Message
to
Shareholders
I
am
pleased
to
write
this
year’s
Message
to
Shareholders.
We
made
tremendous
progress
in
2011.
Early
in
the
year,
the
ZCL
management
team
established,
and
the
Board
supported,
our
“simplify
to
grow”
strategy.
This
mission
has
rooted
itself
with
our
people,
our
customers
and
the
investment
community
and
it
has
made
a
difference
in
the
tone
and
direction
of
our
Company.
Changes
have
been
made
within
the
management
team
and
the
asset
profile
in
order
to
provide
a
"turn
of
the
page."
Our
balance
sheet
is
in
excellent
fiscal
condition,
our
profitability
is
improving
and
our
people
are
re-‐focused
on
activities
that
create
shareholder
value.
Our
fourth
quarter
2011
earnings
per
share
(EPS)
of
$0.06
per
share
represents
our
third
profitable
quarter
in
a
row.
Our
2011
earning
marks
our
strongest
annual
profitability
since
2008.
If
we
had
not
been
impacted
by
a
series
of
one-‐time
events-‐-‐cash
outlays
for
litigation,
severance,
external
legal
fees-‐-‐our
profitability
improvements
in
2011
would
have
been
much
more
visible.
A
major
component
of
our
“simplify
to
grow”
strategy
was
the
departure
from
our
past
stated
objective
of
delivering
strong
annual
revenue
growth
and
an
emphasis
on
the
imperative
for
delivering
“profitable”
growth.
To
this
end,
we
overhauled
our
cash
compensation
plan
to
incent
our
people
solely
on
the
metric
of
profitability.
To
expedite
the
return
to
profitability,
we
high-‐graded
our
customer
mix,
we
changed
our
procurement
strategy
for
key
raw
materials,
we
level-‐loaded
our
plants
to
optimize
labour
hours,
we
engaged
lean
consultants
to
improve
our
plant
efficiencies,
we
tightened
all
discretionary
spending
and
we
re-‐evaluated
our
financing
and
tax
strategies.
As
we
have
discussed
before,
we
have
restructured
our
business
into
the
three
business
unit
areas
where
we
demonstrate
strong
product
competency-‐-‐Petroleum,
Water,
and
Industrial
Corrosion.
While
we
operate
under
one
corporate
umbrella
entity—ZCL
Composites—we
continue
to
market
ourselves
by
leveraging
off
the
strong
brand
identities
of
ZCL,
Xerxes,
Parabeam,
Dualam
and
Troy.
To
better
support
our
sales
and
marketing
effort,
we
introduced
a
more
commercially
appealing
website
www.zcl.com.
We
believe
it
clearly
defines
the
present
and
the
future
for
ZCL
Composites
and
we
would
encourage
you
to
visit
the
site.
You
have
been
patient
as
we
have
worked
through
our
Strategic
Plan.
I
am
very
pleased
to
write
that
the
momentum
we
gained
in
the
latter
part
of
2011
has
continued
into
the
first
quarter
of
2012
with
all
of
our
plants
operating
at
high
levels
of
activity
in
our
traditionally
slow
period.
An
important
objective
in
the
“simplify
to
grow”
strategy
was
the
return
of
ZCL
to
a
financial
position
whereby
we
could
“reward
you
to
wait.”
I
am
proud
to
say
that
the
Board
of
Directors
has
reinstated
our
dividend
after
a
two
year
hiatus.
I
acknowledge
that
our
one
cent
per
quarter
payment
is
modest,
however,
it
will
be
reviewed
quarterly
by
the
Board
with
a
philosophical
balance
of
fiscal
prudence
and
a
sharing
of
improved
results.
On
a
final
note,
as
we
disclosed
earlier
in
the
year,
for
family
reasons
I
have
decided
to
step
back
from
my
role
as
President
and
CEO.
I
am
pleased
that
after
an
extensive
search
process,
the
Board
has
announced
Ron
Bachmeier,
current
Chief
Operating
Officer
of
ZCL,
will
be
assuming
the
role
of
President
and
CEO
effective
August
8,
2012.
I
have
had
the
pleasure
of
working
with
Ron
for
a
number
of
years
and
believe
that
his
relationships
with
suppliers,
customers,
employees
and
the
financial
community
make
him
the
obvious
choice
to
lead
our
Company
over
the
long
term.
Rod
Graham
1 Management’s
Discussion
and
Analysis
Management’s
Discussion
and
Analysis
INTRODUCTION
Inc.’s
(“ZCL”
or
ZCL
Composites
the
"Company")
Management's
Discussion
and
Analysis
("MD&A")
of
the
results
of
operations,
cash
flows
and
financial
position
as
at
December
31,
2011,
should
be
read
in
conjunction
with
the
Company’s
audited
consolidated
financial
statements
and
related
notes
for
the
year
ended
December
31,
2011.
at
The
www.sedar.com
at
www.zcl.com.
SEDAR
the
Company’s
website
statements
available
are
on
or
The
Canadian
Accounting
Standards
Board
(“AcSB”)
requires
all
Canadian
publicly
accountable
enterprises
to
adopt
International
Financial
Reporting
Standards
(“IFRS”)
for
interim
and
annual
reporting
periods
beginning
on
or
is
after
January
1,
2011,
therefore
the
Company
presenting
in
financial
statements
accordance
with
IFRS.
These
are
the
Company’s
first
IFRS
consolidated
financial
statements
for
the
year
ended
December
31,
2011
and
IFRS
1:
“First-‐time
Adoption
of
International
Financial
Reporting
Standards”
has
been
in
applied.
All
figures
presented
Canadian
dollars
unless
otherwise
specified.
in
this
MD&A
are
its
consolidated
CORPORATE
PROFILE
ZCL
is
North
America’s
largest
manufacturer
and
supplier
of
environmentally
friendly
fibreglass
reinforced
plastic
(“FRP”)
underground
storage
tanks.
We
also
provide
custom
engineered
aboveground
FRP
and
dual-‐laminate
composite
storage
tanks,
piping
and
lining
systems
and
related
products
and
accessories
where
corrosion
resistance
is
a
high
priority.
ZCL
has
six
plants
in
Canada,
six
in
the
US
and
one
in
The
Netherlands.
The
Company
has
been
restructured
into
three
business
units,
Petroleum
Products,
Water
Products
and
Industrial
Corrosion
Products
and
continues
to
leverage
off
the
strong
brand
identities
of
ZCL,
Xerxes,
Parabeam,
Dualam
and
Troy.
The
Petroleum
and
Water
Products
business
units
are
components
of
the
Underground
Fluid
Containment
(“Underground”)
operating
segment,
use
a
similar
production
process,
and
use
the
brand
identities
of
ZCL,
Xerxes,
and
Parabeam.
Industrial
Corrosion
Products
are
included
the
Aboveground
Fluid
Containment
(“Aboveground”)
operating
segment
and
use
the
brand
identities
of
ZCL
Corrosion,
Dualam
and
Troy.
in
Forward-‐Looking
Statements
This
MD&A
contains
forward-‐looking
information
based
on
certain
expectations,
projections
and
assumptions.
This
information
is
subject
to
a
number
of
risks
and
uncertainties,
many
of
which
are
beyond
the
Company’s
control.
Users
of
this
information
are
cautioned
that
actual
results
may
differ
materially.
For
additional
information
refer
to
the
“Advisory
Regarding
Forward-‐
Looking
Statements”
section
later
in
this
MD&A.
Non-‐IFRS
Measures
The
Company
uses
both
IFRS
and
non-‐IFRS
measures
to
make
strategic
decisions
and
to
set
targets.
EBITDA,
gross
profit,
net
debt,
cash
from
operations,
working
capital
and
backlog
are
non-‐IFRS
measures
that
are
used
by
the
Company.
They
do
not
have
a
standardized
meaning
prescribed
by
IFRS
and
may
not
be
comparable
to
similar
measures
used
by
other
companies.
For
additional
information
refer
to
the
"Non-‐IFRS
Measures"
section
later
in
this
MD&A.
This
MD&A
is
dated
as
of
March
7,
2012.
Underground
Fluid
Containment
Petroleum
Products
ZCL
is
the
leading
provider
of
underground
fuel
storage
tanks
for
the
retail
service
station
market
in
both
Canada
and
the
US.
ZCL
manufactures
both
single
wall,
and
for
secondary
containment,
double
wall
FRP
tanks.
In
addition,
ZCL
operates
internationally
through
technology
licensing
agreements.
As
an
alternative
to
the
replacement
of
underground
storage
tanks,
ZCL
has
developed
the
Phoenix
System™.
(“UL”)
and
This
unique
Underwriters
Laboratories
Underwriters
Laboratories
of
Canada
(“ULC”)
listed
tank
lining
system
allows
in-‐situ
upgrades
of
a
single
wall
steel
or
fibreglass
tank
to
a
secondary
containment
system.
It
is
an
effective
alternative
to
tank
replacement.
A
key
component
of
both
ZCL’s
double
wall
tank
and
the
is
Parabeam®,
a
patented,
three
Phoenix
System™
is
manufactured
and
dimensional
glass
fabric
that
in
The
from
distributed
Netherlands.
the
Company’s
facility
2
Management's
Discussion
and
Analysis
Water
Products
ZCL’s
watertight
and
easily
installed
fibreglass
tanks
are
an
ideal
alternative
to
the
concrete
products
that
have
traditionally
dominated
this
market.
Applications
for
ZCL’s
underground
FRP
storage
tanks
in
the
Water
Products
market
include
onsite
wastewater
treatment
systems,
fire
protection
systems,
potable
water
storage,
rainwater
retention,
large
diameter
wet
wells
and
lift
stations,
grease
interceptors
and
storm
water
retention.
OVERALL
PERFORMANCE
&
OUTLOOK
During
2011,
ZCL
returned
to
profitability
and
significantly
reduced
its
debt.
Net
income
from
continuing
operations
improved
to
$3.5
million
in
2011
from
a
loss
of
$16.7
million
in
2010,
which
included
an
impairment
loss
of
$14.3
million.
Revenue
of
$127.0
million
in
2011
was
the
highest
revenue
in
ZCL’s
history
and
the
Company
has
built
a
strong
order
backlog.
With
the
significant
reduction
in
debt
that
resulted
from
improved
operating
results
and
the
disposal
of
non-‐core
assets,
the
balance
sheet
has
strengthened
considerably
from
December
31,
2010.
Financial
Results
Revenue
Revenue
for
the
year
ended
December
31,
2011
was
$127.0
million,
up
$5.4
million
or
5%
from
$121.6
million
for
the
year
ended
December
31,
2010.
Excluding
the
negative
impact
of
foreign
exchange
of
$2.8
million,
overall
revenue
was
$8.3
million
or
7%
higher
in
2011
than
2010.
increase
The
in
revenue
was
attributable
to
both
Underground
and
Aboveground
operating
segments
and
to
both
the
Canadian
and
US
operations.
Within
Underground,
higher
revenue
for
Petroleum
Products
was
partially
offset
by
reduced
revenue
for
Water
Products.
Gross
Profit
Gross
profit
for
the
year
ended
December
31,
2011
was
$19.5
million,
up
$7.8
million
or
67%
from
2010
gross
profit
of
$11.7
million.
Gross
margin
improved
to
15%
of
revenue
in
2011
from
10%
a
year
earlier.
The
increase
resulted
from
an
increase
in
revenues
as
well
as
an
increase
in
profitability
on
those
revenues.
Both
the
Aboveground
and
Underground
operating
segments
contributed
to
the
increase
in
gross
margin
and
the
Aboveground
segment
was
the
largest
contributor
to
the
increase
in
gross
margin
as
a
percentage
of
revenues.
Aboveground
Fluid
Containment
Industrial
Corrosion
Products
ZCL
manufactures
specialty
and
standard
fibreglass
tanks,
piping
and
related
products
and
accessories
for
industrial
projects
where
corrosion
and
abrasion
resistance
is
a
high
priority.
ZCL’s
capabilities
include
the
manufacture
and
installation
of
custom
engineered
FRP
and
dual-‐laminate
composite
products
for
use
in
the
power
generation,
chemical,
chloralkali,
pulp
and
paper,
mining
and
oil
sands
industries.
in
the
North
The
Company
expanded
American
Industrial
Corrosion
Products
market
with
the
acquisition
of
Dualam
Plastics
Inc.
(“ZCL
Dualam”)
in
2010.
its
presence
Net
income
The
Company
reported
net
income
of
$3.3
million
or
$0.11
per
diluted
share
for
the
year
ended
December
31,
2011,
compared
to
a
net
loss
of
$16.8
million
or
$0.60
per
diluted
share
in
the
previous
year.
The
turnaround
from
the
2010
results
reflects
the
execution
of
the
board-‐
endorsed
strategic
plan.
Net
debt
With
a
number
of
initiatives
in
2011,
the
Company
was
successful
in
reducing
net
debt
by
$13.0
million,
to
$4.6
million
at
December
31,
2011
from
$17.6
million
at
December
31,
2010.
considers
this
a
significant
reduction,
however
expects
the
net
debt
balance
will
fluctuate
throughout
the
2012
year
due
to
the
inherent
seasonality
of
the
business.
Management
A
part
of
the
net
debt
reduction
is
due
to
the
successful
divestiture
of
certain
non-‐core
assets
during
2011.
These
include
the
sale
of
assets
from
the
steel
tank
division
and
the
2011
repatriation
of
the
note
and
debt
received
on
the
2010
sale
of
the
Home
Heating
Oil
Tank
(“HHOT”)
division.
In
2011,
the
Company
reduced
long
term
debt
by
$4.9
million,
of
which
$2.9
million
was
a
result
of
divesting
of
non-‐core
assets.
The
remaining
$8.9
million
of
net
debt
reduction
was
attributable
to
improved
operations.
Dividends
With
three
profitable
quarters,
the
board
has
re-‐
implemented
the
quarterly
dividend
payment.
The
quarterly
dividend
declared
is
$0.01
per
share
for
the
shareholders
of
record
as
of
March
7,
2012
and
will
be
paid
on
April
2,
2012.
This
amount
will
be
revisited
with
a
philosophical
balance
of
fiscal
prudence
and
a
sharing
of
improved
results.
3
Management's
Discussion
and
Analysis
Continuous
Improvements
In
early
2011,
the
ZCL
management
team
established,
and
the
Board
supported,
our
“simplify
to
grow”
strategy.
A
major
component
of
our
“simplify
to
grow”
strategy
was
the
departure
from
our
past
stated
objective
of
delivering
strong
annual
revenue
growth.
Instead
we
emphasized
“profitable”
growth.
To
this
end,
we
overhauled
our
cash
compensation
plan
to
incent
our
people
solely
on
the
metric
of
EBITDA.
To
expedite
the
return
to
profitability,
we
high-‐graded
our
customer
mix,
we
changed
our
procurement
strategy
for
key
raw
materials,
we
level-‐
loaded
our
plants
to
optimize
labour
hours,
we
engaged
lean
consultants
to
improve
our
plant
efficiencies,
we
tightened
all
discretionary
spending
and
we
re-‐evaluated
our
financing
and
tax
strategies.
During
the
past
year,
ZCL
has
focused
and
executed
the
key
tenets
of
the
2011
Strategic
Plan:
•
Focus
on
core
competencies
o Management
has
moved
clearly
identifiable
product
groups
with
strong
brand
identities
associated
with
them
o Non-‐core
assets
identified
for
sale
Improve
EBITDA
as
a
percentage
of
revenue
and
debt
o
Significant
EBITDA
improvement
over
2010
o
Improved
gross
margins
and
reduced
G&A
spending
towards
Improve
balance
sheet
returns
o
Significant
debt
reduction
through
the
sale
of
non-‐core
assets
and
cash
flow
from
operations
Reinstitute
a
dividend
payment
as
our
performance
continues
to
improve
o A
quarterly
dividend
has
been
declared
for
payment
due
to
our
improved
performance
and
anticipation
for
continued
improvement
in
2012
Improve
internal
operating
and
financial
reporting
with
a
suite
of
key
performance
indicators
(“KPIs”)
with
the
implementation
of
the
Enterprise
Resource
Planning
(“ERP”)
system
that
occurred
in
2010
o
Standardized
plant
metrics
developed
and
used
to
measure
profitability
Reinforce
a
program
of
operational
excellence
and
continuous
improvement
with
a
particular
focus
on
cost
controls
o
Progress
made
and
ongoing
efforts
to
improve
including
RFQ
processes
with
major
results
initiatives
suppliers,
undertaken,
training
programs
lean
manufacturing
standardization
reports
and
of
• Maintain
a
strong
safety
culture
o
o
Standardization
of
safety
metrics
and
safety
reporting
Focus
and
attention
at
a
senior
management
level
•
•
•
•
•
Backlog
($millions)
2011
2010
%
change
December
31
42.2
24.9
70%
The
$17.3
million
or
70%
increase
in
backlog
over
the
prior
year
included
growth
across
all
product
groups
and
in
both
the
Canadian
and
US
markets.
The
growth
was
led
by
the
Aboveground
segment
(Industrial
Corrosion)
with
an
increase
in
backlog
of
$12.0
million
or
136%
over
the
prior
year.
Backlog
for
the
Underground
segment
(Petroleum
and
Water
Products),
increased
by
$6.2
million
or
41%
over
December
31,
2010
and
is
generally
realized
within
the
following
quarter.
For
the
Industrial
Corrosion
projects,
the
conversion
of
backlog
to
revenue
is
less
predictable
because
of
variable
timelines
for
design,
engineering
and
production.
On
a
sequential
basis,
the
total
backlog
declined
from
$49.6
million
at
September
30,
2011
due
to
the
traditional
seasonal
factors
affecting
ZCL’s
business.
CEO
Succession
After
the
fifteen
months
of
successfully
directing
Company,
Mr.
Rod
Graham,
President
and
CEO
has
decided
to
step
down
from
this
position
for
family
considerations.
Mr.
Graham
accomplished
many
of
the
goals
he
set
out
to
achieve
including
a
focus
on
improved
earnings.
As
part
of
that
strategy,
non-‐core
businesses
were
exited
and
non-‐core
assets
were
disposed
of
or
monetized.
In
2011,
ZCL
returned
to
profitability,
and
has
established
a
strong
order
backlog.
In
addition,
the
Company’s
net
debt
has
been
reduced
from
a
high
of
$20.6
million
in
the
third
quarter
of
2010
to
$4.6
million
as
at
December
31,
2011.
The
Board
undertook
a
search
process
to
replace
Mr.
Graham
and
has
announced
that
Mr.
Ron
Bachmeier,
the
current
Chief
Operating
Officer
of
ZCL,
will
assume
the
role
of
President
and
CEO
effective
August
8,
2012.
Outlook
The
plan
for
2012
will
continue
the
quest
for
profitable
growth:
•
The
Company
has
taken
steps
to
ensure
a
strong
group
of
companies
within
the
ZCL
family
with
a
single
culture
and
mandate;
•
Cost
control
and
a
continued
focus
on
core
assets;
• With
the
focus
on
marketing
groups,
as
opposed
to
operating
groups,
management
has
been
directed
to
put
forth
a
concerted
effort
to
create
a
stronger
customer
value
proposition;
and
Continued
attention
to
safety.
•
4
Management's
Discussion
and
Analysis
SELECTED
ANNUAL
FINANCIAL
INFORMATION
(in
thousands
of
dollars,
except
per
share
amounts)
Operating
Results
Revenue
Underground
Fluid
Containment
Aboveground
Fluid
Containment
Total
revenue
Gross
profit
(note
1)
%
of
revenue
General
and
administration
Foreign
exchange
(gain)
loss
Depreciation
and
finance
expense
(Gain)
loss
on
disposal
of
assets
Impairment
of
assets
Income
tax
provision
Net
income
(loss)
from
continuing
operations
Net
loss
from
discontinued
operations
Net
income
(loss)
Overall
earnings
(loss)
per
share
from
continuing
operations
Basic
Diluted
EBITDA
(note
1)
%
of
revenue
Cash
Flows
Cash
from
continuing
operations
(note
1
&
4)
Changes
in
non-‐cash
working
capital
Net
advance
(repayment)
of:
Bank
indebtedness
Long
term
debt
Purchase
of
capital
and
intangible
assets
Disposal
of
assets
Business
acquisition,
net
of
disposals
(in
thousands
of
dollars)
Financial
Position
Working
capital
(note
1)
Total
assets
Net
debt
(note
1)
Total
non-‐current
liabilities
2011
$
101,590
25,456
127,046
19,454
15%
9,986
(373)
5,589
(356)
-‐
1,154
3,454
(164)
3,290
0.12
0.12
10,349
8%
8,417
4,782
(8,565)
(4,824)
(1,778)
633
1,336
2011
$
23,387
113,899
4,567
15,229
Year
Ended
December
31
20102
$
97,618
23,956
121,574
11,658
10%
11,394
496
6,155
10
14,293
(3,990)
(16,700)
(149)
(16,849)
(0.59)
(0.59)
2,539
2%
891
(374)
6,092
828
(2,063)
1,940
(7,868)
As
at
December
31
2010
$
17,816
117,629
17,591
18,025
20093
$
98,300
4,853
103,153
17,085
17%
7,381
782
4,137
38
-‐
1,112
3,635
(1,463)
2,172
0.14
0.14
9,816
10%
7,833
286
894
(1,786)
(3,978)
-‐
-‐
2009
$
23,320
102,895
3,955
7,578
Note
1:
Gross
profit,
EBITDA,
cash
from
continuing
operations,
working
capital
and
net
debt
are
non-‐IFRS
measures
and
are
defined
later
in
the
"Non-‐
IFRS
Measures".
Note
2:
The
comparative
information
has
been
adjusted
to
IFRS
requirements
from
the
amounts
reported
under
previous
GAAP.
Note
3:
For
comparative
periods
prior
to
January
1,
2010
(IFRS
transition
date),
the
financial
information
presented
has
not
been
restated
to
reflect
the
Company’s
adoption
of
IFRS.
Note
4:
Cash
from
continuing
operations
excludes
changes
in
non-‐cash
working
capital.
5
Management's
Discussion
and
Analysis
RESULTS
OF
OPERATIONS
Revenue
($000’s)
2011
2010
%
change
Twelve
Months
Underground
Fluid
Containment:
Petroleum
Products
Water
Products
Aboveground
Fluid
Containment:
Industrial
Corrosion
Products
86,468
15,122
101,590
79,764
17,852
97,616
8%
(15%)
4%
25,456
23,958
6%
5%
Note:
With
the
revisions
to
reportable
segments,
certain
revenue
allocations
have
changed
from
what
was
reported
in
previous
MD&As
of
the
Company.
127,046
121,574
in
the
US
economy,
particularly
in
construction
activities.
In
2010,
Water
Products
revenue
benefited
from
US
government
supported
economic
stimulus
infrastructure
spending
that
did
not
recur
in
2011.
In
addition,
foreign
exchange
had
a
negative
impact
on
US
Water
Products
revenue
due
to
a
weaker
US
dollar
compared
with
2010.
Prior
to
a
negative
impact
of
foreign
exchange,
Water
Products
revenue
was
down
12%
in
2011.
Aboveground
Fluid
Containment
Aboveground
(Industrial
Corrosion)
revenue
of
$25.5
million
was
$1.5
million
or
6%
higher
than
2010,
with
the
increase
coming
from
the
ZCL
Dualam
division.
T he
activity
level
for
this
division
was
much
stronger
at
the
end
of
2011
generating
a
backlog
of
$20.8
million
which
was
136%
higher
than
the
$8.8
million
of
backlog
at
the
end
of
2010.
Revenue
was
up
$5.4
million
or
5%
for
the
twelve
months
of
2011
as
compared
to
the
twelve
months
of
2010.
Prior
to
the
negative
impact
of
foreign
exchange,
revenue
in
2011
was
$8.3
million
or
7%
higher
than
the
prior
year.
The
changes
from
2010
reflect
the
factors
noted
below:
Underground
Fluid
Containment
Underground
revenue
was
$4.0
million
or
4%
higher
for
the
year
ended
December
31,
2011
compared
with
the
year
ended
December
31,
2010.
Gross
Profit
($000’s)
Underground
Fluid
Containment
Aboveground
Fluid
Containment
Twelve
Months
2011
2010
%
change
%
of
rev
2011
17,356
13,200
31%
17%
2,098
(1,542)
n/a
19,454
11,658
67%
8%
15%
The
increase
was
attributable
to
gains
in
the
Petroleum
Product
lines
in
Canada
and
the
US.
Even
with
a
lower
foreign
exchange
rate,
US
Petroleum
Products
revenue
increased
by
$5.7
million
or
12%
year
over
year.
Sales
to
both
station
customers
and
distributors
were
up
significantly
over
2010
on
both
sides
of
the
border
due
to
increased
demand
for
FRP
tanks
as
well
as
our
Diesel
Exhaust
Fluid
(DEF)
tank
product.
independent
service
Canadian
Petroleum
Products
revenue
in
2011
increased
by
$4.1
million
or
16%
over
the
year
ended
December
31,
2010.
Petroleum
revenue
also
includes
revenue
from
our
international
operations
which
was
down
year
over
year.
The
reduction
from
2010
was
due
in
part
to
lower
license
fee
revenue
in
2011
as
compared
to
2010.
As
well,
third
party
sales
of
Parabeam
products
were
lower
due
to
higher
internal
demands
and
production
issues
during
the
first
half
of
2011
that
have
been
resolved.
Overall,
Water
Products
revenue
was
$2.8
million
or
15%
lower
in
2011
compared
with
2010.
An
increase
of
11%
in
Canadian
Water
Products
revenue
was
more
than
offset
by
a
significant
decrease
in
US
Water
Products
revenue.
The
reduction
in
the
US
reflected
the
continued
weakness
For
the
year
ended
December
31,
2011,
an
increase
in
revenue
combined
with
improved
gross
margins
resulted
in
a
$7.8
million
or
67%
improvement
in
gross
profit
compared
to
the
year
ended
December
31,
2010.
Gross
margin
improved
to
15%
from
10%
in
2010.
The
increase
reflected
the
factors
discussed
below:
Underground
Fluid
Containment
Underground
gross
profit
increased
$4.2
million
or
31%
in
2011
over
the
2010
gross
profit.
Both
US
and
Canadian
operations
were
responsible
for
the
gross
profit
increases
as
the
US
operations
had
a
very
strong
fourth
quarter.
Overall,
US
Underground
gross
profit
increased
by
$2.6
million.
in
sales
mix
and
increased
production
A
change
efficiencies
during
2011
had
a
positive
impact
on
gross
profit.
However,
competitive
pricing
pressure
in
certain
markets
and
some
upward
pressure
on
raw
material
prices
have
continued
to
dampen
gross
margins
year
to
date.
6
Management's
Discussion
and
Analysis
Aboveground
Fluid
Containment
The
Aboveground
gross
profit
of
$2.1
million
or
8%
of
revenue
has
improved
significantly
compared
with
the
Although
the
segment
has
in
2010.
loss
position
demonstrated
improvement
as
compared
to
2010,
management
has
identified
opportunities
for
continued
improvement
in
the
Aboveground
operating
segment.
General
and
Administration
($000’s)
2011
2010
%
change
Twelve
Months
9,986
11,394
(12%)
General
and
administration
(“G&A”)
for
the
year
ended
December
31,
2011
decreased
$1.4
million
or
12%
over
the
same
period
in
2010.
The
year
over
year
reduction
in
G&A
reflected
a
number
of
cost
saving
initiatives
that
were
offset
by
approximately
$1.6
million
of
restructuring
incurred
by
the
current
and
other
costs
that
were
management
team
as
a
result
of
a
conscious
decision
to
improve
the
future
financial
state
of
the
Company.
In
2010,
approximately
$2.0
million
in
costs
were
incurred
ERP
relating
implementation.
The
restructuring
costs
that
occurred
in
both
2010
and
2011
are
expected
to
result
in
reduced
G&A
spending
in
2012.
restructuring,
integration,
and
to
Foreign
Exchange
(Gain)
Loss
($000’s)
2011
2010
Twelve
Months
(373)
496
The
foreign
exchange
(gain)
loss
for
each
period
primarily
relates
to
the
combination
of
fluctuations
in
the
US
dollar
conversion
rate
and
the
US
denominated
monetary
assets
and
the
Company’s
Canadian
operations.
liabilities
held
by
The
following
tables
detail
the
US
dollar
and
euro
conversion
rates.
US
Dollar
Conversion
Rates
Year
Ended
2011
2010
Avg.
Close
Avg.
Close
0.99
0.97
0.98
1.02
0.97
0.98
1.03
1.02
1.04
1.03
1.04
1.01
1.02
1.05
1.03
1.00
Avg.
Change
(5%)
(6%)
(6%)
1%
Close
Change
(5%)
(7%)
-‐
2%
Q1
Q2
Q3
Q4
euro
Conversion
Rates
Year
Ended
2011
2010
Avg.
Close
Avg.
Close
1.35
1.39
1.39
1.38
1.37
1.41
1.40
1.32
1.44
1.31
1.34
1.38
1.37
1.28
1.40
1.33
Avg.
Change
(6%)
6%
4%
-‐
Close
Change
-‐
10%
-‐
(1%)
Q1
Q2
Q3
Q4
For
additional
information
on
the
Company’s
exposure
to
fluctuations
in
foreign
exchange
rates
see
the
“Financial
Instruments”
section
included
later
in
this
MD&A.
Depreciation
($000’s)
2011
2010
%
change
Twelve
Months
4,317
4,792
(10%)
The
lower
depreciation
expense
resulted
from
the
impairment
loss
taken
on
intangible
assets
relating
to
the
ZCL
Dualam
division
in
the
third
quarter
of
2010.
This
reduction
resulted
in
a
lower
cost
base
for
depreciation
in
the
current
year
relative
to
the
prior
year.
Disposal
of
Assets
and
Discontinued
Operations
During
2011,
the
Company
divested
of
certain
assets
of
the
steel
tank
division
resulting
in
cash
proceeds
of
$0.8
million.
In
2010,
ZCL
disposed
of
its
Home
Heating
Oil
Tank
(“HHOT”)
division
for
cash
proceeds
of
$0.3
million
and
a
loan
with
a
fair
value
of
$1.0
million
payable
to
the
The
Company
Company
over
a
five
year
period.
repatriated
this
loan
for
proceeds
of
$1.3
million
resulting
in
a
gain
on
disposal
of
assets
of
$0.3
million
in
2011.
The
financial
results
from
the
HHOT
division
and
the
steel
tank
division
are
included
in
“Discontinued
Operations”
in
this
MD&A.
Impairment
of
goodwill
and
intangible
assets
During
the
prior
year,
the
Company
recorded
a
$12.7
million
write-‐down
of
goodwill
and
a
$4.2
million
write-‐
down
of
intangible
assets.
These
assets
were
initially
recorded
on
the
acquisition
of
ZCL
Dualam
at
the
beginning
of
2010.
This
impairment
was
partially
offset
by
$3.0
million
related
to
an
earn-‐out
provision
that
had
been
set
up
as
a
contingent
liability
on
the
ZCL
Dualam
acquisition
that
was
subsequently
de-‐recognized.
In
addition
to
the
goodwill
and
intangible
asset
impairments
a
write
down
of
property
plant
and
equipment
of
$0.4
million
was
recorded
in
the
prior
year
relating
to
non-‐
productive
assets
held
for
sale.
7
Management's
Discussion
and
Analysis
Income
taxes
Income
tax
expense
for
the
year
ended
December
31,
2011
represented
25%
of
pre-‐tax
income,
compared
to
19%
of
pre-‐tax
loss
in
2010.
The
change
in
tax
rate
from
the
prior
year
is
due
primarily
to
the
$12.7
million
impairment
of
goodwill
in
2010.
This
impairment
creates
a
permanent
difference
between
tax
and
accounting
net
income,
therefore
did
not
affect
the
deferred
tax
recovery
in
the
prior
year.
Other
comprehensive
income
(loss)
The
table
below
details
other
comprehensive
income
(loss)
before
the
impact
of
net
income
(loss)
in
the
period.
($000’s)
2011
2010
Twelve
Months
787
(2,421)
LIQUIDITY
AND
CAPITAL
RESOURCES
Working
Capital
As
at
December
31,
2011,
the
Company
increased
working
capital
(current
assets
less
current
liabilities)
by
$5.6
million
to
$23.4
million.
The
increase
is
the
result
of
a
significant
increase
in
inventory
and
a
significant
decrease
in
bank
indebtedness,
offset
partially
by
a
decrease
in
accounts
receivable
and
an
increase
in
deferred
revenue.
As
at
December
31,
2011,
the
Company
had
cash
and
cash
equivalents
of
$1.7
million
(2010
-‐
$2.1
million)
and
$nil
(2010
-‐
$8.6
million)
drawn
against
its
revolving
operating
credit
facility
(bank
indebtedness).
In
2011,
the
amount
drawn
against
the
revolving
credit
facility
reached
a
quarterly
high
of
$9.5
million
as
at
June
30,
2011.
This
compared
to
a
high
in
the
prior
year
of
$10.9
million
as
at
September
30,
2010.
internally
generated
cash
Management
believes
that
flows,
along
with
the
available
revolving
operating
credit
facility,
will
be
sufficient
to
cover
the
Company’s
normal
operating
and
capital
expenditures
for
the
foreseeable
future.
Credit
Arrangements
The
Company’s
operating
credit
facility
is
provided
by
a
Canadian
chartered
bank.
The
maximum
available
under
this
facility
is
$20.0
million,
subject
to
prescribed
margin
requirements
related
to
a
percentage
of
accounts
receivable
and
inventory
balances
at
a
point
in
time
and
reduced
by
priority
claims.
The
operating
facility
is
due
on
demand
and
matures
on
May
31,
2012.
Other
comprehensive
income
(loss)
for
each
period
resulted
from
the
translation
of
foreign
operations
with
functional
currencies
denominated
in
US
dollars
and
euros.
For
accounting
purposes,
assets
and
liabilities
of
these
foreign
operations
are
translated
at
the
exchange
rate
in
effect
on
the
balance
sheet
date.
The
other
comprehensive
income
in
the
2011
year
was
due
to
the
strengthening
of
the
US
dollar
relative
to
the
Canadian
dollar
throughout
the
year,
while
in
2010,
the
US
dollar
weakened
relative
to
the
Canadian
dollar
throughout
the
year,
resulting
in
a
comprehensive
loss.
Due
to
the
transition
to
IFRS
in
2010,
the
translation
adjustment
for
foreign
operations
changed
from
a
loss
of
$2.2
million
to
a
loss
of
$2.4
million.
During
the
year,
the
Company
elected
to
convert
its
Canadian
banker’s
acceptance
based
term
loan
to
a
US
based
LIBOR
loan
as
permitted
by
the
existing
credit
facility.
The
Company’s
term
loan
is
provided
by
a
Canadian
chartered
bank
and
requires
monthly
interest
payments
and
quarterly
principal
repayments
of
$0.3
million
Canadian
dollars,
with
the
balance
due
on
maturity
on
May
31,
2013.
The
interest
charged
on
the
loan
is
the
US
dollar
based
LIBOR
plus
250
basis
points.
The
Company
is
also
subject
to
mandatory
repayments
of
outstanding
principal
equal
to
100%
of
any
net
proceeds
on
asset
insurance
proceeds
received
by
the
disposals
and
Company.
During
the
twelve
months
ended
December
31,
2011,
the
Company
repaid
$2.9
million
of
principal
relating
to
proceeds
from
asset
sales
that
occurred
at
the
end
of
2010
and
the
settlement
of
a
note
receivable
on
the
disposal
of
the
Home
Heating
Oil
Tank
division.
The
Company
also
has
long
term
debt
with
a
different
lender
of
approximately
$2.0
million.
This
term
debt
requires
monthly
repayments
of
$15,100
plus
interest,
maturing
in
November
2023.
Subsequent
to
year
end,
the
Company
repaid
this
loan
with
funds
from
the
term
loan,
for
additional
in
the
consolidated
financial
statements.
information,
refer
to
note
27
8
Management's
Discussion
and
Analysis
Share
Capital
Investing
Activities
The
Company
did
not
issue
any
shares
during
the
year
ended
December
31,
2011.
In
the
prior
year,
through
a
private
placement,
the
Company
issued
550,000
common
shares
to
its
President
and
CEO
at
price
of
$2.31
per
share
for
total
proceeds
of
$1.3
million.
Also
in
2010,
in
conjunction
with
the
acquisition
of
Dualam,
the
Company
issued
1,636,490
common
shares
with
a
fair
value
of
$5.9
million
based
on
a
share
price
of
$3.62.
Cash
Flows
($000’s)
Operating
activities
Financing
activities
Investing
activities
Foreign
exchange(1)
Discontinued
operations
Twelve
Months
2011
13,199
2010
517
(13,389)
7,537
191
(223)
(176)
(398)
(7,991)
(229)
(597)
(763)
(1)
Foreign
exchange
loss
on
cash
held
in
foreign
currency.
Operating
Activities
The
cash
flows
from
operating
activities
reflects
the
net
impact
of
i)
cash
from
continuing
operations
(for
additional
information
see
the
“Non-‐GAAP
Measures”
section
later
in
this
MD&A)
and
ii)
changes
in
non-‐cash
working
capital.
Cash
from
operations,
not
including
changes
in
non-‐cash
working
capital,
totalled
$8.4
million
in
2011,
compared
to
$0.9
million
in
2010.
The
increase
in
cash
flows
from
operations
was
primarily
due
to
the
improvement
in
net
income
from
continuing
operations
from
all
operating
segments
with
the
biggest
difference
from
year
to
year
realized
in
the
aboveground
operating
segment.
Changes
in
non-‐cash
working
capital
totalled
$4.8
million
in
2011,
compared
to
a
negative
$0.4
million
in
2010.
The
positive
change
in
2011
was
due
mostly
to
an
increase
in
current
liabilities
coupled
with
a
reduction
of
accounts
receivable.
These
categories
were
partially
offset
by
the
large
increase
in
inventory
from
2010.
Financing
Activities
The
cash
flow
from
financing
activities
in
2011
reflected
repayments
of
bank
debt
of
$8.6
million
and
repayment
of
long
term
debt
of
$4.8
million.
In
2010,
bank
indebtedness
increased
$6.1
million
and
long
term
debt
was
increased
$0.8
million.
In
2010,
the
issuance
of
common
shares
for
$1.5
million
was
offset
by
the
payment
of
dividends
of
$0.9
million.
The
cash
inflows
from
investing
activities
in
the
year
ended
December
31,
2011
primarily
reflected
disposal
of
property,
plant
and
equipment
and
other
assets
for
$1.9
million
offset
with
the
purchase
of
property,
plant
and
equipment
for
$1.8
million.
The
outflow
from
investing
activity
during
2010
included
cash
consideration
paid
in
conjunction
with
the
acquisition
of
Dualam,
net
of
cash
acquired,
of
$8.1
million
and
normal
maintenance
capital
expenditures
and
the
ERP
system
offset
by
the
proceeds
on
disposal
of
non-‐core
assets.
Contractual
Obligations
its
captive
The
Company
has
provided
a
letter
of
credit
in
the
amount
of
$0.5
million
US
to
secure
claims
in
favour
of
the
Commissioner
of
Insurance
for
the
State
of
Montana
to
establish
insurance
company,
Radigan
Insurance
Inc.
(“Radigan”).
Radigan
provides
insurance
protection
for
product
warranties,
patent
infringements,
and
the
general
liability
coverage
for
the
US
operations.
The
Company
has
issued
a
letter
of
credit
for
$0.2
million
to
secure
the
delivery
of
product.
In
addition,
cash
and
cash
equivalents
of
$0.25
million
US
held
by
Radigan
are
restricted
for
collateral
on
a
contract
performance
guarantee.
The
Company
has
provided
a
letter
of
credit
in
the
amount
of
$1.0
million
to
secure
a
line
of
credit
for
the
same
amount
for
our
US
operations.
The
Company
has
also
provided
a
letter
of
credit
in
the
amount
of
$0.4
million
to
secure
claims
for
the
Company’s
US
workers’
compensation
program.
In
the
normal
course
of
business,
the
Company
provides
letters
of
credit
as
collateral
for
contract
performance
guarantees.
As
at
December
31,
2011
the
issued
performance
letters
of
credit
totalled
less
than
$0.2
million.
As
at
December
31,
2011,
ZCL’s
minimum
annual
lease
commitments
under
all
non-‐cancellable
operating
leases
for
production
facilities,
office
space
and
automotive
and
equipment
totalled
approximately
$9.2
million.
The
following
table
details
the
Company’s
contractual
obligations
due
over
the
next
five
years
and
thereafter:
($000’s)
2012
2013
2014
2015
2016
Thereafter
Total
Long
Term
Debt
1,687
2,999
181
181
181
1,045
6,274
Operating
Leases
2,675
2,535
1,892
1,047
687
408
9,244
Total
4,362
5,534
2,073
1,228
868
1,453
15,518
9
Management's
Discussion
and
Analysis
SUMMARY
OF
QUARTERLY
RESULTS
The
table
below
presents
selected
financial
information
for
the
eight
most
recent
quarters
which
should
be
read
in
conjunction
with
the
applicable
interim
unaudited
and
annual
audited
consolidated
financial
statements
and
accompanying
notes.
The
Company’s
financial
results
have
historically
been
affected
by
seasonality
with
the
lowest
levels
of
activity
occurring
in
the
first
half
of
the
year
and
particularly
the
first
quarter.
In
addition,
the
Company
is
subject
to
fluctuations
in
the
US
to
Canadian
dollar
exchange
rate
since
a
significant
portion
of
its
revenue
is
denominated
in
US
dollars.
Over
the
past
eight
quarters,
the
US
to
Canadian
dollar
conversion
rate
has
ranged
from
a
low
of
0.97
in
the
first
quarter
of
2011
to
a
high
of
1.05
in
the
second
quarter
of
2010.
For
the
three
months
ended
2011
2010
(in
thousands
of
dollars,
except
per
share
amounts)
Revenue
Net
income
(loss)
Dec
31
Sep
30
Jun
30
Mar
31
$
37,716
$
$
36,352
29,820
$
23,158
Dec
31
(restated)
$
35,028
Sep
30
(restated)
$
32,340
Jun
30
(restated)
$
30,521
Mar
31
(restated)
$
23,685
Continuing
operations
1,840
1,892
969
(1,247)
(1,102)
(12,485)
(437)
(2,676)
Discontinued
operations
-‐
-‐
(181)
17
Total
1,840
1,892
788
(1,230)
287
(815)
(233)
4
(207)
(12,718)
(433)
(2,883)
Basic
and
diluted
earnings
(loss)
per
share
Continuing
operations
Total
0.06
0.06
0.07
0.07
0.03
0.02
(0.04)
(0.04)
(0.04)
(0.03)
(0.44)
(0.45)
(0.02)
(0.02)
(0.09)
(0.10)
(1)
The
comparative
information
has
been
adjusted
for
IFRS
requirements
from
the
amounts
reported
under
previous
GAAP.
(2)
The
discontinued
operations
are
the
steel
tank
division
which
was
sold
May
31,
2011
and
the
Home
Heating
Oil
Tank
division,
which
ZCL
sold
June
14,
2010
because
they
were
not
part
of
ZCL’s
core
business.
10
Management's
Discussion
and
Analysis
FOURTH
QUARTER
RESULTS
Selected
Financial
Information
(in
thousands
of
dollars,
except
per
share
amounts)
Operating
Results
Revenue
Underground
fluid
containment
Aboveground
fluid
containment
Total
Revenue
Gross
profit
(note
1)
%
of
revenue
General
and
administration
Foreign
exchange
loss
Depreciation
and
finance
expense
Loss
on
disposal
of
assets
Impairment
of
assets
Income
tax
expense
(recovery)
Net
income
(loss)
from
continuing
operations
Net
loss
from
discontinued
operations
Net
income
(loss)
Overall
earnings
(loss)
per
share
Basic
Diluted
EBITDA
(note
1)
%
of
revenue
Cash
Flows
Cash
from
continuing
operations
(note
1
&
3)
Changes
in
non-‐cash
working
capital
Net
advance
(repayment)
of:
Bank
indebtedness
Long
term
debt
Fourth
Quarter
Ended
December
31
20102
$
2011
$
29,670
8,046
37,716
6,188
16%
2,120
16
1,468
16
-‐
728
1,840
-‐
1,840
0.06
0.06
4,172
11%
4,011
4,926
29,261
5,767
35,028
2,783
8%
2,698
282
1,457
-‐
547
(1,099)
(1,102)
287
(815)
(0.03)
(0.03)
537
2%
435
1,209
(8,924)
(763)
(503)
-‐
238
(3,666)
(157)
1,550
Purchase
of
capital
and
intangible
assets
Disposal
of
assets
Note
1:
Gross
profit,
EBITDA,
and
cash
from
continuing
operations
are
non-‐IFRS
measures
and
are
defined
later
in
the
MD&A
under
"Non-‐IFRS
Measures".
Note
2:
The
comparative
information
has
been
adjusted
to
IFRS
requirements
from
the
amounts
reported
under
previous
GAAP.
Note
3:
Cash
from
continuing
operations
excludes
changes
in
non-‐cash
working
capital..
11
Fourth
Quarter
2011
2010
%
change
($000’s)
2011
2010
%
change
%
of
rev
2011
Fourth
Quarter
Management's
Discussion
and
Analysis
Overall
Fourth
Quarter
Performance
The
net
income
in
the
fourth
quarter
of
2011
was
$1.8
million
or
$0.06
per
diluted
share,
compared
to
a
net
loss
of
$0.8
million
or
$0.03
per
diluted
share
in
the
fourth
quarter
of
2010.
The
increase
in
earnings
reflected
higher
revenues,
a
significant
improvement
in
gross
profit
and
a
reduction
in
G&A,
finance
and
other
expenses,
when
compared
to
the
same
quarter
in
2010.
The
factors
impacting
the
fourth
quarter
of
2011
were
generally
consistent
with
those
impacting
the
full
year
2011
as
previously
discussed
in
this
MD&A.
Revenue
($000’s)
Underground
Fluid
Containment
Petroleum
Products
Water
Products
Aboveground
Fluid
Containment
Industrial
Corrosion
Products
25,020
4,650
29,670
23,754
5,507
29,261
5%
(16%)
1%
8,046
5,767
37,716
35,028
40%
8%
Underground
Fluid
Containment
in
revenue
Overall,
revenue
from
the
Underground
segment
was
relatively
flat
as
compared
to
the
same
quarter
in
2010.
The
$1.2
million
or
5%
increase
in
Petroleum
Products
revenue
in
the
fourth
quarter
of
2011
as
compared
to
the
fourth
quarter
of
2010
was
attributable
to
a
comparable
increase
from
both
US
and
Canadian
Petroleum
Product
sales.
The
10%
increase
from
US
operations
was
primarily
driven
by
increases
in
sales
to
independent
retailers
which
were
up
by
$2.1
million
over
the
fourth
quarter
of
2010.
These
were
partially
offset
by
sales
to
other
US
customers,
which
were
down
by
approximately
$1.7
million.
The
increase
in
Canada
was
attributable
mainly
to
major
oil
customers.
Revenue
from
the
international
operations
was
down
$0.9
million
due
primarily
to
lower
licensee
related
revenue
when
compared
to
the
fourth
quarter
of
2010.
Although
Water
Product
sales
were
up
slightly
in
Canada,
overall
revenue
was
$4.7
million,
down
$0.9
million
or
16%
from
the
same
period
in
2010.
The
continued
weakness
in
the
US
construction
market
has
resulted
in
the
decline
in
revenues
when
compared
to
the
same
period
of
2010,
where
US
government
supported
economic
stimulus
infrastructure
spending
buoyed
Water
Product
sales.
Aboveground
Fluid
Containment
Revenue
for
the
fourth
quarter
of
2011
was
$8.0
million,
up
$2.2
million
or
40%
compared
to
the
fourth
quarter
of
2010.
The
increase
from
2010
predominately
reflected
an
increase
in
revenue
of
$3.2
million
for
the
ZCL
Dualam
operation,
compared
with
the
same
quarter
in
2010.
The
backlog
in
the
Industrial
Corrosion
division
is
significantly
higher
at
December
31,
2011
than
a
year
earlier,
and
although
certain
of
the
projects
are
longer
term
in
nature,
the
increased
revenue
reflects
the
strengthening
demand
for
Industrial
Corrosion
Products.
Gross
Profit
Underground
Fluid
Containment
Aboveground
Fluid
Containment
5,399
3,433
57%
18%
789
(650)
n/a
6,188
2,783
122%
10%
16%
The
increase
of
$3.4
million
or
122%
in
gross
profit
over
the
same
period
in
2010
reflect
the
factors
discussed
below:
Underground
Fluid
Containment
Gross
profit
from
the
Underground
segment
of
$5.4
million
or
18%
of
revenue
was
an
increase
of
$2.0
million
or
57%
in
the
fourth
quarter
of
2011
as
compared
to
the
fourth
quarter
of
2010.
The
increase
was
a
result
of
higher
revenues
earned
in
the
fourth
quarter
of
2011
along
with
improved
profits
as
a
percentage
of
revenue
as
compared
to
the
same
period
in
2010.
US
Underground
Fluid
Containment
drove
a
significant
portion
of
the
increase
in
gross
margin
with
improved
profitability
on
sales
to
independent
service
station
operators.
Aboveground
Fluid
Containment
The
Aboveground
(Industrial
Corrosion)
gross
profit
of
$0.8
million
is
a
$1.5
million
improvement
over
the
negative
gross
profit
in
the
fourth
quarter
of
2010.
The
improvement
occurred
in
both
the
traditional
ZCL
Corrosion
operations
and
the
ZCL
Dualam
operations
and
is
the
result
of
a
continued
focus
on
cost
reduction
and
production
efficiencies.
Despite
the
gain
over
the
prior
period,
there
continues
to
be
lower
margin
orders
taken
in
prior
quarters
that
are
still
in
work
in
progress
and
backlog.
12
Management's
Discussion
and
Analysis
General
and
Administration
Income
taxes
($000’s)
2011
2010
%
change
Fourth
Quarter
2,120
2,698
(21%)
The
fourth
quarter
of
2011
saw
a
reduction
of
$0.6
million
or
21%
in
general
and
administration
(“G&A”)
over
the
same
quarter
of
2010.
The
reduction
primarily
related
to
cost
saving
initiatives
that
occurred
throughout
2011.
G&A
costs
were
6%
of
revenue
in
the
fourth
quarter
of
2011
compared
to
8%
in
the
same
quarter
of
2010.
Income
tax
expense
for
the
three
months
ended
December
31,
2011
represented
28%
of
pre-‐tax
income,
compared
to
50%
of
pre-‐tax
loss
in
the
fourth
quarter
of
2010.
The
50%
effective
tax
rate
of
2012
reflected
some
additional
impairment
losses
that
created
a
permanent
difference
between
tax
and
accounting
net
loss
therefore
it
did
not
affect
the
deferred
tax
recovery
in
the
prior
period.
Other
Comprehensive
(Loss)
The
table
below
details
other
comprehensive
loss
before
the
impact
of
net
income
(loss)
in
the
period.
Foreign
Exchange
Loss
($000’s)
2011
2010
Fourth
Quarter
16
282
($000’s)
2011
2010
Fourth
Quarter
(789)
(1,422)
The
foreign
exchange
loss
for
each
period
primarily
relates
to
the
combination
of
fluctuations
in
the
US
dollar
conversion
rate
and
the
US
denominated
monetary
assets
and
the
Company’s
Canadian
operations.
liabilities
held
by
The
table
below
details
the
US
dollar
and
euro
conversion
rates.
Fourth
Quarter
2011
2010
Avg.
Close
Avg.
Close
USD
euro
1.02
1.38
1.02
1.32
1.01
1.38
1.00
1.33
Avg.
Change
1%
-‐
Close
Change
2%
(1%)
For
additional
information
on
the
Company’s
exposure
to
fluctuations
in
foreign
exchange
rates
see
the
“Financial
Instruments”
section
included
later
in
this
MD&A.
Depreciation
($000’s)
2011
2010
%
change
Fourth
Quarter
1,212
1,148
6%
The
2011
depreciation
expense
was
relatively
consistent
with
the
prior
quarter
of
2010.
Other
comprehensive
loss
for
each
period
resulted
from
the
translation
of
foreign
operations
with
functional
currencies
denominated
in
US
dollars
and
the
euro.
For
accounting
purposes,
assets
and
liabilities
of
these
foreign
operations
are
translated
at
the
exchange
rate
in
effect
on
the
balance
sheet
date.
The
other
comprehensive
loss
in
the
fourth
quarter
of
2011
was
due
to
the
US
dollar
conversion
rate
decreasing
from
1.03
in
the
third
quarter
of
2011
to
1.02
in
the
fourth
quarter
of
2011.
The
euro
conversion
rate
also
decreased
from
1.40
in
the
third
quarter
of
2011
to
1.32
in
the
fourth
quarter
of
2011.
Financial
Position/Cash
Flows
The
Company’s
working
capital
(current
assets
less
current
liabilities)
of
$23.4
million
as
at
December
31,
2011
was
an
improvement
over
the
$20.7
million
at
September
30,
2011.
Positive
cash
flows
from
operations
and
increases
in
deferred
revenue
contributed
to
the
repayment
of
the
improvement
in
working
capital.
indebtedness
and
the
bank
13
Management's
Discussion
and
Analysis
FINANCIAL
INSTRUMENTS
rate
risk
and
risk),
credit
The
Company’s
activities
expose
it
to
a
variety
of
financial
risks
including
market
risk
(foreign
exchange
risk
and
risk.
interest
Management
reviews
these
risks
on
an
ongoing
basis
to
ensure
they
are
appropriately
managed.
In
addition
to
the
discussion
below,
see
note
23
of
the
Company’s
financial
December
31,
2011
audited
consolidated
statements
for
information
on
the
exposure
to
financial
instruments
risk.
liquidity
Foreign
Exchange
Risk
The
Company
operates
on
an
international
basis
and
is
subject
to
foreign
exchange
risk.
The
most
significant
risk
is
the
fluctuation
of
the
US
dollar
in
comparison
to
the
Canadian
dollar.
The
tables
below
provide
an
indication
of
ZCL’s
exposure
to
changes
in
the
US
to
Canadian
dollar
conversion
rate
as
at
and
for
the
year
ended
December
31,
2011.
Balance
sheet
exposure
related
to
financial
assets,
net
of
financial
liabilities,
at
December
31,
2011
was
as
follows:
(in
thousands
of
US
dollars)
Foreign
operations
Domestic
operations
Net
balance
sheet
exposure
$
777
(4,421)
(3,644)
Operating
exposure
for
the
year
ended
December
31,
2011
was
as
follows:
(in
thousands
of
US
dollars)
Sales
Operating
expenses
Net
operating
exposure
$
82,582
75,319
7,263
Based
on
the
exposures
noted
above,
with
other
variables
unchanged,
a
20%
decline
in
the
Canadian
dollar
would
have
impacted
net
income
for
the
year
ended
December
31,
2011
as
follows:
(in
thousands
of
US
dollars)
$
Net
balance
sheet
exposure
of
domestic
operations
(566)
930
Net
operating
exposure
of
foreign
operations
364
Increase
in
net
income
Other
comprehensive
income
(loss)
would
have
also
increased
an
additional
$0.1
million
due
to
the
net
balance
sheet
exposure
of
self-‐sustaining
operations.
An
increase
or
strengthening
of
20%
in
the
Canadian
dollar
would
have
had
an
equal
but
opposite
impact
on
net
income
and
other
comprehensive
income.
Credit
Risk
financial
funds
with
reputable
The
Company
is
exposed
to
credit
risk
through
its
cash
and
cash
equivalents,
restricted
cash
and
accounts
receivable.
The
Company
manages
the
credit
risk
associated
with
its
cash
and
cash
equivalents
by
holding
institutions
and
its
investing
only
in
highly
rated
securities
that
are
traded
on
active
markets
and
are
capable
of
prompt
liquidation.
Credit
risk
for
trade
and
other
accounts
receivable
are
managed
through
established
credit
monitoring
activities
and
by
obtaining
a
cash
deposit
from
certain
customers
with
no
prior
order
history
with
the
Company
or
where
the
Company
determines
the
customer
has
a
higher
level
of
risk.
The
Company
has
a
concentration
of
customers
in
the
oil
and
gas
sector.
The
concentration
risk
is
mitigated
by
the
number
of
customers
and
by
a
significant
portion
of
the
customers
being
large
international
organizations.
As
at
December
31,
2011,
no
single
customer
exceeded
10%
of
the
consolidated
trade
accounts
receivable
balance.
The
Company’s
maximum
exposure
to
credit
risk
for
trade
accounts
receivable
is
the
carrying
value
of
$19.5
million
as
at
December
31,
2011
(December
31,
2010
-‐
$22.1
million).
Included
in
accounts
receivable
are
balances
not
considered
trade
receivables
of
$0.4
million
(2010
-‐
$0.6
million)
which
include
various
federal
and
provincial
tax
refunds
and
rebates.
On
a
geographic
basis
as
at
December
31,
2011,
approximately
65%
(December
31,
2010
–
59%)
of
the
balance
of
trade
accounts
receivable
was
due
from
Canadian
and
non-‐US
customers
and
35%
(December
31,
2010
–
41%)
was
due
from
US
customers.
Payment
terms
are
generally
net
30
days.
As
at
December
31,
2011,
the
percentages
of
trade
accounts
receivable
were
as
follows:
51%
current
(December
31,
2010
–
56%),
27%
past
due
1
to
30
days
(December
31,
2010
–
23%),
12%
past
due
31
to
60
days
(December
31,
2010
–
10%),
8%
past
due
61
to
90
days
(December
31,
2010
–
5%)
and
2%
past
due
greater
than
90
days
(December
31,
2010
–
6%).
14
Management's
Discussion
and
Analysis
RISKS
AND
UNCERTAINTIES
The
Company
is
subject
to
a
number
of
known
and
unknown
risks,
uncertainties
and
other
factors
that
could
cause
the
Company’s
actual
future
results
to
differ
materially
from
those
historically
achieved
and
those
reflected
in
forward-‐looking
statements
made
by
the
Company.
These
factors
include,
but
are
not
limited
to,
fluctuations
in
the
level
of
capital
expenditures
in
the
Petroleum
Products,
Water
Products
and
Industrial
Corrosion
Products
markets;
drilling
activity
and
oil
and
natural
gas
prices
and
other
factors
that
affect
demand
industry
for
the
Company’s
products
and
services;
competition;
the
need
to
effectively
integrate
acquired
businesses;
the
ability
of
management
to
implement
the
Company’s
business
strategy
effectively;
political
and
general
economic
conditions;
the
ability
to
attract
and
retain
key
personnel;
raw
material
and
labour
costs;
fluctuations
in
the
US
and
Canadian
dollar
exchange
rates;
accounts
receivable
risk;
the
ability
to
generate
capital
or
maintain
liquidity
and
credit
agreements
necessary
to
fund
future
operations,
and
other
risks
and
uncertainties
described
under
the
heading
“Risk
Factors”
in
the
Company’s
most
recent
Annual
Information
Form
and
elsewhere
in
other
documents
filed
with
Canadian
provincial
securities
authorities
which
are
available
to
the
public
at
www.sedar.com.
CRITICAL
ACCOUNTING
ESTIMATES
&
JUDGEMENTS
is
dependent
upon
The
Company’s
financial
statements
have
been
prepared
following
IFRS.
The
measurement
of
certain
assets
and
future
events
whose
liabilities
outcome
will
not
be
fully
known
until
future
periods.
Therefore,
the
preparation
of
the
financial
statements
requires
management
and
assumptions
that
affect
the
reported
amounts
of
assets,
liabilities,
revenues
and
expenses.
Such
estimates
and
assumptions
have
been
made
using
careful
judgments,
which
in
management’s
opinion,
are
reasonable
and
conform
to
the
significant
accounting
policies
summarized
in
the
consolidated
financial
statements.
Actual
results
may
vary
from
those
estimated.
to
make
estimates
Impairment
The
Company
assesses
impairment
at
each
reporting
period
by
evaluating
the
circumstances
specific
to
the
organization
that
may
lead
to
an
impairment
of
assets.
In
addition
to
the
quarterly
assessment,
the
Company
also
performs
an
annual
impairment
test
on
goodwill
and
Environmental
risks
To
conduct
business
operations,
the
Company
owns
or
leases
properties
and
is
subject
to
environmental
risks
due
to
the
use
of
chemicals
in
the
manufacturing
process.
This
risk
is
limited
to
exposure
post
acquisition
for
properties
obtained
through
the
Xerxes
and
ZCL
Dualam
acquisitions
as
the
purchase
agreements
hold
the
vendors
responsible
issues
pre
ZCL
ownership.
With
the
ZCL
Dualam
acquisition,
phase
two
assessments
were
undertaken
and,
as
a
result,
the
Company
is
aware
of
environmental
liabilities
on
two
of
the
properties.
These
properties
are
in
the
process
of
being
remediated
by
the
vendor,
therefore,
no
clean-‐up
costs
have
been
accrued
in
these
financial
statements.
for
any
environmental
ZCL
manages
its
environmental
risks
by
appropriately
dealing
with
chemicals
and
waste
material
in
an
environmentally
safe
manner
and
in
accordance
with
In
addition,
the
known
regulatory
requirements.
Company
has
a
Safety,
Health
and
Environment
Committee
that
meets
regularly
to
review
and
monitor
related
issues,
compliance,
risks
and
mitigation
strategies.
However,
there
can
be
no
absolute
assurance
that
specific
environmental
incidents
will
not
impact
ZCL
operations
in
the
future.
The
Company
elects
to
self-‐insure
against
risk
of
environmental
contamination
at
its
production
facilities
as
it
has
determined
the
risk
to
be
low.
The
Company
is
not
aware
of
any
unrecorded
material
environmental
exposures
other
than
the
items
noted
above.
certain
intangible
assets
in
accordance
with
IAS
36
–
“Impairment
of
Assets”.
Where
indicators
of
impairment
exist,
and
annually
for
goodwill
and
certain
intangible
assets,
the
recoverable
amount
of
the
asset
or
group
of
assets
(cash
generating
units)
is
compared
against
the
carrying
amount.
Any
excess
in
the
carrying
amount
over
the
recoverable
amount
will
be
recognized
as
an
impairment
loss
in
the
income
statement.
The
recoverable
amount
is
calculated
as
the
higher
of
the
assets’
(or
group
of
assets)
value
in
use
or
fair
value
less
cost
to
sell.
The
actual
growth
rates
and
other
estimates
used
in
the
determination
of
fair
values
at
the
time
of
impairment
tests
may
vary
materially
from
those
realized
in
future
periods.
15
Management's
Discussion
and
Analysis
Property,
plant
and
equipment,
intangible
assets
and
goodwill
tested
lives
are
recorded
at
cost
Property,
plant
and
equipment
and
intangible
assets
with
less
accumulated
finite
amortization.
Goodwill
and
indefinite
life
intangible
assets
are
recorded
at
cost.
The
unamortized
balances,
or
carrying
values,
are
regularly
reviewed
for
recoverability
impairment
whenever
events
or
or
circumstances
indicate
that
these
amounts
exceed
their
fair
values.
The
valuation
of
these
assets
is
based
on
estimated
future
net
cash
flows,
taking
into
account
current
and
future
industry
and
other
conditions.
An
impairment
loss
would
be
recognized
for
the
amount
that
the
carrying
value
exceeds
the
fair
value.
for
Amortization
of
property,
plant
and
equipment
and
intangible
assets
with
finite
lives
is
based
on
estimates
of
the
useful
lives
of
the
assets.
The
useful
lives
are
estimated,
and
a
method
of
amortization
is
selected
at
the
time
the
assets
are
initially
acquired
and
then
re-‐
evaluated
each
reporting
period.
Judgment
is
required
to
determine
whether
events
or
circumstances
warrant
a
revision
to
the
remaining
periods
of
amortization.
The
estimates
of
cash
flows
used
to
assess
the
potential
impairment
of
these
assets
are
subject
to
measurement
uncertainty.
A
significant
change
in
these
estimates
and
judgments
could
result
in
a
material
change
to
amortization
expense
or
impairment
charges.
Allowance
for
Doubtful
Accounts
receivable
balance
is
a
The
Company’s
accounts
significant
portion
of
overall
assets.
Credit
is
spread
among
many
customers
and
the
Company
has
not
experienced
significant
accounts
receivable
collection
problems
in
the
past.
The
Company
performs
ongoing
credit
evaluations
and
maintains
allowances
for
doubtful
accounts,
based
on
the
assessment
of
individual
customer
receivable
balances,
credit
information,
past
collection
history
and
the
overall
financial
strength
of
customers.
A
change
in
these
factors
could
impact
the
estimated
allowance
and
the
provision
for
bad
debts
recorded
in
the
accounts.
The
actual
collection
of
accounts
receivable
and
the
resulting
bad
debts
may
differ
from
the
estimated
allowance
for
doubtful
accounts
and
the
difference
may
be
material.
Self-‐insured
Liabilities
The
Company
self-‐insures
certain
risks
related
to
pollution
protection
provided
on
certain
product
sales,
general
liability
claims
and
patent
infringement
through
Radigan
Insurance
Inc.,
its
captive
insurance
company.
The
provision
for
self-‐insured
liabilities
includes
estimates
of
the
costs
of
reported
and
expected
claims
based
on
estimates
of
loss
using
assumptions
determined
by
a
certified
loss
reserve
analyst.
The
actual
costs
of
claims
may
vary
from
those
estimates,
and
the
difference
may
be
material.
As
at
December
31,
2011,
the
Company
has
set
aside
restricted
cash
of
$0.3
million
US
($0.3
million
Canadian)
for
such
claims.
Warranties
The
Company
generally
warrants
its
products
for
a
period
of
one
year
after
sale,
and
for
up
to
thirty
years
for
corrosion,
if
the
products
are
properly
installed
and
are
used
solely
for
storage
of
listed
liquids.
The
Company
markets
a
storage
system
under
the
Prezerver™
trademark
that
carries
an
enhanced
protection
program.
In
Canada,
the
Prezerver
system
includes
an
enhanced
ten
year
limited
warranty
covering
product
replacement,
third
party
pollution
protection,
site
clean-‐up
and
defence
costs
up
to
the
limits
allowed
under
the
warranty.
Until
December
1,
2006,
the
Canadian
Prezerver
program
was
insurance
underwritten
by
a
major
covered
by
international
insurer.
Effective,
December
1,
2006,
the
Company
formed
its
own
insurance
captive
to
insure
the
Prezerver
program.
No
claims
have
been
registered
since
the
Prezerver
program’s
inception
in
1996.
Additionally,
a
number
of
component
materials
and
parts
are
similarly
warranted
by
their
manufacturers,
thereby
reducing
the
Company’s
exposure
to
warranty
claims.
The
Company
also
began
marketing
the
Prezerver
system
in
the
US
in
2008.
Under
this
program,
the
customer
is
offered
a
ten
year
non-‐cancellable
master
program
of
insurance
by
a
third
party
insurance
provider
which
covers
third
party
property
damage,
onsite
cleanup
of
pollution
costs
and
product
warranty/replacement
up
to
limits
allowed
under
the
policy.
The
tank
warranty/replacement
portion
of
the
insurance
is
reinsured
by
the
third
party
coverage
provider
to
ZCL’s
insurance
captive.
conditions,
defence
The
Company
provides
for
warranty
obligations
based
on
a
review
of
products
sold
and
historical
warranty
costs
experienced.
Provisions
for
warranty
costs
are
charged
to
manufacturing
and
selling
costs
and
revisions
to
the
estimated
provision
are
charged
to
earnings
in
the
period
in
which
they
occur.
While
the
Company
maintains
high
quality
standards
and
has
a
limited
history
of
liability
or
warranty
problems
under
its
standard
warranties
or
Prezerver
programs,
there
can
be
no
guarantee
that
the
warranty
provision
recorded,
self-‐insurance
provided
by
ZCL's
captive
insurance
company
or
third
party
insurance
will
be
sufficient
to
cover
all
potential
claims.
The
actual
costs
of
warranties
may
vary
from
those
estimated,
and
the
difference
may
be
material.
16
Management's
Discussion
and
Analysis
CHANGES
IN
ACCOUNTING
POLICIES
INCLUDING
INITIAL
ADOPTION
As
discussed
in
the
introduction
to
the
MD&A,
these
are
financial
the
Company’s
statements
for
the
year
ended
December
31,
2011
prepared
in
accordance
with
IFRS.
first
annual
consolidated
The
accounting
policies
in
note
3
to
the
consolidated
financial
statements
have
been
applied
in
preparing
the
year
ended
December
31,
2011
statement
of
income
(loss)
and
the
comparative
information
for
the
year
ended
December
31,
2010.
The
policies
were
also
used
in
the
preparation
of
the
balance
sheets
presented
for
the
opening
IFRS
balance
sheet
date
on
the
transition
date
of
January
1,
2010,
the
year
ended
December
31,
2010
and
the
year
ended
December
31,
2011.
IFRS
1:
“First
time
adoption
of
IFRS”
IFRS
1
sets
forth
guidance
for
the
initial
adoption
of
IFRS.
Under
IFRS
1,
the
standards
are
applied
retrospectively
at
the
transition
date
with
all
adjustments
to
assets
and
liabilities
taken
to
retained
earnings
unless
certain
mandatory
exemptions
and
optional
exemptions
are
applied.
The
Company
elected
to
apply
the
following
IFRS
1
optional
exemptions.
Readers
should
refer
to
note
28
of
the
consolidated
financial
statements
for
a
full
reconciliation
of
the
effects
the
transition
to
IFRS
had
on
SUMMARY
OF
SIGNIFICANT
IFRS
RE-‐MEASUREMENTS
With
the
transition
to
IFRS
on
January
1,
2010,
certain
balances
were
re-‐measured
according
to
the
guidance
provided
in
IFRS
that
resulted
in
significant
differences
from
the
measurements
previously
reported
under
previous
GAAP.
Discussed
below
is
a
summary
of
the
significant
IFRS
re-‐measurements
and
their
impact
on
the
January
1,
2010
and
December
31,
2010
balance
sheets
relative
to
previous
GAAP.
Impairment
of
intangible
assets
As
previously
disclosed
in
the
September
30,
2010
and
December
31,
2010
consolidated
financial
statements
and
MD&A,
the
Company
conducted
an
impairment
test
on
the
intangible
assets
relating
to
ZCL
Dualam.
Using
the
guidance
available
under
previous
GAAP,
the
customer
relationships,
trade
names
and
non-‐patented
technology
intangible
assets
were
not
considered
impaired
as
their
expected
undiscounted
cash-‐flows
(recoverability
test)
exceeded
their
carrying
value
as
at
September
30,
2010.
the
comparative
statements
of
comprehensive
income
(loss)
and
balance
sheets.
a)
IFRS
3:
“Business
Combinations”
has
not
been
applied
retrospectively
to
acquisitions
of
subsidiaries
prior
to
the
transition
date
of
IFRS.
b) Certain
parcels
of
land
grouped
in
with
property,
plant
and
equipment
have
been
adjusted
to
their
fair
value
based
on
land
valuations
performed
by
external
land
valuators.
The
Company
has
elected
to
regard
those
fair
values
as
deemed
cost
at
the
date
of
transition
to
IFRS.
c) The
Company
has
elected
not
to
reassess
arrangements
under
IFRS
Interpretations
Committee
(“IFRIC”)
4:
“Determining
Whether
an
Arrangement
Contains
a
Lease”
that
were
assessed
under
previous
GAAP
in
the
same
manner
as
required
by
IFRIC
4
and
to
apply
the
transitional
provision
in
IFRIC
4
to
those
that
were
not.
IFRS
2:
“Share-‐based
Payments”
has
not
been
applied
retrospectively
for
stock
options
that
had
vested
prior
to
the
transition
date.
d)
loss
of
$4.1
million.
The
impairment
test
under
IFRS
requires
the
use
of
a
discounted
cash
flow
forecast
in
order
to
estimate
the
fair
value
of
the
intangible
assets.
This
fair
value
is
then
compared
to
the
carrying
amount
as
at
September
30,
2010.
The
IFRS
impairment
test
resulted
in
an
additional
impairment
Subsequent
to
September
30,
2010,
the
lower
carrying
amount
resulted
impaired
in
reduced
depreciation
expense
on
the
intangible
assets
of
$0.1
million
for
the
remainder
of
the
year
ended
December
31,
2010.
The
net
reduction
of
the
carrying
amount
of
intangible
assets
as
at
December
31,
in
the
2010
was
$3.9
million
due
to
the
changes
impairment
testing
under
IFRS.
Property,
plant
and
equipment
As
discussed
in
the
“Changes
in
Significant
Accounting
Policies”
section
of
the
MD&A,
upon
transition
to
IFRS,
the
Company
elected
to
use
the
fair
value
of
certain
parcels
of
land
as
their
deemed
cost
as
allowed
under
the
IFRS
1.
This
resulted
in
an
increase
of
$2.7
million
of
property,
plant
and
equipment
with
the
corresponding
adjustment
recorded
in
opening
equity
as
at
the
transition
date.
17
Management's
Discussion
and
Analysis
Translation
of
foreign
operations
Under
previous
GAAP,
the
Parabeam
Industries
BV,
Radigan
Insurance
Inc.
and
certain
US
based
subsidiaries
of
ZCL
Dualam
were
considered
to
be
integrated
foreign
operations
within
the
ZCL
Composites
consolidated
group
of
companies.
The
financial
statements
of
these
foreign
based
subsidiaries
were
translated
using
the
temporal
method,
which
required
the
translation
of
monetary
assets
and
liabilities
of
the
foreign
subsidiaries
to
Canadian
dollars
using
the
closing
rate
on
each
reporting
date.
The
non-‐monetary
assets
and
liabilities
of
these
subsidiaries
were
carried
at
their
historical
Canadian
dollar
cost
and
not
translated
to
the
reporting
currency
(Canadian
dollars)
at
the
current
rates.
Under
IFRS,
the
functional
currency
of
these
entities
was
assessed
using
the
guidance
available
in
IAS
21:
“The
Effects
of
Changes
in
Foreign
Exchange
Rates”.
The
functional
currencies
of
these
entities
was
determined
to
be
the
domestic
currencies,
therefore
the
financial
CONTROLS
AND
PROCEDURES
statements
of
these
subsidiaries
are
now
being
translated
using
the
current
rate
method.
Under
the
current
rate
method
all
assets
and
liabilities
of
the
subsidiaries
are
translated
at
the
closing
rate
in
effect
at
the
reporting
period.
The
primary
impact
of
changing
from
the
temporal
rate
method
to
the
current
rate
method
for
these
entities
was
the
impact
on
the
carrying
amount
of
property,
plant
and
in
Canadian
dollars
and
the
cumulative
equipment
translation
adjustment
which
forms
part
of
other
comprehensive
income.
As
at
January
1,
2010,
the
impact
was
not
significant,
however
as
at
December
31,
2010,
the
impact
of
this
change
resulted
in
a
reduction
in
the
carrying
value
of
property,
plant
and
equipment
of
$0.2
million
and
an
in
the
accumulated
other
comprehensive
loss
of
$0.3
million
when
compared
to
the
December
31,
2010
consolidated
financial
statements
released
under
previous
GAAP.
increase
Disclosure
Controls
and
Procedures
Internal
Controls
over
Financial
Reporting
(“ICFR”)
Disclosure
controls
and
procedures
are
designed
to
provide
reasonable
assurance
that
material
information
is
gathered
and
reported
to
senior
management,
including
the
Chief
Executive
Officer
(“CEO”)
and
the
Chief
Financial
Officer
(“CFO”)
of
ZCL
on
a
timely
basis
so
that
appropriate
decisions
can
be
made
regarding
public
disclosure.
In
accordance
with
National
Instrument
52-‐
109:
“Certification
of
Disclosure
in
Issuers’
Annual
and
Interim
Filings”,
the
CEO
and
CFO
have
evaluated
the
effectiveness
of
the
Company’s
disclosure
controls
and
procedures
as
of
the
period
ended
December
31,
2011.
Based
on
that
evaluation,
the
CEO
and
CFO
have
concluded
that
the
disclosure
control
procedures
are
effective
and
provide
reasonable
assurance
that:
(a)
information
required
to
be
disclosed
by
the
Company
in
its
quarterly
interim
filings
or
other
reports
filed
and
submitted
under
applicable
securities
is
recorded,
processed,
summarized
and
reported
within
the
prescribed
time
periods,
and
(b)
material
information
regarding
and
communicated
to
management,
including
its
CEO
and
CFO
in
a
timely
manner.
accumulated
legislation
Company
the
is
Management
has
evaluated
whether
there
were
changes
in
the
Company’s
ICFR
during
the
period
ended
December
31,
2011
that
have
materially
affected,
or
are
reasonably
likely
to
materially
affect,
the
Company’s
ICFR.
No
material
changes
were
identified.
There
were
also
no
material
weaknesses
relating
to
the
design
of
ICFR
at
December
31,
2011
and
no
limitations
on
the
scope
of
design
of
ICFRs.
While
management
of
the
Company
have
evaluated
the
effectiveness
of
disclosure
controls
and
procedures
and
ICFR
as
of
December
31,
2011
and
have
concluded
that
these
controls
and
procedures
are
being
maintained
as
designed,
they
expect
that
the
disclosure
controls
and
procedures
and
ICFR
may
not
prevent
all
errors
and
fraud.
A
control
system,
no
matter
how
well
conceived
or
operated,
can
only
provide
reasonable,
not
absolute
assurance
that
the
objectives
of
the
control
system
are
met.
18
Management's
Discussion
and
Analysis
TRANSACTIONS
WITH
RELATED
PARTIES
components
purchased
Certain
manufacturing
for
$30,000
(2010
-‐
$82,000)
for
the
year
ended
December
31,
2011,
included
in
manufacturing
and
selling
costs
in
the
consolidated
statements
of
income
or
inventories
were
provided
by
a
corporation
whose
Chairman
and
CEO
is
a
director
of
the
Company.
The
transactions
were
incurred
in
the
normal
course
of
operations
and
recorded
OUTSTANDING
SHARE
DATA
As
at
March
7,
2012,
there
were
28,802,020
common
shares
and
2,207,498
share
options
outstanding.
Of
the
options
outstanding,
747,469
are
currently
exercisable
into
common
shares.
OTHER
INFORMATION
Additional
information
relating
to
the
Company,
including
the
Annual
Information
Form
(AIF),
is
filed
on
SEDAR
at
www.sedar.com.
NON-‐IFRS
MEASURES
The
Company
uses
both
IFRS
and
non-‐IFRS
measures
to
make
strategic
decisions
and
set
targets
and
believes
that
these
non-‐IFRS
measures
provide
useful
supplemental
information
to
investors.
EBITDA,
gross
profit,
cash
from
operations,
working
capital,
net
debt
and
backlog
are
measures
used
by
the
Company
that
do
not
have
a
standardized
meaning
prescribed
by
IFRS
and
may
not
be
comparable
to
similar
measures
used
by
other
companies.
Included
below
are
tables
calculating
or
reconciling
these
non-‐IFRS
measures
where
applicable.
Gross
profit
is
defined
as
revenue
less
manufacturing
and
selling
costs.
Manufacturing
and
selling
costs
include
direct
materials
and
fixed
manufacturing
overhead
and
marketing
and
selling
expenses
and
exclude
depreciation,
general
and
administration
and
financing
expenses.
labour,
variable
and
EBITDA
is
defined
as
income
from
continuing
operations
income
taxes,
share-‐based
before
finance
expense,
payments,
depreciation
on
property,
plant
and
equipment
at
the
exchange
amount
being
normal
commercial
rates
for
the
products.
Accounts
payable
and
accrued
liabilities
at
December
31,
2011
included
$nil
(2010
-‐
$13,000)
owing
to
the
corporation.
There
are
no
ongoing
contractual
or
other
commitments
resulting
from
these
transactions.
On
January
4,
2010,
1,078,948
preferred
shares
with
a
redemption
value
of
$5.1
million
were
issued
by
a
subsidiary
of
the
Company.
These
preferred
shares
have
a
term
of
five
years
and
a
dividend
rate
of
4.4%.
In
years
two
to
five,
these
preferred
shares
are
redeemable
by
the
Company
for
cash
at
$4.75
per
share
or
exchangeable
by
the
vendor
for
common
shares
on
a
one
to
one
basis.
deferred
development
costs
and
intangible
assets,
gains
or
losses
on
sale
of
property,
plant
and
equipment,
impairment
of
assets,
and
costs
not
expected
to
recur
on
a
regular
basis.
Readers
are
cautioned
that
EBITDA
should
not
be
construed
as
an
alternative
to
net
income
as
determined
in
accordance
with
IFRS.
Cash
from
continuing
operations
is
defined
as
cash
flows
from
operating
activities
before
changes
in
non-‐cash
working
capital.
Working
capital
is
defined
as
current
assets
less
current
liabilities.
Net
debt
is
defined
as
long
including
current
portion,
plus
bank
term
debt,
indebtedness,
less
cash
and
cash
equivalents.
Preferred
shares
are
not
a
component
of
net
debt.
Backlog
is
defined
as
the
total
value
of
orders
that
have
not
yet
been
included
in
revenue
and
that
management
has
assessed
as
having
a
high
certainty
of
being
performed
because
of
the
existence
of
a
contract
or
purchase
order
specifying
the
scope,
value
and
timing
of
an
order.
19
Management’s
Discussion
and
Analysis
RECONCILIATION
OF
NON-‐IFRS
MEASURES
The
following
table
presents
the
calculation
of
gross
profit
and
gross
profit
as
a
percentage
of
revenue.
(in
thousands
of
dollars)
Revenue
Manufacturing
and
selling
costs
Gross
profit
Fourth
Quarter
Ended
December
31
2011
$
37,716
31,528
6,188
2010
(restated)
$
35,028
32,245
2,783
2011
$
127,046
107,592
19,454
Year
Ended
December
31
2010
(restated)
$
121,574
109,916
11,658
2009
(Note
1)
$
103,153
86,068
17,085
Gross
profit
as
a
%
of
revenue
Note
1:
For
comparative
periods
prior
to
January
1,
2010
(IFRS
transition
date),
the
financial
information
presented
has
not
been
restated
to
reflect
the
Company’s
adoption
of
IFRS.
15%
16%
10%
8%
17%
The
following
table
reconciles
net
income
(loss)
from
continuing
operations
in
accordance
with
IFRS
to
EBITDA.
(in
thousands
of
dollars)
Net
income
(loss)
from
continuing
operations
Adjustments:
Depreciation
Finance
expense
Income
tax
expense
(recovery)
Stock-‐based
compensation
(Gain)
loss
on
disposal
of
assets
Impairment
of
assets
Restructuring,
integration
and
ERP
costs2
EBITDA
Fourth
Quarter
Ended
December
31
2011
$
1,840
1,212
256
728
120
16
-‐
-‐
4,172
2010
(restated)
$
(1,102)
1,149
309
(1,099)
173
-‐
547
560
537
Year
Ended
December
31
2010
(restated)
$
(16,700)
4,792
1,363
(3,990)
791
10
14,293
1,980
2,539
2011
$
3,454
4,317
1,272
1,154
508
(356)
-‐
-‐
10,349
2009
(Note
1)
$
3,635
4,137
501
1,112
393
38
-‐
-‐
9,816
10%
%
of
revenue
Note
1:
For
comparative
periods
prior
to
January
1,
2010
(IFRS
transition
date),
the
financial
information
presented
has
not
been
restated
to
reflect
the
Company’s
adoption
of
IFRS.
Note
2:
Includes
costs
associated
with
restructuring
and
integration
activities
as
well
as
costs
related
to
the
initial
implementation
of
the
Company’s
new
ERP
system.
11%
8%
2%
2%
20
Management’s
Discussion
and
Analysis
The
following
table
presents
the
calculation
of
cash
from
continuing
operations.
(in
thousands
of
dollars)
Net
income
(loss)
from
continuing
operations
Add
items
not
affecting
cash:
Depreciation
Future
tax
expense
(recovery)
Gain
(loss)
on
disposal
of
assets
Stock-‐based
compensation
expense
Impairment
of
assets
Other
Fourth
Quarter
Ended
December
31
2011
$
1,840
2010
(restated)
$
(1,102)
Year
Ended
December
31
2010
(restated)
$
(16,700)
2009
(Note
1)
$
3,635
2011
$
3,454
1,212
748
16
120
-‐
75
4,011
1,149
(333)
-‐
173
547
1
435
4,317
185
(356)
508
-‐
309
8,417
4,792
(1,400)
10
791
13,363
35
891
4,137
(385)
38
393
-‐
15
7,833
Cash
from
continuing
operations
Note
1:
For
comparative
periods
prior
to
January
1,
2010
(IFRS
transition
date),
the
financial
information
presented
has
not
been
restated
to
reflect
the
Company’s
adoption
of
IFRS.
The
following
table
presents
the
calculation
of
working
capital.
As
at
2011
December
31
2009
(Note
1)
$
(in
thousands
of
dollars)
Current
assets
Current
liabilities
Working
capital
Note
1:
For
comparative
periods
prior
to
January
1,
2010
(IFRS
transition
date),
the
financial
information
presented
has
not
been
restated
to
reflect
the
Company’s
adoption
of
IFRS.
47,873
24,486
23,387
39,993
16,673
23,320
$
The
following
table
presents
the
calculation
of
net
debt.
As
at
(in
thousands
of
dollars)
Long
term
debt
(including
current
portion,
excluding
preferred
shares)
Bank
indebtedness
Less:
cash
and
cash
equivalents
Net
debt
Note
1:
For
comparative
periods
prior
to
January
1,
2010
(IFRS
transition
date),
the
financial
information
presented
has
not
been
restated
to
reflect
the
Company’s
adoption
of
IFRS.
$
6,274
-‐
(1,707)
4,567
5,346
1,477
(2,868)
3,955
2011
December
31
2009
(Note
1)
$
2010
(restated)
$
47,821
30,005
17,816
2010
(restated)
$
11,131
8,565
(2,105)
17,591
21
lending
standards,
volatile
capital
markets,
fluctuating
commodity
prices,
and
other
factors
could
negatively
impact
the
demand
for
the
Company’s
products
and
the
Company’s
ability
to
grow
or
sustain
revenues
and
earnings.
Fluctuations
in
the
US
to
Canadian
dollar
conversion
rate
also
have
the
potential
to
impact
the
Company’s
revenues
and
earnings.
The
Company
believes
that
the
expectations
reflected
in
the
forward-‐looking
statements
are
reasonable,
but
no
assurance
can
be
given
that
these
expectations
will
prove
to
be
correct
and
such
forward-‐looking
statements
included
in
this
report
should
not
be
unduly
relied
upon.
The
forward-‐looking
statements
in
this
report
speak
only
as
of
the
date
of
this
report.
The
Company
does
not
undertake
to
update
any
forward-‐looking
statement,
whether
written
or
oral,
that
may
be
made
from
time
to
time
by
the
Company
or
on
the
Company’s
behalf,
whether
as
a
result
of
new
information,
future
events,
or
otherwise,
except
as
may
be
required
under
applicable
securities
statements
contained
in
this
document
are
expressly
qualified
by
this
cautionary
statement.
forward-‐looking
laws.
The
Management’s
Discussion
and
Analysis
ADVISORY
REGARDING
FORWARD-‐LOOKING
STATEMENTS
to
efforts
This
document
contains
forward-‐looking
statements
under
the
heading
“Outlook”
and
elsewhere
concerning
future
events
or
the
Company’s
future
performance,
including
the
Company’s
objectives
or
expectations
for
revenue
and
earnings
growth,
income
taxes
as
a
percentage
of
pre-‐tax
income,
business
opportunities
in
Industrial
the
Petroleum
Products,
Water
Products,
Corrosion
reduce
Products
markets,
administrative
and
production
costs,
manage
production
levels,
anticipated
capital
expenditure
trends,
activity
in
the
petroleum
and
other
industries
and
markets
served
by
the
Company
and
the
sufficiency
of
cash
flows
and
credit
facilities
available
to
cover
normal
operating
and
capital
expenditures.
Forward-‐looking
statements
are
often,
but
not
always,
identified
by
the
use
of
words
such
as
“seek”,
“anticipate”,
“plan”,
“continue”,
“estimate”,
“expect”,
“may”,
“will”,
“project”,
“predict”,
“potential”,
“targeting”,
“should”,
“believe”
and
similar
expressions.
Actual
events
or
results
in
the
may
differ
materially
from
those
reflected
Company’s
forward-‐looking
statements
due
to
a
number
of
known
and
unknown
risks,
uncertainties
and
other
factors
affecting
the
Company’s
business
and
the
industries
the
Company
serves
generally.
“intend”,
“might”,
“could”,
These
factors
include,
but
are
not
limited
to,
fluctuations
in
the
level
of
capital
expenditures
in
the
Petroleum
Industrial
Corrosion
Products,
Water
Products,
and
Products
markets,
drilling
activity
and
oil
and
natural
gas
prices,
and
other
factors
that
affect
demand
for
the
Company’s
products
and
services,
industry
competition,
the
need
to
effectively
integrate
acquired
businesses,
uncertainties
as
to
the
Company’s
ability
to
implement
its
business
strategy
effectively,
political
and
economic
conditions,
the
Company’s
ability
to
attract
and
retain
key
personnel,
raw
material
and
labour
costs,
fluctuations
in
the
US
and
Canadian
dollar
exchange
rates,
and
other
risks
and
uncertainties
described
under
the
heading
“Risk
Factors”
recent
Annual
Information
Form,
and
elsewhere
in
this
document
and
other
documents
filed
with
Canadian
provincial
securities
authorities.
These
documents
are
available
to
the
public
at
www.sedar.com.
Unless
otherwise
indicated,
the
consolidated
financial
statements
have
been
prepared
in
accordance
with
International
Financial
Reporting
Standards
and
the
reporting
currency
is
in
Canadian
dollars.
the
Company’s
most
in
In
addition
to
the
factors
noted
above,
management
cautions
readers
that
the
current
economic
environment
could
have
a
negative
impact
on
the
markets
in
which
the
Company
operates
and
on
the
Company’s
ability
to
achieve
its
financial
targets.
Factors
such
as
continuing
economic
uncertainty
in
the
US
and
Canada,
tighter
22
Consolidated
Financial
Statements
ZCL
Composites
Inc.
Consolidated
Financial
Statements
and
Notes
For
the
years
ended
December
31,
2011
and
2010
23
Consolidated
Financial
Statements
MANAGEMENT’S
REPORT
March
7,
2012
The
Annual
Report,
including
the
consolidated
financial
statements
and
other
financial
information,
is
the
responsibility
of
the
management
of
the
Company.
The
consolidated
financial
statements
were
prepared
by
management
in
accordance
with
International
Financial
Reporting
Standards.
When
alternative
accounting
methods
exist,
management
has
chosen
those
it
considers
most
appropriate
in
the
circumstances.
The
significant
accounting
policies
used
are
described
in
note
2
to
the
consolidated
financial
statements.
The
integrity
of
the
information
presented
in
the
financial
statements,
including
estimates
and
judgments
relating
to
matters
not
concluded
by
year
end,
is
the
responsibility
of
management.
Financial
information
presented
elsewhere
in
this
Annual
Report
has
been
prepared
by
management
and
is
consistent
with
the
information
in
the
consolidated
financial
statements.
Management
is
responsible
for
the
establishment
and
maintenance
of
systems
of
internal
accounting
and
administrative
controls
which
are
designed
to
provide
reasonable
assurance
that
the
financial
information
is
accurate
and
reliable,
and
that
the
Company's
assets
are
appropriately
accounted
for
and
adequately
safeguarded.
The
internal
control
system
also
includes
an
established
business
conduct
policy
that
applies
to
all
employees.
Management
believes
the
system
of
internal
controls,
review
procedures,
and
established
policies
provide
reasonable
assurance
as
to
the
reliability
and
relevance
of
the
financial
reports.
The
Board
of
Directors
is
responsible
for
ensuring
that
management
fulfills
its
responsibilities
and
for
final
approval
of
the
annual
consolidated
financial
statements.
The
Board
appoints
an
Audit
Committee
consisting
of
unrelated,
non-‐management
directors
that
meets
at
least
four
times
each
year
under
a
written
mandate
from
the
Board.
The
Audit
Committee
meets
with
management
and
with
the
independent
auditors
to
satisfy
itself
that
they
are
properly
discharging
their
responsibilities,
reviews
the
consolidated
financial
statements
and
the
Auditors'
Report,
including
the
quality
of
the
accounting
principles
and
significant
judgments
applied,
and
examines
other
auditing
and
accounting
matters.
The
Committee
also
recommends
the
firm
of
external
auditors
to
be
appointed
by
the
shareholders.
The
independent
auditors
have
full
and
unrestricted
access
to
the
Audit
Committee,
with
and
without
management
being
present.
The
consolidated
financial
statements
and
other
financial
information
have
been
reviewed
by
the
Audit
Committee
and
approved
by
the
Board
of
Directors
of
ZCL
Composites
Inc.
The
consolidated
financial
statements
have
been
audited
by
the
Company’s
external
auditors,
Ernst
&
Young
LLP,
Chartered
Accountants,
in
accordance
with
generally
accepted
auditing
standards
on
behalf
of
the
shareholders.
The
Auditors'
Report
outlines
the
nature
of
their
examination
and
their
opinion
on
the
consolidated
financial
statements
of
the
Company.
“Rod
Graham”
Roderick
W.
Graham,
CFA,
MBA
President
and
Chief
Executive
Officer
“Kathy
Demuth”
Katherine
L.
Demuth,
CA,
CMA,
CIA
Chief
Financial
Officer
24
Consolidated
Financial
Statements
INDEPENDENT
AUDITORS’
REPORT
To
the
Shareholders
of
ZCL
Composites
Inc.
We
have
audited
the
accompanying
consolidated
financial
statements
of
ZCL
Composites
Inc.,
which
comprise
the
consolidated
balance
sheets
as
at
December
31,
2011,
and
2010,
and
January
1,
2010,
and
the
consolidated
statements
of
income
(loss),
comprehensive
income
(loss),
and
shareholders’
equity
and
cash
flows
for
the
years
ended
December
31,
2011
and
2010,
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.
Auditors’
responsibility
Our
responsibility
is
to
express
an
opinion
on
these
consolidated
financial
statements
based
on
our
audits.
We
conducted
our
audits
in
accordance
with
Canadian
generally
accepted
auditing
standards.
Those
standards
require
that
we
comply
with
ethical
requirements
and
plan
and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
consolidated
financial
statements
are
free
from
material
misstatement.
An
audit
involves
performing
procedures
to
obtain
audit
evidence
about
the
amounts
and
disclosures
in
the
consolidated
financial
statements.
The
procedures
selected
depend
on
the
auditors’
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
auditors
consider
internal
control
relevant
to
the
entity's
preparation
and
fair
presentation
of
the
consolidated
financial
statements
in
order
to
design
audit
procedures
that
are
appropriate
in
the
circumstances,
but
not
for
the
purpose
of
expressing
an
opinion
on
the
effectiveness
of
the
entity's
internal
control.
An
audit
also
includes
evaluating
the
appropriateness
of
accounting
policies
used
and
the
reasonableness
of
accounting
estimates
made
by
management,
as
well
as
evaluating
the
overall
presentation
of
the
consolidated
financial
statements.
We
believe
that
the
audit
evidence
we
have
obtained
in
our
audits
is
sufficient
and
appropriate
to
provide
a
basis
for
our
audit
opinion.
Opinion
In
our
opinion,
the
consolidated
financial
statements
present
fairly,
in
all
material
respects,
the
financial
position
of
ZCL
Composites
Inc.
as
at
December
31,
2011,
and
2010
and
January
1,
2010,
and
its
financial
performance
and
its
cash
flows
for
the
years
ended
December
31,
2011
and
2010,
in
accordance
with
International
Financial
Reporting
Standards.
Edmonton,
Canada
March
7,
2012
Chartered
accountants
25
Consolidated
Financial
Statements
Consolidated
Balance
Sheets
As
at
(in
thousands
of
dollars)
ASSETS
Current
Cash
and
cash
equivalents
Accounts
receivable
[note
23]
Inventories
[note
5]
Income
taxes
recoverable
Prepaid
expenses
Property,
plant
and
equipment
[note
7]
Assets
held
for
sale
[note
7]
Intangible
assets
[note
8]
Goodwill
[note
4]
Restricted
cash
Other
assets
TOTAL
ASSETS
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
Current
Bank
indebtedness
[note
9]
Accounts
payable
and
accrued
liabilities
Income
taxes
payable
Deferred
revenue
Current
portion
of
provisions
[note
10]
Current
portion
of
long
term
debt
[note
11]
Current
portion
of
preferred
shares
[note
12]
Deferred
tax
liabilities
[note
17]
Long
term
portion
of
provisions
[note
10]
Long
term
debt
[note
11]
Preferred
shares
[note
12]
TOTAL
LIABILITIES
Commitments
[note
13]
Shareholders'
equity
Share
capital
[note
15]
Contributed
surplus
[note
16a]
Equity
component
of
preferred
shares
[note
12]
Accumulated
other
comprehensive
loss
Retained
earnings
TOTAL
SHAREHOLDERS’
EQUITY
TOTAL
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
See
accompanying
notes
December
31,
December
31,
January
1,
2011
$
1,707
19,908
24,271
1,082
905
47,873
26,133
952
7,979
30,263
255
444
113,899
—
15,435
797
5,325
1,185
1,687
57
24,486
5,068
449
4,587
5,125
39,715
69,862
2,177
845
(7,073)
8,373
74,184
113,899
2010
(Restated)
[note
28]
$
2010
(Restated)
[note
28]
$
2,105
22,722
18,759
3,311
924
47,821
26,921
946
10,116
29,820
250
1,755
117,629
8,565
15,589
27
1,935
434
3,398
57
30,005
4,848
319
7,733
5,125
48,030
69,862
1,669
845
(7,860)
5,083
69,599
117,629
2,868
14,228
19,943
1,650
963
39,652
25,933
—
9,481
28,997
262
458
104,783
1,477
10,380
8
1,805
286
2,343
—
16,299
4,431
374
3,003
—
24,107
62,395
943
—
(5,439)
22,777
80,676
104,783
On
behalf
of
the
Board:
Director
Director
26
Consolidated
Financial
Statements
Consolidated
Statements
of
Income
(Loss)
For
the
years
ended
December
31,
2011
and
2010
(in
thousands
of
dollars,
except
per
share
amounts)
Revenue
Manufacturing
and
selling
costs
[note
6]
Gross
profit
General
and
administration
Foreign
exchange
(gain)
loss
Depreciation
[notes
7
and
8]
Finance
expense
[note
21]
(Gain)
loss
on
disposal
of
assets
Impairment
of
assets
[note
4]
Income
(loss)
before
income
taxes
Income
tax
expense
(recovery)
[note
17]
Current
Deferred
Net
income
(loss)
from
continuing
operations
Net
loss
from
discontinued
operations
[note
18]
Net
income
(loss)
Income
(loss)
per
share
from
continuing
operations
[note
19]
Basic
Diluted
Loss
per
share
from
discontinued
operations
[note
19]
Basic
Diluted
Income
(loss)
per
share
[note
19]
Basic
Diluted
See
accompanying
notes
2011
$
127,046
107,592
19,454
9,986
(373)
4,317
1,272
(356)
—
14,846
4,608
969
185
1,154
3,454
(164)
3,290
$0.12
$0.12
($0.01)
($0.01)
$0.11
$0.11
2010
(Restated)
[note
28]
$
121,574
109,916
11,658
11,394
496
4,792
1,363
10
14,293
32,348
(20,690)
(1,660)
(2,330)
(3,990)
(16,700)
(149)
(16,849)
($0.59)
($0.59)
($0.01)
($0.01)
($0.60)
($0.60)
27
Consolidated
Financial
Statements
Consolidated
Statements
of
Comprehensive
Income
(Loss)
For
the
years
ended
December
31,
2011
and
2010
(in
thousands
of
dollars)
Net
income
(loss)
Translation
of
foreign
operations
Comprehensive
income
(loss)
Consolidated
Statements
of
Shareholders’
Equity
For
the
years
ended
December
31,
2011
and
2010
2011
$
3,290
787
4,077
2010
(Restated)
[note
28]
$
(16,849)
(2,421)
(19,270)
Equity
Component
Accumulated
Other
Common
Shares
#
Share
Capital
$
Contributed
of
Pref.
Shares
$
Surplus
$
Comprehensive
Retained
Earnings
$
Loss
$
Total
$
(in
thousands)
(Restated)
[note
28]
Balance,
December
31,
2010
Share-‐based
payments
28,802
69,862
1,669
[note
16a]
—
Translation
of
foreign
operations
—
Net
income
—
28,802
Balance,
December
31,
2011
—
—
—
69,862
508
—
—
2,177
(Restated)
[note
28]
Balance,
January
1,
2010
Share-‐based
payments
[note
16a]
—
70
Shares
issued
on
exercise
of
options
[note
16a]
Reclassification
of
fair
value
of
stock
options
previously
expensed
[note
15]
Shares
issued
related
to
business
acquisition
[notes
4
and
15]
Shares
issued
through
private
placement
[note
15]
550
Translation
of
foreign
operations
—
—
Preferred
shares
[note
12]
—
Dividends
paid
[note
14]
Net
loss
—
Balance,
December
31,
2010
28,802
See
accompanying
notes
1,637
26,545
62,395
—
—
206
943
791
—
65
(65)
5,926
—
1,270
—
—
—
—
69,862
—
—
—
—
—
1,669
845
—
—
—
845
—
—
—
—
—
—
—
845
—
—
845
(7,860)
5,083
69,599
—
787
—
(7,073)
—
—
3,290
8,373
508
787
3,290
74,184
(5,439)
22,777
80,676
—
—
—
—
—
—
—
—
—
(2,421)
—
—
—
(7,860)
—
—
—
(845)
(16,849)
5,083
791
206
—
5,926
1,270
(2,421)
845
(845)
(16,849)
69,599
28
Consolidated
Financial
Statements
Consolidated
Statements
of
Cash
Flows
For
the
years
ended
December
31,
2011
and
2010
(in
thousands
of
dollars)
CASH
FLOWS
FROM
OPERATING
ACTIVITIES
Net
income
(loss)
from
continuing
operations
Add
(deduct)
items
not
affecting
cash:
Depreciation
[notes
7
and
8]
Deferred
tax
expense
(recovery)
(Gain)
loss
on
disposal
of
assets
Share-‐based
compensation
expense
[note
16]
Impairment
of
assets
Other
Changes
in
non-‐cash
working
capital:
Decrease
(increase)
in
accounts
receivable
(Increase)
decrease
in
inventories
Decrease
in
prepaid
expenses
Increase
in
accounts
payable,
accrued
liabilities
and
provisions
Increase
(decrease)
in
deferred
revenue
Increase
(decrease)
in
income
taxes
payable
Cash
flows
from
operating
activities
CASH
FLOWS
FROM
FINANCING
ACTIVITIES
Issue
of
common
shares
on
the
exercise
of
stock
options,
net
of
issuance
costs
[note
15]
Issue
of
common
shares
on
private
placement
[note
15]
Net
(repayment)
advance
of
bank
indebtedness
Advance
on
long
term
debt,
net
of
financing
charges
Repayment
of
long
term
debt
Dividends
paid
[note
14]
Cash
flows
(used
in)
from
financing
activities
CASH
FLOWS
FROM
INVESTING
ACTIVITIES
Purchase
of
property,
plant
and
equipment
Disposal
of
property,
plant
and
equipment
Purchase
of
intangible
assets
Business
acquisitions,
net
of
cash
acquired
[note
22b]
Disposal
of
other
assets
[note
18]
Cash
flows
from
(used
in)
investing
activities
Foreign
exchange
loss
on
cash
held
in
foreign
currency
Cash
used
in
discontinued
operations
[note
18]
Decrease
in
cash
and
cash
equivalents
Cash
and
cash
equivalents,
beginning
of
the
year
Cash
and
cash
equivalents,
end
of
the
year
See
accompanying
notes
2011
$
3,454
4,317
185
(356)
508
—
309
8,417
2,825
(5,345)
31
1,025
3,403
2,843
4,782
13,199
—
—
(8,565)
—
(4,824)
—
(13,389)
(1,753)
633
(25)
—
1,336
191
(223)
(176)
(398)
2,105
1,707
2010
(Restated)
[note
28]
$
(16,700)
4,792
(2,330)
10
791
14,293
35
891
(1,959)
2,295
130
714
(314)
(1,240)
(374)
517
192
1,270
6,092
9,964
(9,136)
(845)
7,537
(1,355)
1,940
(708)
(8,120)
252
(7,991)
(229)
(597)
(763)
2,868
2,105
29
Notes
to
the
Consolidated
Financial
Statements
Notes
to
the
Consolidated
Financial
Statements
For
the
year
ended
December
31,
2011
1. CORPORATE
INFORMATION
ZCL
Composites
Inc.
(the
“Company”)
is
a
public
company
incorporated
and
domiciled
in
Canada
and
its
common
stock
trades
on
the
Toronto
Stock
Exchange.
The
address
of
the
Company’s
registered
office
is
1420
Parsons
Road
S.W.,
Edmonton,
Alberta,
Canada,
T6X
1M5.
The
Company
and
its
subsidiaries
(the
“Company”)
are
principally
involved
in
the
manufacturing
and
distribution
of
liquid
storage
systems,
including
fibreglass
underground
and
aboveground
storage
tanks,
dual-‐laminate
composite
tanks
and
related
products
and
accessories.
The
Company
also
produces
and
sells
fibreglass
lining
systems
and
three
dimensional
glass
fabric
material.
2. BASIS
OF
PRESENTATION
The
consolidated
financial
statements
have
been
prepared
on
a
historical
cost
basis
except
for
the
following
material
items
presented
on
the
consolidated
balance
sheets:
•
Liabilities
for
cash-‐settled
share-‐based
payment
arrangements
under
the
Company’s
Stock
Appreciation
Rights
Plan
and
Restricted
Share
Unit
Plan
are
measured
at
fair
value.
The
consolidated
financial
statements
are
reported
in
Canadian
dollars
which
is
the
functional
currency
of
the
reporting
entity,
ZCL
Composites
Inc.
Statement
of
Compliance
The
consolidated
financial
statements
of
the
Company
have
been
prepared
in
accordance
with
International
Financial
Reporting
Standards
(“IFRS”).
These
are
the
Company’s
first
IFRS
consolidated
financial
statements
and
IFRS
1:
“First-‐time
Adoption
of
International
Financial
Reporting
Standards”
has
been
applied.
Note
28
explains
how
the
transition
to
IFRS
has
affected
the
reported
consolidated
balance
sheets
and
statement
of
loss
for
the
comparative
periods.
The
note
includes
reconciliations
of
equity
and
total
comprehensive
loss
for
comparative
periods
and
a
reconciliation
of
equity
at
the
date
of
transition
from
previous
generally
accepted
accounting
principles
(“GAAP”)
to
IFRS.
The
note
also
includes
a
listing
of
the
exemptions
taken
by
the
Company
under
IFRS
1.
The
consolidated
financial
statements
were
authorized
for
issue
by
the
Board
of
Directors
on
March
7,
2012.
Basis
of
Consolidation
The
consolidated
financial
statements
of
the
Company
include
the
accounts
of
ZCL
Composites
Inc.
and
its
subsidiaries
including
Parabeam
Industries
BV,
Radigan
Insurance
Inc.,
ZCL
International
SRL
(formerly
VRB
&
Associates
SRL),
ZCL
Dualam
Inc.
formerly
Dualam
Plastics
Inc.
(“ZCL
Dualam”)
and
Xerxes
Corporation
(“Xerxes”).
Subsidiaries
are
fully
consolidated
from
the
date
of
acquisition,
being
the
date
on
which
the
Company
obtains
control,
and
continue
to
be
consolidated
until
the
date
that
such
control
ceases.
On
acquisition,
the
assets,
liabilities
and
contingent
liabilities
of
a
subsidiary
are
measured
at
their
fair
values.
Any
excess
of
the
cost
over
the
fair
values
of
the
identifiable
net
assets
acquired
is
recognized
as
goodwill.
The
financial
statements
of
the
subsidiaries
are
prepared
for
the
same
reporting
period
as
the
parent
company
using
consistent
accounting
policies.
All
intra-‐group
balances,
income
and
expenses,
unrealized
gains
and
losses
and
dividends
resulting
from
intra-‐group
transactions
are
eliminated
in
full.
30
Notes
to
the
Consolidated
Financial
Statements
3. SIGNIFICANT
ACCOUNTING
POLICIES
Cash
and
cash
equivalents
Cash
and
cash
equivalents
consist
of
cash
balances
and
highly
liquid
investments
with
original
maturities
of
three
months
or
less.
Cash
equivalents
are
invested
in
money
market
funds
and
are
readily
convertible
into
a
known
amount
of
cash
and
are
subject
to
an
insignificant
risk
of
change
in
value.
Inventories
Inventories
are
valued
at
the
lower
of
cost
and
net
realizable
value.
Costs
incurred
in
bringing
each
product
to
its
present
location
and
condition
are
accounted
for
as
follows:
•
•
Raw
materials:
purchase
cost
determined
on
an
average
cost
basis.
Finished
goods
and
work
in
progress:
cost
of
direct
materials,
labour
and
a
proportionate
share
of
variable
and
fixed
production
overhead
expenses
allocated
based
on
a
normal
operating
capacity
for
direct
labour
hours.
Net
realizable
value
is
the
estimated
selling
price
in
the
ordinary
course
of
business,
less
estimated
costs
of
completion
and
the
estimated
costs
necessary
to
make
the
sale.
Property,
plant
and
equipment
Property,
plant
and
equipment
are
stated
at
historical
cost,
net
of
accumulated
depreciation
and
accumulated
impairment
losses,
if
any.
Such
costs
include
the
cost
of
replacing
property,
plant
and
equipment
as
well
as
borrowing
costs
for
long
term
construction
projects
if
the
recognition
criteria
are
met.
When
significant
parts
of
property,
plant
and
equipment
are
required
to
be
replaced
in
intervals
or
major
inspections
are
required,
the
Company
recognizes
such
costs
as
individual
components
of
an
asset
and
depreciates
them
according
to
their
specific
useful
lives.
Land
is
not
depreciated
and
leasehold
improvements
are
depreciated
using
the
straight-‐line
method
over
the
term
of
the
lease.
Depreciation
for
the
remainder
of
property,
plant
and
equipment
is
calculated
using
the
declining
balance
method
using
the
following
rates:
Buildings
Land
improvements
Manufacturing
equipment
Office
equipment
Automotive
equipment
4%
10%
10%
20%
30%
An
item
of
property,
plant
and
equipment
and
any
significant
component
initially
recognized
is
derecognized
upon
disposal
or
when
no
future
economic
benefits
are
expected
from
its
use
or
disposal.
Any
gain
or
loss
arising
from
derecognition
is
included
in
the
consolidated
statements
of
income
(loss)
when
the
asset
is
derecognized.
The
useful
lives,
residual
values
and
methods
of
depreciation
of
property,
plant
and
equipment
are
reviewed
at
each
year
end
and
adjusted
prospectively,
if
appropriate.
31
Notes
to
the
Consolidated
Financial
Statements
Impairment
of
non-‐financial
assets
Assets
that
have
an
indefinite
useful
life,
for
example,
goodwill
or
intangible
assets
not
ready
for
use,
are
not
subject
to
depreciation
and
are
tested
annually
for
impairment.
Assets
that
are
subject
to
depreciation
are
reviewed
for
impairment
whenever
events
or
changes
in
circumstances
indicate
that
the
carrying
amount
may
not
be
recoverable.
An
impairment
loss
is
recognized
for
the
amount
by
which
the
asset’s
carrying
amount
exceeds
its
recoverable
amount.
The
recoverable
amount
is
the
higher
of
an
asset’s
fair
value
less
costs
to
sell
and
value
in
use.
For
the
purposes
of
assessing
impairment,
assets
are
grouped
into
Cash-‐generating
Units
(“CGUs”).
Non-‐financial
assets
other
than
goodwill
that
suffered
an
impairment
are
reviewed
for
possible
reversal
of
the
impairment
at
each
reporting
date.
CGUs
are
the
smallest
identifiable
group
of
assets
that
generate
cash
flows
that
are
independent
of
the
cash
flows
of
other
groups
of
assets.
The
determination
of
CGUs
was
based
on
management’s
judgments
in
regard
to
the
geographic
location
of
operating
divisions,
product
groups
and
shared
infrastructure.
Intangible
assets
Internally
developed
intangible
assets
–
deferred
development
costs:
Development
costs
that
are
directly
attributable
to
the
design
and
testing
of
identifiable
and
unique
products
controlled
by
the
Company
are
recognized
as
intangible
assets
when
the
following
criteria
are
demonstrated:
The
technical
feasibility
of
completing
the
intangible
asset
so
it
will
be
available
for
use
or
sale;
The
intention
to
complete
the
intangible
asset
and
use
or
sell
it;
The
ability
to
use
or
sell
the
intangible
asset;
•
•
•
• How
the
intangible
asset
will
generate
probable
future
economic
benefits;
•
The
availability
of
adequate
technical,
financial
and
other
resources
to
complete
the
development
and
to
use
or
sell
the
intangible
asset;
and
The
ability
to
measure
reliably
the
expenditure
attributable
to
the
intangible
asset
during
its
development.
•
Expenditures
on
research
activities
are
recognized
as
an
expense
in
the
period
in
which
it
is
incurred.
The
amount
initially
recognized
for
internally
developed
intangible
assets
is
the
sum
of
the
expenditures
incurred
from
the
date
when
the
intangible
asset
first
meets
the
recognition
criteria
listed
above.
Where
no
internally
developed
intangible
asset
can
be
recognized,
development
expenditures
are
recognized
as
an
expense
in
the
period
in
which
it
is
incurred.
Subsequent
to
initial
recognition,
internally
developed
intangible
assets
are
reported
at
cost
less
accumulated
depreciation
and
impairment
losses,
if
any.
Internally
developed
software
is
depreciated
over
the
expected
life
of
ten
years.
Acquired
intangible
assets:
Acquired
intangible
assets
include
non-‐contractual
customer
relationships,
brands,
licenses,
patents,
customer
backlog,
air
permits
and
non-‐patent
technology.
The
cost
of
intangible
assets
acquired
in
a
business
combination
is
its
fair
value
as
at
the
date
of
acquisition.
Following
initial
recognition,
intangible
assets
are
carried
at
cost
less
any
accumulated
depreciation
and
accumulated
impairment
losses,
if
any.
The
estimated
useful
lives
for
the
current
and
comparative
periods
are
as
follows:
Non-‐contractual
customer
relationships
Brands
Licenses
Patents
Air
permits
Non
–
patented
technology
Software
Estimated
life
of
the
relationship
(three
to
ten
years)
Expected
life
of
the
brand
(ten
years)
Term
of
the
license
agreement
(three
to
nine
years)
Life
of
the
patent
(six
years)
Life
of
the
permit
(five
years)
Expected
life
of
related
products
(five
years)
Expected
life
of
the
software
system
(ten
years)
Intangible
assets
with
finite
lives
are
depreciated
over
the
useful
economic
life
and
assessed
for
impairment
whenever
there
is
an
indication
that
the
intangible
asset
may
be
impaired.
The
depreciation
period
and
the
depreciation
method
for
an
intangible
asset
with
a
finite
useful
life
is
reviewed
at
the
end
of
each
reporting
period.
Changes
in
the
expected
useful
life
or
the
expected
pattern
of
consumption
of
future
economic
benefits
embodied
in
the
asset
is
accounted
for
by
changing
the
depreciation
period
or
method,
as
appropriate,
and
are
treated
as
changes
in
accounting
estimates.
32
Notes
to
the
Consolidated
Financial
Statements
Intangible
assets
with
indefinite
useful
lives
are
not
depreciated,
but
are
tested
for
impairment
annually,
either
individually
or
at
the
CGU
level.
The
assessment
of
indefinite
life
is
reviewed
annually
to
determine
whether
the
indefinite
life
continues
to
be
supportable.
If
not,
the
change
in
useful
life
from
indefinite
to
finite
is
made
on
a
prospective
basis.
Gains
or
losses
arising
from
de-‐recognition
of
an
intangible
asset
are
measured
as
the
difference
between
the
net
disposal
proceeds
and
the
carrying
amount
of
the
asset
and
are
recognized
in
the
consolidated
statements
of
income
(loss)
when
the
asset
is
derecognized.
Business
combinations
and
goodwill
Business
combinations
from
January
1,
2010:
Business
combinations
are
accounted
for
using
the
acquisition
method.
The
cost
of
an
acquisition
is
measured
at
the
aggregate
of
the
consideration
transferred,
measured
at
the
acquisition
date
in
addition
to
the
fair
value
of
any
non-‐
controlling
interest
in
the
acquired.
All
acquisition
costs
are
expensed
as
incurred.
Any
contingent
consideration
expected
to
be
paid
will
be
recognized
at
fair
value
at
the
acquisition
date.
Subsequent
changes
to
the
fair
value
of
the
contingent
consideration
will
be
recognized
in
accordance
with
IAS
39
“Financial
Instruments:
Recognition
and
Measurement”.
Goodwill
is
initially
measured
at
cost
being
the
excess
of
the
consideration
transferred
over
the
Company’s
net
identifiable
assets
acquired
and
liabilities
assumed.
If
this
consideration
is
lower
than
the
fair
value
of
the
net
assets
of
the
subsidiary
acquired,
the
difference
is
recognized
as
a
gain
for
the
period.
After
initial
recognition,
goodwill
is
measured
at
cost
less
any
accumulated
impairment
losses.
Goodwill
is
assigned
to
the
Company’s
CGUs
that
are
expected
to
benefit
from
the
combination,
irrespective
of
whether
the
assets
and
liabilities
of
the
acquired
are
assigned
to
that
(those)
CGU(s).
If
a
business
unit
is
disposed
of,
goodwill
disposed
of
is
measured
based
on
the
relative
values
of
the
operation
disposed
of
and
the
portion
of
the
CGU
retained.
Business
combinations
prior
to
January
1,
2010:
Prior
to
January
1,
2010,
the
following
significant
differences
exist
in
accounting
for
business
combinations.
Using
the
elections
available
under
IFRS
1,
the
Company
has
elected
not
to
restate
the
accounting
for
business
combinations
that
occurred
prior
to
the
date
of
transition
to
IFRS.
Business
combinations
were
accounted
for
using
the
purchase
method
and
transaction
costs
incurred
in
the
acquisition
of
a
subsidiary
formed
part
of
the
acquisition
costs.
Contingent
consideration
was
recognized
only
if
the
Company
had
a
present
obligation,
the
economic
outflow
was
more
likely
than
not
and
had
a
reliable
estimate
of
the
amount.
Subsequent
adjustments
to
the
contingent
consideration
resulted
in
adjustments
to
the
goodwill
balance.
Goodwill
is
tested
for
impairment
annually
as
at
October
1
or
more
frequently
when
circumstances
indicate
that
the
carrying
value
may
be
impaired.
Impairment
is
determined
by
assessing
the
recoverable
amount
of
each
CGU
(or
group
CGUs)
to
which
the
goodwill
relates.
Where
the
recoverable
amount
of
the
CGU
(including
the
carrying
value
of
the
allocated
goodwill)
is
less
than
their
carrying
amount,
an
impairment
loss
is
recognized.
Impairment
losses
relating
to
goodwill
cannot
be
reversed
in
future
periods.
Provisions
General:
Provisions
are
recognized
when
the
Company
has
a
present
obligation
(legal
or
constructive)
as
a
result
of
a
past
event,
it
is
probable
that
an
outflow
of
resources
will
occur
and
a
reliable
estimate
of
the
obligation
can
be
made.
Where
the
Company
expects
to
be
reimbursed
for
any
part
of
a
provision,
the
reimbursement
is
recognized
as
a
separate
asset
only
when
the
reimbursement
is
virtually
certain,
otherwise
the
circumstances
of
the
reimbursement
are
disclosed
as
a
contingency.
Expenses
relating
to
a
provision
are
presented
in
the
consolidated
statements
of
income
(loss)
net
of
any
recognized
reimbursement.
33
Notes
to
the
Consolidated
Financial
Statements
Self-‐insured
liabilities:
The
Company
self-‐insures
certain
risks
related
to
pollution
protection
provided
on
certain
product
sales,
general
liability
claims,
US
workers’
compensation
and
patent
infringement
through
Radigan
Insurance
Inc.,
its
captive
insurance
company.
The
provision
for
self-‐insured
liabilities
includes
estimates
of
the
costs
of
reported
and
expected
claims
based
on
estimates
of
losses
using
assumptions
determined
by
a
certified
reserve
analyst.
Warranty:
The
Company
generally
warrants
its
products
for
a
period
of
one
year
after
sale,
and
for
up
to
30
years
for
corrosion,
if
the
products
are
properly
installed
and
used
solely
for
storage
of
listed
liquids.
A
number
of
component
materials
and
parts
are
similarly
warranted
by
their
manufacturers,
thereby
offsetting
the
Company’s
exposure
to
warranty
claims.
The
Company’s
complete
storage
systems
marketed
under
the
Prezerver
trademark
carry
an
enhanced
10
year,
insurance-‐
backed
warranty
covering
product
replacement
and
pollution
protection
up
to
the
limits
of
the
policy.
The
Prezerver
warranty
is
covered
by
insurance
underwritten
by
a
major
international
insurer
for
Prezerver
storage
systems
installed
before
December
1,
2006.
The
Prezerver
warranty
for
qualifying
storage
systems
installed
thereafter
is
insured
through
the
Company’s
captive
insurance
company,
Radigan
Insurance
Inc.
The
Company
also
carries
general
liability
insurance
including
product
pollution
coverage.
The
Company’s
warranty
provision
is
based
on
a
review
of
products
sold
and
historical
warranty
cost
experienced
over
the
past
five
years.
Provisions
for
warranty
costs
are
charged
to
the
consolidated
statements
of
income
(loss)
and
revisions
to
the
estimated
provision
are
charged
to
the
consolidated
statements
of
income
(loss)
in
the
period
in
which
they
occur.
Foreign
currency
translation
The
Company’s
consolidated
financial
statements
are
presented
in
Canadian
dollars
and
this
is
also
the
parent
Company’s
functional
currency.
The
functional
currency
of
each
of
the
Company’s
subsidiaries
is
determined
and
the
financial
statements
of
each
entity
are
measured
using
that
functional
currency.
The
determination
of
functional
currency
is
based
on
management’s
judgments
with
regard
to
the
main
settlement
currency
for
the
entities
sales,
labour
costs
and
major
materials.
In
addition,
management
also
considers
factors
such
as
the
currency
of
the
entity’s
financing
activities,
the
autonomy
of
foreign
operations
and
the
proportion
of
the
foreign
operation’s
transactions
that
are
with
the
parent
company.
Subsidiaries:
The
assets
and
liabilities
of
foreign
subsidiaries
whose
functional
currencies
are
not
denominated
in
Canadian
dollars
are
translated
into
Canadian
dollars
at
the
rate
of
exchange
prevailing
at
the
reporting
date
and
their
statements
of
income
(loss)
are
translated
at
the
exchange
rates
prevailing
at
the
date
of
the
transactions.
Exchange
differences
arising
on
the
translation
of
foreign
subsidiaries
are
recognized
in
other
comprehensive
income
(loss).
Any
goodwill
arising
on
the
acquisition
of
a
foreign
subsidiary
and
any
fair
value
adjustments
to
the
carrying
value
of
assets
and
liabilities
arising
on
acquisition
and
are
treated
as
assets
and
liabilities
of
the
foreign
subsidiary
and
are
translated
into
Canadian
dollars
at
the
rate
of
exchange
prevailing
on
the
reporting
date.
The
Parabeam
subsidiary’s
functional
currency
is
the
euro
and
the
functional
currency
of
all
other
subsidiaries
is
US
dollars
with
the
exception
of
the
Canadian
operations
of
ZCL
Dualam.
Foreign
transactions
and
balances:
When
the
Company
or
one
of
its
subsidiaries
transacts
in
a
currency
other
than
its
functional
currency,
the
transaction
is
measured
initially
at
the
closing
rate
at
the
date
of
the
transaction.
Monetary
assets
and
liabilities
denominated
in
foreign
currencies
are
translated
at
the
functional
currency
closing
rate
at
a
reporting
period
with
the
differences
being
recorded
in
the
consolidated
statements
of
income
(loss).
Non-‐monetary
assets
and
liabilities
are
measured
in
terms
of
historical
costs
and
are
translated
using
the
exchange
rates
in
existence
at
the
date
of
the
initial
transaction.
Revenue
recognition
Revenue
is
recognized
to
the
extent
that
it
is
probable
that
the
economic
benefits
will
flow
to
the
Company
and
the
revenue
can
be
reliably
measured.
Revenue
is
measured
at
the
fair
value
of
the
consideration
received.
Sale
of
tanks
and
related
products:
Revenue
from
the
sale
of
tanks
and
related
products
is
recognized
when
the
significant
risks
and
rewards
of
ownership
of
the
goods
have
passed
to
the
buyer.
Risks
and
rewards
are
generally
transferred
upon
delivery
of
the
goods,
however
there
are
34
Notes
to
the
Consolidated
Financial
Statements
circumstances
where
the
buyer
accepts
the
risks
and
rewards
of
ownership
prior
to
accepting
delivery
of
the
goods
which
also
triggers
revenue
recognition.
Installation
and
field
service
contracts:
Revenue
from
installation
and
field
service
contracts
is
accounted
for
using
the
percentage
of
completion
method.
The
stage
of
completion
of
a
transaction
qualifying
for
percentage
of
completion
revenue
recognition
is
determined
by
the
proportion
of
costs
incurred
to
date
relative
to
the
estimated
total
costs
to
complete
the
transaction.
Anticipated
losses
on
transactions
are
recognized
as
soon
as
they
can
be
reliably
estimated.
Up-‐front
non-‐refundable
license
fees
and
royalty
revenue:
Revenue
from
up-‐front
non-‐refundable
license
fees
is
recognized
on
a
straight-‐line
basis
over
the
term
of
the
Company’s
obligation
of
the
related
deliverables
unless
there
is
evidence
that
another
method
is
more
representative
of
the
stage
of
completion.
Royalty
revenue
from
the
third
party
use
of
the
Company’s
technology
is
recognized
in
accordance
with
the
royalty
agreement
and
when
the
revenue
can
be
reliably
measured.
Financial
instruments
Financial
assets:
The
Company
classifies
financial
assets
as
either
fair
value
through
profit
or
loss,
held
to
maturity
investments,
loans
or
receivables
or
available
for
sale
financial
assets
or
derivatives
as
appropriate.
The
classification
of
a
financial
asset
is
determined
at
the
time
of
initial
recognition
of
the
asset.
Financial
assets
at
fair
value
through
profit
or
loss:
The
Company’s
financial
assets
held
at
fair
value
through
profit
or
loss
consist
of
cash
and
cash
equivalents
and
restricted
cash.
Loans
and
receivables:
The
Company’s
loans
and
receivables
consist
of
accounts
receivable,
other
assets
and
income
taxes
recoverable.
These
assets
are
measured
initially
at
fair
value
on
the
consolidated
balance
sheet,
then
they
are
carried
at
amortized
cost
using
the
effective
interest
method
less
any
related
impairment
losses.
Held
to
maturity
investments:
As
at
December
31,
2011,
2010
and
January
1,
2010,
the
Company
did
not
have
any
held
to
maturity
investments
on
the
consolidated
balance
sheet.
Available
for
sale
financial
instruments:
As
at
December
31,
2011,
2010
and
January
1,
2010,
the
Company
did
not
have
any
available
for
sale
financial
instruments
on
the
consolidated
balance
sheet.
Financial
liabilities:
The
Company
classifies
financial
liabilities
at
fair
value
through
profit
or
loss,
loans
and
borrowings
or
as
derivatives
designated
as
hedging
instruments.
The
classification
of
a
financial
liability
is
determined
at
the
time
of
initial
recognition.
Financial
liabilities
at
fair
value
through
profit
and
loss:
The
Company’s
financial
liabilities
carried
at
fair
value
through
profit
or
loss
consist
of
liabilities
for
cash-‐settled
share-‐based
payment
arrangements
under
the
Company’s
Stock
Appreciation
Rights
Plan
and
Restricted
Share
Unit
Plan.
See
note
16
for
further
details.
Loans
and
borrowings:
The
Company’s
loans
and
borrowings
consist
of
accounts
payable,
income
taxes
payable,
current
portion
of
long
term
debt,
long
term
debt,
current
portion
of
preferred
shares
and
preferred
shares.
These
liabilities
are
measured
initially
at
fair
value
plus
transaction
costs
on
the
consolidated
balance
sheet,
then
they
are
carried
at
amortized
cost
using
the
effective
interest
method
less
any
related
impairment
losses.
Transaction
costs
are
incremental
costs
directly
related
to
the
acquisition
of
a
financial
asset
or
the
issuance
of
a
financial
liability.
The
Company
incurs
transaction
costs
primarily
through
the
issuance
of
debt
and
classifies
these
costs
with
the
long
term
debt.
These
costs
are
amortized
using
the
effective
interest
method
over
the
life
of
the
related
debt
instrument.
35
Notes
to
the
Consolidated
Financial
Statements
Share-‐based
payments
Equity-‐settled
transactions:
Equity-‐settled
share-‐based
payments
consist
of
stock
options
issued
by
the
Board
of
Directors
of
the
Company
to
directors,
employees
or
other
people
who
provide
management
services
to
the
Company.
The
cost
of
the
stock
options
granted
are
measured
at
their
fair
value
at
the
date
on
which
they
were
granted.
The
fair
value
is
estimated
using
the
Black-‐Scholes
option
pricing
model
and
it
factors
in
several
inputs.
For
more
information
on
the
estimates
and
inputs
made
by
the
Company,
refer
to
note
16.
The
cost
of
equity-‐settled
transactions
is
recognized
in
the
consolidated
statement
of
income
(loss)
over
the
period
in
which
the
service
condition
is
fulfilled
with
the
corresponding
adjustment
added
to
the
contributed
surplus
account.
No
expense
is
recognized
for
awards
that
do
not
vest.
Where
equity-‐settled
transactions
are
cancelled
by
the
Company,
they
are
treated
as
if
they
had
vested
and
any
unrecognized
expense
relating
to
the
cancelled
options
is
recognized
in
the
consolidated
statement
of
income
(loss)
in
that
period.
Cash-‐settled
transactions:
Cash-‐settled
transactions
consist
of
the
SAR
and
RSU
plans.
Stock
Appreciation
Rights
(“SAR”)
plans
are
granted
to
directors
and
senior
management
of
the
Company
and
each
unit
entitles
the
holder
to
the
cash
amount
of
the
difference
between
the
value
specified
under
the
plan
and
the
market
value
of
the
Company’s
common
shares
on
the
exercise
date.
The
cost
of
SARs
is
measured
initially
at
fair
value
which
is
determined
using
the
Black-‐Scholes
option
pricing
model
and
it
is
expensed
over
the
period
until
the
vesting
date
with
the
corresponding
adjustment
recognized
as
a
liability
on
the
consolidated
balance
sheet.
At
each
reporting
date,
the
liability
is
remeasured
to
fair
value,
with
the
corresponding
changes
in
fair
value
recognized
in
the
statement
of
income
(loss).
Restricted
Share
Unit
(“RSU”)
plans
are
granted
to
senior
management
of
the
Company
and
each
unit
entitles
the
holder
to
the
cash
equivalent
of
one
notional
common
share.
The
cost
of
the
RSUs
is
measured
at
fair
value
which
is
determined
by
the
Company’s
stock
price
on
the
grant
date.
At
each
reporting
period,
the
RSUs
are
remeasured
to
fair
value
based
on
the
trading
price
of
the
Company’s
stock
at
the
reporting
date.
Income
taxes
Current
income
taxes:
Current
income
tax
assets
and
liabilities
for
the
current
and
prior
periods
are
measured
at
the
amount
expected
to
be
recovered
from
or
paid
to
the
taxation
authorities.
Deferred
taxes:
Deferred
tax
is
accounted
for
using
the
liability
method
on
temporary
differences
at
the
reporting
date
between
the
tax
basis
of
assets
and
liabilities
and
the
carrying
value
for
accounting
purposes.
Deferred
tax
liabilities
are
recorded
for
all
temporary
differences
other
than:
• Where
the
temporary
difference
arises
from
the
initial
recognition
of
goodwill,
or
• Where
the
temporary
difference
is
associated
with
investments
in
subsidiaries
can
be
controlled
and
it
is
probable
that
the
temporary
difference
will
not
reverse
in
the
foreseeable
future.
Deferred
tax
assets
are
recognized
for
all
deductible
temporary
differences,
carry
forward
of
unused
tax
credits
and
unused
losses
to
the
extent
that
it
is
probable
that
the
taxable
profit
will
be
available
against
the
deductible
temporary
difference
and
can
be
utilized.
The
carrying
amount
of
deferred
tax
assets
is
reviewed
at
each
reporting
date
and
if
necessary,
reduced
to
the
extent
that
it
is
no
longer
probable
that
the
future
taxable
income
will
be
sufficient
to
utilize
the
deferred
tax
asset.
Unrecognized
deferred
tax
assets
are
reassessed
at
each
reporting
period
and
if
it
is
probable
that
the
asset
will
be
recovered,
a
deferred
tax
asset
is
recognized
to
that
extent.
All
deferred
tax
assets
and
liabilities
are
measured
at
the
tax
rates
that
are
expected
to
apply
to
the
period
in
which
the
asset
is
realized
or
the
liability
is
settled,
based
on
tax
rates
which
have
been
enacted
or
substantively
enacted
by
the
end
of
the
reporting
period.
36
Notes
to
the
Consolidated
Financial
Statements
4. BUSINESS
ACQUISITION
Business
acquisitions
are
accounted
for
using
the
acquisition
method
with
the
results
of
the
acquired
business
included
in
the
consolidated
financial
statements
since
their
effective
acquisition
date.
Effective
January
4,
2010,
the
Company
acquired
100%
of
the
issued
and
outstanding
shares
of
ZCL
Dualam
and
its
subsidiaries.
ZCL
Dualam
was
a
privately
held
company
based
out
of
Montreal,
Quebec
and
is
a
leading
provider
of
custom
engineered
fibreglass
reinforced
plastic
and
dual-‐laminate
composite
products
for
use
in
corrosion-‐resistant
applications
in
the
power
generation,
chemical,
chloralkali,
pulp
and
paper
and
other
industrial
sectors.
As
indicated
in
note
3,
Significant
Accounting
Policies,
contingent
consideration
and
goodwill
relating
to
business
combinations
are
recorded
differently
under
IFRS
as
opposed
to
previous
GAAP.
The
net
assets
acquired
as
at
January
4,
2010
and
aggregate
consideration
given,
are
presented
as
follows
under
IFRS
along
with
a
reconciliation
of
the
differences
between
previous
GAAP
and
IFRS:
Fair
value
of
net
assets
acquired
(in
thousands
of
dollars)
Current
assets,
net
of
cash
acquired
Property,
plant
and
equipment
Intangible
assets
Customer
relationships,
eight
year
useful
life
Brands,
five
year
useful
life
Intellectual
property,
10
year
useful
life
Non-‐competition
agreement,
five
year
useful
life
Goodwill
Other
assets
Total
assets
Current
liabilities
Deferred
tax
liabilities
Long
term
liabilities,
other
than
deferred
taxes
Total
liabilities
Net
assets
acquired
Consideration
given
(in
thousands
of
dollars)
Previous
GAAP
$
Re-‐measurements
$
9,854
6,030
3,277
1,088
2,220
320
12,327
23
35,139
(9,487)
(2,842)
(2,365)
(14,694)
20,455
—
—
—
—
—
—
2,329
—
2,329
—
(64)
—
(64)
2,265
Previous
GAAP
$
Re-‐measurements
$
Cash
1,636,490
common
shares
issued
at
a
fair
value
of
$3.63
per
share
1,078,948
preferred
shares
issued
by
a
subsidiary
of
the
Company
[note
12]
Contingent
consideration
Acquisition
costs
Total
consideration
7,800
5,940
5,970
—
735
20,445
—
—
—
3,000
(735)
2,265
IFRS
$
9,854
6,030
3,277
1,088
2,220
320
14,656
23
37,468
(9,487)
(2,906)
(2,365)
(14,758)
22,710
IFRS
$
7,800
5,940
5,970
3,000
—
22,710
37
Notes
to
the
Consolidated
Financial
Statements
Goodwill
and
intangible
assets
impairment:
Due
to
the
operating
losses
experienced
in
ZCL
Dualam,
the
Company
conducted
an
impairment
test
on
the
goodwill
and
intangible
assets
acquired
as
at
September
30,
2010.
An
impairment
loss
of
$10,271,000
and
$159,000
was
recognized
on
the
goodwill
and
intangible
assets
respectively
using
previous
GAAP
standards.
Under
IFRS,
impairment
losses
of
$12,692,000
and
$4,226,000
are
recognized
for
goodwill
and
intangible
assets
respectively.
As
at
the
year
ended
December
31,
2011,
the
carrying
amount
of
goodwill
and
intangible
assets
relating
to
ZCL
Dualam
is
$2,091,000
and
$1,550,000
respectively.
The
differences
between
IFRS
and
previous
GAAP
were
retroactively
recognized
in
these
consolidated
financial
statements.
For
further
information
regarding
the
restated
opening
balances
for
the
December
31,
2010
period,
refer
to
note
27.
Contingent
consideration:
The
contingent
consideration
recognized
on
the
acquisition
of
ZCL
Dualam
relates
to
an
earn-‐out
provision
whereby
the
vendor
could
have
earned
up
to
an
additional
$6,000,000
over
the
first
two
years
after
the
acquisition
(annual
maximum
of
$3,000,000).
The
earn-‐out
was
calculated
on
a
pre-‐defined
formula
based
on
the
EBITDA
of
the
ZCL
Dualam
divisions.
The
initial
budget
for
the
ZCL
Dualam
divisions
prepared
shortly
after
the
acquisition
indicated
that
the
EBITDA
requirements
would
not
have
been
met
for
the
2010
year,
but
the
full
EBITDA
target
was
expected
to
be
met
for
the
2011
earn-‐out
period;
therefore
a
provision
of
$3,000,000
was
set
up
on
the
acquisition
as
per
the
requirements
under
IFRS
3:
“Business
Combinations”.
Further
economic
analysis
performed
on
the
market
segments
serviced
by
the
ZCL
Dualam
divisions
showed
a
reduction
in
the
projects
being
sent
out
for
bid
and
increasing
price
competition
on
available
jobs.
As
a
result,
the
analysis
indicated
that
ZCL
Dualam
would
not
likely
meet
the
minimum
EBITDA
targets
defined
in
the
earn-‐out
provisions
and
a
gain
of
$3,000,000
was
recognized
in
the
September
30,
2010
period.
The
differences
between
IFRS
and
previous
GAAP
were
retroactively
recognized
in
these
consolidated
financial
statements.
5.
INVENTORIES
As
at
(in
thousands
of
dollars)
Raw
materials
Work
in
progress
Finished
goods
December
31,
2011
$
December
31,
2010
$
January
1,
2010
$
8,846
5,950
9,475
24,271
9,302
2,966
6,491
18,759
7,826
3,719
8,398
19,943
During
the
year
ended
December
31,
2011,
there
was
a
write
down
of
$175,000
(December
31,
2010
-‐
$49,000)
of
inventory
to
its
net
realizable
value.
6. MANUFACTURING
AND
SELLING
COSTS
For
the
year
ended
December
31,
(in
thousands
of
dollars)
Raw
materials
and
consumables
used
Labour
costs
Other
costs
Net
change
in
inventories
of
finished
goods
and
work
in
progress
2011
$
45,345
24,357
43,858
(5,968)
107,592
2010
$
41,041
30,488
36,017
2,370
109,916
38
Notes
to
the
Consolidated
Financial
Statements
7. PROPERTY,
PLANT
AND
EQUIPMENT
Land
$
Buildings
$
Manufacturing
Office
Equip.
$
Equip.
$
Leaseholds
$
3,501
2,690
6,191
6,006
—
6,006
2,629
—
2,629
22,616
—
22,616
3,119
—
3,119
—
4
128
527
376
(in
thousands
of
dollars)
Cost
As
at
January
1,
2010
IFRS
re-‐measurements
Restated
January
1,
2010
Additions
Acquired
through
business
combination
Disposals
Impairment
losses
Reclassified
as
held
for
sale
Foreign
exchange
As
at
December
31,
2010
Additions
Disposals
Foreign
exchange
on
assets
held
for
sale
Foreign
exchange
As
at
December
31,
2011
Accumulated
Depreciation
As
at
January
1,
2010
IFRS
re-‐measurements
Restated
January
1,
2010
Depreciation
Disposals
Reclassified
as
held
for
sale
Foreign
exchange
As
at
December
31,
2010
Depreciation
Disposals
Foreign
exchange
As
at
December
31,
2011
853
(371)
—
(304)
(58)
6,311
—
—
—
2
6,313
—
—
—
—
—
—
—
—
—
—
—
Carrying
Amount
As
at
January
1,
2010
As
at
December
31,
2010
As
at
December
31,
2011
6,191
6,311
6,313
3,446
(290)
(375)
(847)
(271)
7,673
278
—
(8)
109
8,052
1,570
—
1,570
234
(28)
(205)
19
1,590
275
—
(38)
1,827
4,436
6,083
6,264
358
(73)
—
—
(100)
2,942
310
(61)
—
35
3,226
732
—
732
239
(35)
—
56
992
338
(12)
128
1,446
1,168
(1,912)
(361)
—
(1,187)
20,851
950
(1,740)
—
87
20,148
10,542
26
10,568
1,414
(1,261)
—
(968)
9,753
1,131
(1,321)
17
9,580
1,897
1,950
1,780
12,048
11,098
10,568
186
(65)
—
—
(162)
3,454
200
(67)
—
11
3,598
2,008
—
2,008
338
(56)
—
11
2,301
346
(51)
5
2,601
1,111
1,153
997
Auto
Equip.
$
524
—
524
107
214
(376)
—
—
(52)
417
15
(30)
—
6
408
274
—
274
89
(373)
—
101
91
78
(17)
6
158
Total
$
38,395
2,690
41,085
1,142
6,225
(3,087)
(736)
(1,151)
(1,830)
41,648
1,753
(1,898)
(8)
250
41,745
15,126
26
15,152
2,314
(1,753)
(205)
(781)
14,727
2,168
(1,401)
118
15,612
250
326
250
25,933
26,921
26,172
Capital
work
in
progress
of
$524,000
(December
31,
2010
-‐
$180,000)
is
included
above
and
is
not
subject
to
depreciation.
Included
in
this
figure
is
$251,000
in
buildings
(improvements)
and
$273,000
in
manufacturing
equipment.
Assets
held
for
sale
of
$952,000
(December
31,
2010
-‐
$946,000)
are
comprised
of
land
and
buildings
which
have
been
determined
to
be
surplus
to
the
Company’s
needs.
39
Notes
to
the
Consolidated
Financial
Statements
8.
INTANGIBLE
ASSETS
Customer
Relationships
$
Brands
$
Internally
Developed
ERP
Software
$
Deferred
Development
Costs
$
Product
Certifications
$
Other
$
Total
$
6,246
3,071
2,539
1,194
102
1,539
14,691
(in
thousands
of
dollars)
Cost
As
at
January
1,
2010
Additions
Acquired
through
business
combinations
Disposals
Impairment
losses
Foreign
exchange
As
at
December
31,
2010
Additions
Disposals
Foreign
exchange
As
at
December
31,
2011
Accumulated
Depreciation
As
at
January
1,
2010
Depreciation
Foreign
exchange
As
at
December
31,
2010
Depreciation
Foreign
exchange
As
at
December
31,
2011
Carrying
Amount
As
at
January
1,
2010
As
at
December
31,
2010
As
at
December
31,
2011
—
—
705
—
3,277
—
(2,798)
(293)
6,432
—
—
117
6,549
1,088
—
(480)
(144)
3,535
—
—
58
3,593
—
—
—
—
3,244
—
—
33
3,277
—
—
—
—
1,194
—
—
—
1,194
2,868
870
—
727
1,213
(161)
3,920
895
97
4,912
3,378
2,512
1,637
495
(50)
1,315
411
31
1,757
2,201
2,220
1,836
245
(5)
240
322
9
571
2,539
3,004
2,706
297
—
1,024
170
—
1,194
467
170
—
—
—
(32)
—
—
70
—
(70)
—
—
—
—
—
—
—
—
—
236
941
2,540
—
(949)
(47)
3,319
25
—
19
3,363
6,905
(32)
(4,227)
(484)
17,794
25
(70)
227
17,976
745
5,210
457
(23)
1,179
370
14
1,563
2,707
(239)
7,678
2,168
151
9,997
102
70
—
794
2,140
1,800
9,481
10,116
7,979
Other
intangible
assets
include
licenses,
patents,
air
permits,
non-‐patented
technology
and
costs
related
to
an
RTP-‐1
certification.
As
at
December
31,
2011,
the
Company
incurred
$286,000
in
expenditures
relating
to
the
RTP-‐1
certification
project
(December
31,
2010
-‐
$268,000).
The
certification
is
still
in
progress
and
no
depreciation
has
been
recorded
against
the
RTP-‐1
costs.
40
Notes
to
the
Consolidated
Financial
Statements
9. BANK
INDEBTEDNESS
Bank
indebtedness
consists
of
amounts
drawn
under
available
credit
facilities
and
cheques
issued
in
excess
of
related
bank
balances;
the
Company
has
a
maximum
of
$20
million
of
available
credit
under
this
operating
facility.
The
operating
facility
is
repayable
on
demand
and
expires
on
May
31,
2012;
however
the
operating
facility
is
typically
renewed
on
an
annual
basis
with
the
Company’s
primary
lender.
The
rate
of
interest
charged
on
the
operating
credit
facility
for
Canadian
dollar
balances
is
prime
plus
100
basis
points.
The
rate
of
interest
charged
on
the
operating
credit
facility
for
US
dollar
balances
is
US
prime
plus
100
basis
points.
The
Company
has
pledged
as
general
collateral
for
advances
under
the
operating
credit
facility
a
general
security
agreement
on
present
and
future
assets,
guarantees
from
each
present
and
future
direct
and
indirect
subsidiary
of
the
Company
supported
by
a
first
registered
security
over
all
present
and
future
assets,
and
pledge
of
shares.
The
Company
is
not
permitted
to
sell
or
re-‐pledge
significant
assets
held
under
collateral
without
consent
from
the
lenders.
The
Company
is
required
to
meet
certain
covenants
as
a
condition
of
the
debt
agreements.
At
December
31,
2011,
the
Company
was
in
compliance
with
all
restrictive
covenants
relating
to
the
operating
credit
facility.
10. PROVISIONS
AND
CONTINGENCIES
a)
Provisions
(in
thousands
of
dollars)
As
at
January
1,
2010
Amounts
used
against
the
provision
Additional
provision
Foreign
exchange
As
at
December
31,
2010
Amounts
used
against
the
provision
Additional
provision
Foreign
exchange
As
at
December
31,
2011
Warranty
$
Self-‐insured
liabilities
$
256
(575)
741
(15)
407
(521)
650
7
543
374
(141)
102
(16)
319
—
121
10
450
Other
$
30
(26)
24
(1)
27
(227)
824
17
641
Total
$
660
(742)
867
(32)
753
(748)
1,595
34
1,634
Of
the
$1,634,000
in
provisions
described
above,
the
Company
expects
$1,185,000
to
settle
within
12
months
of
the
balance
sheet
date,
the
remaining
$449,000
of
provisions
are
classified
as
long
term
liabilities
on
the
balance
sheet.
b)
Contingencies
In
the
normal
conduct
of
operations,
various
legal
claims
or
actions
are
pending
against
the
Company
in
connection
with
its
products
and/or
other
commercial
matters.
The
Company
carries
liability
insurance,
subject
to
certain
deductibles
and
policy
limits,
against
such
claims.
Based
on
advice
and
information
provided
by
legal
counsel,
management
records
losses,
if
any,
in
the
period
in
which
uncertainty
regarding
such
matters
is
resolved
and
the
amount
of
the
loss
can
be
reasonably
estimated.
41
Notes
to
the
Consolidated
Financial
Statements
11. LONG
TERM
DEBT
(in
thousands
of
dollars)
Term
loan
Other
long
term
debt
Total
long
term
debt
Less
current
portion
a)
Term
loan
December
31,
2011
$
December
31,
2010
$
January
1,
2010
$
4,168
2,106
6,274
1,687
4,587
8,487
2,644
11,131
3,398
7,733
4,500
846
5,346
2,343
3,003
During
the
year
ended
December
31,
2011,
the
Company
elected
to
convert
its
Canadian
banker’s
acceptance
based
term
loan
to
a
US
dollar
based
LIBOR
loan
as
permitted
by
the
existing
credit
facility.
Excluding
financing
cost,
the
principal
balance
of
the
term
loan
as
of
December
31,
2011
is
$4,144,000
USD
(December
31,
2010
–
$8,487,000
Canadian
dollars)
which
is
a
reasonable
estimate
of
its
fair
value.
During
the
year
ended
December
31,
2011,
the
Company
amended
certain
financial
covenants
relating
to
the
term
loan
that
took
effect
during
the
fourth
quarter
of
the
2011
fiscal
year.
The
term
loan
requires
monthly
interest
payments
and
quarterly
principal
repayments
of
$337,500
Canadian
dollars,
with
the
balance
due
on
maturity
on
May
31,
2013.
The
interest
charged
on
the
loan
is
the
US
dollar
based
LIBOR
rate
plus
250
basis
points.
The
Company
is
also
subject
to
mandatory
prepayments
of
outstanding
principal
equal
to
100%
of
any
net
proceeds
on
asset
disposals
and
insurance
proceeds
received
by
the
Company.
During
the
year
ended
December
31,
2011,
the
Company
repaid
$2,936,000
Canadian
dollars
of
principal
relating
to
proceeds
from
asset
sales
and
the
settlement
of
a
note
receivable
on
the
disposal
of
the
Home
Heating
Oil
Tank
division.
Transaction
costs
directly
attributable
to
the
term
loan
are
recorded
as
part
of
the
carrying
value
of
the
debt
and
reflected
in
the
measurement
of
the
amortized
cost
of
the
obligation
using
the
effective
interest
method.
The
term
loan
is
secured
through
a
collateral
mortgage
over
four
properties
owned
by
the
Company.
The
carrying
amount
of
these
four
properties
as
at
December
31,
2011
is
$6,754,000.
As
part
of
the
term
loan
renewal
process,
an
appraisal
of
the
four
properties
was
performed
on
December
31,
2010
which
indicated
an
estimated
fair
value
of
$12,965,000
for
the
secured
properties.
Given
the
recent
valuation
of
these
properties,
these
appraisals
fairly
represent
the
fair
values
of
the
secured
properties
as
at
December
31,
2011.
The
Company’s
operating
and
term
credit
facilities
are
utilized
as
required
throughout
the
year.
Both
credit
facilities
bear
interest
at
floating
rates
and
changes
in
interest
rates
would
affect
the
Company’s
exposure
to
interest
rate
risk
in
servicing
the
facilities
(see
note
23a).
b)
Other
long
term
debt
Other
long
term
debt
includes
long
term
financing
assumed
with
the
acquisition
of
ZCL
Dualam,
along
with
a
financing
agreement
involving
software
license
fees,
services
and
equipment
relating
to
the
Company’s
internally
developed
ERP
software
and
related
hardware
components.
The
ZCL
Dualam
long
term
debt
requires
monthly
repayments
of
$15,100
plus
interest,
maturing
in
November
2023,
and
is
collateralized
by
the
assets
financed.
The
loan
bears
interest
at
0.25%
above
the
base
rate
of
the
Business
Development
Bank
of
Canada
(“BDC”).
Subsequent
to
the
year
end,
this
loan
was
paid
out
and
the
balance
of
the
term
loan
was
increased
by
$2,000,000
Canadian
dollars.
For
additional
details,
please
refer
to
note
26.
The
finance
agreements
require
repayments
of
$30,300
including
interest
where
applicable,
monthly
with
the
balance
due
on
maturity
in
May
2012.
The
finance
agreements,
depending
on
the
nature
of
the
amounts
financed,
have
rates
of
interest
that
vary
between
0%
and
7.15%
per
annum.
The
amount
of
debt
will
be
accreted
to
its
face
value
over
the
term
of
the
instrument
with
the
offsetting
charge
to
interest
expense.
42
Notes
to
the
Consolidated
Financial
Statements
12. PREFERRED
SHARES
In
conjunction
with
the
business
acquisition
of
ZCL
Dualam
as
described
in
note
4,
on
January
4,
2010,
1,078,948
preferred
shares
were
issued
by
a
subsidiary
of
the
Company,
with
a
fair
value
of
$5,970,000.
The
preferred
shares
have
a
term
of
five
years
and
a
cumulative
annual
dividend
rate
of
4.4%
payable
quarterly.
In
addition,
the
preferred
shares
in
years
three
to
five,
are
redeemable
by
the
Company
for
cash
or
exchangeable
by
the
vendor
for
the
Company’s
common
shares
at
a
rate
of
$4.75
per
common
share.
If
the
shares
remain
outstanding
at
the
end
of
five
years
and
have
not
been
converted
by
the
vendor,
they
are
required
to
be
redeemed
by
the
Company
for
cash.
The
preferred
shares
have
been
accounted
for
in
accordance
with
IAS
39:
“Financial
Instruments:
Recognition
and
Measurement”
and
IAS
32:
“Financial
Instruments:
Presentation”.
Under
this
guidance,
the
Company
valued
the
financial
instrument
as
a
whole
as
well
as
the
liability
component
of
the
financial
instrument.
The
difference
between
the
estimated
fair
values
of
the
liability
and
the
entire
instrument
was
recorded
as
equity.
On
the
valuation
date,
the
value
of
the
liability
component
preferred
shares
was
calculated
to
be
$5,125,000
and
the
amount
allocated
to
equity
was
$845,000.
The
fair
value
at
the
date
of
acquisition
is
still
a
reasonable
measure
of
fair
value
as
at
the
year
ended
December
31,
2011.
The
current
portion
of
the
preferred
shares
relates
to
accrued
interest
payable.
The
liability
component
was
calculated
using
a
discount
rate
of
4.4%
and
a
maturity
date
of
five
years
from
date
of
issue.
The
accrued
interest
payable
on
the
preferred
share
dividend
was
$57,000
as
at
December
31,
2011
(December
31,
2010
-‐
$57,000)
and
is
presented
as
a
current
liability.
The
long
term
portion
of
the
preferred
shares
have
a
carrying
value
of
$5,125,000
as
at
December
31,
2011
(December
31,
2010
-‐
$5,125,000)
and
is
presented
as
a
long
term
liability
on
the
consolidated
financial
statements.
13. COMMITMENTS
Lease
Commitment
The
Company’s
minimum
annual
payments
under
the
terms
of
all
operating
leases
are
as
follows:
(in
thousands
of
dollars)
2012
2013
2014
2015
2016
Thereafter
14. DIVIDENDS
PAID
$
2,675
2,535
1,892
1,047
688
408
The
Company
did
not
declare
or
pay
any
dividends
during
the
year
ended
December
31,
2011,
however
subsequent
to
year
end,
the
Company’s
board
of
directors
declared
a
dividend
of
$288,000
to
be
paid
on
April
2,
2012,
equivalent
to
$0.01
per
common
share
for
all
shareholders
of
record
as
of
March
7,
2012.
During
the
year
ended
December
31,
2010,
dividends
in
the
amount
of
$845,000
were
paid
on
April
12,
2010,
equivalent
to
$0.03
per
share
for
all
shareholders
of
record
on
April
8,
2010.
15. SHARE
CAPITAL
Authorized
Unlimited
number
of
common
shares
with
no
par
or
stated
value.
Issued
and
outstanding
During
the
year
ended
December
31,
2011,
the
Company
issued
no
new
shares.
For
the
year
ended
December
31,
2010,
the
Company
issued
1,636,490
common
shares
at
$3.63
per
share.
The
total
fair
value
of
these
shares
is
$5,940,000
less
issuance
costs
of
$14,000
relating
to
the
acquisition
of
ZCL
Dualam
referred
to
in
note
4.
The
Company
also
issued
550,000
shares
at
$2.31
per
share
during
the
December
31,
2010
period
through
a
private
placement.
During
the
year
ended
December
31,
43
Notes
to
the
Consolidated
Financial
Statements
2010,
the
Company
issued
69,999
common
shares
for
options
exercised.
3,332
stock
options
exercised
had
an
exercise
price
of
$3.75
and
66,667
stock
options
had
an
exercise
price
of
$2.90,
resulting
in
cash
proceeds
to
the
Company
of
$206,000
less
$14,000
in
share
issuance
costs
for
the
year
ended
December
31,
2010.
There
were
no
amounts
credited
to
share
capital
during
the
year
as
no
options
were
exercised
during
2011.
Amounts
credited
to
share
capital
related
to
options
exercised
included
$65,000
during
the
year
ended
December
31,
2010
for
options
in
respect
of
compensation
expense
previously
included
in
contributed
surplus.
16. SHARE-‐BASED
PAYMENTS
The
Black-‐Scholes
option
pricing
model,
used
by
the
Company
to
calculate
the
values
of
options,
as
well
as
other
currently
accepted
option
valuation
models,
was
developed
to
estimate
the
fair
value
of
freely
tradable,
fully-‐transferable
options
without
vesting
restrictions.
These
models
require
subjective
assumptions,
including
future
share
price
volatility
and
expected
time
until
exercise,
which
affect
the
calculated
values.
a) Stock
options
Under
the
Company’s
stock
option
plan,
options
to
purchase
common
shares
may
be
granted
by
the
Board
of
Directors
to
directors,
employees,
and
persons
who
provide
management
or
consulting
services
to
the
Company.
The
shareholders
authorized
the
number
of
options
that
may
be
granted
under
the
plan
to
be
not
more
than
10%
of
the
issued
and
outstanding
shares
of
the
Company
on
a
non-‐diluted
basis
provided
that
the
number
of
listed
securities
that
may
be
reserved
for
issuance
under
stock
options
granted
to
any
one
individual
or
insiders
of
the
Company
not
exceed
5%
of
the
Company’s
issued
and
outstanding
securities.
The
exercise
price
of
options
granted
cannot
be
less
than
the
closing
market
price
of
the
Company’s
common
shares
on
the
last
trading
day
preceding
the
grant.
The
Company’s
Board
of
Directors
may
determine
the
term
of
the
options
but
such
term
cannot
be
greater
than
five
years
from
the
date
of
issuance.
Vesting
terms,
eligibility
of
qualifying
individuals
to
receive
options
and
the
number
of
options
issued
to
individual
participants
are
determined
by
the
Company’s
Board
of
Directors.
The
plan
has
no
cash
settlement
features.
Options
generally
expire
90
days
from
the
date
on
which
a
participant
ceases
to
be
a
director,
officer,
employee,
management
company
employee
or
consultant
of
the
Company.
As
at
December
31,
2011,
the
Company
has
2,207,498
(2010
–
1,414,000)
options
outstanding,
which
expire
on
dates
between
December
2013
and
December
2016.
The
outstanding
options
vest
evenly
over
a
three-‐year
period
commencing
on
the
anniversary
of
the
original
grant
date.
As
at
December
31,
2011,
747,469
(2010
–
590,119)
of
the
outstanding
options
were
vested
and
exercisable
into
common
shares.
The
following
table
presents
the
changes
to
the
options
outstanding
during
each
of
the
fiscal
periods:
For
the
year
ended
December
31,
2011
2010
Weighted
average
exercise
price
4.01
3.10
—
4.39
4.55
3.44
Stock
options
1,414,000
1,195,000
—
(351,502)
(50,000)
2,207,498
Weighted
average
exercise
Price
3.99
3.88
2.94
3.81
—
4.01
Stock
options
955,667
642,500
(69,999)
(114,168)
—
1,414,000
Balance,
as
at
January
1
Granted
Exercised
Forfeited
Expired
Balance,
as
at
December
31
44
Notes
to
the
Consolidated
Financial
Statements
2011
Options
Outstanding
Weighted
Average
Exercise
Price
$
Weighted
Average
Remaining
Contractual
Life
in
Years
#
3.75
3.87
4.09
3.05
3.23
3.15
3.44
1.94
3.02
3.19
4.19
4.40
4.93
3.55
2010
Options
Outstanding
Weighted
Average
Exercise
Price
$
Weighted
Average
Remaining
Contractual
Life
in
Years
#
4.55
10.14
7.67
3.75
3.87
4.09
4.01
0.47
1.92
2.21
2.94
4.02
4.19
3.27
Stock
options
#
579,999
464,999
22,500
510,000
7,500
622,500
2,207,498
Stock
options
#
50,000
37,400
1,600
737,500
565,000
22,500
1,414,000
Exercise
Price
$
3.75
3.87
4.09
3.05
3.23
3.15
3.05
–
4.09
Exercise
Price
$
4.55
10.14
7.67
3.75
3.87
4.09
3.75
–
10.14
Options
Exercisable
Weighted
Average
Exercise
Price
$
3.75
3.87
4.09
—
—
—
3.78
Stock
options
#
579,999
159,972
7,498
—
—
—
747,769
Options
Exercisable
Stock
options
#
50,000
37,400
1,067
501,652
—
—
590,119
Average
Exercise
Price
$
4.55
10.14
7.67
3.75
—
—
4.23
During
the
year
ended
December
31,
2011,
1,195,000
options
were
granted
(2010
–
642,500).
622,500
options
were
granted
on
December
6,
2011
at
an
exercise
price
of
$3.15,
565,000
options
were
granted
on
March
11,
2011
at
an
exercise
price
of
$3.05
and
7,500
options
were
granted
on
May
25,
2011
at
an
exercise
price
of
$3.23.
During
the
year
ended
December
31,
2010,
642,500
options
were
granted.
620,000
options
were
granted
on
January
7,
2010
at
an
exercise
price
of
$3.87
and
22,500
options
were
granted
on
March
10,
2010
at
an
exercise
price
of
$4.09.
3,332
stock
options
exercised
that
had
an
exercise
price
of
$3.75
and
66,667
options
exercised
had
an
exercise
price
of
$2.90,
resulting
in
cash
proceeds
to
the
Company
of
$206,000
for
the
year
ended
December
31,
2010.
The
Company
cancelled
351,502
stock
options
(2010
–
114,168)
during
the
year
ended
December
31,
2011
with
an
average
exercise
price
of
$4.39
(2010
–
3.81).
During
the
year
ended
December
31,
2011,
50,000
stock
options
expired
with
an
exercise
price
of
$4.55
(2010
–
nil).
During
the
year
ended
December
31,
2011,
$nil
(2010
–
$65,000)
was
credited
to
share
capital
related
to
options
exercised
in
respect
of
compensation
expense
previously
included
in
contributed
surplus.
The
Company
uses
the
fair
value
method
of
accounting
for
all
stock
options
granted
to
employees.
The
fair
value
of
stock
options
at
the
date
of
grant
or
transfer
is
determined
using
the
Black-‐Scholes
option
pricing
model
with
assumptions
for
risk-‐
free
interest
rates,
dividend
yield,
volatility
factors
of
the
expected
market
prices
of
the
Company’s
common
shares,
expected
forfeitures
and
an
expected
life
of
the
instrument.
Share-‐based
compensation
expense
is
recognized
using
a
graded
vesting
model.
During
the
year
ended
December
31,
2011,
share-‐based
compensation
expense
of
$508,000
(2010
-‐
$791,000)
was
recorded
in
manufacturing
and
selling
costs
and
general
and
administration
expenses
in
the
consolidated
statements
of
income
(loss).
45
Notes
to
the
Consolidated
Financial
Statements
The
estimated
fair
values
of
stock
options
granted
are
determined
at
the
date
of
the
grant
using
the
Black-‐Scholes
option
pricing
model
with
the
following
weighted
average
assumptions
resulting
in
a
fair
value
per
option
of
$0.90,
$1.21
and
$0.97
for
the
three
issuances
granted
respectively
($1.28
and
$1.34
during
the
year
ended
December,
2010
respectively).
Risk-‐free
interest
rate
(%)
Expected
hold
period
to
exercise
(years)
Volatility
in
the
price
of
the
Company’s
shares
(%)
Forfeiture
rate
(%)
Dividend
yield
(%)
2011
1.7
3.2
49.8
5.0
1.7
2010
2.3
4.0
53.4
2.6
3.0
The
expected
hold
period,
volatility
and
dividend
yield
are
based
on
management’s
judgments
in
regard
to
the
Company’s
past
history
and
expectations
for
the
future.
The
above
figures
reflect
the
average
parameters
used
in
all
three
grants
issued
during
the
2011
year
and
both
grants
during
the
2010
year.
b) Stock
Appreciation
Rights
(SARs)
and
Restricted
Share
Units
(RSUs)
2011
SARs
#
RSUs
#
2010
SARs
#
RSUs
#
Balance,
as
at
January
1
67,743
11,840
153,090
23,000
Granted
Cancelled
/
expired
Forfeited
Exercised
Balance,
as
at
December
31
—
(62,743)
(5,000)
—
—
—
—
(4,440)
—
7,400
—
(73,930)
(11,417)
—
67,743
73,125
—
(77,685)
(6,600)
11,840
The
Company’s
Board
of
Directors
have
approved
a
Stock
Appreciation
Rights
Plan
whereby
SARs
may
be
granted
to
directors,
officers
and
employees
of
the
Company
at
the
Board
of
Directors’
discretion.
Each
SAR
entitles
the
holder
to
the
cash
amount
for
the
difference
between
the
value
specified
under
the
plan
and
the
intrinsic
value
of
the
Company’s
common
shares
on
the
exercise
date.
When
granted,
the
rights
vest
equally
over
a
three
year
period
following
the
date
of
grant
and
expire
one
year
after
each
vested
year.
No
SARs
were
granted
in
2011
or
2010.
The
Company’s
Board
of
Directors
also
approved
a
Restricted
Share
Unit
Plan
where
each
designated
executive
receives
an
annual
grant
of
RSUs
as
part
of
their
compensation
at
the
board’s
discretion.
Each
RSU
represents
one
notional
common
share
that
entitles
the
participant
to
an
equivalent
cash
amount
upon
attainment
of
both
performance
targets
and
a
specified
time
period,
three
to
four
years,
following
the
year
of
the
date
of
grant.
There
were
no
RSU’s
granted
during
the
year
ended
December
31,
2011.
On
January
7,
2010,
73,125
RSUs
were
granted
to
employees
and
directors
of
the
Company
with
an
exercise
price
of
$3.87.
For
the
year
ended
December
31,
2011,
in
the
consolidated
statement
of
income
(loss),
a
recovery
in
manufacturing
and
selling
costs
and
general
and
administration
expenses
of
$5,000
(2010
–$13,000)
was
recorded
relating
to
the
RSUs.
No
expenses
were
incurred
during
2011
or
2010
relating
to
SAR’s.
As
at
December
31,
2011,
a
liability
of
$23,000
(December
31,
2010
-‐
$28,000)
was
recorded
on
the
consolidated
balance
sheet
relating
to
RSUs.
No
liability
relating
to
the
SARs
existed
as
at
December
31,
2011
or
December
31,
2010
because
it
is
unlikely
that
there
will
be
any
cash
settlement
related
to
the
SARs
due
to
the
low
trading
value
of
the
Company’s
shares
relative
to
the
exercise
price
of
the
SARs.
46
Notes
to
the
Consolidated
Financial
Statements
17. INCOME
TAXES
The
Company's
effective
income
tax
expense
has
been
determined
as
follows:
(in
thousands
of
dollars)
Statutory
federal
and
provincial
taxes
at
27.03%
(2010
–
28.65%)
Increase
(decrease)
in
income
taxes
resulting
from:
Rate
differences
for
foreign
jurisdictions
Effect
of
permanent
differences
Non-‐taxable
foreign
income,
other
tax
exempt
income
and
other
items
Significant
components
of
the
Company’s
deferred
tax
liabilities
are
as
follows:
(in
thousands
of
dollars)
Property,
plant
and
equipment
Land
Intangible
assets
Inventories
Refundable
insurance
premiums
Non-‐deductible
reserves
and
accrued
liabilities
Loss
carry
forward
Scientific
research
and
experimental
development
credits
Other
2011
$
1,246
39
257
(388)
1,154
2011
$
3,239
343
1,862
571
118
(603)
(308)
(161)
7
5,068
2010
$
(5,928)
(292)
2,963
(733)
(3,990)
2010
$
3,284
348
1,996
335
122
(443)
(690)
—
(104)
4,848
The
Company
has
U.S.
federal
and
state
loss
carry
forwards
of
approximately
US$264,000
and
US$1,538,000
respectively
that
are
available
to
reduce
the
taxable
income
of
certain
US
subsidiaries
that
expire
at
varying
times
from
2012
to
2031.
The
Company
also
has
Canadian
non-‐capital
loss
of
$603,000
which
will
expire
from
2029
to
2031
and
may
be
applied
to
reduce
taxable
income
in
the
future.
The
potential
income
tax
benefits
related
to
these
losses
have
been
recognized
in
these
financial
statements.
18. DISCONTINUED
OPERATIONS
On
May
31,
2011,
the
Company
disposed
of
the
steel
tank
division
for
cash
proceeds
of
$800,000.
On
June
14,
2010,
the
Company
disposed
of
the
Home
Heating
Oil
Tank
(“HHOT”)
division
which
included
all
related
inventory
and
equipment
for
cash
proceeds
of
$300,000
and
a
loan
payable
to
the
Company
with
a
face
value
of
$1,700,000
as
at
December
31,
2010.
The
loan
was
paid
out
in
cash
proceeds
of
$1,336,000
on
March
16,
2011.
47
Notes
to
the
Consolidated
Financial
Statements
a) The
results
of
the
discontinued
operations
are
as
follows:
(in
thousands
of
dollars)
Revenue
Manufacturing
and
selling
costs
Depreciation
General
and
administration
Gain
on
disposal
of
equipment
Loss
on
impairment
of
property,
plant
and
equipment
Loss
before
income
taxes
Income
tax
recovery
Net
loss
from
discontinued
operations
b) The
carrying
amounts
of
the
assets
disposed
are
as
follows:
(in
thousands
of
dollars)
Inventory
Equipment
Total
carrying
values
of
assets
disposed
c) Cash
used
in
discontinued
operations
are
as
follows:
(in
thousands
of
dollars)
Cash
flows
from
continuing
operations
Net
loss
Add
items
not
affecting
cash:
Depreciation
Gain
on
disposal
of
assets
Loss
on
impairment
of
property,
plant
and
equipment
Cash
used
in
discontinued
operations
19. EARNINGS
PER
SHARE
2011
$
2,066
2,277
(211)
19
26
(31)
—
14
(225)
(61)
(164)
May
31,
2011
$
530
397
927
2011
$
(164)
19
(31)
—
(176)
2010
$
6,050
6,850
(800)
229
—
(1,038)
361
(448)
(352)
(203)
(149)
June
14,
2010
$
424
575
999
2010
$
(149)
229
(1,038)
361
(597)
The
following
table
sets
forth
the
net
income
(loss)
available
to
common
shareholders
and
weighted-‐average
number
of
common
shares
outstanding
for
the
computation
of
basic
and
diluted
earnings
per
share:
For
the
year
ended
December
31,
Numerator
(in
thousands
of
dollars)
Net
income
(loss)
from
continuing
operations
Net
loss
from
discontinued
operations
Net
income
(loss)
2011
$
2010
$
3,454
(16,700)
(164)
3,290
2011
(149)
(16,849)
2010
48
Notes
to
the
Consolidated
Financial
Statements
Denominator
(in
thousands)
Weighted
average
shares
outstanding
-‐
basic
Effect
of
dilutive
securities:
Stock
options
Weighted
average
shares
outstanding
-‐
diluted
20. RELATED
PARTY
TRANSACTIONS
a) Transactions
in
the
normal
course
of
operations:
#
28,802
—
28,802
#
28,311
—
28,311
Certain
manufacturing
components
purchased
for
$30,000
(2010
-‐
$82,000)
for
the
year
ended
December
31,
2011,
included
in
manufacturing
and
selling
costs
in
the
consolidated
statements
of
income
(loss)
or
inventories
were
provided
by
a
corporation
whose
Chairman
and
CEO
is
a
director
of
the
Company.
The
transactions
were
incurred
in
the
normal
course
of
operations
and
recorded
at
the
exchange
amount
being
normal
commercial
rates
for
the
products.
Accounts
payable
and
accrued
liabilities
at
December
31,
2011
included
$nil
(December
31,
2010
-‐
$13,000)
owing
to
the
corporation.
There
are
no
ongoing
contractual
or
other
commitments
resulting
from
these
transactions.
b) Transactions
with
key
management
and
directors:
For
the
year
ended
December
31,
(in
thousands
of
dollars)
Salaries,
benefits
and
director
fees
Share-‐based
payments
Termination
benefits
Total
2011
$
1,126
164
—
1,290
2010
$
1,300
252
750
2,302
The
Company
has
identified
the
named
executive
officers
as
key
management
to
the
Company
in
addition
to
the
members
of
the
board
of
directors.
The
figures
above
are
included
in
general
and
administrative
expenses
for
the
years
ended
December
31,
2011
and
2010.
Share-‐based
payments
are
the
amount
of
expense
recognized
in
the
consolidated
statement
of
income
(loss)
relating
to
the
identified
key
management
and
directors.
21. FINANCE
EXPENSE
For
the
year
ended
December
31,
(in
thousands
of
dollars)
Short-‐term
interest,
net
of
interest
income
Interest,
long
term
obligations
2011
$
940
332
1,272
2010
$
805
558
1,363
49
Notes
to
the
Consolidated
Financial
Statements
22. STATEMENT
OF
CASH
FLOWS
Supplementary
disclosures
required
in
respect
of
the
statement
of
cash
flows
are
as
follows:
a)
Interest
and
income
taxes
paid
For
the
year
ended
December
31,
(in
thousands
of
dollars)
Net
interest
paid
Income
taxes
paid
b) Cash
used
in
business
acquisitions,
net
of
cash
acquired
For
the
year
ended
December
31,
(in
thousands
of
dollars)
Cash
consideration
paid
[note
4]
Acquisition
costs
Less:
cash
acquired
in
business
acquisition
Cash
used
in
business
acquisition,
net
of
cash
acquired
23. FINANCIAL
INSTRUMENTS
Financial
risk
management
2011
$
1,206
133
2011
$
—
—
—
—
2010
$
1,377
432
2010
$
7,800
735
(415)
8,120
The
Company’s
activities
expose
it
to
a
variety
of
financial
risks
including
market
risk
(foreign
exchange
risk
and
interest
rate
risk),
credit
risk
and
liquidity
risk.
Management
reviews
these
risks
on
an
ongoing
basis
to
ensure
that
the
risks
are
appropriately
managed.
The
Company
may
use
foreign
exchange
forward
contracts
to
manage
exposure
to
fluctuations
in
foreign
exchange
from
time
to
time.
The
Company
does
not
currently
have
a
practice
of
trading
derivatives
and
had
no
derivative
instruments
outstanding
at
December
31,
2011.
a)
Interest
rate
risk
The
Company’s
objective
in
managing
interest
rate
risk
is
to
monitor
expected
volatility
in
interest
rates
while
also
minimizing
the
Company’s
financing
expense
levels.
Interest
rate
risk
mainly
arises
from
fluctuations
of
interest
rates
and
the
related
impact
on
the
return
earned
on
cash
and
cash
equivalents,
restricted
cash
and
the
expense
on
floating
rate
debt.
On
an
ongoing
basis,
management
monitors
changes
in
short
term
interest
rates
and
considers
long
term
forecasts
to
assess
the
potential
cash
flow
impact
to
the
Company.
The
Company
does
not
currently
hold
any
financial
instruments
to
mitigate
its
interest
rate
risk.
Cash
and
cash
equivalents
and
restricted
cash
earn
interest
based
on
market
interest
rates.
Bank
indebtedness
balances
and
long
term
debt
have
floating
interest
rates
which
are
subject
to
market
fluctuations.
The
effective
interest
rate
on
the
bank
indebtedness
balance
at
December
31,
2011
was
prime
plus
100
basis
points,
4%
(December
31,
2010
-‐
prime
plus
175
basis
points,
4.75%)
adjusted
quarterly
based
on
certain
financial
indicators
of
the
Company.
The
effective
interest
rate
on
the
term
loan
balance
at
December
31,
2011
was
US
LIBOR
rate
plus
250
basis
points,
2.75%,
adjusted
quarterly
based
on
certain
financial
indicators
of
the
Company.
The
Dualam
long
term
debt
bears
interest
at
25
basis
points
above
the
base
rate
of
the
Business
Development
Bank
of
Canada
(“BDC”).
With
other
variables
unchanged,
an
increase
or
decrease
of
100
basis
points
in
the
US
LIBOR
and
Canadian
prime
interest
rate
as
at
December
31,
2011
would
have
impacted
net
income
for
the
year
then
ended
by
approximately
$131,000.
See
note
26
on
BDC
loan
payout.
50
Notes
to
the
Consolidated
Financial
Statements
b) Foreign
exchange
risk
The
Company
operates
on
an
international
basis
and
is
subject
to
foreign
exchange
risk
exposures
arising
from
transactions
denominated
in
foreign
currencies.
The
Company’s
objective
with
respect
to
foreign
exchange
risk
is
to
minimize
the
impact
of
the
volatility
related
to
financial
assets
and
liabilities
denominated
in
a
foreign
currency
where
possible
through
effective
cash
flow
management.
Foreign
currency
exchange
risk
is
limited
to
the
portion
of
the
Company’s
business
transactions
denominated
in
currencies
other
than
Canadian
dollars.
The
Company’s
most
significant
foreign
exchange
risk
arises
primarily
with
respect
to
the
US
dollar.
The
revenues
and
expenses
of
the
Company’s
US
operations
are
denominated
in
US
dollars.
Certain
of
the
revenue
and
expenses
of
the
Canadian
operations
are
also
denominated
in
US
dollars.
The
Company
is
also
exposed
to
foreign
exchange
risk
associated
with
the
euro
due
to
its
operations
in
The
Netherlands,
however
these
amounts
are
not
significant
to
the
Company’s
consolidated
financial
results.
On
an
ongoing
basis,
management
monitors
changes
in
foreign
currency
exchange
rates
as
well
as
considering
long
term
forecasts
to
assess
the
potential
cash
flow
impact
to
the
Company.
During
the
year
ended
December
31,
2011,
the
Company
converted
Canadian
dollar
cash
to
US
dollar
cash
to
help
mitigate
foreign
exchange
exposures
resulting
from
fluctuations
in
exposed
monetary
assets
and
liabilities.
The
Company
continues
to
monitor
its
foreign
exchange
exposure
on
monetary
assets.
The
tables
that
follow
provide
an
indication
of
the
Company’s
exposure
to
changes
in
the
value
of
the
US
dollar
relative
to
the
Canadian
dollar
as
at
and
for
the
year
ended
December
31,
2011.
The
analysis
is
based
on
financial
assets
and
liabilities
denominated
in
US
dollars
at
the
end
of
the
period
(“balance
sheet
exposure”),
which
are
separated
by
domestic
and
foreign
operations,
and
US
dollar
denominated
revenue
and
operating
expenses
during
the
period
(“operating
exposure”).
Balance
sheet
exposure
as
at
December
31,
2011,
(in
thousands
of
US
dollars)
Cash
and
cash
equivalents
Accounts
receivable
Restricted
cash
Accounts
payable
and
accrued
liabilities
Trade
balances
with
self-‐sustaining
foreign
entities
Long
term
debt
Net
balance
sheet
exposure
Operating
exposure
for
the
year
ended
December
31,
2011,
(in
thousands
of
US
dollars)
Sales
Operating
expenses
Net
operating
exposure
Foreign
Operations
$
Domestic
Operations
$
473
8,767
250
(8,713)
—
—
777
30
4,077
—
(1,341)
(3,046)
(4,141)
(4,421)
Total
$
503
12,844
250
(10,054)
(3,046)
(4,141)
(3,644)
$
82,582
75,319
7,263
The
weighted
average
US
to
Canadian
dollar
translation
rate
was
0.99
for
the
year
ended
December
31,
2011.
The
translation
rate
as
at
December
31,
2011
was
1.02.
Based
on
the
Company’s
foreign
currency
exposures
noted
above,
with
other
variables
unchanged,
a
twenty
percent
change
in
the
Canadian
dollar
would
have
impacted
net
income
as
follows:
51
Notes
to
the
Consolidated
Financial
Statements
For
the
year
ended
December
31,
2011,
(in
thousands
of
US
dollars)
$
Net
balance
sheet
exposure
of
other
operations
Net
operating
exposure
of
foreign
operations
Change
in
net
income
Other
comprehensive
income
(loss)
would
have
changed
$100,000
if
the
value
of
the
Canadian
dollar
fluctuated
by
20%
due
to
the
net
balance
sheet
exposure
of
financial
assets
and
liabilities
of
foreign
operations.
The
timing
and
volume
of
the
above
transactions
as
well
as
the
timing
of
their
settlement
could
impact
the
sensitivity
analysis.
(566)
930
364
c) Credit
risk
Credit
risk
is
the
risk
of
a
financial
loss
to
the
Company
if
a
customer
or
counterparty
to
a
financial
instrument
fails
to
meet
its
contractual
obligations.
The
Company
is
exposed
to
credit
risk
through
its
cash
and
cash
equivalents,
restricted
cash
and
accounts
receivable.
The
Company
manages
the
credit
risk
associated
with
its
cash
and
cash
equivalents
and
restricted
cash
by
holding
its
funds
with
reputable
financial
institutions
and
investing
only
in
highly
rated
securities
that
are
traded
on
active
markets
and
are
capable
of
prompt
liquidation.
Credit
risk
for
trade
and
other
accounts
receivable
are
managed
through
established
credit
monitoring
activities.
The
Company
also
mitigates
its
credit
risk
on
trade
accounts
receivable
by
obtaining
a
cash
deposit
from
certain
customers
with
no
prior
order
history
with
the
Company
or
where
the
Company
perceives
the
customer
has
a
higher
level
of
risk.
The
Company
has
a
concentration
of
customers
in
the
oil
and
gas
and
corrosion
sectors.
The
concentration
risk
is
mitigated
by
the
number
of
customers
and
by
a
significant
portion
of
the
customers
being
large
international
organizations.
As
at
December
31,
2011
and
2010
no
single
customer
exceeded
10%
of
the
consolidated
trade
accounts
receivable
balance.
Losses
under
trade
accounts
receivable
have
not
historically
been
significant.
The
creditworthiness
of
new
and
existing
customers
is
subject
to
review
by
management
by
considering
such
items
as
the
type
of
customer,
prior
order
history
and
the
size
of
the
order.
Decisions
to
extend
credit
to
new
customers
are
approved
by
management
and
the
creditworthiness
of
existing
customers
is
monitored.
The
Company
reviews
its
trade
accounts
receivable
regularly
and
amounts
are
written
down
to
their
expected
realizable
value
when
the
account
is
determined
not
to
be
fully
collectable.
This
generally
occurs
when
the
customer
has
indicated
an
inability
to
pay,
the
Company
is
unable
to
communicate
with
the
customer
over
an
extended
period
of
time,
and
other
methods
to
obtain
payment
have
been
considered
and
have
not
been
successful.
The
bad
debt
expense
is
charged
to
net
income
in
the
period
that
the
account
is
determined
to
be
doubtful.
Estimates
for
the
allowance
for
doubtful
accounts
are
determined
on
a
customer-‐by-‐customer
evaluation
of
collectability
at
each
reporting
date,
taking
into
account
the
amounts
which
are
past
due
and
any
available
relevant
information
on
the
customers’
liquidity
and
going
concern
status.
After
all
efforts
of
collection
have
failed,
the
accounts
receivable
balance
not
collected
is
written
off
with
an
offset
to
the
allowance
for
doubtful
accounts,
with
no
impact
on
net
income.
The
Company’s
maximum
exposure
to
credit
risk
for
trade
accounts
receivable
is
the
carrying
value
of
$19,472,000
as
at
December
31,
2011
(December
31,
2010
-‐
$22,124,000).
On
a
geographic
basis
as
at
December
31,
2011,
approximately
47%
(December
31,
2010
–
59%)
of
the
balance
of
trade
accounts
receivable
was
due
from
Canadian
and
non-‐US
customers
and
53%
(December
31,
2010
–
41%)
was
due
from
US
customers.
Payment
terms
are
generally
net
30
days.
As
at
December
31,
2011,
the
percentages
of
past
due
trade
accounts
receivable
were
as
follows:
27%
past
due
1
to
30
days
(December
31,
2010
–
23%),
12%
past
due
31
to
60
days
(December
31,
2010
–
10%),
8%
past
due
61
to
90
days
(December
31,
2010
–
5%)
and
2%
past
due
greater
than
90
days
(December
31,
2010
–
6%)
prior
to
including
the
allowance
for
doubtful
accounts.
Despite
the
established
payment
terms,
customers
in
the
oil
and
gas
industry,
who
represent
a
significant
portion
of
the
customer
base
for
the
Company,
typically
pay
amounts
within
60
days
of
the
invoice
date.
Accordingly,
it
is
management’s
view
that
amounts
outstanding
from
these
customers
up
to
60
days
from
the
invoice
date
have
a
low
risk
of
not
being
collected.
Included
in
the
accounts
receivable
balance
are
balances
not
considered
trade
receivables
of
$436,000
which
include
funds
receivable
from
various
sales
tax
refunds,
insurance
refunds
and
rebates
(December
31,
2010
-‐
$589,000).
52
Notes
to
the
Consolidated
Financial
Statements
The
Company
had
recorded
an
allowance
for
doubtful
accounts
of
$207,000
as
at
December
31,
2011
(December
31,
2010
-‐
$347,000).
The
allowance
is
an
estimate
of
the
December
31,
2011
trade
receivable
balances
that
are
considered
uncollectible.
The
allowance
increased
for
bad
debt
expense
of
$145,000
(2010
-‐
$513,000),
offset
by
payments
of
$95,000
(2010
-‐
$193,000),
write
offs
of
$47,000
(2010
-‐
$nil)
and
a
translation
adjustment
of
$8,000
(2010
-‐
$16,000)
for
the
year
ended
December
31,
2011.
d) Liquidity
risk
The
Company’s
objective
related
to
liquidity
risk
is
to
effectively
manage
cash
flows
to
minimize
the
exposure
that
the
Company
will
not
be
able
to
meet
its
obligations
associated
with
financial
liabilities.
On
an
ongoing
basis,
liquidity
risk
is
managed
by
maintaining
adequate
cash
and
cash
equivalent
balances
and
appropriately
utilizing
available
lines
of
credit.
Management
believes
that
forecasted
cash
flows
from
operating
activities,
along
with
the
available
lines
of
credit,
will
provide
sufficient
cash
requirements
to
cover
the
Company’s
forecasted
normal
operating
activities,
commitments
and
budgeted
capital
expenditures.
The
Company
has
pledged
as
general
collateral
for
advances
under
the
operating
credit
facility
and
the
bank
term
loan
a
general
security
agreement
on
present
and
future
assets,
guarantees
from
each
present
and
future
direct
and
indirect
subsidiary
of
the
Company
supported
by
a
first
registered
security
over
all
present
and
future
assets,
and
pledge
of
shares.
The
Company
is
not
permitted
to
sell
or
re-‐pledge
significant
assets
held
under
collateral
without
consent
from
the
lenders.
The
following
are
the
undiscounted
contractual
maturities
of
financial
liabilities
excluding
future
interest:
(in
thousands
of
dollars)
Accounts
payable,
accrued
liabilities
and
provisions
Long
term
debt
Total
Carrying
Amount
$
2012
$
2013
$
2014
$
2015
$
2016
$
Thereafter
$
17,069
6,274
23,343
17,069
1,687
18,756
—
2,999
2,999
—
181
181
—
181
181
—
181
181
—
1,045
1,045
Subsequent
to
the
year
end,
the
BDC
loan
was
paid
out
and
the
balance
of
the
term
loan
was
increased
by
$2,000,000
Canadian
dollars.
For
additional
details,
please
refer
to
note
27.
24. CAPITAL
RISK
MANAGEMENT
Management’s
objectives
when
managing
capital
are
to
safeguard
the
Company’s
ability
to
continue
as
a
going
concern,
to
provide
an
adequate
return
to
shareholders,
to
meet
external
capital
requirements
on
the
Company’s
debt
and
credit
facilities
and
preserve
financial
flexibility
in
order
to
benefit
from
potential
opportunities
that
may
arise.
The
Company
defines
capital
that
it
manages
as
the
aggregate
of
its
long
term
debt
and
shareholders’
equity,
which
is
comprised
of
issued
capital,
contributed
surplus,
accumulated
other
comprehensive
loss
and
retained
earnings.
53
Notes
to
the
Consolidated
Financial
Statements
a) Long
term
debt
and
adjusted
capital
employed
As
at
(in
thousands
of
dollars)
Current
portion
of
long
term
debt
Current
portion
of
preferred
shares
Long
term
debt
[note
11]
Preferred
shares
[note
12]
Total
long
term
debt
Share
capital
Contributed
surplus
Equity
component
of
preferred
shares
[note
12]
Retained
earnings
Adjusted
shareholders’
equity
Adjusted
capital
employed
December
31,
2011
$
December
31,
2010
$
January
1,
2010
$
1,687
57
4,587
5,125
11,456
69,862
2,177
845
8,373
81,257
92,713
3,398
57
7,733
5,125
16,313
69,862
1,669
845
5,083
77,459
93,772
2,343
—
3,003
—
5,346
62,395
943
—
22,777
86,115
91,461
Management
considers
changes
in
economic
conditions,
risks
that
impact
the
consolidated
operations
and
future
significant
capital
investment
opportunities
in
managing
its
capital
and
considers
adjustments
to
its
ratio
of
long
term
debt
to
adjusted
capital
employed
when
significant
changes
in
these
factors
are
expected.
Management
considers
the
ratio
of
long
term
debt
to
adjusted
capital
employed
of
12%
as
at
December
31,
2011
(December
31,
2010
–
17%)
to
be
low.
The
change
since
December
31,
2010
reflects
the
repayments
of
principal
on
the
term
loan
of
$4,286,000.
Adjusted
capital
employed
is
defined
by
the
Company
as
long
term
debt
plus
total
shareholders’
equity
excluding
accumulated
other
comprehensive
loss.
b) Debt
management
Under
its
long
term
credit
facilities,
the
Company
must
maintain
a
number
of
financial
covenants
on
a
quarterly
basis.
These
covenants
include,
but
are
not
limited
to,
a
minimum
shareholders’
equity
value,
a
debt
to
net
tangible
worth
ratio,
a
fixed
charge
ratio
and
a
current
ratio.
These
ratios
are
calculated
in
accordance
with
the
credit
facility
and
are
not
necessarily
consistent
with
figures
presented
in
these
consolidated
financial
statements
under
IFRS.
The
following
summarizes
the
financial
ratios
mentioned
above
calculated
in
accordance
with
the
Company’s
credit
facility:
December
31,
2011
Actual
December
31,
2011
Required
December
31,
2010
Actual
December
31,
2010
Required
Minimum
equity
value
Debt
to
tangible
net
worth
Fixed
charge
coverage
ratio
Current
ratio
$74
million
0.15
3.93
1.92
>$50
million
<2.0
>1.5
>1.25
$70
million
0.63
1.18
1.63
>$50
million
<2.0
>1.0
>1.25
The
changes
since
December
31,
2010
in
the
bank
covenants
reflect
the
net
income
from
continuing
operations
of
$3,454,000
and
the
repayment
of
$4,286,000
in
long
term
debt
which
strengthened
the
debt
to
tangible
net
worth
and
fixed
charge
ratios.
On
an
ongoing
basis,
management
expects
to
continue
meeting
all
financial
covenants
under
its
current
credit
facility.
54
Notes
to
the
Consolidated
Financial
Statements
25. SEGMENTED
INFORMATION
Operating
segments
are
defined
as
components
of
the
Company
for
which
separate
financial
information
is
available
that
is
evaluated
regularly
by
the
chief
operating
decision
maker
in
allocating
resources
and
assessing
performance.
The
chief
operating
decision
maker
of
the
Company
is
the
Chief
Executive
Officer.
The
Company
operates
substantially
all
of
its
activities
in
two
reportable
segments,
Underground
Fluid
Containment
(“Underground”)
and
Aboveground
Fluid
Containment
(“Aboveground”).
The
Company’s
r eportable
segments
changed
with
the
acquisition
of
ZCL
Dualam
on
January
4,
2010;
therefore
there
is
no
comparative
information
on
assets
for
the
January
1,
2010
opening
IFRS
balance
sheet.
Information
about
reportable
segments
For
the
year
ended
December
31,
Underground
Aboveground
Total
2011
2010
2011
2010
2011
(in
thousands
of
dollars)
$
$
$
$
$
2010
$
Revenue
Manufacturing
and
selling
costs
Gross
profit
101,590
97,618
25,456
23,956
127,046
121,574
84,234
17,356
84,418
13,200
23,358
2,098
25,498
(1,542)
107,592
19,454
109,916
11,658
Manufacturing
and
selling
costs
are
the
only
costs
that
are
directly
attributable
to
the
Underground
and
Aboveground
operating
segments.
All
other
costs
are
not
specifically
identifiable
to
an
individual
segment
and
management
has
determined
that
there
is
no
rational
basis
on
which
to
allocate
general
and
administration
and
other
expenses.
Only
a
gross
profit
measure
is
reported
to
the
Chief
Executive
Officer
on
a
regular
basis;
therefore
gross
profit
is
disclosed
as
the
measure
of
profit.
As
at
(in
thousands
of
dollars)
Underground
Aboveground
Total
Inventories
Dec
31,
2011
$
18,311
5,960
24,271
Dec
31,
2010
$
16,376
2,383
18,759
Property,
plant
and
equipment
Dec
31,
2011
$
20,342
5,791
26,133
Dec
31,
2010
$
20,617
6,304
26,921
Goodwill
and
intangible
assets
Dec
31,
2011
$
34,031
4,211
38,242
Dec
31,
2010
$
35,371
4,565
39,936
The
only
assets
that
can
be
identified
by
reportable
segments
are
inventories,
property,
plant
and
equipment,
goodwill
and
intangible
assets.
All
other
current
and
long
term
assets,
as
well
as
current
and
long
term
liabilities
are
not
segregated
into
the
reportable
segments
and
management
has
determined
that
there
is
no
rational
basis
on
which
to
allocate
other
assets
and
liabilities,
they
are
not
reported
to
the
Chief
Executive
Officer
and
therefore
this
information
is
not
disclosed.
Information
about
major
customers
The
Company
has
long
term
contracts
and
alliance
arrangements
with
many
of
the
major
oil
and
gas
companies
in
Canada
and
provides
products
for
distributors
and
retail
oil
and
gas
companies
in
the
US.
For
the
year
ended
December
31,
2011
and
2010,
no
single
customer
exceeded
10%
of
total
revenue.
55
Notes
to
the
Consolidated
Financial
Statements
Information
about
geographic
areas
For
the
years
ended
December
31,
(in
thousands
of
dollars)
Canada
United
States
International
(in
thousands
of
dollars)
Canada
United
States
International
Revenues
2011
$
55,034
68,382
3,630
127,046
2010
$
48,153
67,402
6,019
121,574
Property,
plant
and
equipment,
goodwill
and
intangible
assets
2010
$
2011
$
26,220
36,604
1,551
64,375
27,713
37,084
2,060
66,857
Total
assets
2011
$
52,218
58,898
2,783
113,899
2010
$
55,597
58,153
3,879
117,629
26. IMPAIRMENT
TESTING
OF
GOODWILL
Goodwill
acquired
through
business
combinations
has
been
allocated
to
three
cash-‐generating
units
(“CGUs”)
as
follows:
• Underground
Canada
• Underground
US
•
Aboveground
Carrying
amount
of
goodwill
and
intangible
assets
allocated
to
each
CGU
As
at
(in
thousands
of
dollars)
Goodwill
Underground
Canada
Dec
31,
2010
$
1,442
Dec
31,
2011
$
1,377
Underground
US
Aboveground
Dec
31,
2011
$
26,586
Dec
31,
2010
$
25,733
Dec
31,
2011
$
2,641
Dec
31,
2010
$
2,454
The
Company
performed
its
annual
goodwill
impairment
test
as
at
October
1,
2011.
The
Company
considers
the
relationship
between
its
fair
values
less
cost
to
sell
(“FVLCS”)
of
its
CGUs,
to
their
carrying
amounts,
among
other
factors,
when
reviewing
for
indicators
of
impairment.
As
at
October
1,
2011,
the
FVLCS
of
the
CGUs
were
above
the
carrying
amounts,
indicating
there
was
not
an
impairment
of
goodwill
in
any
of
the
CGUs
identified
above.
The
balances
relating
to
goodwill
disclosed
above
are
as
at
October
1,
2011,
the
date
of
the
impairment
test.
Goodwill
carried
in
the
Underground
US
CGU
is
denominated
in
US
dollars
and
the
carrying
amount
is
subject
to
fluctuations
in
the
US
dollar
to
Canadian
dollar
exchange
rate,
which
is
why
the
figures
above
may
differ
from
the
December
31,
2011
carrying
amount.
There
has
been
no
impairment
of
goodwill
recognised
in
the
2011
year.
For
details
on
the
g oodwill
impairment
recognized
in
2010,
refer
to
notes
4
and
28.
56
Notes
to
the
Consolidated
Financial
Statements
Key
assumptions
used
in
the
FVLCS
calculations
The
calculation
of
the
FVLCS
for
the
three
CGUs
is
most
sensitive
to
the
following
assumptions:
• Discount
rates
• Growth
rate
used
to
extrapolate
cash
flows
beyond
the
budget
period
• Gross
profit
Discount
rates:
Discount
rates
represent
the
current
market
assessment
of
the
risks
specific
to
each
CGU,
regarding
the
time
value
of
money
and
individual
risks
of
the
underlying
assets
which
have
not
been
incorporated
in
the
cash
flow
estimates.
The
discount
rate
calculation
is
based
on
the
market
risks
and
specific
circumstances
of
the
Company
and
its
operating
segments
and
derived
from
its
weighted
average
cost
of
capital
(WACC).
The
WACC
takes
into
account
both
debt
and
equity.
The
cost
of
equity
is
derived
from
the
expected
return
of
investment
by
investors.
The
cost
of
debt
is
based
on
market
conditions
and
the
Company’s
interest
bearing
borrowings.
Segment-‐specific
risk
is
incorporated
by
applying
individual
beta
factors.
The
beta
factors
are
evaluated
annually
based
on
publicly
available
market
data
and
specific
risk
premiums
are
calculated
after
consideration
for
the
volatility
in
the
revenue
streams
and
the
risk
factors
affecting
the
predictability
of
the
particular
CGU.
Discount
rate
ranges
utilized
by
CGUs
are
as
follows:
Underground
Canada
(15.1%
to
15.9%),
Underground
U.S.
(15.4%
to
16.2%)
and
Aboveground
(24.6%
to
25.4%).
Growth
rate
estimates:
Growth
rates
for
2012
are
established
using
the
board
approved
budgeted
growth
rate
by
CGU.
Longer
term
growth
rates
are
established
using
the
five-‐year
Strategic
Plan
for
each
CGU.
Both
the
2012
operating
budget
and
the
five-‐year
Strategic
Plan
were
calculated
using
our
current
prospects
and
our
planned
strategic
changes
expected
to
be
implemented.
The
growth
rate
used
to
extrapolate
cash
flows
beyond
the
budget
period
used
(five
years)
is
based
on
Government
of
Canada
target
inflation
rates
and
U.S.
Federal
Reserve
long-‐term
inflation
expectations
(2%
for
all
CGUs).
Gross
profit:
Gross
profit
is
based
on
historical
values
and
is
adjusted
upwards
or
downwards
depending
on
expected
changes
in
revenues.
As
fixed
costs
remain
relatively
constant
over
the
short
term
while
revenues
increase,
gross
profits
improve
over
this
same
period.
Sensitivity
to
changes
in
assumptions
Discount
rates:
Most
rates
used
within
the
WACC
calculation
do
not
change
significantly
year
to
year;
however,
if
the
specific
risk
premium
were
adjusted
in
either
direction,
it
would
have
an
effect
on
the
FVLCS
of
the
CGU.
This,
in
turn,
would
change
the
excess
or
deficiency
values
over
the
carrying
amounts
of
the
CGU.
For
the
Underground
Canada
CGU,
the
specific
risk
premium
would
need
to
increase
19%
in
the
worst
case
scenario
before
a
deficiency
would
be
created.
For
the
Underground
US
CGU,
the
specific
risk
premium
would
need
to
increase
14%
and
with
the
Aboveground
CGU,
the
specific
risk
premium
would
need
to
increase
73%
over
the
current
worst
case
scenario
before
a
deficiency
over
the
carrying
value
would
be
created.
Growth
rate
and
gross
profit
assumptions:
Sales
growth
rates
used
were
very
modest;
however,
any
reduction
in
the
sales
growth
rate
would
have
a
negative
impact
on
the
FVLCS
of
the
overall
CGUs.
Similarly,
gross
profits
as
a
percentage
of
revenues
used
were
in
line
with
historical
rates
realized
by
the
CGUs.
For
the
Underground
Canada
CGU,
gross
profit
would
have
to
fall
to
91%
of
our
current
expectations;
the
Underground
U.S.
CGU
would
have
to
fall
to
93%;
and
the
gross
profit
for
the
Aboveground
CGU
would
have
to
fall
to
63%
of
its
current
expectations
before
a
deficiency
would
result
in
the
respective
carrying
amounts.
As
at
October
1,
2011,
the
recoverable
amount
of
the
Company's
CGUs
exceeded
their
carrying
amounts
by
a
substantial
amount.
With
regard
to
the
assessment
of
fair
value
less
costs
to
sell,
management
believes
that
no
reasonably
possible
change
in
any
of
the
above
key
assumptions
would
have
caused
the
carrying
amount
of
the
CGUs
to
materially
exceed
its
recoverable
amount.
57
Notes
to
the
Consolidated
Financial
Statements
27. SUBSEQUENT
EVENTS
Subsequent
to
the
balance
sheet
date,
the
Company
paid
out
the
long
term
credit
facility
with
the
BDC.
This
loan
carried
an
interest
rate
of
25
basis
points
above
the
BDC
base
rate.
To
fund
the
payout,
the
Company
increased
the
balance
of
the
term
loan
by
$2,000,000
which
carries
an
interest
rate
of
250
basis
points
above
the
US
dollar
LIBOR
rate
and
matures
in
May
of
2013.
28. FIRST
TIME
ADOPTION
OF
INTERNATIONAL
FINANCIAL
REPORTING
STANDARDS
As
discussed
in
note
2,
these
are
the
Company’s
first
consolidated
financial
statements
prepared
in
accordance
with
IFRS.
The
accounting
policies
in
note
3
have
been
applied
in
preparing
the
consolidated
financial
statements
for
the
year
ended
December
31,
2011
and
the
comparative
information
for
the
year
ended
December
31,
2010.
They
were
also
used
in
the
preparation
of
the
consolidated
balance
sheet
presented
for
the
opening
consolidated
IFRS
balance
sheet
date
on
January
1,
2010
(“the
transition
date”).
In
preparing
the
consolidated
financial
statements,
the
comparative
information
for
the
year
ended
December
31,
2010
has
been
adjusted
from
the
amounts
previously
reported
under
previous
GAAP.
An
explanation
of
how
the
transition
from
previous
GAAP
to
IFRS
has
affected
the
Company’s
consolidated
balance
sheets
and
statements
of
comprehensive
loss
is
presented
below:
Key
first
time
adoption
exemptions
applied:
IFRS
1:
“First
time
Adoption
of
International
Financial
Reporting
Standards”
allows
first
time
adopters
certain
exemptions
from
retrospective
application
of
certain
IFRS.
The
Company
has
applied
the
following
exemptions:
a)
IFRS
3:
“Business
Combinations”
has
not
been
applied
retrospectively
to
acquisitions
of
subsidiaries
that
occurred
prior
to
the
transition
date
to
IFRS.
b) Certain
parcels
of
land
grouped
in
with
property,
plant
and
equipment
have
been
adjusted
to
their
fair
value
based
on
land
valuations
performed
by
external
land
valuators.
The
Company
has
elected
to
regard
those
fair
values
as
deemed
cost
at
the
date
of
transition
to
IFRS.
c) The
Company
has
elected
not
to
reassess
arrangements
under
IFRS
Interpretations
Committee
Update
(“IFRIC”)
4:
“Determining
Whether
an
Arrangement
Contains
a
Lease”
that
were
assessed
under
previous
GAAP
in
the
same
manner
as
required
by
IFRIC
4
and
to
apply
the
transitional
provisions
in
IFRIC
4
to
those
that
were
not.
IFRS
2:
“Share-‐based
Payments”
has
not
been
applied
retrospectively
for
stock
options
that
had
vested
prior
to
the
transition
date.
d)
58
Notes
to
the
Consolidated
Financial
Statements
Reconciliation
of
Equity
As
at
January
1,
2010
(date
of
transition
to
IFRS)
(in
thousands
of
dollars)
ASSETS
Current
Cash
and
cash
equivalents
Accounts
receivable
Inventories
Income
taxes
recoverable
Prepaid
expenses
[note
28a]
Property,
plant
and
equipment
[note
28c]
Intangible
assets
Goodwill
Restricted
cash
Other
assets
[note
28f]
TOTAL
ASSETS
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
Current
Bank
indebtedness
Accounts
payable
and
accrued
liabilities
Income
taxes
payable
Deferred
revenue
Current
portion
of
provisions
Current
portion
of
long
term
debt
Deferred
tax
liabilities
[note
28b]
Long
term
portion
of
provisions
Long
term
debt
TOTAL
LIABILITIES
Shareholders'
equity
Share
capital
Contributed
surplus
[note
28g]
Accumulated
other
comprehensive
loss
Retained
earnings
TOTAL
SHAREHOLDERS’
EQUITY
TOTAL
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
Previous
GAAP
$
Re-‐measurements
$
IFRS
$
2,868
14,228
19,943
1,650
1,072
39,761
23,269
9,481
28,997
262
893
102,663
1,477
11,040
8
1,805
—
2,343
16,673
4,343
—
3,003
24,019
62,395
873
(5,387)
20,763
78,644
102,663
—
—
—
—
(109)
(109)
2,664
—
—
—
(435)
2,120
—
(660)
—
—
286
—
(374)
88
374
—
88
—
70
(52)
2,014
2,032
2,120
2,868
14,228
19,943
1,650
963
39,652
25,933
9,481
28,997
262
458
104,783
1,477
10,380
8
1,805
286
2,343
16,299
4,431
374
3,003
24,107
62,395
943
(5,439)
22,777
80,676
104,783
59
Notes
to
the
Consolidated
Financial
Statements
Reconciliation
of
Equity
As
at
December
31,
2010
(in
thousands
of
dollars)
ASSETS
Current
Cash
and
cash
equivalents
Accounts
receivable
Inventories
Income
taxes
recoverable
Prepaid
expenses
[note
28a]
Property,
plant
and
equipment
[note
28c]
Assets
held
for
sale
Intangible
assets
[note
28d]
Goodwill
Restricted
cash
Other
assets
TOTAL
ASSETS
LIABILITIES
AND
SHAREHOLDERS'
EQUITY
Current
Bank
indebtedness
Accounts
payable
and
accrued
liabilities
Income
taxes
payable
Deferred
revenue
Current
portion
of
provisions
Current
portion
of
long
term
debt
Current
portion
of
preferred
shares
Deferred
tax
liabilities
[note
28b]
Long
term
portion
of
provisions
Long
term
debt
Preferred
shares
TOTAL
LIABILITIES
Shareholders'
equity
Share
capital
Contributed
surplus
[note
28g]
Equity
component
of
preferred
shares
Accumulated
other
comprehensive
loss
Retained
earnings
TOTAL
SHAREHOLDERS’
EQUITY
TOTAL
LIABILITIES
AND
SHAREHOLDERS’
EQUITY
Previous
GAAP
$
Re-‐measurements
$
IFRS
$
2,105
22,722
18,759
3,311
1,060
47,957
24,441
946
14,051
29,820
250
1,755
119,220
8,565
16,342
27
1,935
—
3,398
57
30,324
5,921
—
7,733
5,125
49,103
69,862
1,386
845
(7,564)
5,588
70,117
119,220
—
—
—
—
(136)
(136)
2,480
—
(3,935)
—
—
—
(1,591)
—
(753)
—
—
434
—
—
(319)
(1,073)
319
—
—
(1,073)
—
283
—
(296)
(505)
(518)
(1,591)
2,105
22,722
18,759
3,311
924
47,821
26,921
946
10,116
29,820
250
1,755
117,629
8,565
15,589
27
1,935
434
3,398
57
30,005
4,848
319
7,733
5,125
48,030
69,862
1,669
845
(7,860)
5,083
69,599
117,629
60
Notes
to
the
Consolidated
Financial
Statements
Reconciliation
of
Total
Comprehensive
Loss
For
the
year
ended
December
31,
2010
(in
thousands
of
dollars)
Revenue
Manufacturing
and
selling
costs
[note
28g]
Gross
profit
General
and
administration
[notes
27f
and
g]
Foreign
exchange
loss
[note
28c]
Depreciation
[notes
28c
and
d]
Interest
expense
Loss
on
disposal
of
assets
Impairment
of
assets
[notes
28d
&
e]
Loss
before
income
taxes
Income
tax
recovery
Current
Deferred
Net
loss
from
continuing
operations
Net
loss
from
discontinued
operations
Net
loss
Other
comprehensive
loss
Exchange
differences
on
translation
of
foreign
operations
Total
comprehensive
loss
Previous
GAAP
$
Re-‐measurements
$
IFRS
$
121,574
109,823
11,751
10,974
597
5,007
1,363
10
10,805
28,756
(17,005)
(1,692)
(1,132)
(2,824)
(14,181)
(149)
(14,330)
(2,177)
(16,507)
—
93
(93)
420
(101)
(215)
—
—
3,488
3,592
(3,685)
32
(1,198)
(1,166)
(2,519)
—
(2,519)
(244)
(2,763)
121,574
109,916
11,658
11,394
496
4,792
1,363
10
14,293
32,348
(20,690)
(1,660)
(2,330)
(3,990)
(16,700)
(149)
(16,849)
(2,421)
(19,270)
There
were
no
material
changes
to
the
year
ended
December
31,
2010
statement
of
cash
flows
attributable
to
the
IFRS
conversion.
61
Notes
to
the
Consolidated
Financial
Statements
a)
Prepaid
expenses
Under
previous
GAAP,
the
Company
did
not
recognize
any
temporary
differences
arising
from
a
transfer
of
assets
within
the
consolidated
group
until
there
was
a
transfer
outside
of
the
consolidated
group.
The
taxes
paid/payable
relating
to
unrealized
profits
on
inter-‐group
parabeam
sales
were
recognized
as
prepaid
taxes
under
previous
GAAP.
By
contrast,
IFRS
requires
that
deferred
taxes
are
recognized
on
unrealized
profits
for
the
intergroup
transactions.
Accordingly,
related
prepaid
expenses
are
derecognised
and
deferred
tax
assets
are
recognized
at
tax
rates
in
applicable
purchasers’
jurisdictions.
b)
Deferred
tax
assets
and
deferred
tax
liabilities
A
summary
of
the
items
affecting
the
deferred
tax
asset
and
liability
balances
is
presented
below:
As
at
(in
thousands
of
dollars)
Temporary
differences
arising
on
increased
carrying
amount
of
land
(see
note
28c
for
further
explanation)
Reduction
of
temporary
difference
on
expensing
acquisition
costs
Deferred
taxes
recognized
on
profit
from
intra-‐group
transfers
of
asset.
Change
in
carrying
value
of
property,
plant
and
equipment
and
intangible
assets
of
ZCL
Dualam
on
IFRS
transition
Other
foreign
exchange
translation
differences
Net
deferred
tax
differences
on
IFRS
transition
c)
Property,
plant
and
equipment
December
31,
2010
$
January
1,
2010
$
(347)
190
195
1,020
15
1,073
(347)
113
146
—
—
(88)
Upon
transition
to
IFRS,
the
Company
elected
to
use
the
fair
value
of
certain
parcels
of
land
as
deemed
cost
as
allowed
under
the
IFRS
1:
“First
Time
Adoption
of
International
Financial
Reporting
Standards”.
This
resulted
in
increasing
the
carrying
value
of
property,
plant
and
equipment
by
$2,664,000,
with
the
corresponding
adjustment
recorded
in
opening
retained
earnings
as
at
the
transition
date.
Under
IAS
21:
“The
Effects
of
Changes
in
Foreign
Exchange
Rates”,
the
Company
is
translating
the
consolidated
assets
and
liabilities
of
its
Parabeam
and
Radigan
subsidiaries
using
the
current
rate
method
whereas
under
previous
GAAP
the
temporal
method
was
used.
The
corresponding
adjustments
have
been
recognized
in
the
accumulated
other
comprehensive
loss
and
the
opening
retained
earnings
balance
at
the
transition
date.
d)
Intangible
assets
On
September
30,
2010,
the
Company
conducted
an
impairment
test
on
the
intangible
assets
relating
to
the
ZCL
Dualam
operations.
Using
the
guidance
available
under
previous
GAAP,
the
customer
relationships,
trade
names
and
non-‐patented
technology
intangible
assets
were
not
considered
impaired
as
their
expected
undiscounted
cash-‐flows
(recoverability
test)
exceeded
their
carrying
value
as
at
September
30,
2010.
The
impairment
test
under
IFRS
requires
the
use
of
a
discounted
cash
flow
forecast
in
order
to
estimate
the
fair
value
of
the
intangible
assets.
This
fair
value
is
then
compared
to
the
carrying
amount
as
at
September
30,
2010.
The
IFRS
impairment
test
resulted
in
an
additional
impairment
loss
of
$4,067,000.
Subsequent
to
September
30,
2010,
the
lower
carrying
amount
resulted
in
reduced
depreciation
expense
on
the
impaired
intangible
assets
of
$132,000.
62
Notes
to
the
Consolidated
Financial
Statements
e)
Goodwill
On
September
30,
2010,
the
Company
conducted
an
impairment
test
on
the
goodwill
relating
to
the
ZCL
Dualam
cash
generating
unit.
This
resulted
in
recording
an
impairment
loss
of
$12,692,000.
The
impairment
loss
under
previous
GAAP
was
$10,271,000
for
a
difference
of
$2,421,000;
however
the
carrying
value
of
goodwill
is
the
same
under
both
IFRS
and
previous
GAAP
as
at
December
31,
2010.
For
additional
details
on
the
goodwill
impairment,
refer
to
note
4.
f)
Other
assets
Previous
GAAP
requires
capitalization
of
acquisition
costs
related
to
business
combinations
while
IFRS
does
not
allow
the
capitalization
of
such
costs.
The
costs
of
$434,000
related
to
the
ZCL
Dualam
purchase
are
derecognised
as
at
the
transition
date
under
IFRS.
In
addition
to
the
derecognition,
general
and
administrative
expenses
were
increased
by
$301,000
due
to
expensing
professional
fees
incurred
relating
to
the
acquisition
during
the
2010
fiscal
year.
g)
Share-‐based
payments
Upon
transition
to
IFRS,
the
Company
used
the
graded
vesting
model
for
expensing
unvested
equity-‐settled
stock
options
as
at
the
January
1,
2010
transition
date.
This
resulted
in
the
following
impacts
to
the
total
comprehensive
loss
and
consolidated
balance
sheets.
Impact
on
the
consolidated
balance
sheets:
As
at
(in
thousands
of
dollars)
Contributed
surplus
Retained
earnings
Net
impact
on
closing
equity
Impact
on
total
comprehensive
loss:
For
the
year
ending
(in
thousands
of
dollars)
Increase
in
manufacturing
and
selling
costs
Increase
in
general
and
administration
expense
Net
impact
on
total
comprehensive
loss
December
31,
2010
$
January
1,
2010
$
283
(70)
213
70
(70)
—
December
31,
2010
$
94
119
213
63