THE WESTAIM CORPORATION - Morningstar, Inc

THE WESTAIM CORPORATION2000 annual report

Brought to you by Global Reports


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T h e W e s t a i m C o r p o r a t i o n

Table of Contents

Financial Highlights 2

A message from the President & CEO 4

iFire Technology Inc. 10

Westaim Biomedical Corp. 16

Savvion, Inc. 22

Surface Engineered Products Corp. 26

Westaim Ambeon 28

Westaim Coinage 30

2000 Financials

Management’s Discussion & Analysis 32

Auditors’ Report to Shareholders 37

Consolidated Financial Statements 38

Notes to Consolidated Financial Statements 41

Shareholder Information 53

Board of Directors 53

Corporate Information 54


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Year 2000 Highlights

> iFire Technology secures a US$25-million non-exclusive

licensing agreement and equity investment with TDK Corporation of

Japan to produce iFire™ displays less than 12 inches in size

> iFire Technology demonstrates a 17-inch color prototype

video display

> Westaim Biomedical receives US Food & Drug Administration

and Canadian Health Protection Branch clearance for Acticoat® 7

dressing, a seven-day dressing designed for the US$1-billion

chronic wound market



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> Westaim Biomedical signs an agreement with Century Medical

for Japanese distribution of its Acticoat® burn dressings

> Westaim purchases minority interest in Silicon Valley-

based Savvion, a leading e-business software company

> Shares of Westaim begin trading on Nasdaq under the

symbol WEDX


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the westaim corporation

• Business leadership

• Accelerate time to market

• Focus on commercialization

• Strategic partnerships

• ROI of 30-40% compounded annually

• Exit 3-5 years

Financial Highlights

Cash - $124.5 million Revenue - $127.8 million Shareholder’s equity - $275.6 million Assets - $309.5 million No debt

>>>

Kevin J. JenkinsPresident & CEO


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Dear Fellow Shareholders,

In 2000, Westaim aggressively moved its technology investments forward and expanded its

holdings, resulting in a 78 per cent increase in shareholder value during the year. As the

investment climate in the technology sector as a whole turns more cautious, we believe our

strategy of investing in breakthrough, high-earnings potential business opportunities will serve

our shareholders well in 2001 and the years ahead.

At Westaim, we add value to our technology investments by ensuring that each company has

an aggressive, milestone-driven business strategy; is properly capitalized; and has an

experienced leadership team. We have a small “hands-on” group of corporate executives that

on a daily basis works with and supports each of Westaim’s investments to make certain they

have the direction and resources necessary for business success.


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iFire Technology’s focus continues to be the development of an

affordable flat panel consumer TV that is high quality and less than two-

inches thick to compete in the US$66-billion market for televisions 25

to 50 inches in size. During 2000 we made great strides toward achieving this objective in both

the technical and commercial development.

In the first quarter of 2000, iFire Technology signed a US$25-million agreement with TDK

Corporation of Japan, including a 2.5 per cent equity investment in iFire Technology. This is a

significant endorsement from one of the world’s leading electronic component manufacturers.

Under the non-exclusive license agreement, TDK will produce iFire displays less than 12-inches

in size, primarily for industrial and automotive applications.

iFire Technology continued to make advancements in critical quality areas such as color

saturation, contrast and brightness. In the second quarter, iFire Technology successfully

demonstrated a 17-inch iFire™-based prototype TV display with 100 candelas per meter-

squared brightness, proving that the iFire™ flat panel display technology can be scaled without

compromising brightness, color or image quality.

In 2001, iFire Technology’s major technology goal is to achieve the specifications required for

television on its prototype displays. In January 2001, iFire Technology made a significant step

toward meeting TV specifications by achieving 100 per cent CRT-quality color for each of the

primary colors – red, green and blue. iFire Technology’s primary commercial milestone in 2001

is to enter into a partnership agreement with a major TV manufacturer, which will pave the

way for the production of iFire™ TV modules in 2003.


In only two years on the market, Acticoat® antimicrobial dressings

have become a product of choice for healthcare professionals

working in burn centers across North America. In 2000, sales of

Acticoat® burn dressings climbed to $7.7 million, up more than 60 per cent from 1999.

Building on its success and credibility in the burn market, Westaim Biomedical is entering the

much larger and equally challenging chronic wound market. Chronic wounds affect 4.1 million

individuals in North America alone and currently more than US$1 billion is spent worldwide on

products for these wounds.

In the third quarter, Westaim Biomedical’s new seven-day dressing, branded Acticoat®7,

received U.S. Food & Drug Administration and Canadian Health Protection Branch clearance.

Acticoat®7 dressings provide a sustained release of antimicrobial silver for up to seven days –

the usual length of time between physician visits for people who suffer from chronic wounds.

Westaim Biomedical also completed an agreement with Century Medical Inc. to distribute

Acticoat® burn dressings in Japan. Under the terms of the agreement, Century Medical is

responsible for obtaining all Japanese regulatory approvals.

We expect 2001 to be a breakthrough year for Westaim Biomedical. Goals for the year include

entering into a worldwide distribution partnership for Acticoat® chronic wound products with

one of the world’s leading wound care companies and developing new products where

Acticoat® coatings can add antimicrobial protection value to implant devices as well as

consumer applications.


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In the first quarter, Westaim purchased a minority interest in Savvion, a

privately held Silicon Valley-based e-business software developer, for

US$16 million. Westaim worked with Savvion to secure additional

venture capital funding, broaden sales and increase distribution channels.

Savvion’s BusinessManager™ software quickly and easily turns any business process into a

distributed web application, increasing both productivity and profitability. In 2000, Savvion

greatly broadened its customer base. Its customers include Fujitsu, Cisco, Hewlett Packard, i2

Technologies, Phillips and Alpha Tech. Savvion has also partnered with a number of companies

to integrate its BusinessManager™ software into other complementary products. Its integration

partners include Oracle, BEA Systems Inc., Mercator and webMethods.

Industrial Technologies

Westaim’s industrial technology divisions, Surface Engineered Products and Ambeon, continued

to advance their technologies. In 2000, Surface Engineered Products released its second-

generation coating product, branded CoatAlloy™-1100. This new higher-temperature coating

allows ethylene producers to increase their furnace temperatures, which increases yields in the

production of ethylene.


At the end of 2000, our Aerospace division changed its name to Westaim Ambeon to reflect a

successful extension of its composite material manufacturing technologies into electronic

materials. Revenues from electronics materials grew by more than 90 per cent in 2000 and

now account for 19 per cent of Ambeon’s sales, compared to only 3.5 per cent in 1997.

Coinage Products

Westaim’s Coinage division again provided cash flow for the company to reinvest in its high-

potential technology businesses. Together with Ambeon, the two divisions posted combined

earnings of $15.9 million.

At year-end, Westaim sold the assets of the Chemicals division for $18 million. The sale is

consistent with the company’s strategy to focus on its high-potential technology businesses.

On behalf of the Board of Directors, I want to thank our dedicated employees for their superior

performance and their commitment to our objectives.

Sincerely,

Kevin J. JenkinsPresident & Chief Executive Officer


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Signed “Kevin J. Jenkins”


ifire technology inc.

at a glance

2000 Accomplishments

- 8.5-inch QVGA (320 X 240v) pixel format, full-colordisplay with an average brightness of 150 cd/m2

- Non-exclusive licensing arrangement with TDKCorporation, a leading Japan-based electronic components manufacturer, to collaborativelydevelop monochrome, RGB and full-color iFire™displays under 12-inches in size

- 17-inch video display with 100 cd/m2 brightnessand 8-bit analog grayscale

2001 Goals

- Complete partnership agreement with anelectronics manufacturer to commercialize iFire™flat panel display modules for the TV market

- Improve 8.5-inch display performance to EBU color levels

- Achieve TV color and pixel specifications on 17-inch prototype displays

T e c h n o l o g y I n v e s t m e n t s

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At the 1939 World’s Fair in New York City, television first captured the

imagination of the public. That same year, television sets went on sale

to eagerly awaiting consumers. And in just 60 years, this amazing

technology has penetrated 98 per cent of all North American homes.

While significant improvements have been made over this time, one thing has not changed:

the physical shape of TV. Even today, affordable TV sets remain bulky.

Development of flat panel technologies began almost immediately after the introduction of TV,

but nothing has been able to compete with the reigning incumbent and original TV technology

– the cathode ray tube or CRT – on both performance and price. Liquid crystal displays (LCD)

have penetrated the portable and to a lesser degree, desktop PC monitor markets, but

challenges in cost-effectively scaling to large sizes and producing acceptable video images

have kept it out of the TV market. Plasma displays have conquered the size and video issues,

but remain too expensive for consumers even after 15 years of development and five years

of commercial sales.

i F i r e T e c h n o l o g y I n c .


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iFire Technology’s goal is

to have the lowest cost large screen

flat panel TV technology.

These challenges present an opportunity for iFire Technology. iFire™ flat panel displays will

offer distinct advantages over other technologies and meet the requirements – performance

and cost – for consumer TV.

iFire Technology TV commercialization strategy

iFire Technology expects to be producing iFire-branded flat panel modules for the TV market in

2003, with a goal of having the lowest cost large screen flat panel TV technology. Leading up

to commercialization, iFire Technology will continue to advance the technical development of

its technology toward the specifications required for consumer TV. In 2001, iFire Technology’s

milestones include transferring its 100 per cent European Broadcasting Union (EBU) standard

color achievement to larger displays, increasing brightness to product quality and establishing

a joint venture with a large consumer electronics company.

In addition to the opportunity for an affordable flat panel technology, other developments are

opening up the market for new digital television technologies like iFire™ displays. Digital

broadcasting and HDTV-format programming are becoming realities, and the same consumer

demands for new technology that drove initial sales of TV in the 1940s are driving demand for

digital, interactive, multi-use displays.


iFire™ flat panel displays will be entering the

market on the front edge of this digital

broadcasting evolution.

According to Stanford Resources Inc., an

electronic display industry research firm, the

consumer television market in the 25- to 50-

inch screen-size range will be approximately

US$66 billion in 2004. Ninety-seven percent of sets

sold today in this size range, or 54 million units, use CRT technology.

Almost all CRT sets sell for less than US$3,000. Sales of plasma display panels in 2000 were

estimated to be only 219,000 units, with more than 75 per cent used for commercial monitor

applications, not consumer TV, due to their high price.



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Additionally, sales of 20-inch or larger LCD televisions were reported to be only 60,000 units in

2000, according to DisplaySearch, a flat panel market research and consulting firm. Sales of

these two flat panel television technologies remain slow because their retail price is simply too

high for most consumers, leaving the door open for a new low-cost flat panel alternative like

iFire™ displays.

Small Graphic Displays

iFire Technology’s relationship with TDK

iFire Technology has a non-exclusive licensing arrangement with TDK Corporation, a leading

Japan-based electronic components manufacturer, to collaboratively develop iFireTM displays

under 12-inches. TDK plans to invest at least 7 billion yen (US$65 million) over the next four

years to manufacture iFire™ displays, and will pay iFire Technology an ongoing royalty on sales

of iFire™-based products.

TDK was attracted to iFire™ displays because it recognized their low-cost potential and the

need for a rugged and bright flat panel display with video-quality full-color image capability.

Currently, there is no low cost flat panel technology that can meet all these performance

characteristics.

Characteristics of iFire™ displays

- Low cost manufacturing

- Emissive, no backlight

- Wide viewing angle > 160° conical

- Thin: 2.1 mm depth (panel only)

- Full color: 8-bit analoggrayscale (16.7 million colors)

- Video rate response: < 1 millisecond

- Rugged: all solid state (no gases or liquids)

- Wide operating temperaturerange: -40 C to +85 C

- Scalable: 5 to 50 inches

- Low capital investment


Under the licensing agreement, iFire Technology

agreed to collaborate with TDK to prepare for

the commercial production of small graphic

iFire™ displays. The agreement called for the

technology transfer to be completed within

eight months, but due to the simplicity of the

technology in terms of tool set, materials and

structure, the project took only a few weeks to

complete.

Once the transfer was complete, TDK began working with potential customers to better

understand their flat panel display needs. From this early work, TDK has identified a number of

target applications, including automotive center console and entertainment displays, industrial

process control and monitoring equipment and medical displays, where iFire™ displays offer

important performance advantages over other technologies.



westaim biomedical corp.

at a glance


- Sales for burn dressings increased more than 60 per cent to $7.7 million

- Used in 100 of 120 North American burn centers

- Signed distribution agreement for Japan withCentury Medical

- Received FDA and Health Canada clearance forActicoat® 7 dressings

- Entered chronic wound market in North Americathrough existing sales force

- Advanced partnership negotiations with distribution partner

2001 Goals

- Complete global distribution partnership for chronic wound dressings

- Enter new markets for Acticoat® products, including implants and surgical dressings

- Pursue over-the-counter product opportunities


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Westaim Biomedical has harnessed the age-old power of

silver to develop a revolutionary antimicrobial technology

branded Acticoat®. In less than three years, this infection

fighting technology has become the fastest growing first-line therapy for preventing

life-threatening infections in burn patients throughout North America, has demonstrated

astonishing results with decade-old chronic wounds and has opened the door to examining the

healing power of the company’s unique nanocrystalline silver ions.

With the advent and increased use of antibiotics, pure silver fell

out of favor as an antimicrobial agent. However, as pathogens

evolve and become resistant to antibiotics, new methods of

fighting infection are critical for our survival.

W e s t a i m B i o m e d i c a l C o r p .


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The Power of Acticoat® Antimicrobial Barrier

In 1991, Dr. Robert Burrell, Westaim Biomedical’s Vice President of Science and Technology,

invented and patented a method of applying a thin layer of nanocrystalline silver to a dressing

so that a constant supply of the antimicrobial metal ions could be delivered to wounds.

Branded as Acticoat®, Dr. Burrell’s silver nanocrystals are unique and clinically superior to

traditional silver ions, and can eradicate more than 150 known pathogens, including so-called

antibiotic-resistant superbugs that have spread through hospital wards.

In late 1998, Westaim Biomedical began selling its first Acticoat® product. Acticoat® burn

dressings quickly became a product of choice in the vast majority of North American burn

centers. In just two years, sales grew from $800,000 in 1998 to $7.7 million in 2000, and

Acticoat® dressings are now used in more than 100 of the 120 major burn treatment centers

in North America. Heathcare professionals treating burn wounds have found Acticoat®

dressings to be more cost effective, a superior barrier to infection and less painful for patients

compared to other burn treatments.

The Advantages of Acticoat® Dressings

- Unsurpassed spectrum of activity andrapid kill rate

- Sustained antimicrobial activity for up to seven days

- Effective against more than 150pathogens including the “superbugs”MRSA and VRE

- Less pain for patients – easier forhealthcare providers to apply and remove dressings

- More cost effective than silver-basedprescription creams

- Non-toxic to wound tissues

- Less likelihood of resistance

- Provides an optimal environment forwound healing

- Compatible with advanced tissueengineered products

- Appears to have potent healingproperties


Buoyed by two years of success in the burn

treatment market, Westaim Biomedical

entered the much larger chronic wound

market in 2000. It received US Food & Drug

Administration and Canadian Health Protection

Branch clearance for its Acticoat® 7 dressing, a

seven-day dressing designed specifically for

chronic wounds, and began marketing through

its existing sales force. Currently, there is no

dominant treatment in the estimated US$1-billion annual chronic wound dressing market.

In 2001, Westaim Biomedical plans to enter into a global distribution agreement with a major

medical products company for its chronic wound products. Such a strategic alliance will greatly

accelerate Acticoat® chronic wound dressing’s penetration into the market.


Silver-coated high-density polyethylene mesh facilitatesthe passage of silver through the dressing

Rayon/polyester core helps manage moisturelevel and control silver release

Ultrasound welds bond the layers together


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Healing Power

When doctors and nurses started using Acticoat® dressings on chronic wounds, they noticed

that decade-old wounds were beginning to heal. By definition, chronic wounds are wounds

that won’t heal, and often become infected. They include venous insufficiency ulcers, diabetic

foot ulcers and pressure sores. Chronic wounds are often painful, unsightly, messy and have

unpleasant odors. Sufferers experience immobility, embarrassment and can have difficulty

maintaining employment because of their affliction. Since chronic wounds are often caused by

age-related diseases, this problem is only going to get worse with the aging population.

Traditionally, chronic wound products focused on wound management, because healing is so

difficult to achieve. However, the early anecdotal reports of Acticoat® dressings’ effects on

chronic wounds, as well as ongoing clinical research, has led Westaim Biomedical to consider

pursuing a therapeutic claim for Acticoat® dressings. The pursuit of such a claim, that Acticoat®

dressings promote wound healing, will take two to four years, as extensive clinical studies

must be completed to meet rigorous government standards. Achievement of this claim will

open up new channels for higher-value Acticoat® products.

“In my clinical experience, Acticoat products

accelerate wound healing in chronic and other

serious wounds.”

Dr. Robert Demling, Professor of Surgery, Harvard Medical School


An important part of Westaim Biomedical’s research into Acticoat® dressings’ possible healing

properties centers around the cutting edge of infection and wound healing research. In recent

years, wound researchers have identified that chronic wounds have high levels of a proteolytic

enzymes called MMPs (Matrix Metalloproteinases) in the wound bed. MMPs are not dangerous

in and of themselves, but researchers believe that an excess of MMPs can impede wound

healing. Westaim Biomedical has demonstrated that Acticoat® dressings are effective in

normalizing elevated MMP levels in chronic wounds and that this a key factor in moving

wounds from a non-healing state into a progressive healing state.

In addition to pursuing wound-healing Acticoat® products, Westaim Biomedical is working on

over-the-counter Acticoat® products to serve as infection barriers for minor wounds that are

treated in the home. Additional research includes using Acticoat® antimicrobial silver in other

delivery vehicles, such as gels or sprays, and for coating implant devices such as catheters,

surgical meshes and orthopaedic implants.


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savvion, inc.

at a glance


- Secured $US25 million in financing to expand marketing and sales

- Built strategic partnerships with systems integration firms

- Released Savvion BusinessManager™ 3.0

- Expanded internationally with offices in Europe and Japan

- 20 new customers added

2001 Goals

- Increase revenue

- Increase customer base


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Savvion, Inc. helps enterprises create order out of process chaos.

Business processes are everywhere, in a multitude of systems,

comprised of essential corporate data, governed by rules too many

to count and impacting all elements of the enterprise. By making it possible to manage internal

and external operations while taking advantage of Internet technologies, Savvion leads the

industry in automating business processes across the extended enterprise, and providing

companies with the greatest gains in operational efficiencies.

Savvion’s flagship product, Savvion BusinessManager™, is an enterprise software platform

designed to extend the highest level of management control over business operations. By

integrating management tools, BusinessManager allows companies to continuously manage

integrated processes, regardless of their complexity. Managers can proactively reassign

resources or modify processes on the fly in response to changing business conditions. At the

heart of BusinessManager is flexible, sophisticated Java- and XML- based technology, which

allows companies to quickly define, deploy and integrate processes throughout the enterprise

and beyond.

S a v v i o n , I n c .


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Competition

The business process management market is estimated to be US$2 billion and growing at an

annual rate of 50 per cent. As customers begin to invest in infrastructure software, they start

to look beyond basic e-business toward streamlining internal operations and processes to gain

real efficiencies.

Savvion is the only company delivering a highly flexible business platform that manages

business processes within and across the extended enterprise coupled with a sophisticated

design tool to model and deploy a myriad of business processes. Competing companies only

offer partial solutions that fall short because they are not built from the ground up for business

process management and automation.

Similarly, packaged e-business application providers typically require extensive customization

and address only one business aspect, such as enterprise resource planning (ERP), customer

relationship management (CRM) or supply chain management (SCM), while Savvion’s

BusinessManager can deploy existing or completely new business processes that span all

these areas.


In addition to high cost, custom e-business

applications rarely offer comprehensive solutions

to automate business processes across multiple

business areas, and few even attempt to provide

the capabilities to monitor these processes.

Enterprise application integration (EAI) vendors

integrate disparate enterprise applications but

fail to deliver revolutionary operational change

through the management and automation of business processes that include people and

enterprise systems. Savvion's solutions integrate easily with legacy systems and existing

applications, providing companies with the highest level of management control over business

operations.


savvion helps create order out of

process chaos


surface engineered products corp.

at a glance


- Launched CoatAlloy™-1100 coatings

- Eight full-furnace orders

- Seven of top-ten ethylene producers as customers

- Opened international offices in Europe and Asia

2001 Goals

- Increase revenue

- Expand customer base

- Increase manufacturing efficiency

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S u r f a c e E n g i n e e r e d P r o d u c t s C o r p .

Surface Engineered Products’ CoatAlloy™ coatings provide

significant economic benefits to the world’s ethylene

producers. In just two years on the market, seven of the

top-ten global ethylene producers have signed on as customers.

Ethylene is produced by processing hydrocarbon feedstock in high temperature furnaces. An

unwanted side effect during this course is the build up of carbon, or coke, on the inner walls

of the tubes and fittings in an ethylene furnace. Typically, ethylene producers must shut down

their furnaces as often as every seven days to burn off the coke. This results in more than $US2

billion in lost production every year.

Producers know that conversion of feedstock increases with temperature. However, in an

uncoated furnace, increasing the furnace temperature also results in significant decreases in

run time because it accelerates coking. CoatAlloy™ coatings significantly reduce coking, even

at higher operating temperatures. The higher operating temperature and reduced coking allows

increased run time and conversion of feedstock, resulting in better yields and higher profits for

producers.

In 2000, Surface Engineered Products released its second-generation coating, branded

CoatAlloy™-1100. The new coating allows end-of-run operating temperatures of up to 1100°C

and has a thermal stability of 1150°C. It provides anti-coking performance for ethylene

furnaces at temperatures 40°C higher than previously attainable using the first generation

CoatAlloy™ coated products.


westaim ambeon

at a glance

2000 accomplishments

- In June 2000 received Best Value Gold MedalAward from US Defence Supply Center Richmondas one of the US government's best suppliers

- Turbine engine seal materials approved on newturbine engine models, including the Eurojet EJ200and Rolls-Royce Trent 500

- Revenue from electronic materials productsincreased almost 100 per cent over 1999

2001 goals

- Secure new turbine engine approvals for currentand developmental products

- Continue growth in electronic materials and new product releases

- Evaluate new markets and technologies

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Westaim Ambeon is a high-performance leader in the field of

advanced materials. As materials often define and enhance the

performance characteristics of a customer's product, they

represent an enabling technology that solve performance problems and deliver superior value

to the customer. The Ambeon brand represents the division’s promise of high performance

from its people and the products they produce.

For more than 40 years, Westaim Ambeon has built its advanced materials technology portfolio

by seizing new opportunities that target fast growing, high-potential markets. Under this

strategy, revenues from new products have increased to 19 per cent of total sales in 2000 from

only 3.5 per cent in 1997.

Electronics Materials

Westaim Ambeon’s newest and fastest growing business focuses on the electronics industry.

This product group concentrates on conductive filler material opportunities in electromagnetic

interference (EMI) shielding products. These powders provide the conductivity and shielding

functions that are required in many electronic devices, including cell phones and personal data

assistants.

Turbine Engine Materials

The historic base of the business has been the sale of composite powders and fabricated

honeycomb parts for use as abradable seals in turbine engines. Westaim Ambeon’s DurabradeTM

and NeometTM brand seal systems reduce the clearance between rotating and stationary parts,

which enable higher pressures to be achieved yielding an improvement in fuel efficiency of

2 to 3 per cent. The division is an approved supplier to many of the world’s leading engine

manufacturers including Rolls-Royce, GE Aircraft Engines and Pratt & Whitney.

W e s t a i m A m b e o n


westaim coinage

at a glance


- Introduced new low-cost, aluminum-based familyof plated coin blanks

- Produced more than 10,000 tonnes of coinageproducts, a new business record

2001 Goals

- Obtain first orders for plated aluminum coin blanks

- Continue to leverage technology leadership intoproduct orders and technology opportunities

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Westaim’s coinage division is a world leader in developing and patenting highly successful coin

technologies. In operation since 1961, Westaim has an unequaled international track record in

plated coin blanks, with coins still in circulation after more than 20 years.

In 2000, Westaim achieved another technology breakthrough by developing a new family of

aluminum-based plated coins. The coins are expected to be significantly cheaper than

traditional plated coin blanks, easier to mint and more difficult to counterfeit. The global annual

market for the initial target market, low denomination coins, is estimated at US$200 million.

Westaim is the largest non-European supplier of plated coin blanks for the biggest coinage

project in history – the new Euro coins, which will enter circulation in 2002. In 1999, Westaim

was chosen to be a supplier for Germany, France, Spain, Portugal, Italy and Finland, producing

blanks for the one-, two- and five-cent denominations. To date, the company has already

produced or has orders approaching four billion blanks for the six countries.

Westaim’s other coinage products, each of which is based on groundbreaking proprietary

technology, are: Nickel Bonded Steel (N-B-S™), Aureate Bonded Steel (A-B-S), Copper Bonded

Steel (C-B-S) and bi-color coin blanks. In 2000, the company supplied Canada with nickel strip

for the 10-cent, 25-cent, 50-cent and two-dollar coins, and aureate-bonded nickel blanks for

one-dollar coins. With an annual production capacity exceeding 10,000 tonnes, Westaim’s

coinage products have been used in more than 40 countries for more than 100 denominations.

Westaim has also licensed its technology in three facilities in China and Brazil.

W e s t a i m C o i n a g e


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Management’s Discussion and Analysis

The following discussion of the results of operations and financial condition for the years

ended December 31, 2000 and December 31, 1999 should be read in conjunction with the

Consolidated Financial Statements and accompanying notes.

CONSOLIDATED RESULTS

For the year ended December 31, 2000 The Westaim Corporation (“Westaim” or the “Company”) reported a net loss of $14.6 million after gains from discontinued operations and sale of discontinued assets totaling $13.6 million. The loss fromcontinuing operations in 2000 was $28.2 million, down from a loss of $28.8 million in 1999 primarily due to a dilution gain of$10.5 million recorded on the sale of a 2.5% equity interest in one of Westaim’s subsidiaries, iFire Technology Inc. (“iFire”),offset in part by an equity loss for accounting purposes of $8.0 million with respect to Savvion, Inc. (“Savvion”). The basic and fully diluted loss per common share in 2000 was $0.19 compared to $0.32 in 1999. The loss per common share fromcontinuing operations was $0.37 compared to $0.38 in 1999. The weighted average shares outstanding were 76.9 million and75.4 million in 2000 and 1999 respectively.

Revenues from continuing operations in 2000 were $127.8 million compared to $97.1 million in 1999 and were generatedprimarily from the mature industrial businesses.

Operating costs from continuing operations for the year ended December 31, 2000 were $158.5 million which include:manufacturing costs of $97.9 million in the business units with commercial operations; selling, general and administrativeexpenses of $21.0 million; research and development costs of $30.1 million and depreciation of $9.5 million. Corporateexpenses for the year ended December 31, 2000 were $7.9 million and interest income from the investment of the Company’scash position was $7.7 million. Income tax recovery recorded for the year ended December 31, 2000 was $0.3 million.

Operating costs from continuing operations for the year ended December 31, 1999 were $127.1 million which include:manufacturing costs of $78.0 million in the business units with commercial operations; selling, general and administrativeexpenses of $17.8 million; research and development costs of $23.9 million and depreciation of $7.4 million. Corporateexpenses for the year were $6.8 million and interest income was $8.5 million. Income tax expense recorded for the year endedDecember 31, 1999 was $0.4 million.

On December 29, 2000 the Company sold substantially all assets related to its Chemicals business segment for proceeds of $18million, resulting in an after-tax gain of $9.2 million. The results from operations of the Chemicals business and the estimatedcosts of disposition have been accounted for on a discontinued basis. The book value of the assets divested comprised primarilyworking capital of $1.5 million and capital assets of $3.3 million. Earnings from discontinued operations net of income taxeswere $4.3 million for the period ended December 29, 2000 compared to $4.9 million for the year ended December 31, 1999.



During the year, iFire entered into a strategic business arrangement with Japan-based TDK Corporation (“TDK”) for technologycollaboration, production of iFire™ displays, and a 2.5% common equity investment in iFire for US $7.5 million. The equityinvestment made by TDK is accounted for as an effective disposition of shares, resulting in a gain of $10.5 million.

All eligible research and development expenditures qualify for a 20% tax credit, which can be utilized when the Companyreaches a taxable position. No development costs were capitalized in 2000 or 1999.

OPERATIONS

Westaim’s operations are organized into two high potential emerging technology businesses: iFire Technology Inc. and WestaimBiomedical Corp.; two industrial technology businesses: Surface Engineered Products Corporation and Westaim Ambeon(formerly Aerospace Products); and one mature, profitable Industrial Products business, Coinage Products. Westaim’s strategyis to reinvest the cash generated from its mature businesses in the independent technical, research, operating and marketingand sales capabilities of each of its technology investments through the early years of product development, introduction andcommercialization.

iFire Technology Inc.

iFire has developed a proprietary full-colour solid state display technology with application in both the fast-growth large screenTV market and the small graphic display market. The business unit achieved further milestones towards proving commercialviability of its technology demonstrating scalability to larger sizes and improving brightness and colour depth. In 2000, iFiredemonstrated an 8.5-inch prototype display with luminance of 150 candelas per meter squared (“cd/m2”) and a 17-inchprototype with luminance of 100 cd/m2, video performance and 16.7 million colours.

iFire entered into a strategic partnership and licensing agreement with TDK in the first quarter of 2000. In addition to the equityinvestment already described, the business arrangement includes an up-front license fee of $11.8 million for the rights to useiFire’s proprietary technology to manufacture flat panel displays under 12-inches in size, a commitment to invest in thedevelopment of iFire’s technology and ongoing royalty payments on future sales of displays manufactured by TDK using iFire’stechnology. The up-front license fees are recognized in revenue over the period that services are provided.

The net loss in iFire for the year ended December 31, 2000 was $22.0 million compared to $19.4 million in 1999. Licensingrevenues recognized for the year ended December 31, 2000 were $3.5 million compared to nil in 1999. Spending on research,development and trial manufacturing activities was $25.5 million in 2000 compared to $19.4 million in 1999. Capital spendingon research and development equipment and on modifications to the trial manufacturing facility in Toronto, Ontario totaled$3.7 million in 2000 compared to $4.2 million in 1999.

Westaim Biomedical Corp.

Westaim Biomedical develops and manufactures patented anti-microbial products designed to reduce infection and promotehealing particularly in the burn wound and chronic wound markets. Its first product, Acticoat® burn dressing, is now beingused to treat burn wounds, graft sites and donor sites in more than 100 burn centers in North America. In the fourth quarterof 2000 Westaim Biomedical received US Food and Drug Administration and Canadian Health Protection Branch approval tomarket its Acticoat® 7 anti-microbial dressing, which is targeted at the chronic wound market. Westaim Biomedical’s sales andmarketing activities are headquartered in New Hampshire, USA. Research and development and manufacturing operations arelocated in Fort Saskatchewan, Alberta.

33


34

The net loss in Westaim Biomedical for the year ended December 31, 2000 was $8.1 million compared to $12.4 million in 1999.Revenues for the year ended December 31, 2000 increased to $7.7 million from $4.7 million in the prior year while researchand development, manufacturing, selling and administration expenses declined to $15.8 million in 2000 from $17.1 million in1999. Capital spending totaled $0.3 million in 2000 compared to $0.5 million in 1999.

Surface Engineered Products Corporation

Surface Engineered Products develops and markets proprietary products and services, which reduce operating costs andincrease productivity in medium to high severity operating environments found in the petrochemical industry and other processindustries. Its first product, designed for the ethylene industry, is in use in the operations of several world scale ethyleneproducers. In 2000, Surface Engineered Products launched its latest coating product, branded CoatAlloy™-1100, which allowsethylene producers to operate furnaces at even higher temperatures to increase throughput and raise yields per unit offeedstock.

The net loss in Surface Engineered Products for the year ended December 31, 2000 was $15.9 million compared to $14.6million in 1999. Revenues for the year ending December 31, 2000 declined to $3.6 million from $5.7 million in 1999 ascustomers deferred product orders awaiting the introduction of CoatAlloy™-1100 coatings to the market. Spending on research,development, manufacturing, selling and administration activities was $19.5 million in 2000 compared to $20.3 million in theprior year. Capital spending totaled $2.9 million in 2000 compared to $12.5 million in 1999.

Westaim Ambeon

The Westaim Ambeon division is engaged in the production and marketing of composite nickel powders and nickel-basedhoneycomb for use in gas turbine engines. In addition, the business unit is broadening its business scope by expanding aproduct line into markets for electronic and radio frequency interference shielding materials. Westaim Ambeon also producesand sells nickel welding powders. During the year the division sold 438 tonnes of materials used in the aerospace andelectronics industries compared to sales of 375 tonnes during the prior year and 593 tonnes of welding powders in 2000compared to 576 tonnes in the prior year.

Pre-tax operating earnings in Westaim Ambeon were $9.4 million for the year ended December 31, 2000 compared to $9.0million for the prior year. Revenues increased to $40.2 million in 2000 from $32.4 million in 1999 primarily due to significantincreases in the underlying price of commodity nickel used in welding powder products and to strong growth in sales ofmaterials for electronics applications. Capital expenditures during the year were $4.2 million, directed at modernizing end-of-life equipment and de-bottlenecking plant capacity, compared to $2.4 million in 1999.

Coinage Products

The Coinage Products division manufactures and sells coin blanks and nickel strip to the national mints of countries around theworld. In addition, the division provides contract services in the transfer of coin blank manufacturing technology to nationalmints. Pre-tax earnings in Coinage Products were $6.5 million for the year ended December 31, 2000 compared to $7.9 for theprior year. The decline in earnings is primarily attributable to a year-over-year weakening of the Euro against the Canadiandollar reducing margins on certain products and to competitive pricing in the global coin blank industry generally. Coinagerevenue increased to $72.8 million in 2000 from $54.3 million in 1999 due primarily to the effect of higher commodity nickelprices on products where nickel input costs are passed on to customers without margin and to strong sales volumes in lowermargin products. Sales volumes in 2000 were 10,015 tonnes compared to 8,044 tonnes in the prior year.


Management’s Discussion & Analysis


35

INVESTMENTS

In a series of transactions completed in the second quarter of 2000, Westaim purchased an equity interest in Savvion, Inc., aprivate business process management software company based in Santa Clara, California. Savvion recently launched its flagshipproduct, BusinessManager™, a fast, cost-effective solution for building and managing an e-business. At December 31, 2000Westaim’s voting interest through the ownership of common and convertible preferred shares was 27.6%, and 19.6% on afully-diluted basis. Westaim’s investment in Savvion is accounted for using the equity method of accounting.

INVENTORY

Westaim’s inventories in continuing operations were $27.6 million at December 31, 2000 compared to $30.8 million atDecember 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000 the Corporation had cash and short-term investments of $124.5 million compared to $146.7 million atDecember 31, 1999. Cash used in continuing operations, before working capital changes, totaled $20.4 million for the yearended December 31, 2000 compared to $21.4 million for the prior year. Capital expenditures for continuing operations in 2000were $12.9 million compared to $20.2 million in 1999.

Management believes that current cash balances, short-term investments and cash generated from operations will be sufficientto finance the Company’s operations and capital expenditures.

DIVIDENDS

The Company did not pay cash dividends in 2000 or 1999 and has a policy of retaining its cash reserves to finance capitalprojects and business growth.

RISKS AND UNCERTAINTIES

The Company’s core operating businesses are the production and marketing of metal-based powders and products. Earningsperformance can be sensitive to fluctuations in nickel commodity prices. From time to time, Westaim hedges its exposure tonickel commodity price changes through the use of forward contracts. The Company’s earnings performance can also besensitive to currency and interest rate fluctuations. Westaim reduces this exposure by entering into foreign currency forwardtransactions and interest rate forward rate agreements.

The Company’s technology businesses are dependent upon the talents and knowledge of key individuals in each of thebusinesses. The risk of losing valuable information in the event one of these individuals leaves the Company is minimized bythe use and enforcement of confidentiality agreements. The Company also provides competitive remuneration and incentivesfor the retention of key personnel.

MARKET FOR SECURITIES

The common shares of The Westaim Corporation are listed on The Toronto Stock Exchange under the symbol WED and on Nasdaqunder the symbol WEDX.


36

Management’s Responsibility for Financial Statements

The accompanying consolidated financial statements, the notes thereto and other financial information contained in this annualreport have been prepared by, and are the responsibility of, the management of The Westaim Corporation. Financialinformation contained throughout this annual report is consistent with the financial statements. These financial statementshave been prepared in accordance with Canadian generally accepted accounting principles, using management’s best estimatesand judgements when appropriate. The Board of Directors is responsible for ensuring that management fulfills its responsibilityfor financial reporting and internal control. Policies and procedures are designed to give reasonable assurance that transactionsare properly authorized, assets are safeguarded and financial records properly maintained to provide reliable information forthe preparation of financial statements. The Audit Committee, which is comprised of three Directors, none of whom is an officerof the Company, meets with management as well as the external auditors to satisfy itself that management is properlydischarging its financial reporting responsibilities and to review the consolidated financial statements and the report of theauditors. It reports its findings to the Board of Directors who approve the consolidated financial statements.

The consolidated financial statements have been audited by Deloitte & Touche LLP, the independent auditors, in accordancewith Canadian generally accepted auditing standards. The auditors have full and unrestricted access to the Audit Committee.

Kevin J. Jenkins G.A. (Drew) Fitch

President and Executive Vice President andChief Executive Officer Chief Financial Officer


Management’s Responsibility

Signed “Kevin J. Jenkins” Signed “G.A. (Drew) Fitch”


To the Shareholders of The Westaim Corporation

We have examined the consolidated balance sheets of The Westaim Corporation as at December 31, 2000 and 1999 and theconsolidated statements of loss and deficit and cash flow for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that weplan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significant estimates made by management as well asevaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of theCompany as at December 31, 2000 and 1999 and the results of its operations and cash flow for the years then ended inaccordance with Canadian generally accepted accounting principles.

Chartered AccountantsFebruary 7, 2001

37


Auditors’ Report

Signed “Deloitte & Touche LLP”


38


Consolidated Balance Sheets

(thousands) December 31, 2000 December 31, 1999

Assets

Current

Cash and cash equivalents $ 124,519 $ 56,564

Short-term investments - 90,126

Accounts receivable 44,894 32,150

Inventories (Note 5) 27,614 30,777

Future income taxes (Note 6) 9,345 -

Other 778 1,632

207,150 211,249

Capital assets (Note 7) 77,023 76,016

Deferred charges (Note 8) 2,575 1,958

Future income taxes (Note 6) 7,249 -

Investments (Note 9) 15,485 -

$ 309,482 $ 289,223

Liabilities And Shareholders' Equity

Current

Accounts payable and accrued liabilities $ 21,658 $ 29,846

Provision for site restoration (Note 10) 3,885 -

Deferred income taxes - 362

Deferred licensing revenue (Note 11) 8,325 -

33,868 30,208

Shareholders' equity

Capital stock (Note 12) 372,131 361,682

Deficit (96,517) (102,667)

275,614 259,015

$ 309,482 $ 289,223

Approved on behalf of the Board:

Ian W. Delaney Guy J. Turcotte

Director Director

Signed “Ian W. Delaney ” Signed “Guy J. Turcotte ”


39


Consolidated Statements of Loss and Consolidated Statements of Deficit

Year Ended Year Ended(thousands) December 31, 2000 December 31, 1999

Revenue $ 127,754 $ 97,078

Costs

Manufacturing 97,914 77,999

Selling, general and administrative 21,040 17,785

Research and development 30,103 23,938

Depreciation and amortization 9,466 7,367

Divisional loss (30,769) (30,011)

Corporate costs (7,916) (6,833)

Interest income 7,694 8,488

Gain on issuance of shares by subsidiary (Note 13) 10,509 -

Equity loss (Note 9) (8,024) -

Loss from continuing operations before income taxes (28,506) (28,356)

Income tax recovery (expense) (Note 6)

Current (698) (431)

Future 994 -

296 (431)

Loss from continuing operations (28,210) (28,787)

Earnings from discontinued operations net of income taxes (Note 4) 4,323 4,926

Gain on disposal of discontinued assets net of income taxes (Note 4) 9,239 -

Net loss for the year $ (14,648) $ (23,861)

Loss per common share

Continuing operations $ (0.37) $ (0.38)

Net loss (0.19) (0.32)

Weighted average number of shares outstanding (thousands) 76,940 75,405

Deficit at beginning of year $ (102,667) $ (78,806)

Change in accounting policy (Note 3) 20,798 -

As restated (81,869) (78,806)

Net loss (14,648) (23,861)

Deficit at end of year $ (96,517) $ (102,667)


40

Consolidated Cash Flow Statements

Year Ended Year Ended(thousands) December 31, 2000 December 31, 1999

Operating activities

Loss from continuing operations $ (28,210) $ (28,787)

Items not affecting cash

Depreciation and amortization 9,466 7,367Provision for site restoration 5,463 -Future income taxes (994) -Gain on issuance of shares by subsidiary (10,509) -Deferred licensing revenue (3,467) -Equity loss 8,024 -Other items (200) -

Cash used in continuing operations before non-cashworking capital changes (20,427) (21,420)

Changes in continuing operations non-cash working capital

Accounts receivable (15,354) (8,051)Inventories 2,675 (5,127)Other 854 (929)Accounts payable and accrued liabilities (7,579) 3,786

Site restoration expenditures (1,578) -

Deferred licensing revenue 11,792 -

Cash used in continuing operations (29,617) (31,741)

Cash provided from discontinued operations 6,635 4,425

Total cash used in operating activities (22,982) (27,316)

Investing activities

Capital expenditures - continuing operations (12,896) (20,174)Capital expenditures - discontinued operations (836) (362)Sale of discontinued assets 18,000 -Short-term investments 90,126 (90,126)Deferred charges (906) (330)Investments (23,509) -

Cash provided from (used in) investing activities 69,979 (110,992)

Financing activities

Issue of common shares 10,449 1,282 Proceeds on sale of subsidiary shares 10,509 -

Cash provided from financing activities 20,958 1,282

Net increase (decrease) in cash and cash equivalents 67,955 (137,026)

Cash and cash equivalents at beginning of year 56,564 193,590

Cash and cash equivalents at end of year $ 124,519 $ 56,564

Short-term investments:

Opening short-term investments $ 90,126 $ -

Purchase of short-term investments 39,300 153,530

Sale of short-term investments (129,426) (63,404)

Closing short-term investments $ - $ 90,126



41

1 BASIS OF PRESENTATION

The Westaim Corporation (“the Company”) was incorporated on May 7, 1996 by articles of incorporation under the BusinessCorporation Act (Alberta).

The consolidated financial statements include the accounts of the Company, and its principal subsidiaries, iFire Technology Inc.(“iFire”), Westaim Biomedical Corp., Surface Engineered Products Corporation, Westaim Technologies Inc. and Neomet Limited.

All amounts are expressed in thousands except per share data.

2 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada,which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities andthe reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.

a) Principles of Consolidation

The financial statements of entities, which are controlled by the Company, referred to as subsidiaries, are consolidated.

Entities which are not controlled, but over which the Company has the ability to exercise significant influence are accounted

for using the equity method of accounting. Investments in other entities are accounted for using the cost method.

b) Translation of foreign currencies

Transactions in foreign currencies are translated into Canadian dollars at rates of exchange at the time of such

transactions. Monetary assets and liabilities are translated at current rates of exchange. Foreign operations are considered

financially and operationally integrated and are translated into Canadian dollars using the temporal method of translation.

Gains or losses resulting from the translation adjustments are included in income.

c) Revenue recognition

Revenue is generally recognized when product has been delivered. The Company recognizes revenue from licensing fees

over the term that services are being rendered. Deferred licensing revenue represents amounts received under

agreements for which the process of earning the revenue has not been completed. Royalties are recognized when earned

in accordance with the terms of the agreement. For certain products and services, revenue is recognized on the

percentage of completion basis, as specific critical events occur. In some instances, product is sold on the basis of

achieving defined performance standards. In these cases revenue is not recognized until these performance standards are

achieved. In addition, a provision for potential warranty claims is provided for at the time of sale, based on warranty

terms and prior claims experience.


Notes to Consolidated Financial Statements


42

d) Cash and cash equivalents

Cash and cash equivalents consist of cash on deposit and highly liquid short-term investments with original maturities at

the date of acquisition of 90 days or less and are recorded at cost.

e) Short-term investments

Short-term investments consist of money-market instruments with maturities of less than one year. As at December 31, 2000,

the Company held no short-term investments. As at December 31, 1999, the Company’s short-term investments consisted

solely of held-to-maturity investments and their carrying value was substantially the same as their market value.

f) Inventory valuation

Finished products, commodity and raw materials, materials in process and spare parts and operating materials are valued

at the lower of average cost and net realizable value.

g) Research and development costs

Research costs are expensed as incurred and significant project development costs are capitalized once the Company has

determined that commercialization criteria concerning the product or process have been met. Amortization of these costs

commences with the successful commercial production or use of the product or process. As at December 31, 2000, no such

costs have been capitalized.

h) Capital assets

i) Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation and amortization is

calculated using a straight-line method based on estimated useful lives of the particular assets which do not exceed 20

years for buildings and do not exceed 10 years for equipment.

ii) Carrying Value - The Company evaluates the carrying value of property, plant and equipment and deferred development

costs based on anticipated results and operating budgets, and recognizes an impairment when it is probable that future

estimated cash flows will be less than the carrying value of the assets.

i) Site restoration costs

Site restoration costs have been estimated taking into consideration the anticipated method and extent of the remediation

consistent with legal requirements, industry practices, current technology and the possible uses of the site.

j) Derivative financial instruments

Prices for certain nickel stocks may be hedged using futures contracts, the gain or loss thereon is recognized when the

underlying product is sold. The Company may reduce exposure to foreign currency and interest rate fluctuations through

forward contracts, which are recorded at the lower of cost or market.

k) Income taxes

Income taxes are accounted for using the liability method of income tax allocation. Under the liability method, income

tax assets and liabilities are recorded to recognize future income tax inflows and outflows arising from the settlement or

recovery of assets and liabilities at their carrying values.




43

Income tax assets are also recognized for the benefits from tax losses and deductions that cannot be identified with

particular assets or liabilities, provided those benefits are more likely than not to be realized. Future income tax assets

and liabilities are determined based on the tax laws and rates that are anticipated to apply in the period of realization.

l) Stock-based compensation plans

The Company and certain of its subsidiaries have stock-based compensation plans, which are described in Note 12. No

compensation expense is recognized for these plans when stock options are issued. Any consideration paid by option

holders for the purchase of stock is credited to capital stock. If plan entitlements are repurchased from the holder, the

consideration paid is charged to retained earnings.

m) Statement of cash flow

The consolidated cash flow statement has been prepared using the indirect method.

n) Employee future benefits

Effective January 1, 2000, the Company and its subsidiaries adopted the new Section 3461 of the Handbook of the

Canadian Institute of Chartered Accountants (“CICA”), which requires that all employee future benefits be accounted for

on an accrual basis. The change has been applied on a prospective basis. The transitional obligation of $1,338 is being

amortized to pension expense on a straight-line basis over eight years which is the average remaining service period of

active employees expected to receive benefits under the pension plan.

Post retirement benefit costs for the Company’s defined benefit pension plan are actuarially determined using the

projected benefit method prorated on service. The estimated market value of the pension plan assets is actuarially

determined based on a five-year moving average. Experience gains and losses, and amounts arising as a result of changes

in assumptions and plan amendment are amortized on a straight-line basis over the expected average remaining life of

the employee group.

3 CHANGE IN ACCOUNTING POLICY - INCOME TAXES

Commencing January 1, 2000, the Company and its subsidiaries adopted the liability method of accounting for income taxes inaccordance with the provisions of Section 3465 of the Handbook of the CICA. Under this method, current income taxes arerecognized for the estimated income taxes payable for the current year. Future income tax assets and liabilities are recognizedfor temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of lossesavailable to be carried forward to future years for tax purposes to the extent that they are likely to be realized.

The provisions were applied retroactively without restatement of prior period financial statements. At January 1, 2000, futureincome tax assets of $20,798 were recorded and this amount has been credited to Deficit at January 1, 2000. Prior to January1, 2000, the Company and its subsidiaries used the deferral method of accounting for income taxes.

The balance of future income taxes at December 31, 2000 represents the future benefits of temporary differences between thetax and accounting bases of assets and liabilities, consisting mainly of losses available to be carried forward for tax purposesto the extent that they are likely to be realized.


44

4 DISCONTINUED OPERATIONS

Effective December 29, 2000 the Company sold substantially all its assets and liabilities related to the Chemicals businesssegment, including its wholly-owned subsidiary Thio-Pet Chemicals Ltd., for cash proceeds of $18,000. Accordingly, the resultsof these operations and the estimated costs of disposition have been accounted for on a discontinued basis. The assets andliabilities related to this business were principally accounts receivable, inventories, capital assets and trade accounts payable,the book values of which immediately prior to the sale were as follows:

Net working capital $1,517

Capital assets 3,292

Book value of assets sold $4,809

The results of discontinued operations are summarized as follows:

Period ended Year ended

December 29, 2000 December 31, 1999

Revenue $18,487 $18,142

Net earnings after taxes 4,323 4,926

The net earnings after taxes of discontinued operations is after deductions for depreciation of $258 (1999 - $228) and incometaxes of $2,724 (1999 - $1,004). The gain on disposal of discontinued assets of $9,239 is net of income taxes of $3,752.

5 INVENTORIES


Commodity materials $ - $ 221

Raw materials 8,118 7,381

Materials in process 6,779 6,098

Finished product 7,964 11,306

Spare parts and operating materials 4,753 5,283

Continuing Operations 27,614 30,289

Discontinued Operations - 488

$27,614 $30,777




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6 INCOME TAXES

2000 1999

Loss from continuing operations before income taxes $(28,506) $(28,356)

Income not subject to tax (2,485) -

Unrecognized tax losses 30,194 28,616

(797) 260

Combined basic Canadian federal and provincial tax rate 44.62% 44.62%

Expected income tax (recovery) expense (356) 116

Add (deduct):

Large corporations and capital taxes 362 238

Difference between statutory rate and subsidiary tax rates (137) (79)

Tax rate reduction (287) -

Other items 122 156

Total income tax (recovery) expense $ (296) $ 431

The future income tax balance at December 31, 2000 consists primarily of the future benefit of losses available to be carriedforward for tax purposes to the extent that they are likely to be realized. Accumulated unrecognized tax losses of approximately$81,297 at December 31, 2000 (1999 - $100,909: $54,298 after restatement - Note 3) are available to offset income of specificentities of the consolidated group in future periods. Of these losses, the amount of approximately $4,185 (1999 - $13,907) hasbeen applied to offset accumulated taxable temporary differences. Continuing operations cash taxes paid during the year were$817 (1999 - $614).

7 CAPITAL ASSETS

December 31, 2000

Westaim Ambeon $ 16,591 $ 5,149 $11,442

Coinage Products 25,004 15,807 9,197

Surface Engineered Products 34,284 5,325 28,959

Westaim Biomedical 7,183 2,221 4,962

iFire Technology 21,446 6,197 15,249

Other 16,462 9,248 7,214

$120,970 $43,947 $77,023

Year ended December 31,

Cost

Accumulated

depreciation and

amortization

Net

book value


46

December 31, 1999

Westaim Ambeon $ 13,204 $ 4,751 $ 8,453

Coinage Products 24,635 14,750 9,885

Surface Engineered Products 31,494 2,864 28,630

Westaim Biomedical 6,877 1,442 5,435

iFire Technology 17,700 3,378 14,322

Other 15,195 8,634 6,561

Continuing Operations 109,105 35,819 73,286

Discontinued Operations 8,243 5,513 2,730

$117,348 $41,332 $76,016

Included in the continuing operations capital assets is construction in progress of $5,982 (1999 - $6,201) that is not currentlysubject to depreciation. Depreciation on continuing operations capital assets was $9,191 (1999 - $7,150).

8 DEFERRED CHARGES


Organization costs $1,448 $1,448

Patents 2,754 1,979

Other assets 455 21

4,657 3,448

Less accumulated amortization (2,082) (1,492)

Continuing Operations 2,575 1,956

Discontinued Operations - 2

$2,575 $1,958

Organization costs are amortized over 5 years and patents are amortized over 10 years.



Cost

Accumulated

depreciation and

amortization

Net

book value


47

9 INVESTMENTS


Savvion, Inc. - shares - equity basis $15,101 $ -

Other investment - shares - cost basis 384 -

Total $15,485 $ -

During the year the Company made an investment in Savvion, Inc. (formerly Technology Deployment International Inc.), a U.S. private business management software and service company. As at December 31, 2000, the investment in Savvion, Inc.represents a 27.6% voting interest (19.6% fully-diluted) through the ownership of common stock and redeemable convertiblepreferred shares.

The Company has determined the purchase price discrepancy representing the excess price of the acquisition of voting equityover the related net book value of Savvion, Inc. at the date of acquisition to be $12,186. This purchase price discrepancy, whichhas been ascribed to purchased intangibles and goodwill, is being amortized on a straight-line basis over an average of 5 years.At December 31, 2000, the remaining unamortized purchased intangibles and goodwill amounted to $10,150.

The Company records impairment losses if there has been an impairment in the value of investments that is other thantemporary in nature. No impairment charges have been recorded as at December 31, 2000.

10 PROVISION FOR SITE RESTORATION

Changes in the provision were as follows:


Provision at beginning of year $ - $ -

Additional provisions required 5,463 -

Site restoration expenditures incurred (1,578) -

Provision at end of year $ 3,885 $ -

11 LICENSING AGREEMENTS

During the year iFire entered into a non-exclusive licensing agreement with a third party. The licensing fee is being recognizedas revenue over three years, the term that services are being rendered under the agreement. Deferred licensing revenuerepresents the unamortized portion of cash received. In addition, iFire is entitled to royalties from future commercial sales ofproducts, utilizing the technology, by the third party. These receipts vary in amount based on certain factors and are contingentupon the successful development and commercialization of the iFire technology in products produced by the third party.


48

12 CAPITAL STOCK

The Company’s authorized share capital consists of an unlimited number of common shares, Preferred A shares and PreferredB shares. Changes in the Company’s common shares outstanding during 2000 and 1999 are as follows:

Number Number Amount Amount

Common Shares December 31, 2000 December 31, 1999 December 31, 2000 December 31, 1999

Balance at beginning of year 75,562,340 75,278,046 $ 361,682 $ 360,400

Employee Stock Options and Share Purchase Plan 2,157,358 284,294 10,449 1,282

Balance at end of year 77,719,698 75,562,340 $ 372,131 $ 361,682

Stock-Based Compensation Plans - The Company maintains an Employee and Director Stock Option Plan under which theCompany may grant options for up to 11,000,000 shares of common stock of the Company. The exercise price of each optionequals the weighted average trading price of the Company’s stock for the five days prior to the date of grant. Options awardedare exercisable for a period of 10 years and vest as to one third of the grant on each of the first, second and third anniversariesafter the date of the grant. The Company maintains a Directors and Officers Share Purchase Program and an ExecutiveReplacement Option Program under the provisions of the Stock Option Plan. Under the Share Purchase Program, directors anddesignated officers may be granted one option or equivalent Stock Appreciation Right (“SAR”) for each common sharepurchased, to a cumulative 50,000 options. Options equal to the net purchases of common shares by the optionee during thecalendar year vest at the end of the calendar year in which the purchases were made. Any options issued under this programwhich do not vest at year end are cancelled. Under the Replacement Option Program, upon exercise of options, designatedexecutives may be granted an equivalent number of replacement options or equivalent SARs provided the executive eitherpurchases or retains ownership of shares received on exercise equivalent in value to 50% of the after-tax proceeds resultingfrom the exercise. Replacement options vest evenly over a three year period provided that if the executive sells any of thequalifying shares during the three year period, then all unvested replacement options are cancelled. Effective December 31,2000 the Executive Replacement Option Program has been discontinued.

A summary of the status of the Company’s stock option plans as of December 31, 2000 and 1999 and changes during the yearsending on those dates is presented below:

2000 1999

Weighted-Average Weighted-Average

Shares Exercise Price Shares Exercise Price

Outstanding at beginning of year 4,726,366 $ 5.43 4,356,666 $5.13

Granted 2,214,596 $14.06 634,700 $6.96

Exercised (2,125,962) $ 4.79 (240,000) $4.23

Cancelled/Purchased (130,001) $12.02 (25,000) $4.04

Outstanding at end of year 4,684,999 $ 9.61 4,726,366 $5.43




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The following table summarizes information about stock options outstanding at December 31, 2000:

Options Outstanding Options Exercisable

Number Weighted- NumberOutstanding Average ExercisableAt December Remaining Weighted-Average At December Weighted-Average

31, 2000 Contractual Life Exercise Price 31, 2000 Exercise Price

1,125,700 5.6 years $ 4.31 1,125,700 $ 4.31

1,925,970 8.1 years $ 7.35 970,803 $ 7.63

1,633,329 9.3 years $ 15.93 - $ -

4,684,999 7.9 years $ 9.61 2,096,503 $ 5.85

Employee Share Purchase Plan - Under the Employee Share Purchase Plan, employees are entitled to subscribe for commonshares of the Company, to a maximum value of five percent of their annual compensation. Payment for these shares is madeover a 24 month period at a price per share equal to the lesser of the market value at the offering date and the market valueat the end of the purchase period. The market value at the offering date July 17, 2000 was $19.42 (July 19, 1999 - $6.94). AtDecember 31, 2000 there were outstanding purchase arrangements with employees having an aggregate value of $1,021(1999 - $851). During the year ended December 31, 2000, 30,343 shares were issued, at an average price of $8.47, under thisplan (1999 - 44,294 shares at $6.01).

Subsidiary Stock-Based Compensation Plans - The Company also maintains equity incentive plans for certain employees ofits technology subsidiaries, Surface Engineered Products Corporation, Westaim Biomedical Corp. and iFire Technology Inc.,under which stock options have been granted representing 2.9% to 6.4% of the outstanding shares of the respectivesubsidiaries. Subsidiary stock options vest evenly over a 3-year period and expire after 10 years from the date of grant. Theexercise prices of the stock options are based on the estimated intrinsic value of the subsidiary’s stock at the time of the grant.

SARs have been granted to employees of the technology subsidiaries. SARs vest over time and may be settled with cash, sharesof the subsidiary or shares of the Company, at the Company’s option. The exercise price of the SARs are based on the estimatedintrinsic value of the subsidiary’s stock at the time of the grant.

Shareholder Rights Plan - The Company has a Shareholder Rights Plan under which one Right has been issued for eachoutstanding common share of the Company. The Rights expire on March 9, 2005. Each Right may be exercised eight tradingdays after a triggering event, which is determined when a person (an “Acquiring Person”) has acquired or has commenced atakeover bid to acquire 20% or more of the common shares, other than by an acquisition pursuant to a takeover bid permittedby the Shareholder Rights Plan. Upon occurrence of a triggering event, as described above, each Right entitles the holder, otherthan an Acquiring Person, to purchase for $75 that number of common shares of the Company having an aggregate marketprice of $150. The Plan was effective March 9, 1999 when it was approved by the Board of Directors and it was subsequentlyconfirmed by the shareholders at the Annual and Special Meeting held April 28, 1999.

Range ofExercisePrices

$4 - $6

$6 - $15

> $15

$4 - $16


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13 GAIN ON ISSUANCE OF SHARES BY SUBSIDIARY

During the year, iFire issued shares to a third party reducing the Company’s ownership from 100% to 97.5%. The reduction inthe Company’s equity interest in iFire is accounted for as an effective disposition of shares and resulted in a gain for accountingpurposes of $10,509.

14 PENSION PLANS

The Company maintains defined contribution pension plans for the salaried and hourly employees. These plans were funded$1,356 during the year ended December 31, 2000 (1999 - $1,277).

The Company also maintains a defined benefit pension plan for certain salaried employees. The plan provides for the paymentof benefits based on years of service and compensation. This plan was funded $370 (1999 - $149) by the Company andbenefits of $150 (1999 - $135) were disbursed during the year. The plan assets at market value of $2,350 (1999 - $2,275) areoffset by the actuarial present value of the benefit obligation of $3,177 (1999 - $3,196), creating a plan deficit of $827 (1999- $921) and an accrued benefit liability of $238 (1999 - $54). The unamortized transitional obligation at December 31, 2000was $1,171 and pension expense was $229 (1999 - $74). The significant actuarial weighted average assumptions adopted inmeasuring the Company’s accrued benefit obligations are discount rate - 7%, rate of return on plan assets - 8% andcompensation increase rate - 5%. Plan assets consist primarily of listed stocks, government and corporate fixed-incomesecurities and pooled and balanced funds.

The Company funds the plans in amounts that are neither less than the minimum statutory funding requirements nor morethan the maximum amount that can be deducted for federal income tax purposes.

15 DERIVATIVE FINANCIAL INSTRUMENTS

From time to time, the Company hedges its exposure to contracted nickel sales, raw material purchases and certain producedinventory which are at price risk, through the use of nickel forward contracts traded Over the Counter with counterparties underterms governed by the London Metal Exchange (“LME”) policies. Settlements are based on LME prices, unless other prices arenegotiated. At December 31, 2000, there were deferred gains of $207 and unrealized gains of $88 (1999 - deferred losses of$962 and unrealized losses of $538) on these hedges which are offset by unrecognized losses (1999 - gains) in physicalinventory and raw material costs.

The unrealized positions at December 31, 2000 totaled 684 tonnes (1999 - 762 tonnes) and expire on varying dates to January17, 2001.

From time to time, the Company reduces its exposure to foreign currency and interest rate fluctuations by entering into forwardtransactions. Gains are recognized upon realization, losses when identified, and both are included in interest income. AtDecember 31, 2000 the unrecognized gains on open foreign exchange contracts were $166 (1999 - $183). The open positionsat December 31, 2000, which expire on varying dates to November 30, 2001 were 7,138 Euro and $4,000 U.S. (1999 - $6,000U.S.). At December 31, 2000, the unrecognized losses on the open forward rate agreement contracts were $47 (1999 -unrecognized gains $62). The cumulative notional amount of these open positions at December 31, 2000, which expire onvarying dates to September 18, 2001, were offsetting (1999 - $300,000).




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16 COMMITMENTS

The Company is committed to capital expenditures of $1,066 (1999 - $1,088) and to future annual payments under operatingleases as follows:

2001 2002 2003 2004 2005

$ 641 $ 336 $ 114 $ 5 $ -

17 FINANCIAL INSTRUMENTS

Fair value of financial instruments

The carrying value of the Company’s interest in financial instruments approximates their fair value. The estimated fair valueapproximates the amount for which the financial instruments could currently be exchanged in an arm’s length transactionbetween willing parties who are under no compulsion to act. Certain financial instruments lack an available trading markettherefore fair value amounts should not be interpreted as being necessarily realizable in an immediate settlement of theinstrument.

Interest rate risk

Interest rate risk reflects the sensitivity of the Company’s financial results and condition to movements in interest rates. For 2000 a 1% decrease in interest rates would have reduced earnings before income taxes by $1,314. Conversely, a 1%increase in interest rates would increase earnings before taxes by a similar amount.

Foreign currency risk

The Company is exposed to currency risks as a result of its export to foreign jurisdictions of goods produced in Canada. Theserisks are partially covered by purchases of goods and services in the foreign currency and by forward exchange contracts.

Credit risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and short-terminvestments, accounts receivable and forward contracts. Cash and short-term investments are placed with major financialinstitutions or invested in the commercial paper of large organizations. Concentrations of credit risk with respect to receivablesare limited due to the large number of customers and their dispersion across geographic areas.

18 SEGMENTED INFORMATION

The Company is managed using five operating segments, which have been determined based on the nature of the productsproduced: Westaim Ambeon, Coinage Products, Surface Engineered Products, Westaim Biomedical, and iFire Technology. TheChemicals industry segment previously operated by the Company was sold effective December 29, 2000 and is reported underdiscontinued operations.


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The Westaim Ambeon segment is primarily engaged in the production and marketing of composite nickel powders and nickel-based honeycomb used in gas turbine engines. The Coinage Products segment manufactures and sells coin blanks and nickelstrip to the mints of countries around the world as well as contracting technology transfers to countries worldwide. SurfaceEngineered Products develops and markets proprietary products and services which reduce operating costs and increaseproductivity in the severe operating environments found in the petrochemical and other process industries. The WestaimBiomedical segment develops, manufactures and sells patented anti-microbial products designed to reduce infection andpromote healing, particularly in the burn and chronic wound markets. The iFire Technology segment has developed aproprietary flat-panel full color solid state display technology with applications in both the large screen and small graphicdisplay markets.

The accounting policies of the reportable segments are the same as those described in Note 1. Included in other non-cashassets of $43,780 at December 31, 2000 are the Investments disclosed in Note 9 and Future income tax assets that cannot beallocated to a particular segment.

Depreciation Non-Cash Assets

Year ended Divisional and Capital December 31,

December 31, 2000 Revenue Earnings (Loss) Amortization Expenditures 2000

Westaim Ambeon $ 40,162 $ 9,377 $1,239 $ 4,236 $ 38,674

Coinage Products 72,834 6,486 1,137 391 43,875

Surface Engineered Products 3,596 (15,893) 2,643 2,936 34,480

Westaim Biomedical 7,695 (8,146) 948 305 8,245

iFire Technology 3,467 (22,045) 2,891 3,745 15,909

Other - (548) 608 1,283 43,780

Continuing Operations 127,754 (30,769) 9,466 12,896 184,963

Discontinued Operations 18,487 7,047 258 836 -

$146,241 $(23,722) $9,724 $13,732 $184,963

Depreciation Non-Cash Assets

Year ended Divisional and Capital December 31,

December 31, 1999 Revenue Earnings (Loss) Amortization Expenditures 1999

Westaim Ambeon $ 32,376 $ 8,990 $1,149 $ 2,444 $ 30,665

Coinage Products 54,336 7,877 1,136 200 38,793

Surface Engineered Products 5,680 (14,578) 1,921 12,464 32,407

Westaim Biomedical 4,686 (12,398) 978 509 8,143

iFire Technology - (19,375) 2,048 4,206 14,822

Other - (527) 135 351 11,803

Continuing Operations 97,078 (30,011) 7,367 20,174 136,633

Discontinued Operations 18,142 5,930 228 362 5,900

$115,220 $(24,081) $7,595 $20,536 $142,533

Direct export shipments for continuing operations amounted to $80,305 (1999 - $64,695). These exports were to customers inthe United States $36,267 (1999 - $29,539), Europe $31,909 (1999 - $33,016), South America $10,175 (1999 - $1,071) andAsia $1,954 (1999 - $1,069).

19 COMPARATIVE FIGURES

Certain 1999 figures have been reclassified to conform to the presentation of the current year.




53


Investor Relations

Anthony B. JohnstonSenior Vice PresidentThe Westaim CorporationTel: (403) 234-3103Fax: (403) [email protected]

Stock information

Traded on Nasdaq under the symbol WEDXTraded on The Toronto Stock Exchangeunder the symbol WEDPart of the TSE 300 index

Shares issued and outstanding

77,719,698 as at December 31, 2000

Transfer Agent

Computershare Trust Company of Canada530-8th Avenue S.W., Suite 600Calgary, Alberta T2P 3S8Tel: [email protected]

Directors

Ian W. Delaney 4Non-executiveChairman of the BoardThe Westaim Corporation

Neil Carragher 1,2,4Chairman of The Corporate Partnership Ltd.

Kevin J. JenkinsPresident and Chief Executive OfficerThe Westaim Corporation

Frank W. King 3,4President of Metropolitan Investment Corporation

Edward M. Lakusta 1,3,4Private Business and Energy Consultant

Daniel P. Owen 2,3,4Chairman of Molin Holdings Limited

Guy J. Turcotte 1,4Chairman and Chief Executive Officer ofFort Chicago Energy Partners L.P.

Bruce V. Walter 2,4Managing Director,Co-Head of Media/Telecom/TechnologyBMO Nesbitt Burns Inc.

Shareholder Information

Notice of Annual and Special Meeting

Tuesday April 24, 200110 a.m. Metro Toronto Convention Centre, North BuildingJohn Bassett Memorial Theatre255 Front Street West, Toronto, Ontario

1. Member of the Audit Committee 2. Member of the Environmental Health andSafety Committee

3. Member of the Compensation Committee

4. Member of the Corporate GovernanceCommittee


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Executive Officers

Kevin J. JenkinsPresident and Chief Executive Officer

G.A. (Drew) FitchExecutive Vice President and ChiefFinancial Officer

Barry M. HeckSenior Vice President

Anthony B. JohnstonSenior Vice President

Subsidiaries & Divisions

iFire Technology Inc.Michael W. GoldsteinPresident

Westaim Biomedical Corp.Scott H. GillisPresident

Surface Engineered ProductsCorporationTed RedmondPresident

Westaim Ambeon David WeindGeneral Manager

Westaim CoinageMark R. BenzGeneral Manager

Westaim PartnersAbe RolnickPresident

Offices

The Westaim CorporationExecutive Office / Westaim Partners144 – 4th Avenue S.W.Suite 1010Calgary, Alberta T2P 3N4Tel: (403) 237-7272Fax: (403) 237-6565E-mail: [email protected]

The Westaim CorporationCorporate Office / Westaim Ambeon /Westaim Coinage10102 – 114 StreetFort Saskatchewan, AlbertaT8L 3W4Tel: (780) 992-5300Fax: (780) 992-5301

iFire Technology Inc.15 City View DriveToronto, OntarioM9W 5A5Tel: (416) 246-1030Fax: (416) 246-0458www.ifire.com

Westaim Biomedical Corp.One Hampton Road, Suite 302Exeter, New Hampshire 03833, USATel: (603) 775-7300Fax: (603) 775-7302www.westaimbiomedical.com

Savvion, Inc.5000 Old Ironside DriveSanta Clara, California95054, USATel: (408) 330-3400Fax: (408) 330-0236www.savvion.com

Surface Engineered ProductsCorporation2415 - 101 Street S.W.Edmonton, Alberta T6X 1A1Tel: (780) 431-4100 Fax: (780) 431-4101www.surfaceengineered.com

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