,526
79,615
28,142
792,344
100,605
12,072
905,021
$
Gross
unrealized gains
$
$
6
1,463
8,854
937
933
282
12,475
4,918
1,116
18,509
- 26 -
Gross
unrealized losses
$
December 31, 2011
Fair value
$
$
84,786
188,871
380,076
41,456
80,507
28,320
804,016
103,433
13,142
920,591
-
273
378
7
41
104
803
2,090
46
2,939
$
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
4
Investments (continued)
The following table presents the amortized cost and fair value of held-to-maturity investments, carried at amortized cost:
Canadian bonds - Government
Canadian bonds - Corporate
Amortized cost
73,006
$
24,462
97,468
$
Gross
unrealized gains
$
$
7,634
1,679
9,313
$
Gross
unrealized losses
$
December 31, 2011
Fair value
$
$
80,640
26,141
106,781
-
-
-
The annual coupon rates for the fixed term investments ranged from 1.0% to 12.2% at December 31, 2011. The average effective book
yield using amortized cost and the contractual interest rates, adjusted for amortization of premiums and discounts at December 31, 2011,
was 2.8%.
Fair value determination
Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties
who are under no compulsion to act and are best evidenced by quoted market prices, if they exist. The calculation of estimated fair value is
based on market conditions at a specific point in time and may not be reflective of future fair values.
The Company uses a fair value hierarchy to categorize the inputs used in valuation techniques to measure fair value. The extent of the
Company’s use of quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and internal
models without observable market information (Level 3) in the valuation of the Company’s investments at December 31, 2011 is as follows:
December 31, 2011
Available-for-sale investments:
Short-term investments
Canadian bonds - Government
Canadian bonds - Corporate
Canadian bonds - Mortgage backed
Canadian bonds - Other asset backed
United States bonds - Corporate
Common shares - Canadian
Preferred shares - Canadian
Held-to-maturity investments:
Canadian bonds - Government
Canadian bonds - Corporate
Impairment Analysis
Fair value
Level 1
Level 2
Level 3
$
$
$
$
84,786
188,871
380,076
41,456
80,507
28,320
103,433
13,142
920,591
80,640
26,141
106,781
$
$
$
$
-
-
-
-
-
-
103,433
13,142
116,575
-
-
-
$
$
$
$
84,786
188,871
379,176
41,456
80,507
28,320
-
-
803,116
80,640
26,141
106,781
$
$
$
$
-
-
900
-
-
-
-
-
900
-
-
-
Management performs a quarterly analysis of investment holdings to determine whether there is objective evidence that the estimated cash
flows of the investments have been affected. The analysis includes the following procedures as deemed appropriate by management:
assessing whether any credit losses are expected for those investments. This assessment includes consideration of, among other
things, all available information and factors having a bearing upon collectability such as changes to credit rating by rating agencies,
financial condition of the issuer, expected cash flows and value of any underlying collateral;
identifying all security holdings in unrealized loss positions that have existed for at least six months or other circumstances that
management believes may impact the recoverability of the investment;
obtaining a valuation analysis from third party investment managers regarding the intrinsic value of these holdings based on their
knowledge, experience and other market based valuation techniques;
reviewing the trading range of certain investments over the preceding year;
assessing whether declines in market value for debt investment holdings represent objective evidence of impairment based on their
investment grade credit ratings from third party security rating agencies;
assessing whether declines in market value for any debt investment holdings with non-investment grade credit rating represent
objective evidence of impairment based on the history of its debt service record; and
- 27 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
4
Investments (continued)
determining necessary provisions for declines in market values for which there is objective evidence of impairment based on analyses
performed.
The risks and uncertainties inherent in the assessment methodology utilized to determine whether declines in market value represent
objective evidence of impairment include, but may not be limited to, the following:
the opinion of professional investment managers could be incorrect;
the past trading patterns of individual investments may not reflect future valuation trends;
the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts related to a
company’s financial situation; and
the debt service pattern of non-investment grade investments may not reflect future debt service capabilities and may not reflect
unknown underlying financial problems.
5
Property and Equipment
Details of cost and accumulated depreciation of property and equipment at December 31, 2011 are as follows:
Cost
Accumulated depreciation
Land
Building
$
$
1,283
-
1,283
$
$
16,584
(963)
15,621
6
Intangible Assets
Leasehold
improvements
$
3,268
(227)
3,041
$
Furniture
and
equipment
2,784
$
(847)
1,937
$
Computers
1,663
$
(912)
751
$
Automobiles
286
$
(101)
185
$
Total
$ 25,868
(3,050)
$ 22,818
Details of cost and accumulated amortization of intangible assets at December 31, 2011 are as follows:
Cost
Accumulated amortization
$
$
6,049
(2,205)
3,844
7
Unpaid Claims and Adjustment Expenses
(a) Nature of unpaid claims and adjustment expenses
The establishment of the provision for unpaid claims and adjustment expenses is based on known facts and interpretation of circumstances
and is therefore a complex and dynamic process influenced by a large variety of factors. These factors include the Company’s own
experience with similar cases and historical trends involving claim payment patterns, loss payments, pending levels of unpaid claims and
adjustment expenses, product mix and concentration, claims severity and claim frequency patterns.
Other factors include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and
expertise of the Company’s claim departments’ personnel and independent adjusters retained to handle individual claims, the quality of the
data used for projection purposes, existing claims management practices including claims handling and settlement practices, the effect of
inflationary trends on future claims settlement costs, investment rates of return, court decisions, economic conditions and public attitudes. In
addition, time can be a critical part of the provision determination, since the longer the span between the incidence of a loss and the
settlement of the claims, the more variable the ultimate settlement amount can be. Accordingly, short-tailed claims, such as property claims,
tend to be more reasonably predictable than long-tailed claims, such as general liability and automobile accident benefit claims.
The process of establishing the provision relies on the judgment and opinions of a large number of individuals, on historical precedents and
trends, on prevailing legal, economic, social and regulatory trends and on expectations as to future developments. The provision reflects
expectations of the ultimate cost of resolution and administration of claims based on an assessment of facts and circumstances then known
together with a review of historical settlement patterns, estimates of trends in claims severity and frequency, legal theories of liability and
other factors.
- 28 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
7
Unpaid Claims and Adjustment Expenses (continued)
Variables affecting the determination of the provision are the receipt of additional claims information and other internal and external factors,
such as changes in claims handling procedures, economic inflation, legal and judicial trends, legislative changes, and inclusion of exposures
not contemplated at the time of policy inception. The provision for claims and adjustment expenses is reviewed separately by, and must be
acceptable to, management of the Company, the Appointed Actuary and an external valuation actuary during the Company’s triennial
actuarial examination.
(b) Methodologies and assumptions
The best estimates of future claims and adjustment expenses have been determined from the projected ultimate claims and adjustment
expenses based on the reported / paid claims development method, the Bornhuetter-Ferguson method, the Berquist-Sherman method and
the expected claims method. Considerations in the choice of methods to estimate ultimate claims included, among other factors, the line of
business, the number of years’ experience and the age of the accident years being developed. A description of each of these methods is as
follows:
(i) Reported / paid claims development method
The distinguishing characteristics of the development method are that ultimate claims for each accident year are produced from
recorded values assuming the future claim development is similar to the prior years’ development. The underlying assumption is
that claims recorded to date will continue to develop in a similar manner in the future.
(ii) Bornhuetter-Ferguson method
The key assumption of the Bornhuetter-Ferguson method is that unreported claims will develop based on expected claims. In
other words, the claims reported to date contain no informational value as to the amount of claims yet to be reported. It is most
frequently used for lines of business with long settlement patterns, and lines of business subject to the occurrence of large claims.
(iii) Berquist-Sherman method
The adjusted reported development method, also known as the Berquist-Sherman method, is analogous to the reported / paid
claims development method except that the reported claims used in the calculation of development factors are first adjusted to a
common case reserve adequacy basis. A case reserve is a provision for unpaid claims and adjustment expenses for known
claims. Compared to the reported / paid claims method, which relies on consistency in reserving philosophies and procedures to
produce reliable results, the Berquist-Sherman method modifies the raw data to restate historical case reserves to the level that
the current case reserves would imply, after the consideration of trend.
(iv) Expected claims method
Using the expected claims method, ultimate claims projections are based upon prior measures of the anticipated claims. An
expected claims ratio is applied to the measure of exposure to determine estimated ultimate claims for each year. This method is
more commonly used in lines of business with longer emergence and settlement patterns.
For each line of business, a roll-forward of the liabilities to September 4, 2012, the date of sale of Jevco, was performed based on the
December 31, 2011 analysis. The September 4, 2012 liabilities were based on actuarial assumptions as established in the September 30,
2011 analysis and the December 31, 2011 IBNR reserves and adjusted, as appropriate, based on the actual claims experience. This
approach is based on the assumption that the change in reported / paid development factors for the eight months would not be significantly
affected by the development of reported claims during the eight months ended September 4, 2012. In addition, this approach is based on
the Bornhuetter-Ferguson method principles, where the September 4, 2012 IBNR reserves are calculated based on the September 30, 2011
IBNR reserves projected to December 31, 2011 based on the selected reported / paid development factors, adjusted if necessary, and then
added to the actual reported claims valued as of September 4, 2012 to determine the ultimate claims as of September 4, 2012.
Claims paid and reported, direct and net of reinsurance recoveries and net of salvage and subrogation, were tracked by lines of business,
accident years and development periods. Selected claims development factors were calculated based on the historical development pattern
of the reported claims. Judgment was used whenever there was a wide variability in the past development factors due to a small claims
sample or due to a new class of business; development factors which seemed abnormal were disregarded in selecting the claims
development factors. The Berquist-Sherman method was used to adjust the historical claims information for these variations.
- 29 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
7
Unpaid Claims and Adjustment Expenses (continued)
Claims data includes external claims adjustment expenses and internal claims adjustment expenses (“IAE”). For the portion of the portfolio
which includes IAE, a provision for IAE was determined based on the ratio of paid IAE to paid claims. This method assumes that half of the
IAE is required when the claim is first recorded. The remaining half of the IAE is required to maintain the claim. This IAE percentage is
applied to the pure IBNR and to half of the case reserves plus IBNR for known claims.
The provision for unpaid claims and adjustment expenses is discounted using an interest rate based on the Company’s projected investment
income from the assets supporting the unpaid claims and adjustment expense liabilities, and reflecting the estimated timing of payments and
recoveries. The discount rate used as at September 4, 2012, the date of sale of Jevco, was 2.89% (December 31, 2011 - 3.1%).
Reinsurance recoverable estimates and claims recoverable from other insurers are discounted in a manner consistent with the method used
to establish the related liability.
8
Site Restoration Provision
The site restoration provision is based on periodic independent estimates of costs associated with soil and groundwater reclamation and
remediation of industrial sites formerly owned by the Company. The ultimate environmental costs are uncertain as they are dependent on
the future use of the land and future laws and regulations.
The change in the site restoration provision for the year ended December 31, 2012 is as follows:
Balance at January 1, 2012
Revisions to cash flow estimates
Decrease due to inflation
Increase due to change in discount rates
Changes due to passage of time
Balance at December 31, 2012
$
$
2,401
(632)
(474)
1,341
27
2,663
Change in estimates of future expenditures are as a result of periodic reviews of the underlying assumptions supporting the provision,
including remediation costs and regulatory requirements. The Company does not expect to settle any portion of the site restoration provision
within twelve months after December 31, 2012.
Cash flows are estimated to take place over the next 150 years, with the majority to take place later than 50 years after December 31. 2012.
To calculate the site restoration provision, the estimated cash flows were adjusted for inflation and discounted to December 31, 2012. For
inflation and discounting calculations, all cash flows later than 50 years are treated as if the cash flow would occur at 100 years. Inflation is
estimated at 1.2% per annum over the next 100 years. Discount rates are based on risk free rates which range from 1.1% to 2.4% over the
next 30 years. The 30-year risk free rate is used for discounting cash flows that are estimated to occur later than 30 years after December
31, 2012.
Reimbursements of future costs resulting from indemnifications provided by previous owners of the industrial sites have not been recognized
in these financial statements. Future reimbursements will be recorded when received.
9
Commitments and Contingent Liabilities
(a)
(b)
In connection with its operations, the Company is from time to time named as defendant in actions for damages and costs allegedly
sustained by the plaintiffs. While it is not possible to estimate the outcome of the various proceedings at this time, such actions have
generally been resolved with minimal expenses in excess of amounts provided for. The Company does not believe that it will incur any
significant additional expenses in connection with such actions.
In connection with the sale of the operations and assets of WHL in 2009, WHL agreed to indemnify the purchaser against certain
liabilities or losses as described in the asset purchase agreement to an aggregate maximum of US$11,000, subject to certain
exclusions. The Company also agreed to indemnify the purchaser and the purchaser’s directors, officers and employees, for an
indefinite period, from certain environmental liabilities and costs relating to the premises formerly leased by WHL in Fort
Saskatchewan, Alberta. No claims have been made under, and no amounts have been accrued related to, these indemnities.
- 30 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
9
Commitments and Contingent Liabilities (continued)
(c) The Company has agreements to indemnify its officers and directors for certain events or occurrences while the officer or director is or
was serving at the Company's request in such capacity. The maximum potential amount of future payments is unlimited. However, the
Company maintains Director and Officer Liability insurance coverage that enables the Company to recover a portion of any future
payments.
(d) The Company has provided indemnifications to third parties with respect to future site restoration costs to be incurred on properties
previously owned by the Company. These estimated costs have been included in the site restoration provision (note 8).
(e) The Company has operating leases in Toronto with remaining lease terms of up to 7 years. At December 31, 2012, the Company had
a total commitment of $377 for future minimum lease payments including payments due not later than one year of $99, payments due
later than one year and not later than five years of $254, and payments due later than five years of $24.
10 Share Capital, Warrants and Contributed Surplus
Share Capital
The Company’s authorized share capital consists of an unlimited number of common shares with no par value, Class A preferred shares
with no par value and Class B preferred shares with no par value.
The Company’s share capital at December 31, 2012 and 2011 is as follows:
(thousands)
Common shares issued and fully paid
Series 1 Class A preferred shares issued and fully paid
December 31, 2012
December 31, 2011
Number
695,210
-
695,210
Stated Capital
$ 203,640
-
$ 203,640
Number
580,344
63,853
644,197
Stated Capital
$ 656,618
30,784
$ 687,402
Common shares
(thousands)
As at January 1
Issued
Conversion of Series 1 Class A preferred shares
Return of capital
Purchased and cancelled
Series 1 Class A preferred shares
(thousands)
As at January 1
Exercise of warrants
Conversion to common shares
Year ended
December 31, 2012
Number
580,344
41,013
73,853
-
-
695,210
Stated Capital
$ 656,618
30,745
37,684
(521,407)
-
$ 203,640
Year ended
December 31, 2012
Number
63,853
10,000
(73,853)
-
Stated Capital
30,784
$
6,900
(37,684)
-
$
Year ended
December 31, 2011
Number
580,565
6,234
-
-
(6,455)
580,344
Stated Capital
$ 660,651
3,270
-
-
(7,303)
$ 656,618
Year ended
December 31, 2011
Number
63,853
-
-
63,853
$
Stated Capital
30,784
-
-
30,784
$
There were no Class B preferred shares outstanding during the years ended December 31, 2012 and 2011. No shares of the Company are
held by the Company or by its subsidiaries.
At a special meeting of the Company’s shareholders on June 28, 2012, the shareholders voted in favour of a special resolution to reduce the
stated capital of the common shares of the Company through a return of capital in the form of a cash distribution. The amount of the cash
distribution was determined by the Board of Directors of the Company and the distribution was made on September 28, 2012 at $0.75 per
common share for a total of $521,407. The return of capital was recorded as a reduction in the stated capital of the common shares.
- 31 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
10 Share Capital, Warrants and Contributed Surplus (continued)
The Series 1 Class A preferred shares rank equally with the common shares with respect to liquidation proceeds and are entitled to
dividends as the directors may declare, provided that an equal dividend is declared on the common shares. All the issued Series 1 Class A
preferred shares previously outstanding were held by one shareholder (the “Holder”). Series 1 Class A preferred shares are non-voting and
convertible into common shares, on a one to one basis. The Series 1 Class A preferred shares initially prohibited conversion of such shares
where the conversion would result in the Holder exercising control or direction over greater than 40% of the common shares. At the special
meeting of the Company’s shareholders on June 28, 2012, an amendment to the Company’s articles was approved by a special resolution
which, upon completion of the sale of Jevco, permitted Series 1 Class A preferred shares to be converted to common shares while permitting
the Holder to exceed an ownership of 40% of the common shares. In anticipation of this special resolution, the Company and the Holder
entered into a voting agreement (“Voting Agreement”) on May 25, 2012 to provide comparable protection to the common shareholders as
was provided by the conversion restrictions which were in place prior to the special resolution. Pursuant to the Voting Agreement, the Holder
agreed to vote the shares over which it exercises control or discretion and which represent in excess of 40% of the issued and outstanding
common shares, in such manner as the Company’s Board of Directors specifies or directs. All Series 1 Class A preferred shares were
converted to common shares prior to the cash distribution.
Warrants
10,000,000 warrants to purchase an equal number of Series 1 Class A preferred shares of the Company at an exercise price of $0.50 per
share were exercised on September 11, 2012 for cash consideration of $5,000. The fair value of the warrants at the time of issuance on
February 9, 2010 was $1,900, which was estimated using the Black-Scholes option pricing model assuming a risk-free interest rate of 1.59%
and a volatility of 30.0%. This amount was reclassified to share capital upon the exercise of the warrants.
Contributed Surplus
In August 2011, the Company filed a normal course issuer bid which entitled the Company to acquire up to 30,173,238 common shares
between August 30, 2011 and August 29, 2012. In 2012, no shares were purchased under the normal course issuer bid. In 2011, the
Company repurchased 6,455,000 common shares on the open market through the normal course issuer bid at an average price per share of
$0.4875, for an aggregate consideration of $3,147. The amount by which the average carrying value exceeded the cost of reacquiring the
shares of $4,156 was credited to contributed surplus.
11 Share-based Compensation
Under the Company’s comprehensive long-term equity incentive plan, as approved by the Board of Directors and ratified by the
shareholders, the Company may grant share-based awards for an initial number of 63,858,049 common shares of the Company.
Stock Options - Changes to the number of stock options for the years ended December 31, 2012 and 2011 are as follows:
Common share stock options
Outstanding at January 1
Exercised
Expired and forfeited
Outstanding at December 31
Year ended
December 31, 2012
Number
(thousands)
475
(27)
(75)
373
Weighted Average
Exercise Price
in dollars
3.30
0.22
5.60
3.07
$
$
$
$
Year ended
December 31, 2011
Number
(thousands)
1,072
(70)
(527)
475
Weighted Average
Exercise Price
in dollars
4.03
$
0.22
$
5.19
$
3.30
$
Stock options outstanding are exercisable at prices ranging from $1.23 to $6.18 and have an average remaining contractual life of 2.3 years.
Deferred Share Units - DSUs are granted to non-executive directors of the Company and, prior to the sale of Jevco, also to non-executive
directors, officers and employees of Jevco, and are issued at the market value of the Company’s shares at the date of grant. Directors may
elect to receive DSUs in lieu of fees. Vested DSUs are paid out in cash when the participant ceases to be a director, officer or employee.
All DSUs issued prior to the sale of Jevco vested and were paid out upon the sale of Jevco (note 18).
- 32 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
11 Share-based Compensation (continued)
Changes to the number of DSUs for the years ended December 31, 2012 and 2011 are as follows:
DSUs (thousands)
Outstanding at January 1
Granted
Exercised
Cancelled
Outstanding at December 31
Year ended December 31
2011
4,609
1,006
-
(77)
5,538
2012
5,538
7,232
(7,071)
(39)
5,660
For the year ended December 31, 2012, compensation expense relating to DSUs was $1,296 (2011 - $281). At December 31, 2012, a
liability of $141 (December 31, 2011 - $2,723) has been accrued with respect to outstanding DSUs.
Restricted Share Units - RSUs vest over three years, one third on each of the one year, two year and three year anniversary of the grant
date, and are payable in cash when vested. The holder may elect to apply all or part of such cash payment to a subscription for common
shares of the Company. Upon a change of control of the Company or the sale of substantially all of the assets of the Company, RSUs vest
immediately.
Compensation expense with respect to RSUs for the year ended December 31, 2012 was $10,050 (2011 - $7,222). At December 31, 2012,
accounts payable and accrued liabilities included an accrued liability related to RSUs of $nil (December 31, 2011 - $8,216). Upon the
acquisition of Goodwood Management Inc. (“GMI”) by the Company, an expense of $9,121 was recognized to reflect the value of the RSUs
which were extinguished as a result of the subsequent windup of GMI (note 12).
Changes to the number of RSUs for the years ended December 31, 2012 and 2011 are as follows:
RSUs (thousands)
Outstanding at January 1
Granted
Extinguished on windup of GMI (note 12)
Exercised
Outstanding at December 31
Year ended December 31
2011
25,775
9,666
-
(8,592)
26,849
2012
26,849
9,666
(36,515)
-
-
12 Related Party Transactions
Management services agreement
Prior to September 4, 2012, the Company had a management services agreement (“MSA”) with GMI to manage the day-to-day affairs of the
Company and to present strategic investment opportunities for the Board of Directors to consider. GMI was required to provide certain
services to the Company including the services of two directors, one of whom was also President and Chief Executive Officer, and a Chief
Financial Officer. The MSA provided that GMI was paid an annual service fee designed to compensate GMI for the time and attention of its
officers and employees incurred in furtherance of the Company’s business as well as for the office space, equipment, supplies and other
facilities made available by GMI to the Company. The amount of the services fee was based on a report prepared by an independent
compensation consultant. GMI was also entitled to participate in an annual incentive bonus plan for the purpose of recognizing the
contribution of GMI to the Company’s business.
Prior to the purchase of GMI by the Company on September 4, 2012, GMI was controlled by corporations controlled by two directors of the
Company.
For the year ended December 31, 2012, GMI fee expense, inclusive of harmonized sales tax, was $3,473 (2011 - $3,274). At December 31,
2012, fees of $nil (December 31, 2011 - $226) were included in accounts payable and accrued liabilities. Upon the extinguishment of the
MSA, an expense of $4,966 was recognized in the statement of profit or loss and other comprehensive income.
All RSUs previously outstanding were held by GMI (note 11).
- 33 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
12 Related Party Transactions (continued)
Acquisition of GMI
On September 4, 2012, the Company purchased all the issued and outstanding shares of GMI for $4,190 in cash and 36,514,902 common
shares of the Company. The consideration paid reflected the fair value of the assets and liabilities of GMI. As the fair value of the
consideration paid was determined to be equal to the fair value of the assets and liabilities of GMI, no goodwill was recorded. Immediately
following the acquisition, GMI was wound up into the Company.
Former employees of GMI who are now employees of the Company are considered key management personnel for related party disclosure
purposes beginning on September 4, 2012.
Transactions with key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Company, directly or indirectly, including directors of the Company.
Compensation expenses related to key management personnel for the years ended December 31, 2012 and 2011 are as follows:
Salaries and other short-term employee benefits
Share-based compensation
13
Income Taxes
Year ended December 31
2011
2012
106
565
$
$
282
1,296
388
1,861
$
$
Income taxes are recognized for deferred income taxes attributed to estimated differences between the financial statement carrying values
of assets and liabilities and their respective income tax bases.
The deferred income tax asset consists of deferred taxes related to the following:
Non-capital loss carry-forwards
Unpaid claims and adjustment expenses
Intangible assets, property and equipment
Other
Deferred income tax asset
December 31, 2012
$
December 31, 2011
$
$
$
As the realization of any related tax benefits is not probable, no deferred income tax assets have been recognized for the following:
-
-
-
-
-
44,404
6,640
6,064
1,530
8,672
2,862
7,653
(1,231)
824
10,108
44,054
96,194
28,333
-
8,672
December 31, 2012 December 31, 2011
$
$
Non-capital loss carry-forwards
Capital loss carry-forwards
Deductible temporary differences
Corporate minimum tax credits
Investment tax credits
Previously unrecognized capital loss carry-forwards were utilized as a result of the disposition of Jevco. Deductible temporary differences
decreased due to the payment and extinguishment of share-based compensation and the reversal of other differences deductible for tax.
- 34 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
13
Income Taxes (continued)
The unrecognized non-capital losses and investment tax credits will expire at various times to the end of 2031, as follows:
Non-capital losses by year of expiry:
2026
2027
2028
2029
2030
2031
$
$
7,883
6,151
9,048
103
610
20,609
44,404
Investment tax credits by year of expiry:
2017
2018
2019
2020
2021
Beyond 2021
$
$
3,241
888
961
823
643
2,116
8,672
Temporary differences associated with investments in subsidiaries for which deferred tax liabilities had not been recognized were $99,131 at
December 31, 2011. The Company was able to control the timing of the reversal of these temporary differences which were reversed in the
year ended December 31, 2012.
The following is a reconciliation of income taxes calculated at the statutory income tax rate to the income tax expense included in the
statements of profit or loss and other comprehensive income:
Loss from continuing operations
Gain on sale of discontinued operations
Profit or loss before income taxes on continuing operations
and gain on sale of discontinued operations
Statutory income tax rate
Income taxes at statutory income tax rate
Variations due to:
Non-deductible and non-taxable items
Unrecognized temporary differences
Utilization of previously unrecognized tax losses
Corporate minimum tax
Income tax expense on continuing operations
and gain on sale of discontinued operations
Year ended December 31
$
2012
(33,339)
108,213
2011
$
(9,521)
-
74,874
26.5%
19,842
(9,647)
1,838
(12,033)
1,530
(9,521)
28.0%
(2,666)
47
2,619
-
-
$
1,530
$
-
Income tax expense is recognized in the statements of profit or loss and other comprehensive income as follows:
Income tax expense on:
Continuing operations
Gain on sale of discontinued operations
Income tax expense on continuing operations
and gain on sale of discontinued operations
Income tax expense on profit of discontinued operations
Total income tax expense on continuing
and discontinued operations
Year ended December 31
2011
2012
$
-
1,530
1,530
9,170
$
-
-
-
13,917
$
10,700
$
13,917
14 Earnings per Share
The Company uses the treasury stock method to calculate diluted earnings per share. Following the treasury stock method, the numerator
for the Company’s diluted earnings per share calculation remains unchanged from the basic earnings per share calculation, as the assumed
exercise of the Company’s restricted share units, warrants and stock options does not result in an adjustment to profit or loss.
- 35 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
14 Earnings per Share (continued)
The reconciliation from the basic number of shares to the diluted number of shares used in the denominators to calculate basic and diluted
earnings per share, as presented in the statements of profit or loss and other comprehensive income, is as follows:
Number of common shares and
Series 1 Class A preferred shares (in thousands)
Number of shares for basic earnings per share
Effect of dilutive securities:
- restricted share units
- warrants
- stock options
Number of shares for diluted earnings per share
Year ended December 31
2011
2012
646,774
660,500
9,523
342
9
670,374
9,453
649
17
656,893
The Series 1 Class A preferred shares are considered in substance common shares and are included in the calculation of earnings per
share.
Stock options to purchase 372,800 common shares were outstanding at December 31, 2012 (December 31, 2011 - 475,000). These stock
options were excluded in the calculation of diluted earnings per share because the exercise price of the stock options was greater than the
weighted average market value of the common shares in the years ended December 31, 2012 and 2011.
15 Capital Management
The Company’s capital consists of its shareholders’ equity. The Company’s objectives when managing capital are to maintain a strong
balance sheet and maximize shareholder value. In order to achieve the Company’s capital management objectives, it employs a strong and
efficient capital base and manages capital in accordance with policies established by the Board of Directors. These policies relate to capital
strength, capital mix, dividends and return on capital. The Company has a capital management process in place to measure, deploy and
monitor its available capital to assess its adequacy on a continuous basis. Management develops the capital strategy and oversees the
capital management processes. Capital is managed using internal metrics.
Prior to the sale of Jevco on September 4, 2012, the funds of the Company were mainly invested in the equity of Jevco. Jevco is regulated
by the Office of the Superintendent of Financial Institutions and required to maintain a level of capital sufficient to support the volume and
risk profile of Jevco’s business.
At the special meeting of the Company’s shareholders on June 28, 2012, the shareholders voted in favour of a special resolution to reduce
the stated capital of the common shares of the Company through a return of capital in the form of a cash distribution. The amount of the
cash distribution was determined by the Board of Directors of the Company and the distribution was made on September 28, 2012 at $0.75
per common share for a total of $521,407.
16 Risk Management
Financial instruments comprised the majority of the Company’s statements of financial position as at December 31, 2012 and 2011. The
most significant identified risks which arise from holding financial instruments include credit risk, market risk, liquidity risk and insurance
underwriting risk. Market risk exposure is related to changes in interest rates and adverse movement in equity prices. The insurance
underwriting risk of the Company was primarily related to pricing risk, concentration of risk and reserving risk. The Investment Committee of
the Board of Jevco and senior management monitored the Company’s risk exposures and activities giving rise to these exposures. The
Appointed Actuary performed quarterly and annual analyses of the effect of various projected adverse scenarios on the financial condition of
the Company which were compared to a base scenario using the Company’s business plan. Management considered the results of these
analyses in its risk management procedures. The Company has a comprehensive risk management framework to monitor, evaluate and
manage the risks assumed in conducting its business.
The sale of Jevco has significantly reduced the Company’s exposure to credit risk, market risk and insurance underwriting risk. The most
significant identified risk to the Company at December 31, 2012 is liquidity risk.
Liquidity risk is the risk of having insufficient cash resources to meet current financial obligations without raising funds at unfavorable rates or
selling assets on a forced basis. Liquidity risk arises from general business activities and in the course of managing assets and liabilities.
The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall
due. To meet these cash requirements, the Company monitors the cash position to ensure that all obligations are fulfilled. The Company’s
statement of financial position at December 31, 2012 consists of short-term financial assets and financial liabilities with maturities of less than
one year, other than the site restoration provision discussed in note 8.
- 36 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
17 Operating Segment
Prior to the sale of Jevco, the Company had one reportable segment which comprised the Company’s property and casualty insurance
business carried on through Jevco. All other revenues, expenses, assets and liabilities are related to corporate activities and include the
gain on sale of Jevco. The accounting policies of the reportable segment are the same as the Company’s accounting policies described in
note 2. Segment profit or loss and other comprehensive income represents segment profit or loss and other comprehensive income without
allocation of certain administration costs.
Year ended December 31, 2012
Year ended December 31, 2011
Revenue of continuing operations
Profit or loss and other comprehensive income:
From continuing operations
From discontinued operations
Total
$
Insurance
segment
All other
305
- $
Total
$
305
Insurance
segment
-
$
All other
2,881
$
Total
$
2,881
-
29,667
29,667
(33,339)
106,683
73,344
(33,339)
136,350
103,011
-
49,337
49,337
(9,521)
-
(9,521)
(9,521)
49,337
39,816
December 31, 2012
December 31, 2011
Insurance
segment
All other
Total
Assets
Cash and cash equivalents
Investment income due and accrued
Investments
Instalment premiums
Income taxes recoverable
Accounts receivable and other assets
Recoverable from reinsurers
Claims recoverable from other insurers
Deferred policy acquisition expenses
Deferred income taxes
Property and equipment
Intangible assets
Total assets
Liabilities
Accounts payable and accrued liabilities
Income taxes due and accrued
Unearned premiums
Unpaid claims and adjustment expenses
Leasehold inducements
Site restoration provision
Total liabilities
$
$
$
$
- $ 39,164
-
-
-
-
-
-
-
-
202
-
-
-
-
-
-
-
-
-
-
-
-
-
- $ 39,366
- $
-
-
-
-
-
- $
561
1,530
-
-
-
2,663
4,754
$ 39,164
-
-
-
-
202
-
-
-
-
-
-
$ 39,366
$
$
561
1,530
-
-
-
2,663
4,754
Insurance
segment
$
9,685
5,567
1,018,059
62,781
115
26,008
33,970
50,969
35,601
10,108
22,818
3,844
$1,279,525
$ 20,957
821
164,437
675,094
2,594
-
$ 863,903
All other
Total
$ 14,662
-
-
-
-
1,946
-
-
-
-
-
-
$ 16,608
$ 12,566
-
-
-
-
2,401
$ 14,967
$ 24,347
5,567
1,018,059
62,781
115
27,954
33,970
50,969
35,601
10,108
22,818
3,844
$1,296,133
$ 33,523
821
164,437
675,094
2,594
2,401
$ 878,870
18 Sale of Subsidiary
On May 2, 2012, the Company announced it had entered into an agreement with an unrelated party to sell all the issued and outstanding
shares in the capital of Jevco to the purchaser for $530,000 in cash. On June 28, 2012, at the special meeting of the Company’s
shareholders, a special resolution in favour of the agreement was approved by shareholder vote. The sale of Jevco was concluded on
September 4, 2012 after all regulatory approvals were received.
The insurance segment presented in note 17 Operating Segment consists solely of Jevco, and includes Jevco’s total assets and total
liabilities as at December 31, 2011.
- 37 -
SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
Ian W. Delaney 3
Non-executive Chairman of the Board,
The Westaim Corporation
Daniel P. Owen 1, 2, 3
Chairman and Chief Executive Officer,
Molin Holdings Limited
Chairman, Sherritt International Corporation
Chairman, Heli-Lynx Helicopter Services Inc.
John Gildner 1, 2, 3
Independent Businessman
J. Cameron MacDonald 1
President and Chief Executive Officer,
The Westaim Corporation
Peter H. Puccetti 2, 3
Chairman, Chief Executive Officer and Chief Investment
Officer, Goodwood Inc.
Numbers indicate the individual’s committee membership:
1. Member of the Audit Committee
2. Member of the Human Resources and
Compensation Committee
3. Member of the Corporate Governance Committee
The Westaim Corporation Annual General Meeting of Shareholders Wednesday May 15, 2013 10:00 a.m.
Heenan Blaikie LLP
29th Floor
Bay Adelaide Centre
333 Bay Street
Toronto, Ontario
CORPORATE INFORMATION
STOCK INFORMATION
TRANSFER AGENT
J. Cameron MacDonald
Traded on the TSX Venture Exchange
President and Chief Executive Officer
under the symbol WED
Computershare Trust Company of Canada
600, 530 – 8th Avenue SW
Calgary, Alberta T2P 3S8
Jeffrey A. Sarfin
Chief Financial Officer
Shares issued and outstanding
Tel: 1-800-564-6253
at December 31, 2012 were 695,209,711
E-mail: service@computershare.com
Corporate Office
212 King Street West
Suite 201
Toronto, Ontario M5H 1K5
Tel: (416) 203-2253
Fax: (416) 203-0734
E-mail: info@westaim.com
www.westaim.com
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THE WESTAIM CORPORATION
212 King Street West, Suite 201
Toronto, Ontario, Canada
M5H 1K5
www.westaim.com
info@westaim.com