Halifax, Canada MD&A & Financial Statements 2012

Transcription

1 Halifax, Canada MD&A & Financial Statements

2 Management s Discussion & Analysis Clarke Inc.

3 MANAGEMENT S DISCUSSION & ANALYSIS Management s Discussion & Analysis ( MD&A ) presents management s view of the financial position and performance of Clarke Inc. ( Clarke or the Company ) for the year ended December 31, compared with the year ended December 31, The following disclosures and associated consolidated financial statements are presented in accordance with International Financing Reporting Standards ( IFRS ). This MD&A should be read in conjunction with the information disclosed within the consolidated financial statements and notes thereto for the year ended December 31, and the Company s Annual Information Form ( AIF ) dated March 18, 2013, including the risk factors described therein, available on SEDAR at This MD&A provides an overall discussion, followed by analyses of the performance of the Company s major reportable segments (see note 24 to the consolidated financial statements for the year ended December 31, ). The MD&A is prepared as at March 18, 2013 (unless otherwise stated). All dollar amounts are shown in millions of Canadian dollars unless otherwise indicated. CAUTIONARY STATEMENT REGARDING USE OF NON-IFRS ACCOUNTING MEASURES This MD&A makes reference to earnings before interest, taxes, depreciation and amortization ( EBITDA ) and book value per share. Clarke uses EBITDA as a measure of the performance of its operating subsidiaries as it excludes depreciation and interest charges, which are a function of the company s specific capital structure, and also excludes entity specific tax expense. Clarke uses book value per share as a measure of the performance of the Company as a whole. Book value per share is measured by dividing shareholders equity attributable to equity holders of the Company at the date of the statement of financial position by the number of common shares of the Company ( Common Shares ) outstanding at that date. Clarke s method of determining these amounts may differ from other companies methods and, accordingly, these amounts may not be comparable to measures used by other companies. These amounts are not performance measures as defined under IFRS and should not be considered either in isolation of, or as a substitute for, net earnings prepared in accordance with IFRS. FORWARD-LOOKING STATEMENTS This MD&A may contain or refer to certain forward-looking statements relating, but not limited to, the Company s expectations, intentions, plans and beliefs with respect to the Company. Often, but not always, forward-looking statements can be identified by the use of words such as plans, expects, does not expect, is expected, budget, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or equivalents or variations, including negative variations, of such words and phrases, or state that certain actions, events or results, may, could, would, should, might or will be taken, occur or be achieved. Forward-looking statements include, without limitation, those with respect to the future price of securities held by the Company, changes in these securities holdings, changes to the Company s hedging practices, currency fluctuations, requirements for additional capital, changes to government regulations and the timing and possible outcome of pending litigation. Forward-looking statements rely on certain underlying assumptions that, if not realized, can result in such forward-looking statements not being achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. With respect to the Company s Investment segment, such risks and uncertainties include, without limitation, the Company s investment strategy, legal and regulatory risks, general market risk, potential lack of diversification in the Company s investments, reliance on certain key executives, interest rates and foreign currency fluctuations and other factors. With respect to the Company s Freight Transportation segment, such risks and uncertainties include, without limitation, competition, expiry of certain leases, labour relations, the use of third party service providers, dependence on certain personnel, fuel costs, weather conditions, customer relationships, claims, litigation and insurance, government regulation of the transport industry and other factors. With respect to the Company s Commercial Tanks & Home Heating segment (formerly the Home Heating segment), such risks and uncertainties include, without limitation, the costs of housing and major consumer products, energy costs, alternative energy sources, steel costs, product liability claims, foreign exchange risk, and other factors. Although the Company has attempted to identify important factors that could cause actions, events or results not to be as estimated or intended, there can be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Other than as required by applicable Canadian securities laws, the Company does not update or revise any such forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Accordingly, readers should not place undue reliance on forward-looking statements. 1

4 OVERVIEW Clarke invests in a variety of private and publicly-traded businesses and participates actively where necessary to enhance the performance of such businesses and increase its return. The Clarke portfolio includes publicly-traded securities as well as wholly-owned and majority-owned businesses operating in diverse industries including transportation services, industrial and consumer products and services and energy services. Firmly focused on the bottom line, we actively manage our investments with a view to delivering short and long-term value for our shareholders and debenture holders. OUR OBJECTIVE Clarke s objective is to increase its net asset value per share while returning an increasing amount of capital to shareholders each year. Clarke does this primarily by making investments in undervalued businesses, surfacing value in such businesses and then realizing that value either through cash flow distributions or by exiting the investment when the investment has matured. Clarke uses returns from its investments to invest in new opportunities as they arise and to return capital to our shareholders. OUR STRATEGY Clarke s investment strategy is to identify undervalued businesses where we believe we can deploy our team of professionals to provide strategic and financial advice designed to improve the businesses operating and/or financial performance and increase the value of such businesses for Clarke and our investors. Clarke typically invests in businesses that are out of favour or distressed and prefers to take significant positions in companies or gain meaningful representation on the companies board of directors to be in a position to implement our investment strategies. KEY EVENTS The Commercial Tanks & Home Heating segment generated EBITDA of 8.5 million for the year ended December 31, compared to 5.8 million for the year ended December 31, 2011 which is a result of successful acquisitions completed over the past two years. The Freight Transportation segment generated EBITDA (before intercompany dividend revenue) of 14.0 million for the year ended December 31, compared to 15.2 million for the year ended December 31, 2011 which reflects challenging market conditions in this segment. The Company s Investment segment generated a net loss before intercompany revenue and income taxes of 4.2 million for the year ended December 31, compared to a net loss of 13.6 million for the year ended December 31, The Company s marketable securities portfolio had realized/unrealized losses of 7.5 million for the year ended December 31, compared to realized/unrealized losses of 18.5 million for the year ended December 31, The Company redeemed the remaining 18.2 million principal amount of its 6% convertible debentures due December 31, (the Debentures ). Subsidiaries in the Company s Freight Transportation segment negotiated new credit facilities consisting of an operating loan of 12.0 million and a term loan of 38.0 million, replacing existing facilities. The Company reinstated a quarterly dividend of 0.06 per Common Share. This was Clarke s first dividend payment since August 31, Subsequent to the year ended December 31,, the Company s Board of Directors declared a quarterly dividend of 0.06 per Common Share payable on April 15, 2013 to shareholders of record at the end of business on March 28, The Board of Directors believes that the payment of a dividend is a useful way to return capital to shareholders and that this level of dividend will continue to allow Clarke to pursue its current business plan and invest in attractive opportunities. Additionally, subsequent to the year ended December 31,, the Company obtained the approval of debenture holders to extend the maturity date of the 6.00% convertible unsecured subordinated debentures due December 31, 2013 (the 2013 Debentures ) to December 31,

5 SELECTED ANNUAL INFORMATION & RESULTS OF OPERATIONS Highlights of the consolidated financial statements for the last three completed fiscal years: Year ended December 31, Year ended December 31, 2011 Year ended December 31, 2010 Revenue and other income Income (loss) from continuing operations attributable to equity holders of the Company * 1.3 (9.1) 29.3 Net income (loss) attributable to equity holders of the Company 1.7 (2.6) 30.7 Comprehensive income (loss) attributable to equity holders of the Company 1.3 (2.6) 30.6 Basic earnings per share ( EPS ) (in dollars) Income (loss) from continuing operations Net income (loss) (0.47) (0.13) Diluted EPS (in dollars) Income (loss) from continuing operations Net income (loss) (0.47) (0.13) Total assets Long-term financial liabilities ** Cash dividends paid per share (in dollars) 0.12 Book value per share (in dollars) * Non-IFRS measure determined by deducting non-controlling interest from income (loss) from continuing operations. ** Not included in long-term financial liabilities for the year ended December 31, is 62.3 million principal amount of the 2013 Debentures that is included in current liabilities. Net income attributable to equity holders of the Company for the year ended December 31, was 1.7 million compared with a net loss of 2.6 million in During the year ended December 31,, the Company had unrealized losses on its marketable securities of 4.7 million compared to unrealized losses of 10.2 million in The Company had realized losses on its marketable securities of 2.8 million for the year ended December 31,, compared to realized losses of 8.3 million in The Company s investment portfolio decreased by 10.1 million in value during the year ended December 31, mainly due to net proceeds received on the sale of marketable securities of 16.3 million and net realized and unrealized losses on its marketable securities of 7.5 million. This decrease was partially offset by purchases of marketable securities in the amount of 13.7 million. The Commercial Tanks & Home Heating segment continued to deliver strong sales volumes due in part to incremental sales associated with businesses acquired in the last two years which resulted in increased earnings in this segment. The Freight Transportation segment delivered reasonable results despite challenging market conditions and due to efficiencies introduced over the last two years was able to generate meaningful earnings in this segment. During the year ended December 31,, the Company had equity in losses of associates of 3.4 million compared to losses of 0.9 million in The losses in mainly consist of impairments taken on petroleum and natural gas properties in associate Midlake Oil & Gas Limited ( Midlake ). Basic earnings per share from continuing operations for the year ended December 31, was 0.08, compared to basic loss per share of 0.47 for the year ended December 31, 2011, an increase of 0.55 per share. Book value per share at December 31, was 5.30, in line with book value per share of 5.31 on December 31, Book value per share reflects dividends in the amount of 0.12 per share that were paid during

6 The following graph represents the book value per share of Clarke, compared to the public market price per share for the ten years ended December 31,. Book value per share during the year was consistent with that of the prior year but would have exceeded that of the prior year excluding the payment of dividends Book Value Per Share 7.52 Book Value Per Share Clarke Share Price Year Ended* * Information for the year ended 2003 is as at March of the following year. In 2004, the Company s year-end was changed to December. December 2010 balances restated to comply with IFRS. While book value per share does not necessarily reflect intrinsic value, it is a measure that management reviews in assessing corporate performance. Historically, the trading price for Clarke shares has tracked book value fairly closely. However, over the last 4 years the market price for our shares has lagged that of book value per share. 4

7 SUMMARY OF QUARTERLY RESULTS Key financial information for the current and preceding seven quarters is as follows: Three months ended Mar June 2011 Sept Dec Mar. June Sept. Revenue and other income Income (loss) from continuing operations (1.5) (7.5) (15.7) (11.2) 12.3 (2.9) Income (loss) from discontinued operations * (0.1) Net income (loss) (0.9) (2.0) (15.8) (11.2) 12.3 (2.5) Other comprehensive income (loss) (0.2) 0.3 (0.1) (0.1) 0.1 (0.1) (0.3) Comprehensive income (loss) (0.9) (2.2) (15.5) (11.1) 12.2 (2.8) Basic EPS from continuing operations (in dollars) (0.08) (0.36) (0.81) (0.67) 0.71 (0.20) Diluted EPS from continuing operations (in dollars) (0.08) (0.36) (0.81) (0.67) 0.51 (0.20) Basic EPS (in dollars) (0.05) (0.09) (0.81) (0.67) 0.71 (0.18) Diluted EPS (in dollars) (0.05) (0.09) (0.81) (0.67) 0.51 (0.18) * Income from discontinued operations in 2011 and includes the results from the former Entertainment segment. As a result of Clarke s election to designate all publicly-traded securities at fair value through profit or loss, all realized and unrealized gains and losses are recorded in investment and other income on the consolidated statements of earnings. The Company has experienced significant fluctuations in the market value of certain investments resulting in meaningful fluctuations in the consolidated statements of earnings which are reflected above. Additionally, the results of operations for the Freight Transportation segment and Commercial Tanks & Home Heating segment are influenced by the seasonality of both businesses. Historically, the Freight Transportation segment has delivered stronger results in the third quarter while the Commercial Tanks & Home Heating segment performs better in the third and fourth quarters. SEGMENT REPORTING The table below shows a breakdown by segment of the Company s holdings as at December 31,, 2011 and 2010 based on total assets of continuing operations: December 31, December 31, 2011 December 31, % 000 % 000 % Investment Freight Transportation Commercial Tanks & Home Heating Other Total Dec. 5

8 Investment segment Results of operations for the year ended December 31,, compared to the year ended December 31, 2011 in the Company s Investment segment are as follows: Year ended December 31, Year ended December 31, 2011 Revenue and other income: Management and advisory revenue from external parties Intercompany dividend and management revenue* Investment and other income (4.1) (13.7) 9.9 (5.3) Expenses Net income (loss) before taxes 9.6 (5.7) Net loss before intercompany revenue and income taxes (4.2) (13.6) *Intercompany dividend and management revenue is eliminated upon consolidation. The Investment segment generated a net loss before intercompany revenue and income taxes of 4.2 million for the year ended December 31,, compared with a net loss of 13.6 million for the year ended December 31, Net loss was mainly attributable to unrealized losses of 4.7 million and realized losses of 2.8 million on its publicly-traded securities for the year ended December 31, compared to unrealized losses of 10.2 million and realized losses of 8.3 million on its publicly-traded securities in The fair market value of the Company s marketable securities portfolio decreased by 10.1 million in value during the year ended December 31, mainly due to net proceeds received on the sale of marketable securities of 16.3 million and net realized and unrealized losses on its marketable securities of 7.5 million. This decrease was partially offset by purchases of marketable securities in the amount of 13.7 million. As at December 31, Clarke held securities in seven publicly-traded entities. The Company s marketable securities portfolio included the following investments: December 31, December 31, 2011 Market Market Market Price value Shares or Price 000 % units Market value 000 % Shares or units Avenex Energy Corp. ( Avenex ) 4,500, , ,147, , Bonnett s Energy Corp. ( Bonnett s ) 3,619, , ,930, , Imvescor Restaurant Group Inc. ( Imvescor ) 3,900, , ,271, , Royal Host Inc. ( Royal Host ) 5,293, , ,293, , Supremex Inc. ( Supremex ) 13,094, , ,814, , TerraVest Capital Inc. ( TerraVest ) Vitran Corporation ( Vitran ) 4,021,008 1,008, ,661 4, ,970, , Other public investments , Carrying value of public investments 67, , Fair market value is determined as the last bid price on the last trading day before the end of the reporting period. As a result of our election under IFRS to designate all publicly-traded securities at fair value through profit or loss, the Company may experience large fluctuations in the market value of certain investments over a short period of time resulting in meaningful fluctuations in the consolidated statements of earnings. 6

9 Summary of investee performance Avenex announced in December that it entered into an agreement to sell its liquefied petroleum gas marketing business as well as its intention to merge with Pace Oil & Gas and Charger Energy to create a new mid-tier dividend-focused oil and gas company called Spyglass Resources Corp. The sale price for Avenex s marketing business was slightly higher than our estimate of value. We believe the markets are currently undervaluing Avenex s oil and gas business regardless of whether the merger is completed. Bonnett s continues to perform well as servicing demand for deeper and more complex wells has resulted in higher revenue per job. The company s positive performance has allowed it to continue to reduce its debt, repurchase its shares and invest in new revenue-generating equipment. Clarke believes Bonnett s continues to trade substantially below its intrinsic value and the valuation implied by recent transactions in the sector and therefore Clarke continued to purchase shares throughout the year. Imvescor continued to improve its business during by improving its restaurant operations, pursuing new licensing arrangements for its restaurant brands and reducing and refinancing its debt. Subsequent to the end of the year, Imvescor s share price increased substantially and Clarke used the opportunity to dispose of all its shares. Clarke realized an aggregate profit on this investment of 1.1 million, representing an internal rate of return of 18%. Royal Host successfully amended the terms of its 2013 Series C convertible debentures during the fourth quarter of December 31,, resulting in a five-year maturity extension, a 1.25% interest rate increase and a reduction in the conversion price of the debentures. This was consistent with our expectation and provides the company with financial flexibility to continue its restructuring. As at December 31,, Royal Host was indebted to Clarke in the amount of 5.0 million. Subsequent to the end of the year, the Clarke Inc. Master Trust, the company s pension plan administered by Clarke, entered into (i) a standby facility with Royal Host whereby it agreed to provide a loan in the amount of 2.0 million at an interest rate of 10% secured by a negative pledge on two properties owned by Royal Host, and (ii) a mortgage with Royal Host in the amount of 2.8 million at an interest rate of 8% and a term of five years secured by the Travelodge hotel located in Belleville, Ontario. Supremex continues to experience secular volume declines in the envelope business, impacting its revenue, profitability and cash flow. After Supremex announced a substantial writedown in the value of its goodwill, the price of Supremex s shares declined markedly and Clarke used the opportunity to increase its ownership of the company to its current 45%. With two Clarke representatives on the Supremex board, Supremex is beginning to take actions to reduce its cost structure with a focus on maximizing its free cash flow generation. TerraVest continues to perform well with contribution from both of its divisions (oil and gas servicing and manufacturing of wellhead processing equipment). Clarke expects continued positive performance from TerraVest, which will enable it to quickly repay the debt it incurred to complete its recent substantial issuer bid and to implement a dividend to return additional capital to shareholders. Vitran s financial and operating results continue to get worse, particularly in the company s US LTL business. After nearly exhausting its primary credit facility, Vitran announced in December and January 2013 that it had entered into a second credit facility to be secured by certain US real estate assets and expected to borrow 33.0 million under this facility. This new borrowing represents 2.00 per share of value that is being transferred from Vitran s equity holders to creditors and reduced the company s net asset value materially, reinforcing for us the importance of purchasing interests in companies with a margin of safety. Subsequent to year-end, Vitran announced that it was selling its logistics business, which was one of the recommendations Clarke made to the company. We now believe that this action is too little and too late and that Vitran will suffer materially worse cash outflows in coming quarters. While our activist position with respect to Vitran did not result in the company adopting all the measures we suggested nor our representatives joining the company s board, it did have a profitable conclusion. Subsequent to the end of the year, Clarke disposed of all its shares of Vitran, generating a profit of 2.0 million, representing an internal rate of return of 187%. 7

10 Freight Transportation segment Results of operations for the year ended December 31, compared to the year ended December 31, 2011 in the Company s Freight Transportation segment are as follows: Year ended December 31, Year ended December 31, 2011 Revenue and other income: Sales Investment and other income Less: intercompany dividend revenue* (6.5) Expenses EBITDA before intercompany dividend revenue ** Depreciation and amortization Interest expense Net income before intercompany dividend revenue and income taxes *Intercompany dividend revenue is eliminated upon consolidation. ** Non-IFRS measure. See definitions of non-ifrs measures on page 2. Revenue and other income in the Freight Transportation segment increased by 7.4 million, or 4.2% for the year ended December 31, compared to This is primarily due to the acquisition of refrigeration transportation assets acquired in 2011 and an increased focus on revenue growth. Expenses increased by 8.6 million, or 5.3% for the year ended December 31, compared to Increased expenses exceeded incremental sales during the year due to non-routine costs related to the startup of the refrigeration transportation business acquired in 2011 and increased accidents and claims. Additionally this segment incurred increased expenses related to non-routine repairs and maintenance performed on the Company s cargo vessel. EBITDA before intercompany dividend revenue for the Freight Transportation segment for the year ended December 31, was 14.0 million compared to 15.2 million in Improved efficiencies established by management of the Company s freight companies have enabled them to maintain meaningful results. Management continues to review opportunities to increase sales revenue and implement cost efficiencies. Interest expense increased in the current year due to the restructuring of intercompany financing which has no impact on a consolidated basis. 8

11 Commercial Tanks & Home Heating segment Results of operations for the year ended December 31, compared to the year ended December 31, 2011 in the Company s Commercial Tanks & Home Heating segment are as follows: Year ended December 31, Year ended December 31, 2011 Revenue and other income: Sales Investment and other income Expenses Add: depreciation included in cost of goods sold (1.1) (0.8) EBITDA * Depreciation and amortization Depreciation included in cost of goods sold Interest expense Income before equity in losses of an associate and income taxes * Non-IFRS measure. See definitions of non-ifrs measures on page 2. Revenue and other income in the Commercial Tanks & Home Heating segment increased by 9.8 million, or 24.1% for the year ended December 31, compared to This is primarily due to incremental sales associated with the acquisition of a home heating distribution company and a commercial steel tank manufacturer in The Commercial Tanks & Home Heating segment generated EBITDA of 8.5 million for the year ended December 31, compared to 5.8 million in This increase is due mainly to the acquisitions noted above. The Company continues to develop new product lines and innovative ideas to address potential changes in regulation and consumer preferences. These initiatives will continue through internal research and development and also through strategic partnerships or acquisitions where these are considered to be complimentary to the segment as a whole. This was demonstrated at the end of through the acquisition of a storage tank manufacturer. Other segment The Other segment consists of real estate used primarily in the Freight Transportation segment, together with the Company s IT services, human resource and treasury functions and private investments in associates. The results of the pension plans are also reflected in the Other segment, as well as the interest payable on the 2013 Debentures. During the year ended December 31,, the Company sold land and building and recognized a gain on the disposition of fixed assets in the amount of 1.1 million. During, Clarke undertook an analysis of its real estate holdings with a view to realizing the value of such holdings which is not recognized by the markets. In certain cases, Clarke s owned real estate is used by its operating businesses while in other cases the owned real estate represents residual assets from a prior business disposition. Clarke expects this value realization process to extend over several quarters. Subsequent to the year ended December 31,, the Company disposed of a property in Regina, Saskatchewan for net proceeds of 1.2 million, representing a gain on disposal of 1.0 million. During, Clarke funded 7.0 million under a shareholder credit facility with Royal Host. As at December 31,, the facility earned interest at an annual rate of 10% and Clarke has received a negative pledge on several properties owned by Royal Host. During, 2.0 million of this facility was repaid. The Company expects the remaining amount outstanding to be short-term in nature. 9

12 During the year ended December 31,, the Company invested 9.0 million in Highkelly Drilling Ltd. ( Highkelly ). The Company owns 38% of the outstanding common shares of Highkelly. Highkelly is a newly formed contract drilling company based in Calgary, Alberta that has entered into a strategic partnership with a Calgary-based oilfield equipment manufacturer with facilities in China and has secured three year drilling contracts with a senior natural gas producer for the use of two drilling rigs. During the fourth quarter of, Highkelly took delivery of the first of these two drilling rigs and deployed it at the client s site. Subsequent to the year ended December 31,, Highkelly took delivery of the second drilling rig and deployed it at the client s site. Based on Highkelly s 2013 budgeted EBITDA, Clarke expects a valuation significantly higher than the initial investment of 9.0 million. During the year ended December 31, an investment in an associate, Midlake, incurred impairments pertaining to petroleum and natural gas properties. These impairments were reflected in equity in losses of associates of 3.4 million for the year ended December 31,. Earnings per share The basic and diluted EPS attributable to equity holders of the Company for the year ended December 31, compared to the year ended December 31, 2011 are as follows: (in dollars) Year ended December 31, Year ended December 31, 2011 Basic EPS Income (loss) from continuing operations 0.08 (0.47) Income from discontinued operations Net income (loss) 0.10 (0.13) Diluted EPS Income (loss) from continuing operations 0.08 (0.47) Income from discontinued operations Net income (loss) 0.10 (0.13) As at December 31,, Clarke had 62.3 million principal amount of 2013 Debentures outstanding. Since the option to convert the convertible debentures into Common Shares can be exercised by the holders at any time, the diluted EPS assumes that such a conversion takes place at the later of the beginning of the period or the issue date, with the number of Common Shares increased to reflect the conversion of these debentures, and the net income available to common shareholders increased to remove the interest, net of income taxes, that would have been avoided had the conversion occurred. Convertible debentures were anti-dilutive for years ended. Stock options were dilutive for the year ended December 31, and anti-dilutive for the year ended December 31, NORMAL COURSE ISSUER BIDS ( NCIB ) The directors and senior management are of the opinion that, from time to time, the prices of the Company s publicly-traded securities do not reflect their intrinsic value and, therefore, purchasing such securities is a worthwhile use of funds and in the best interests of the Company and its security holders. In March, Clarke announced that it had received approval from the TSX to conduct a NCIB to purchase for cancellation up to 851,740 Common Shares, representing 5% of the issued and outstanding Common Shares as at that date. Purchases were able to commence on April 2,, and will terminate on April 1, As at December 31,, Clarke had repurchased and cancelled 370,402 Common Shares under this NCIB. In April, Clarke announced that it had received approval from the TSX to conduct a NCIB to purchase for cancellation up to 6.3 million principal amount of its 2013 Debentures, representing 10% of the public float of 2013 Debentures as at that date. Purchases were able to commence on April 5,, and will terminate on April 4, As at December 31,, Clarke had repurchased and cancelled 1.0 million principal amount of the 2013 Debentures under this NCIB. 10

13 Outstanding share data As at March 18, 2013, the Company had authorized an unlimited number of Common Shares, and had 16,682,315 Common Shares outstanding. The Company also has an unlimited number of First Preferred Shares and an unlimited number of Second Preferred Shares authorized, of which 65,000,000 First Preferred Shares are issued and outstanding to wholly-owned subsidiaries that are eliminated upon consolidation, and nil Second Preferred Shares are issued and outstanding. Also as at March 18, 2013, the Company had 160,000 options to acquire Common Shares outstanding, of which all are vested and exercisable, and had convertible debentures outstanding which could be converted into 8,306,173 Common Shares. LIQUIDITY AND CAPITAL RESOURCES During the year, the Company s net short term debt position (a non-ifrs measure representing short-term indebtedness net of cash and cash equivalents) increased from 8.3 million at December 31, 2011 to 24.4 million at December 31,. This was mainly due to the use of cash to fund the redemption of the remaining Debentures in the amount of 18.2 million. The increase in net short term debt was partially offset by cash generated from operating activities during the year. Cash flow from operating activities Cash provided by operating activities was 21.0 million for the year ended December 31,, compared to 15.4 million provided by operations for the year ended December 31, The increase in cash flow provided by operations was due to increased cash flows generated by certain operating subsidiaries during the year. At December 31,, working capital excluding marketable securities was negative 69.7 million, compared to negative 13.4 million as at December 31, The decrease in net working capital is mainly due to the reclassification of the 2013 Debentures from long-term liabilities to current liabilities. Subsequent to year-end, the Company received approval to extend the maturity date on the 2013 Debentures from December 31, 2013 to December 31, The Company currently has the capacity to fund working capital through existing current and long-term debt facilities. Investing activities The Company used net cash of 11.6 million from investing activities for the year ended December 31,, compared to 0.3 million generated during the same period in The Company invested 9.0 million in Highkelly, made net advances of 5.0 million to Royal Host, purchased 13.7 million of marketable securities and 5.0 million of fixed assets. This was partially offset by 16.3 million received on the sale of marketable securities as well as proceeds on the disposition of fixed assets of 5.9 million during year ended December 31,. Financing activities Net cash used in financing activities was 19.5 million for the year ended December 31,. This was mainly due to the redemption of the remaining Debentures of 18.2 million, dividend payments of 2.0 million as well as regular repayments made on long-term debt of 11.0 million. This was partially offset by net proceeds received on long and short term debt in the amount of 14.3 million. Net cash used in financing activities was 16.3 million for the year ended December 31, 2011 mainly due to the redemption and repurchase of convertible debentures and was partially offset by proceeds of long-term debt. The Company has access to several credit facilities where certain of the Company s marketable securities are pledged as collateral. At December 31,, up to 20.0 million was available on these facilities, subject to the amount of eligible securities pledged as collateral. At December 31,, there was 19.7 million drawn on these facilities (December 31, million). Declines in the market value of pledged securities have an adverse effect on the amount of credit available under these facilities. Funds are available to be transferred throughout group entities without restriction, provided the transferring entity is in compliance with all covenant requirements under its borrowing facilities. During the year several subsidiaries in the Company s Freight Transportation segment replaced an operating loan to a maximum of 12.0 million and a term loan of 15.0 million maturing on December 31, 2013 with an operating loan to a maximum of 12.0 million and a term loan to a maximum of 38.0 million maturing on June 1, At December 31,, the Company had drawn 2.5 million on the operating loan (December 31, 2011 nil) and 10.3 million on the term loan (December 31, million) thus leaving 37.2 million undrawn and available to the Company. 11

14 Discontinued operations Discontinued operations generated 1.0 million in cash for the year ended December 31,, compared to 5.2 million generated in Cash from discontinued operations represents cash flows from Butterfly Holdings LP (the former Entertainment segment). Cash generated in this entity in and 2011 represents the sale of the digital licensing business of this company of which two contingent consideration payments were received in for achieving certain performance targets subsequent to the sale of the business. No further contingent payments will be made. Contractual obligations and capital resource requirements The effects of commitments, events, risks and uncertainties on future performance are discussed in the sections relating to Contractual Obligations and Capital Resource Requirements, Risks, and Changes in Accounting Policies, respectively. The table below summarizes Clarke s maximum contractual obligations by due date (in millions of dollars): Contractual obligations Total Less than 1 year 1 3 years 3-5 years After 5 years Short-term indebtedness Long-term debt Operating leases Included in long-term debt obligations due in less than one year is 62.3 million principal amount of the 2013 Debentures. These debentures are convertible into Common Shares at any time at the option of the holder, and therefore the actual cash required at maturity, if any, is dependent upon the number of 2013 Debentures remaining unconverted. The 2013 Debentures are also redeemable at the option of the Company. The redemption price is the principal amount plus accrued and unpaid interest. Clarke is required to provide at least 30 days prior notice of the redemption. Subsequent to the year ended December 31,, the Company obtained approval to extend the maturity date of the 2013 Debentures from December 31, 2013 to December 31, All other terms of the 2013 Debentures remain the same. This balance will be reclassified as long-term subsequent to the year ended December 31,. Clarke expects to be able to fund all working capital requirements, contractual obligations, and capital expenditures from a combination of operating cash flows, existing credit facilities, and its current cash and cash equivalents position. To ensure this is the case, the Company acquired non-recourse, long-term debt at the freight subsidiary level in the amount of 50.0 million (see note 15 to the consolidated financial statements for the year ended December 31, for full details). At December 31,, Clarke had drawn 12.7 million under these facilities with an outstanding undrawn balance of 37.3 million. Clarke also has several investment margin facilities with Canadian brokerage companies. The facilities permit draws of a portion of the market value of purchases of qualifying marketable securities, depending upon the type of instrument, with certain market value restrictions to a maximum of over 20.0 million. At December 31,, Clarke had drawn 19.7 million under these facilities ( million) (see note 14 to the consolidated financial statements for the year ended December 31, ). Unrecorded commitments At December 31,, Clarke continued to be a party to the following unrecorded commitments: Operating leases, as discussed under Contractual Obligations and Capital Resource Requirements above, in the annual MD&A for the year ended December 31,, and in note 17 to the consolidated financial statements for the year ended December 31,. The Company is party to a subscription agreement for a % equity interest in a long-term investment. The agreement requires periodic capital contributions up to a cumulative maximum of US3.0 million. As at December 31,, capital contributions in the amount of US2.2 have been called by the investee, leaving an outstanding commitment of US0.8 million. 12

15 FOURTH QUARTER A comparison of results for the three months ended December 31,, compared to three months ended December 31, 2011, is as follows: Three months ended December 31, Three months ended December 31, 2011 Revenue and other income: Sales of products Provision of services Investment and other income (6.4) Expenses: Cost of goods sold Cost of services provided General and administrative expenses Pension recovery (1.7) (2.6) Depreciation and amortization Interest expense Income (loss) before equity in losses of associates and income taxes (2.4) 17.4 Equity in losses of associates (1.8) (0.9) Income (loss) before income taxes (4.2) 16.5 Provision for (recovery of) for income taxes (1.3) 0.4 Income (loss) from continuing operations (2.9) 16.1 Income from discontinued operations, net of tax Net income (loss) (2.5) 16.5 Comprehensive income (loss) (2.8) 16.4 Net income (loss) attributable to equity holders of the Company (3.0) 16.4 Comprehensive income (loss) attributable to equity holders of the Company (3.3) 16.3 Fourth quarter revenue and other income decreased as a result of a decrease in the value of our portfolio of publicly-traded securities. Realized/unrealized losses on marketable securities for the fourth quarter of were 7.8 million compared to gains of 11.9 million for the same period in This decrease was offset by increased revenue generated in both the Freight Transportation and Commercial Tanks & Home Heating segments. Higher revenue in the Freight Transportation segment is due primarily to an increased focus on revenue growth in that segment and the acquisition of refrigeration transportation assets acquired late in the fourth quarter of Higher revenues in the Commercial Tanks & Home Heating segment are due to incremental sales associated with two businesses acquired in The Company incurred a loss from continuing operations of 2.9 million in the fourth quarter of compared to generating income of 16.1 in the same period in the prior year. This was driven largely by the decrease in the value of the portfolio of publicly-traded securities and equity in losses of associates of 1.8 million. Net income from discontinued operations for both years consists of the results of Butterfly Holdings LP (formerly Countdown LP), which was entirely divested during 2011 with the final contingent payment earned in the fourth quarter of. The value of our portfolio of publicly-traded securities decreased in the fourth quarter of compared to an increase in the fourth quarter for 2011, leading to comprehensive loss attributable to equity holders of the Company of 3.3 million for the fourth quarter of compared to comprehensive income of 16.3 million for the same period in For the three months ended December 31,, Clarke s basic loss per share from continuing operations was 0.20, compared to EPS of 0.78 for the same quarter in This was reflective of the results of operations for each quarter. Net cash provided by operating activities was 16.3 million for the fourth quarter of, compared to 7.7 million during the fourth quarter of Cash flow from operations consisted of cash provided by the Freight Transportation and Commercial Tanks & Home Heating segments, with combined EBITDA for the two segments in the fourth quarters of and 2011 of 5.4 million and 4.5 million, respectively. The remainder of cash provided from operations during the fourth quarter of is attributable to the reduction of net working capital. 13

16 Net cash used in investment activities was 8.5 million in the fourth quarter of, compared to net cash used of 1.3 million in the same period in Net security purchases in the fourth quarter of totalled 6.3 million, with purchases of 7.1 million and sales of 0.8 million. By comparison, 2.7 million of net security sales occurred in the fourth quarter of 2011, with purchases of 1.5 million and sales of 4.2 million. Our Freight Transportation segment spent 2.4 million on fixed assets in the fourth quarter of compared to 1.9 million in These purchases are expected to result in improved future efficiencies. The Company will continue to ensure that all subsidiaries have sufficient capital to meet their operating requirements, both in terms of working capital and fixed assets. Throughout the Company has continued to reduce debt levels, repaying short-term borrowings and long-term debt. Net cash used in financing activities for the fourth quarter of was 7.5 million compared to 15.1 million for the same period in RELATED PARTY TRANSACTIONS The Company was party to the following related party transactions during the year ended December 31, : (i) (ii) (iii) (iv) (v) (vi) (vii) The Company is a party to rental agreements with companies owned by immediate family members of the Company s President & CEO. Included in General and Administrative expenses is rental and other property expenses of 0.2 million ( million) under this agreement. The Company provides information technology services to related companies. Included in provision of services is 0.4 million ( million) for services provided during the year. Included in receivables at December 31, is a nominal amount ( million) for services provided. During the year ended December 31, the Company advanced a 7% promissory note for bridge financing in the amount of 2.9 million to Highkelly, an investment in associate. The note was repaid in full during the year ended December 31,. Included in investment and other income is 0.1 million (2011 nil) for interest earned and received during the year. The Company provides administrative services to two pension plans it sponsors. Included in provision of services is 0.2 million ( million) for services provided to the pension plans during the year. The Company provided consulting services to certain marketable security investments. Included in provision of services is 0.1 million ( million) for the services provided. Included in receivables at December 31, is nil (2011 a nominal amount) for services provided. Certain executives of the Company served as directors of companies in which the Company holds equity interests. Included in provision of services is 0.2 million ( million) for director services. Included in receivables at December 31, is a nominal amount (2011 a nominal amount) for services provided. A subsidiary of the Company has an 8% promissory note payable to a director of the Company. This note matures on December 1, The total principal and carrying amount of the debt is 0.3 million. Subsequent to the year ended December 31,, this note has been repaid in full. (viii) During the year ended December 31,, the Company entered into a shareholder credit facility to lend 5.0 million to Royal Host maturing on or before December 31, The facility bears interest at 10.00% for the first six months, increasing at a rate of 0.25% each six months thereafter and is calculated separately for each draw amount from the date of funding. As at December 31,, 5.0 million was drawn on the facility. Included in investment and other income for the year ended December 31, is the commitment fee of a nominal amount, the funding fee of 0.1 million and interest income of 0.2 million. During the year ended December 31,, the Company entered into a second shareholder credit facility to lend 2.0 million to Royal Host maturing on or before July 16, The facility bore interest at 10.00% for the first six months. During the year ended December 31,, the facility was fully drawn and subsequently repaid. Included in investment and other income for the year ended December 31, is the commitment fee, funding fee and interest income for a total of 0.1 million. 14

17 (ix) During the year ended December 31,, the Company purchased 3,292,300 shares of Supremex Inc. through the facilities of the Toronto Stock Exchange from a company owned by an immediate family member of the Company s President & CEO. The purchase of the shares was made for investment purposes and the Company paid 1.08 per share. Key management of the Company consists of the directors, officers and key employees of the Company. The compensation accrued is as follows: Year ended December 31, Board of directors Officers Total Salary and fees Bonus Stock option grants Pension value Total FINANCIAL INSTRUMENTS In the normal course of operations, the Company uses the following financial and other instruments: To generate investment returns, including investment income and capital appreciation, the Company will invest in shares, trust units, loans, private investment funds, short-term investments and cash. These instruments have interest rate, market, credit and foreign exchange risk associated with them. To manage foreign exchange, interest rate and general market risk, the Company will use where it sees fit, futures and forward exchange contracts. These instruments may have interest, market, credit and foreign exchange risk associated with them. As an investment company, Clarke has a significant number of financial instruments. Notes 4, 5, 7, 12, 14, 15, 20 and 26 to the consolidated financial statements for the year ended December 31, and the Company s AIF dated March 18, 2013, provide further information on classifications in the financial statements, and risks, pertaining to the use of financial instruments by the Company. 15