28 ANNUAL REPORT 2012 MANAGEMENTS DISCUSSION AND ANAL YSIS OF OPERA TING RESUL TS AND FINANCIAL CONDITION DECEMBER 31 2012 REPUTATION IN THE CONSTRUCTION INDUSTRY Reputation and goodwill play an important role in the longterm success of any company in the construction industry Negative opinion may impact longterm results and can arise from a number of factors including competence losses on specifc projects questions concerning business ethics and integrity corporate governance the accuracy and quality of fnancial reporting and public disclosure as well as the quality and timing of the delivery of key products and services Aecon has implemented various procedures and policies to help mitigate this risk including the adoption of a comprehensive Code of Conduct which all employees are expected to review and abide by Nevertheless the adoption of corporate policies and training of employees cannot guarantee that a future breach or breaches of the Code of Conduct or other corporate policies will not occur which may or may not impact the fnancial results of the Company INCREASES IN THE COST OF RAW MATERIALS The cost of raw materials represents a signifcant component of Aecons operating expenses As contractors are not always able to pass such risks on to their customers unexpected increases in the cost of raw materials may negatively impact the Companys results At times during the last several years the global availability of basic construction materials such as cement and steel has been impacted by the massive requirements of the Asian market which has resulted in price fuctuations price escalation and periodic supply shortages Periods of high demand or the failure to anticipate or mitigate demand fuctuations may add a signifcant risk to many vendors and subcontractors some of whom have responded by no longer guaranteeing price or availability on longterm contracts which has in turn increased the risk for contractors who are not always able to pass this risk on to their customers PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company particularly through its whollyowned subsidiary IST depends in part on its ability to protect its intellectual property rights Aecon relies primarily on patent copyright trademark and trade secret laws to protect its proprietary technologies The failure of any patents or other intellectual property rights to provide protection to Aecons technologies would make it easier for competitors to offer similar products which could result in lower sales or gross margins The Companys trademarks and trade names are registered in Canada and the United States and the Company intends to keep these flings current and seek protection for new trademarks to the extent consistent with business needs The Company relies on trade secrets and proprietary knowhow and confdentiality agreements to protect certain of its technologies and processes In addition IST holds a number of patents on its oncethrough HRSG system Nevertheless there remains a threat of others attempting to copy ISTs proprietary technology and processes To mitigate this risk the normal business practice of IST includes the signing of confdentiality agreements with all parties to which confdential information is supplied including all customers and licensees OUTSTANDING SHARE DATA Aecon is authorized to issue an unlimited number of common shares The following are details of common shares outstanding and securities that are convertible into common shares Dec 31 Mar 12 In thousands of dollars except share amounts 2012 2013 Number of common shares outstanding 1 55812149 5 5 8 1 2 1 4 9 Paidup capital of common shares outstanding 2 287571 287571 Outstanding securities exchangeable or convertible into common shares Number of stock options outstanding 1910000 1910000 Number of common shares issuable on exercise of stock options 1910000 1910000 Increase in paidup capital on exercise of stock options 2 4 6 3 4 2 4 6 3 4 Principal amount of convertible debentures outstanding see Note 19 to the 2012 consolidated fnancial statements 253189 253189 Number of common shares issuable on conversion of convertible debentures 13921053 1 3 9 2 1 0 5 3 Increase in paidup capital on conversion of convertible debentures 253189 253189 1 The number of common shares outstanding as per the above table at December 31 2012 includes 2800697 shares March 12 2013 2800697 shares held by the trustee of Aecons LongTerm Incentive Plan LTIP The number of common shares outstanding at December 31 2012 for fnancial statement purposes after deducting the above LTIP shares was 53011452 shares March 12 2013 53011452 shares 2 As described in Note 25 to the December 31 2012 consolidated fnancial statements the LTIP Trust meets the criteria of a Special Purpose Entity that requires consolidation by the Company in accordance with SIC 12 Consolidation Special Purpose Entities As a result share capital at December 31 2012 and March 12 2013 has been reduced by 304 million to refect shares held by the trustee of the LTIP plan