Annual Report 2005-2006

Research and innovation are critically important to Canada's economic growth and national quality of life. One of Canada's challenges is to ensure that the knowledge created in organizations like the National Research Council (NRC) is transformed rapidly into products, services and technologies that will benefit Canadians and help Canada compete in today's aggressive global marketplace.

NRC is Canada's leading resource for science and technology (S&T) development and commercialization. Over the years, NRC has consistently demonstrated its worth by identifying Canada's science and technology-based opportunities and adapting its R&D, industry support and commercialization services, programs and networks to meet national needs and priorities.

Throughout 2005-06, the National Research Council worked closely with industry, government and academia to increase the competitiveness of Canadian industry through S&T. It has mobilized the public and private sectors to invest in new S&T initiatives and research facilities and to strengthen NRC-initiated technology clusters across Canada. Through the NRC Industrial Research Assistance Program (NRC-IRAP), the NRC Industrial Partnership Facilities (IPFs), and the NRC Canada Institute for Scientific and Technical Information (NRC-CISTI), NRC has helped many small and medium-sized enterprises adopt new technologies, develop new products and services and become more competitive in today's markets.

Highlights — 2005-2006

New Directions and Commitments for NRC – 2006-2011

The year 2005-2006 was a transitional year for the organization as it repositioned itself for the future. NRC launched its Renewal Initiative at the beginning of 2005-2006 with the aim of developing a new corporate strategy to guide the organization over the next five to ten years. A series of in-depth studies and consultations were completed which identified critical developments in science and technology, key trends in the global economy, and major challenges and opportunities for Canadian industry in the coming years. The five-year NRC strategy that has emerged, Science at Work for Canada, expresses NRC's commitment to create sustainable economic and quality-of-life benefits for all Canadians.

The strategy affirms that, while continuing to deliver on all aspects of its mandate, NRC will devote more of its research and technology development resources to resolve enduring issues in health and wellness, sustainable energy and the environment — areas crucial to our future as a nation. In addition, the strategy sets out the pathway to helping NRC become more responsive, agile and integrated in its delivery of services and programs to key sectors of industry. It also commits NRC to seek out new methods and opportunities to increase its R&D capacities and provide industry with fully integrated, nationally accessible business solutions.

Performance Highlights for 2005-06

In 2005-06, NRC made significant economic contributions to Canada through collaborative research agreements, licensing of its technologies, new companies created, community-based technology cluster initiatives, and other activities.

Economic Impact

In 2005-2006, NRC launched six new companies to commercialize NRC-created technologies for which there was no identified receptor capacity in Canadian industry. In 2005, investment from all sources in NRC spin-off companies was up significantly, reaching $123 million, over twice the level of 2004 ($57 million). This brings the total of new companies created by NRC since 1995 to 67 with close to 700 full-time jobs and an estimated $462 million in cumulative investment, an increase of 20% from last year.

The continuing success of earlier NRC spin-offs is another indicator of NRC's economic impact. The NRC spin-off, IMRIS, has commercialized intra-operative and functional imaging systems for medical diagnostics and surgery. During 2005-2006, IMRIS received significant funding from investors. In 2005 IMRIS revenue was $15 million, and this figure is expected to rise to $25 million in 2006. The NRC spin-off Novadaq, whose core technology is a cardiac imaging device licensed from NRC, went public and raised an investment of $26 million on the TSX. It also received approval for its imaging device from the US Food and Drug Administration during the last year.

In 2005-2006, NRC signed 393 new formal collaborative research agreements with Canadian partners worth a total of $78 million. The total number of active collaborative agreements now stands at 941 with a total value of $394 million over the lifetime of these agreements. The total value figure is a 6% increase over the previous year. The number and value of collaborative agreements are leading indicators that foretell increased research activity with key industry partners. NRC's Canadian partners invest $1.57 for every dollar NRC invests.

NRC enters into international research agreements to contribute knowledge in areas for which Canada is a leader, gain access to international facilities and research networks, increase international opportunities for Canadian firms, and build new research and technology alliances. In 2005-2006, NRC signed 95 new formal collaborative research agreements with international partners worth $33 million. NRC's active international collaborative agreements have a total value, over the lifetime of the agreements, of $141.6 million. NRC's international partners invest $3.54 for every dollar NRC invests.

Licence agreements show the direct flow of innovative technologies into business applications. By negotiating a licence agreement to use NRC technology, the industrial partner endorses the merit of NRC research. NRC entered into 97 new license agreements in 2005-2006. IP licensing revenue for 2005-2006 was $5.8 million, a 16% increase from last year. Over the past five years (2001-02 to 2005-06), NRC has earned $28.7 million in licensing revenue.

several technologies for plastic, composite and metal-powder based products;
a new elastomeric pad that improves the performance of railcar bogies;
a new generation of Band 3 receivers, extremely sensitive instruments that will contribute to a project which will incorporate dozens of radio astronomy antennas functioning as a single observing platform;
patented archaeosome adjuvant technology for vaccine development. Because this technology provokes systemic and cell-mediated immunity and, it could be used effectively in vaccine applications against both intracellular and extracellular pathogens and cancer;
single-domain antibody techniques and phage display libraries to develop antibody-based cancer therapies; and
single-domain antibody-targeting vectors for brain delivery of drugs and biologics for the treatment of neurodegenerative diseases and brain tumours.

Support for Small and Medium-Sized Enterprises (SMEs)

The NRC Industrial Research Assistance Program (NRC-IRAP) is NRC's innovation and technology assistance program. It supports Canadian SMEs by helping them augment their own capacity to innovate and commercialize their innovations.

In 2005-06, NRC-IRAP contributed technical expertise and funding to 2,677 firms (including 340 new ones) for 2,685 innovation projects of which 1,976 were new in 2005-06.

In addition, NRC-IRAP, in partnership with Industry Canada, delivered the Technology Partnership Program (TPC), which is designed to help SMEs develop new and improved technological products, processes or services. In 2005-06, of 106 funded NRC-IRAP/TPC projects, 43 were newly approved.

NRC-IRAP has partnered with the NRC Canada Institute for Scientific and Technical Information (NRC-CISTI) in a pilot program to provide Competitive Technology Intelligence (CTI) to firms via NRC Industry Technology Advisors. As a next step in this initiative, NRC-IRAP will establish an in-house capability to capture CTI and integrate this information into the advice and services it provides to firms – ultimately helping them strengthen their business strategies for greater competitiveness.

As part of its commercialization efforts in 2005-06, NRC put a number of programs and partnerships in place. For example, Biomedical Commercialization Canada Inc. (BCC) was created in Winnipeg, in partnership with governments, academia and the private sector. BCC is a not-for-profit organization that manages the delivery of commercialization programs within NRC Industrial Partnership Facilities.

Another example is BioMed City in Winnipeg, which was established in partnership with universities and colleges, research hospitals, private research institutes, leading firms, financial institutions, venture capital firms, regional development organizations and municipal, provincial and federal governments. BioMed City, a not-for-profit organization, is a strategic attempt to capitalize on the federal and provincial investment to turn Winnipeg into Canada's community of excellence for public health research and innovation. NRC-IRAP signed a contribution agreement with the International Centre for Infectious Diseases to help development and implement BioMed City.

International Reach

In 2005-06, NRC signed 95 formal international collaborative research agreements. NRC has signed 444 such agreements since the first in 2002.

During the year, NRC organized 173 international conferences and workshops (up from 160 the previous year) and received 184 foreign delegations (down from 194 the previous year). Over the last five years (2001-02 to 2005-06), NRC has organized 696 international conferences and workshops and received 941 foreign delegations.

Community Technology Cluster Initiatives

Over the last five years, the Government of Canada has funded NRC to support the development of technology clusters in communities across Canada. With the initiatives still in early development, NRC continues to nurture their growth by encouraging more involvement, commitment, and leadership from cluster partners. In this leadership role, NRC provides innovative firms with R&D expertise, research assistance and access, a collaborative environment and opportunities for engagement with key players across the community.

In 2005-06, NRC completed the first formative evaluation of its community technology cluster initiatives (those in Atlantic Canada) and secured renewed funding of $110 million over five years to support Phase II of its initiatives in this region. This brings the Government's investments in NRC's cluster initiatives to $480 million since 2000.

Across Canada, in 2005-06 NRC had 116 co-location and Industrial Partnership Facility tenants (up from 109 the previous year). Of these tenants, 22 graduated during the year (up from 14 the previous year). NRC also increased the space available to tenants to 26,820 m2 from 25,397 m2 the previous year.

Highly Qualified People

In 2005-06, NRC had 1,262 visiting workers (up from 1,246 the previous year). From 2001-02 to 2005-06, NRC hosted 6,087 visiting workers. NRC hosted 262 postdoctoral fellows (up from 253 the previous year) and 118 research associates (down from 152 the previous year). From
2001-02 to 2005-06, NRC hosted 1,245 postdoctoral fellows.

In 2005-06, NRC scientists continued to garner recognition, receiving 105 external awards (up from 75 the previous year). The figure has risen since 2001-02, when NRC scientists received 70 external awards.

Excellence and Leadership in Research

Scientific papers in leading peer-reviewed publications and conference proceedings are internationally acknowledged measures of research quality and relevance. They are also a key tool for dissemination of knowledge and the creation of value for Canada in the long-term.

NRC has consistently produced over a thousand peer-reviewed publications each year over the last five years. In 2005-2006, researchers published 1,430 articles in refereed journals (a 10% increase over last year) including two research articles in the highly ranked journal Nature. NRC researchers also published 924 papers for peer-reviewed conferences and 1,515 technical reports.

In 2005-06, NRC organized 273 external conferences, workshops or seminars. From 2001-02 to 2005-06, NRC organized 1,107 conferences, workshops or seminars.

Research Highlights

Although NRC has progressed strongly in virtually all the areas of research it pursues, researchers in some areas have achieved leading-edge discoveries with broad-ranging potential for industry, health and the environment. Only a few examples follow.

Advances in Medical Diagnostics and Treatments

Vaccine development — As part of a research collaboration with a leading multinational vaccine company and Oxford University, NRC obtained proof of principle for a lipopolysacharide-based vaccine strategy against Group B meningitis, a major cause of morbidity and mortality in the developed world. There is currently no approved vaccine against group B meningitis. The LPS-based platform could lead to a second generation vaccine to protect Canadian infants against all groups of this deadly pathogen.

Alternatives to antibiotics — In collaboration with Dow Agrosciences Canada Limited (DASC), NRC researchers are searching for novel alternatives to antibiotics to reduce the risk of food-related disease caused by pathogenic organisms. Antibiotic resistance has posed a significant threat to our ability to control bacterial infections. Research efforts at NRC have focused on Campylobacter jejuni, the leading bacterial cause of food-borne disease in North America. Last year the research team obtained proof of principle for an antibody-based decolonization strategy to reduce the bacterial load in animals. This was a significant achievement towards the development of a new generation of feed-based products. The research team is also exploiting the specificity of unique bacteriophage-binding proteins in the fight against environmental pathogens. Bacteriophages are viruses that attack and kill bacteria.

Neurochip for drug screening and testing — NRC scientists have pioneered the development of a 'neurochip', a complex interface of living neurons or brain tissue with multi-electrode arrays that can potentially be used in drug screening and diagnostic testing. In collaboration with the firm QBM, University of Ottawa, and partners in Germany, NRC is working to create a Neurochip Consortium as a vehicle for future development and commercialization of this technology.

An eye drop against blindness — Cataracts are the leading cause of blindness worldwide. One of the major pathways implicated in the development of cataracts is protein glycation. NRC has screened compound libraries of existing drugs to identify new inhibitors of protein glycation. Among the compounds identified was isoproterenol, considered safe for humans and known to present high ocular absorbance without reducing intraocular pressure of the eye. Its prodrug (D)-isoproterenol dipivalate hydrochloride prepared in an eyedrop form and applied to diabetic rats proved effective in significantly delaying the initiation of the diabetic cataract in the rat model. This simple and innovative eye-drop product potentially offers a cost-effective alternative to surgery for the prevention and treatment of diabetes-, age-, and smoke-related blindness.

Understanding how heart cells respond to hormonal signals — Thanks to breakthrough research, NRC scientists can now visualize and quantify the nanoscale receptor clusters in heart cells. Using a specialized optical microscopy technique, scientists reveal how receptors on the heart muscle cells respond to hormonal signals from their environment. Essentially, the new imaging technique improves researchers' understanding of how these receptors, the primary transducers of the 'fight or flight' response, accelerate the heart rate. This understanding could ultimately lead to the development of novel therapeutics for regulating heart arrhythmias.

Discovering the molecular controllers of brain adaptation and regeneration — NRC scientists have made significant discoveries about the molecules that control brain adaptation and regeneration after stroke-induced damage, and have discovered molecules (tetracycline derivatives, peptide fragments) that target these processes. These discoveries have resulted in two patent applications, high-impact publications and the award of two new Heart and Stroke Foundation grants (greater than $400K) for further research and development of these targets.

Advances in Nanotechnology

Nanotechnology-based construction materials — NRC has continued exploring new technologies and products for the building industry based on nanotechnology, concentrating on cements, cement-based products and concretes. The addition of nanoscale particles to concrete has shown promise in improving the control of concrete microstructure beyond what is possible with existing technologies. Programming the time-release of chemical admixtures will also provide maximum effectiveness at the construction site, while reinforcing cement binders with carbon nanotubes may produce tougher cement-based products by impeding crack formation. The goal is the development of superior quality materials, leading to more sustainable structures that can better endure severe weather changes and natural disasters.

Nanoimprint lithography — Nanoimprint lithography (NIL), a way of inexpensively manufacturing miniature devices, could become a critical part of future production processes in information technology, medicine and environmental science fields. NRC has progressed significantly in putting its nanoimprint platform and strategy in place, finalizing the implementation of its Nanoimprint Lithography Prototyping Facility. NRC advanced significantly in building the facilities, and acquired several pieces of leading-edge equipment. NRC finalized the design and performance specifications for other key fabrication equipment, scheduled for construction and delivery in 2006-07. A strategic partnership with the Canadian Nano Business Alliance (CNBA) was also put in place, a key step in developing the network and commercial interface that will help companies commercialize innovative products based on this technology.

Nanobiosensors for rapidly detecting bacteria — Nanobiotechnology couples biological elements and electronics to create powerful nanoscale biosensors with applications related to drug screening, clinical diagnostics, toxic substance monitoring in water, air, soil, and food, and the detection of biological warfare agents. NRC, in collaboration with Biophage Pharma Inc., has developed a new class of nanobiosensors that use Electric Cell-Substrate Impedance Sensing (ECIS) for the rapid and simultaneous detection and identification of microorganisms in water, food, and biological fluids with greater sensitivity than existing technologies. These nanobiosensors constitute an important breakthrough in the speedy detection of living bacteria and will have wide applications in biodefence, environmental monitoring, quality assurance of foods and beverages, and biomedical diagnosis of antibiotic-resistant bacterial infections.

Single-atom tip for use in scanning tunnelling microscope — NRC and University of Alberta researchers have developed the sharpest tip ever known for use as a sensing probe in scanning tunnelling microscopy (STM). A single atom wide, the new probe provides the smallest electron point source ever for STM. The researchers used tungsten atoms to form a sharp or high aspect ratio pyramid that was stabilized with a single-atom coating of nitrogen. Along with STM, the probe has potential applications in atomic force microscopy and could also be used as a physical probe for nanoscale manipulation or for nanoscale point contacts with metals and semiconductors. The probe also has potential to be a very precise source for electron beams and provide stronger image magnification for scanning electron microscopy and transmission electron microscopy. NRC has filed an application to patent this technology.

Advances in Alternative Fuels

Hydrogen storage — An international team led by NRC researchers published a milestone paper in Nature that outlines how hydrogen can be stored more safely for fuel cells. They showed how adding just a touch of stabilizer allowed them to store twice as much hydrogen in the gas hydrate framework, compared to any previously published studies. Hydrates are ice-like substances found offshore on the continental margins and in permafrost all over the globe. They form when gas comes into contact with water under the right temperature and pressure conditions. Gas hydrates are an excellent hydrogen source and could potentially become a practical alternative to fossil fuels. They are one of the world's largest untapped reservoirs of energy and, according to some estimates, have the potential to meet global energy needs for the next thousand years.

Advances in Plant Biotechnology

Making bigger canola with better oil yield — Since 2003, NRC researchers have been laying the genetic groundwork for a new generation of canola varieties as part of the Genetics of Canola Seed Development and Composition project. Using a variety of genomics techniques, NRC researchers have identified more than 10,000 unique canola genes. They've also built a world-leading library of more than 250,000 Expressed Sequence Tags. This long-term canola genomics research is the foundation for being able to genetically engineer a new generation of canola varieties. An NRC researcher has recently identified a gene that regulates steroid hormone production which in turn affects the rate of plant growth. Once genes are identified, the next challenge will be to manipulate them to produce the desired seed characteristics.

Advances in Molecular Sciences

"Filming" chemical reactions in real time — An international research team lead by NRC has, for the first time, "filmed" a chemical reaction in real time from the molecule's point of view. No technology previously existed that could visually capture a chemical reaction completed within a millionth of a millionth of a second. Fortunately, there are ultrashort laser pulses, measured in femtoseconds, which are even faster than this. With one femtosecond laser pulse used as a starter's pistol, a second laser pulse ― delayed in time ― is used to clock the chemical reaction as it occurs. In this technique, a "picture" of what the molecule is doing at a particular instant is obtained by using the second laser pulse to knock off an electron. Using a combination of techniques, this emitted electron can be analyzed in great detail, providing new information about the chemical process itself. The use of this approach will lead to new thinking about the design of active materials for "molecular electronics" and a more detailed understanding of biological processes such as vision and photosynthesis.

Advances in Microstructural Sciences

Creating building blocks for quantum information technology — In 2002, NRC announced its success in demonstrating that that a single electron could be isolated by purely electrostatic means in a lateral quantum dot device, and its spin controlled by applying voltages. This development led to such devices being considered attractive candidates for quantum bits, the operational element of a quantum computer, since the coupling together of one or more electrons (entanglement) could be controlled by rapidly switching the applied voltages. This year NRC achieved yet another first, demonstrating single electron control and manipulation in a device made up of three quantum dots. This advance has opened a new 'playground' for the construction of designer quantum states for applications in quantum information technology.

Advances in the Science of Measurement

Measuring ultraviolet (UV) light for UV-dependent technologies — Throughout the world, new technologies are being developed that require measurement standards before they can be manufactured and traded on global markets. NRC, as Canada's national metrology organization, determines standards and methods of measurement that have a direct impact on the ease with which Canadian firms can trade internationally. As an example, the ultra high-temperature blackbody, a rare physics tool now being readied at NRC, will soon be one of the world's most accurate ways to measure ultraviolet (UV) light. This new tool will reduce calibration uncertainties up to tenfold, providing valuable opportunities for Canadian industries now developing UV-dependent technologies.

Advances in Construction Standards

New building codes — NRC developed and published the 2005 Objective-Based National Construction Codes that will ensure uniformity, safety and cost reduction in the construction industry. Approximately 18,000 copies of the 2005 codes have been sold to date. The reaction from the industry ― builders, design and engineering practitioners, architects, government representatives and the code-regulatory community, including some 50,000 firms ― is very positive. The electronic versions of the model codes and their associated user's guides will be published during the summer of 2006. The federal government, provinces and territories are working toward adopting the 2005 model codes, a process that should be completed by the end of 2006.

Advances in Astrophysics

Highly sensitive radio astronomy instrumentation — As part of the most ambitious project ever undertaken in radio astronomy, NRC scientists have been refining electronic components that could dramatically increase insights about the complex molecules in space and the origins of our universe. A new generation of Band 3 receivers, extremely sensitive instruments designed for signals in the 84-116 GHz range, will play a critical part in the operation of the Atacama Large Millimetre Array (ALMA), a powerful facility that is being constructed in northern Chile's
high-altitude desert. Once completed, ALMA will incorporate dozens of radio antennas that function as a single observing platform. This telescope is being designed to take in light with wavelengths onthe boundary of the microwave and infrared parts of the electromagnetic spectrum. The cold gases of deep space emit this kind of radiation, which astronomers expect will offer unprecedented insights about the complex molecules found in these recesses of
the universe, along with clues to how planets, stars and whole galaxies are formed.

A Proud Past, a Vital Future

NRC has always foreseen and made a head start on the next generation of technologies and innovations that could help our nation prosper. Much of NRC's success has come from the effectiveness of our partnerships, networks, collaborations, and the national and international committees in which NRC participates.

In the years to come, NRC will continue delivering the programs and activities that have proven effective in generating economic and social benefits and improving the global competitiveness of Canadian firms. Providing technology and advice to SMEs, forging research partnerships with Canadian companies, transferring NRC technologies to industry, and sparking innovation in Canadian communities through our research cluster initiatives – these are just a few of the ways in which NRC helps Canadian companies innovate and successfully commercialize new products and services.

Our objective for the next few years is to see NRC become the 'go-to' national resource for S&T-based innovation in Canada. With the right capabilities and resources to do the job, NRC will deliver on its promise — a promise made to industry, government and all Canadians — to be Science at Work for Canada.

Financial Statement

Financial Statement Discussion and Analysis

The following financial statement discussion and analysis (FSD&A) should be read in conjunction with the audited financial statements and accompanying notes of the National Research Council of Canada (NRC) for the fiscal year ended March 31, 2006. These financial statements have been prepared in accordance with Treasury Board accounting policies and year-end instructions issued by the Office of the Comptroller General which are consistent with Canadian generally accepted accounting principles (GAAP) for the Public Sector. The FSD&A has been prepared following the Public Sector Statement of Recommended Practice SORP-1.

Responsibility for the preparation of the FSD&A rests with the management of the NRC. This FSD&A is limited to discussion of the current financial results of the NRC for 2005-06. Additional performance information will be available in the NRC Departmental Performance Report for 2005-06.

The FSD&A consists of three parts: Highlights, Financial Risk and Uncertainty, and Financial Analysis. All financial information presented herein is denominated in Canadian dollars, unless otherwise indicated.

Special Note Regarding Forward Looking Statements

The words "estimate", "will", "intend", "should", "anticipate" and similar expressions are intended to identify forward looking statements. These statements reflect assumptions and expectations of NRC, based on its experience and perceptions of trends and current conditions. Although NRC believes the expectations reflected in such forward-looking statements are reasonable, they may prove to be inaccurate and consequently NRC's actual results could differ materially from our expectations set out in this FSD&A. In particular, the risk factors described in the "Financial Risk and Uncertainty" section of this report could cause actual results or events to differ materially from those contemplated in forward-looking statements.

Highlights

Audit

Over the last number of years, the Government of Canada has been carrying out a government-wide project to improve the quality of financial management and internal control, an initiative embraced by NRC. An important part of this project is improving the effectiveness of financial management practices and applying the accrual method of accounting to prepare financial statements. This requires dual accounting, as the NRC is still required to use the modified cash method to report on some financial results to the Government of Canada.

In order to ensure that it was on track with this initiative, NRC undertook to have its financial statements for 2005-06 audited by the Office of the Auditor General, in accordance with Canadian generally accepted accounting principles (GAAP) for the Public Sector and Treasury Board accounting policy. NRC is very proud to state that it is being used as a model for other government departments in their transition to audited financial statements.

NRC Renewal

The NRC Renewal Initiative was launched in January 2005 with the purpose of renewing the current Vision (which expires in 2006) and developing a new strategy for NRC that could guide the organization successfully over the next 5 years to 10 years. This project consisted of three phases, all of which occurred to some extent in 2005-06. Phase 1 which began in February 2005 until August 2005, identified NRC's internal competencies, as well as its external opportunities.

Phase 2 which occurred from June 2005 to December 2005 defined key strategic directions for NRC in light of its competencies and external environment. The final phase, which began in January 2006, comprised of the development of the actual business strategy. This strategy – Science at Work for Canada – was approved by the NRC Council in March 2006.

Governance

In keeping with the broad government goal of improved management in the public sector, and as a result of its own internal Renewal project to define the NRC Business Strategy for 2006-2010, NRC has implemented a number of initiatives to improve its governance. These initiatives started with implementing changes to the NRC Council and included a redefinition of the role of the NRC Council, revised terms of reference for Council's Executive Committee and proposed terms of reference for three new standing committees. One of these committees' mandate relates to Audit, Evaluation and Risk Management; another deals with Human Resources and the third committee is mandated in the area of NRC Planning and Priorities. The first two committees have been put into place.

As part of the NRC Renewal initiative, NRC Senior Executive Committee (SEC) established a Strategy and Priorities Committee (SPC). The committee reports to SEC and served as the steering committee for Renewal. It will continue to stand and provide senior management with ongoing advice on NRC priorities and strategic direction.

A significant change in how NRC manages its research institutes and programs was implemented with the introduction of portfolio management. Under this new structure, the Vice Presidents have a greater role in setting the strategic direction of the institutes and allocating resources to these priorities. Once fully implemented, portfolio management will improve NRC's ability to undertake and manage cross institute projects, as well as ensure that research is well aligned with NRC's corporate vision and strategic priorities.

NRC adopted the financial management model proposed by the Office of the Comptroller General which holds a Chief Financial Officer (CFO) accountable to both the Comptroller General and the department head for financial management in the organization. At NRC the position reports directly to the President and is a key player on NRC's Senior Executive Committee. In support of the CFO model, NRC began measures in 2005-06 to centralize the finance function, place financial advisors in each Vice President portfolio and require sign off of financial information by each responsible manager. Full implementation of these changes should occur in 2006-07 and will result in even greater accountability at all levels in the organization for sound financial management.

In addition to changes in the finance structure, in 2005-06 NRC implemented a much more rigorous cycle for the planning and review of spending and revenue. It also implemented a Budget Advisory Committee to analyze and make recommendations to Senior Executive Committee on financial issues. It also began work on an integrated planning and performance cycle to ensure that business plans at the institute program level align with NRC's priorities and that program results are measured against these priorities.

Another significant initiative undertaken in 2005-06 was the introduction of a Risk Management Framework for NRC. This framework identified the major risk areas for NRC and the strategies required to minimize this risk. The methodology which supports risk management was introduced to the institutes on a pilot basis, and risk analysis will be integrated into the NRC business planning cycle in the future.

Revenue

Revenue is important to NRC, not only as a means of financing its operating and capital expenditures, but also because it provides an indication of the value that NRC provides to its clients and collaborators.

NRC earns revenue from several sources. Royalty revenue is earned from licensing the rights to use NRC technology. Royalties are typically based on a percentage of the licensee's sales. In 2005-06 NRC generated $5.8 million in royalties. Of this total, $3.8 million was earned from NRC's Institute for Biological Science, primarily for the license of the Meningitis C vaccine.

Facilitating access to NRC researchers and facilities is an important part of technology transfer at NRC. To this end, NRC provides laboratory space to companies on a commercial basis, often as part of a collaboration or technology transfer agreement. Revenue from lease and use of property amounted to $3.1 million in 2005-06.

In 2005-06, 35% of NRC revenue ($56.1 million) was generated from the provision of research services directly to industry and academic clients. In 2005-06, NRC's Institute for Aerospace Research (IAR) and Canadian Institute for Scientific and Technical Information (CISTI) accounted for over half of NRC's service revenue.

As part of its goal to disseminate scientific and technical information of importance to industry, NRC has publications and certified reference materials that it sells to clients. Total sales of goods and information products were $12.0 million in 2005-06. Part of this revenue was related to the release of the 2005 editions of the Model National Construction Codes. In order to facilitate the online purchasing of these documents, NRC developed an internet sales capability. From the release of the codes to March 31, 2006, approximately $2.6 million in Code documents were ordered, with approximately 44% of the transactions taking place via the NRC Virtual Store. It is estimated that the use of the internet to process Codes sales has resulted in savings of approximately $125 thousand for NRC from September 2005 to March 2006. In addition, significant savings in the average order processing time resulted from a thorough review and improved coordination of processing procedures while developing the NRC Virtual Store.

NRC undertakes research on behalf of the other Government Departments, called Financial Arrangements, and is reimbursed the incremental costs associated with this work. In 2005-06, significant work with other Government Departments was undertaken totaling $58.8 million. Most of this work was with the Department of National Defence ($25.2 million) and Natural Resources Canada ($7.3 million). Also included in the Financial Arrangement revenue is $18.8 million from Industry Canada through Technology Partnerships Canada. This amount was received by NRC as part of a repayable contribution program and was used to provide contributions to firms ($16.2 million) and cover operating costs associated with the program ($2.6 million).

NRC also receives income through collaborative research projects which are cost sharing arrangements that focus on work likely to lead to new expertise or technology. Collaborative funding was earned across sectors at NRC for a total of $21.0 million.

Expenses

NRC's expenses in 2005-06 were $832.8 million, with approximately 47.5% of this representing salary and benefits costs. Grants and contributions costs totaled $129.9 million, with most of this funding going to small and medium sized enterprises through NRC's Industrial Research Assistance Program (IRAP).

Of particular note in 2005-06 is NRC's bad debt expense of $23.9 million. This is primarily due to the review of the IRAP Technology Partnership Repayable Contribution Program that was undertaken in 2005-06. This program provided conditionally repayable contributions to small and medium sized enterprises (SMEs) to support the pre-commercialization phase of their technology development. The program funded up to 33% of the expected total project costs with the firm required to finance the balance. Firms were required to conditionally repay these contributions based on their revenues, meaning that for example, if a firm did not earn any revenue, no repayments were required. This program was targeted to SMEs, many of which were start ups with one technology. Failure to bring the technology to market due to technical or business challenges resulted, at times, in the firms ceasing operations and thus defaulting on their repayment obligations. Further details can be found in the Financial Analysis Section under Accounts Receivable.

Financial Risk and Uncertainty

NRC expects to face significant budget constraints over the coming years, from both internal and external pressures.

As a Federal Government Departmental Corporation, NRC funds the majority of its salary, operating and capital expenditures (78% in 2005-06) from allotments from the government. The non salary portion of this funding is fixed with no indexing for price increases. As a result, the actual funding for NRC, in terms of buying power, has been declining over the past decade. In particular, the increase in cost related to property taxes and utilities is significant for NRC.

NRC owns and manages 186 specialized buildings that comprise approximately 525,958 square meters of space. It also has an equipment and informatics base of approximately $202.6 million, net book value. NRC's capability to fund the upgrade or replacement of these assets from its appropriations is limited, and it will need to secure sources external to NRC for this purpose.

In the last 2 years, the federal government announced a series of budget reductions across federal departments as part of its realignment strategy and initiative to increase its efficiency. The impact on NRC was significant and challenging. Further, in the 2006 federal budget, an additional program review exercise was announced by the government. The actual impact on NRC is not yet known.

To help position itself to meet these challenges, NRC implemented changes in 2005-06 in its governance structure and made significant progress towards the development of a new, focused Business Strategy (as detailed in the section Highlights previously). Both of these initiatives will improve the planning, allocation and monitoring of resources, which will in turn help alleviate some of the financial pressures currently being felt by NRC.

In addition, NRC has commenced a thorough resource allocation review to ensure research in priority areas defined in its Strategy is appropriately funded in the future. Also, significant efforts, that engage the Minister of Industry and Central agencies, have begun which are aimed at finding ways to address the external budget pressures.

Details of other factors influencing NRC's budget pressures and uncertainty are provided below.

Sunsetting Funding

In order to ensure value for money, it has been the practice of Treasury Board over the last number of years to provide funding for new initiatives on a sunsetting basis. This means that a permanent increase in the NRC allotment from the government is not provided, but rather funding is provided on a five year basis, with the option for renewal. Renewal is conditional on performance and availability of funding. While this is recognized as a good management practice for the government in the whole, it does create some level of uncertainty and instability in a research organization such as the NRC.

Although funding is not necessarily provided on an ongoing basis, new, government-approved initiatives, such as the establishment of technology cluster sites in centres across Canada, often entail an ongoing commitment from NRC in terms of the construction and maintenance of new, specialized facilities, and the hiring of staff. There is also an expectation by the communities which support, and in some cases invest in, these new initiatives that they will exist beyond the five year funding window. NRC must always be aware in its planning that funding might not be renewed, and that it may have to support these initiatives from its limited fixed allotments.

Foreign Currency

NRC purchases roughly $50 million per year in currencies other than the Canadian dollar, which exposes NRC to fluctuations in foreign exchange. The majority of foreign purchases (86% average over last three years) are transacted in U.S. dollars. Due to the strengthening Canadian dollar over the last year, NRC benefited from an increase in our purchasing power over 2003-04 levels of approximately $4 million U.S. Continued upswing of the Canadian dollar will benefit NRC, whereas a future decline in the Canadian Dollar relative to the U.S. dollar will have the effect of decreasing NRC's purchasing power.

The 2005-06 gain in purchasing power was somewhat negated by the reduction in Canadian dollars received from foreign sales. In 2005-06, NRC received $31.7 million Cdn on sales of $26.6 million U.S. By way of comparison, in 2003-04, NRC received $35.9 million Cdn from $26.5 million U.S. in sales.

NRC does not use any financial instruments to hedge foreign currency fluctuations.

Dependence on Revenue

NRC's dependence on external sources of funding has been growing since the early 1990's. The portion of NRC's operating and capital expenditures funded from external sources of income was roughly 11% in 1991-92. By 2005-06, this percentage had climbed to over 22%.

In particular, NRC has Centres that rely on external sources of revenue to fund the majority of their operations, namely the NRC-Centre for Surface Transportation and the NRC-Canadian Hydraulics Centre. In addition, NRC's two largest institutes – the NRC-Institute for Aerospace Research, and the NRC-Canada Institute for Scientific and Technical Information (with expenditures in 2005-06 of $46.2 million and $48.1 million respectively) rely on external sources of revenue to fund almost half of their operations. Significant downturns in the industries or federal departments that these groups support will greatly impact NRC's ability to continue operations at current levels.

Finally, it is important to note that NRC must strike a fine balance between providing contract research services that generate the needed revenue, and performing the government funded research that keeps NRC at the leading edge. Too much emphasis on revenue generating contract research could compromise NRC's advanced knowledge and technology base, which in the long term will reduce NRC's ability to serve industry and respond to the needs of the nation in critical fields such as energy, the environment, chronic diseases and other priority fields outlined in the Strategy.

Financial Analysis

In order to comply with generally accepted accounting principles for the Public Sector, NRC changed the way it recorded certain financial information in 2005-06. To ensure continuity, closing balances on the balance sheet as at March 31, 2005 were restated to reflect these changes. Details of the significant changes, as well as other general information can be found below.

Due from Consolidated Revenue Fund

This amount represents an amount of cash that the NRC is entitled to draw from the Federal Government treasury. This amount consists of cash to discharge its liabilities for which NRC has already received an appropriation, as well as revenue received but not spent. In previous years, this amount was not recorded in NRC's financial statements. It was established in 2005-06 and March 31, 2005 was restated to reflect this new policy.

The change in this account between 2005 and 2006 of $11.1 million is due to the increase in accrued liabilities and deferred revenue offset by a decrease in revenue carryforward.

Accounts Receivable

The Industrial Research Assistance Program (IRAP) of NRC has delivered the IRAP-TPC Program since 1998 on behalf of Technology Partnerships Canada (TPC), a special operating agency of Industry Canada. This program provides conditionally repayable contributions to SMEs to support the pre-commercialization phase of their technology development. This conditional repayment program in most cases required quarterly repayments of the contribution based on a percentage of the recipient's gross revenue. This program terminated March 31, 2006 although it will continue to fund, and require repayment from existing agreements during the wind down phase.

It is important to note that this program supported small start-up firms, whose future success was often entirely dependent on one technology. Failure to bring the technology to market, at times, resulted in the firm ceasing operations. However, even with the high risk nature of this program, to date NRC has received repayments amounting to approximately 17% of contributions disbursed; and with over 300 projects still being administered, this percentage is expected to increase over the next decade.

During fiscal year 2005-06, NRC undertook a major initiative to follow-up all active contribution agreements in order to determine whether the repayment phase conditions had been met. As a result of this exercise, $35.6 million in invoices were issued for repayment in 2005-06. An amount of $17.6 million was written-off as uncollectible. An amount of $11.4 million was received from firms, and forwarded back to Industry Canada. As at March 31, 2006, there was a balance of $7.6 million in accounts receivable with respect to this program with a corresponding allowance for doubtful accounts at $6.7 million.

Such a substantial IRAP-TPC write-off is expected to be a one-time occurrence as this amount represents the value of the debt relating to firms that had ceased operations over the last few years.

NRC had accounts receivables with external clients worth $22.2 million on its books as at March 31, 2006 with a corresponding allowance for doubtful accounts equal to $2.0 million. This amount represents receivables for work done with external clients as well as receivables for audit findings for IRAP. The amount at March 31, 2006 is a reduction over the previous year primarily due to the collection of several large accounts. Write offs in 2005-06 were $637 thousand which is quite low given the value of NRC revenue.

The aging of the accounts receivable as at March 31, 2006 (including TPC and excluding other government departments and accrued receivables) is as follows:

Inventory for Resale

NRC produces a number of products that are purchased by external clients, namely the Model National Construction Codes, Monographs and Certified Reference Materials. Historically the costs incurred to produce these products were expensed as incurred and therefore no inventory values were established for quantities on hand. In 2005-06, the method of accounting for inventory for resale was changed and the opening and closing inventory balances were adjusted to reflect a value equal to the lower of cost or market. Cost of Sales was also amended to be recorded at the cost value.

Inventory for resale went up by approximately $255 thousand over 2005 closing values due to the addition of the 2005 Model National Construction Codes, as well as new Certified Reference Materials.

Capital Asset Held for Sale

NRC currently occupies a building on leased land on the campus of the University of British Columbia (UBC) in Vancouver. At the request of UBC, NRC agreed to construct a new building on the campus and relinquish the existing building and land lease for $15.0 million. As there is a signed agreement relating to the sale of this building, the building is being reflected as a financial asset.

Equity Investments

As part of its mandate to promote industrial innovation in Canada, NRC provides financial assistance to firms through access to equipment, intellectual property and incubation space in laboratories and in the organization's Industry Partnership Facilities.

Since these companies are very often in their infancy and cannot afford to pay the full cost of the assistance received from NRC, NRC on occasion takes an equity position in the company in return for the assistance provided. This helps the firms survive the critical technology development stage. In turn, it allows NRC to earn a return that somewhat reflects the risk taken, should the company become successful.

In prior years, NRC investments in public and private corporations were not reflected in the financial statements. In 2005-06, NRC recorded these investments at the lower of cost or fair value. The full value on the balance sheet reflects NRC's investment in publicly traded companies as our shares in privately held corporations are deemed to have no market value. Details of NRC's investment in public companies are as follows:

The increase in equity investments from 2005 to 2006 is attributable to the conversion of the shares held by NRC in the private firm Occell Inc. to publicly traded shares in Chemaphor Inc. due to an amalgamation.

On May 25, 2006, the Council completed a transaction whereby it disposed of all of it's JDS Uniphase Canada Ltd marketable securities; it sold 171,334 shares at their market value of $3.2597 per share for a total of $551 thousand (net of commission of $7.4 thousand) resulting in a net gain of approximately $142 thousand.

Holmes Endowment Fund

The Holmes Endowment Fund is an investment bequeathed to NRC in July 1994. Up to two thirds of the endowment fund's yearly net income is used to finance the H.L. Holmes award on an annual basis. The award provides the opportunity to post-doctoral students to study at world famous graduate schools or research institutes under outstanding researchers.

In 2005-06, the Holmes Endowment Fund Investment was restated to reflect amortized cost of the bonds held in the fund. It had previously been carried at the fair market value of the investments.

Prepaid Expenses

NRC changed the way it accounted for prepaid subscriptions in 2005-06. In prior years, 75% of the total amount paid for subscriptions was established as a prepaid as it was assumed that most subscriptions ran on a calendar year. In 2005-06, this methodology was modified to reflect the actual subscription purchase date and duration by category of subscription.

As part of its objective to disseminate scientific knowledge, NRC manages scientific conferences. Historically, expenses paid in advance of the conference were expense as incurred. New in 2005-06 is the establishment of a prepaid for these expenses.

The other area where changes have been made is the establishment of a prepaid for payments in lieu of taxes (property taxes).

NRC establishes prepaid expenses for items that exceed a threshold of $5 thousand.

Inventory for Consumption

Physical inventory counts were done in 2005-06 on 7 stores out of 14 which represented the larger stores carrying over 70% of the value of NRC's inventory for consumption. A significant effort was made to identify stock that was obsolete or incorrectly valued, resulting in write downs of $378 thousand. This write down was recognized as of March 31, 2005 as it was believed that the conditions that led to the write down existed at that time. An allowance for obsolescence was also created to reflect the value of stock that had not moved for 5 years. This was approximately 15% of the value on hand.

Inventory for consumption went down by an additional $202 thousand over March 2005 levels due to the continued effort to reduce stock on hand.

Capital Assets

In 2005-06, renovations / additions were made to NRC buildings and facilities totaling $24.4 million. Of this amount $13.5 million was for the construction of a new laboratory on the campus of the University of British Columbia in Vancouver for NRC's Institute for Fuel Cell Innovation, $2.9 million was for the Industrial Partnership Facility at NRC's Institute for Biodiagnostics in Winnipeg, $2.4 million was for the animal housing facility on the Montreal Road campus, $793 thousand was for the recladding of the exterior of one of the administration buildings (M-19) and $570 thousand was for a hydro substation to support NRC's Institute for Aerospace Research Gas Turbine facility.

NRC had a number of scientific facilities that had never been recorded as an asset on the balance sheet. This was because it was the government's policy to expense assets when purchased. When this policy changed in 2001, NRC did not have reasonably reliable information on which to base a value for these older facilities and Public Works and Government Services (PWGSC) did not have a methodology for estimating this value. In order to comply with GAAP requirements in 2005-06, NRC engaged Public Works and Government Services to determine a value for these facilities. Based on the PWGSC information, facilities with an estimated historical cost of $104.8 million, with corresponding accumulated depreciation of $73.1 million, were added in our accounts. This addition was recognized as at March 31, 2005.

Corrections were made to the financial statements, as at March 31, 2005 to reclassify assets from machinery and equipment to facilities totaling $5.4 million for the NRC's Canadian Neutron Beam Laboratory, and to record an asset under construction of $6.7 million for a facility at NRC's Institute for Biodiagnostics that had been expensed as incurred instead of capitalized. Other adjustments were made to put buildings and facilities under construction into service totaling $88.4 million and to reclassify fit up and a parking lot for NRC's National Institute for Nanotechnology to leasehold improvements from building ($3.3 million). Lastly, a NRC building on the University of British Columbia campus with a cost of $10.7 million was reclassified from a capital asset to a capital asset held for sale.

Approximately $44.0 million was expended on these items in 2005-06, net of trade-in allowance of $537 thousand. The significant purchases were:

The balance of the expenditures was for machinery, equipment, furniture and informatics equipment costing less than $500 thousand each.

In 2005-06 a physical verification was taken of NRC's assets. Particular care was taken to identify assets that no longer had a useful purpose, or that had been broken up into parts. As a result of this physical count, assets with a net book value of $1.5 million (historical cost value of $51.8 million) were removed from NRC's books. As these items were deemed obsolete at the beginning of 2005-06, this write off was recognized as of March 31, 2005.

Other assets with a historical cost of $17.0 million and a net book value of $636 thousand were disposed of in 2005-06 as part of ongoing operations.

Corrections were made to closing balances as at March 31, 2005 to reclassify software developed in house from asset under construction to in service and to adjust accumulated depreciation.

$5.4 million was expended in 2005-06 for NRC's National Institute for Nanotechnology (NINT) to fit up their premises in the leased building from the University of Alberta.

Reclassifications recognized in 2004-05 were made to reclassify a parking lot and fit up of the building for NINT to leasehold improvements from building ($3.3 million) and expense ($637 thousand).

The capital lease amount is for a building and land on the campus of the University of Western Ontario, which NRC leases for $1 per year. In previous years NRC did not recognize the value of this lease on its financial statements. In 2005-06, NRC recorded the lease as a capital lease valued at $10 million which represents the market value of the building in 1997. NRC's asset balance as at March 31, 2005 was amended to reflect this change in accounting policy.

Accounts Payable

Historically NRC accrued expenses for physical goods or services that had been received but not paid for, but did not accrue for items like payments in lieu of taxes (property taxes). Commencing in 2005-06, NRC began accruing for all material expenses and restated its March 31, 2005 accounts payable balance to reflect this.

The increase in accounts payable from March 31, 2005 is attributable to higher expenditures in 2005-06, as well as higher accruals for IRAP payments. IRAP accruals have increased due to more stringent requirements by NRC to have supporting documentation for claims before releasing payments.

Deferred Revenue

NRC undertakes collaborative work with clients for the mutual benefit of both parties. Funding provided by the collaborator is placed in a Specified Purpose Account (SPA) and used over the duration of the project. Amounts remaining in the SPA at year end are recorded as deferred revenue as it is expected that it will be used in the upcoming year on the project.

The Canadian Institute for Scientific and Technical Information publishes research journals which are available for purchase on a subscription basis. When NRC receives payment for the subscription, it records the amount as deferred revenue and then recognizes the revenue each month as the journal is issued.

NRC currently occupies a building on leased land on the campus of the University of British Columbia (UBC) in Vancouver. At the request of UBC, NRC agreed to construct a new building on the campus and relinquish the existing building and land lease for $15.0 million. As NRC has not yet vacated the old building, the $15.0 million received is being recorded as deferred revenue. It will be recognized when the old building is turned over to UBC.

The change in deferred revenue over 2004-05 is mostly related to $10.1 million received from UBC in 2005-06.

NRC conducts many conferences and seminars, which often require registration many months in advance of the conference date. Receipts from registration are recorded as deferred and recognized when the conference takes place.

The capital lease amount is for a building and land on the campus of the University of Western Ontario, which NRC leases for $1 per year. An amount equal to the value of the leased capital asset was considered a non-monetary contribution and was established as deferred revenue. It is being recognized as revenue on the same basis as the amortization of the leased capital asset.

Employee Future Benefits

In prior years this allowance was recorded by Treasury Board on behalf of departments. In 2005-06, NRC was required to record this liability on its own balance sheet in order to be compliant with GAAP and Treasury Board accounting policy. The amount recorded for March 31, 2005 was $49.6 million. The amount recorded as at March 31, 2006 was $55.3 million. The increase is due to a change in the rate from 21.79% of salary to 23.2% of salary. This change was a result of an actuarial review undertaken by Financial Management and Analysis section, Office of Comptroller General, Treasury Board Secretariat.

Environmental Liabilities

An environmental liability was established for $300 thousand for a contaminated site at Penticton, B.C. The site is a borrow pit used for construction projects that was subsequently used as a dumping site. The $300 thousand is an estimated cost to remediate the site. In prior years, this liability was not recorded.

Governance

NRC Council Members

NRC Executive Officers

Organizational Chart

NRC Research Institutes, Programs and Technology Centres

NRC Canada Institute for Scientific and Technical Information (NRC-CISTI)
Canada and U.S.Toll Free 1-800-668-1222
Outside North America 613-998-8544

NRC Centre for Surface Transportation Technology (NRC-CSTT)
Ottawa 613-998-9639

NRC Industrial Research Assistance Program (NRC-IRAP)
Toll Free 1-877-994-4727

NRC Institute for Information Technology (NRC-IIT)
Fredericton 506-444-0544
Gatineau 819-934-2602
Moncton 506-861-0950
Ottawa 613-993-3320
Saint John 506-635-0622

Charlottetown 902-566-7465 ―NRC Institute for Nutrisciences and Health (NRC-INH)

Table of Contents

Introduction

Highlights — 2005-2006

New Directions and Commitments for NRC – 2006-2011

Performance Highlights for 2005-06

Economic Impact

Support for Small and Medium-Sized Enterprises (SMEs)

International Reach

Community Technology Cluster Initiatives

Highly Qualified People

Excellence and Leadership in Research

Research Highlights

Advances in Medical Diagnostics and Treatments

Advances in Nanotechnology

Advances in Alternative Fuels

Advances in Plant Biotechnology

Advances in Molecular Sciences

Advances in Microstructural Sciences

Advances in the Science of Measurement

Advances in Construction Standards

Advances in Astrophysics

A Proud Past, a Vital Future

Financial Statement

Financial Statement Discussion and Analysis

Special Note Regarding Forward Looking Statements

Highlights

Audit

NRC Renewal

Governance

Revenue

Expenses

Financial Risk and Uncertainty

Sunsetting Funding

Foreign Currency

Dependence on Revenue

Financial Analysis

Due from Consolidated Revenue Fund

Accounts Receivable

Inventory for Resale

Capital Asset Held for Sale

Equity Investments

Holmes Endowment Fund

Prepaid Expenses

Inventory for Consumption

Capital Assets

Accounts Payable

Deferred Revenue

Employee Future Benefits

Environmental Liabilities

Governance

NRC Council Members

NRC Executive Officers

Organizational Chart

NRC Research Institutes, Programs and Technology Centres