U N E A R T H I N G
S O L U T I O N S
F O R
I N D U S T R Y
technology
BADGER
DAYLIGHTING INC.
1 9 9 7 A NNUA L R E P O RT
opportunity
g r ow t h
CORPORATE PROFILE
BADGER DAYLIGHTING INC. IS A VERTICALLY INTEGRATED SERVICE COMPANY COMMITTED TO
UNEARTHING SOLUTIONS FOR THE PETROLEUM AND UTILITIES INDUSTRIES. IN ORDER TO DO THIS,
THE COMPANY HAS DEVELOPED THE BADGER DAYLIGHTING SYSTEM, A PROPRIETARY HYDROVAC
SYSTEM DESIGNED TO MINIMIZE THE DIFFICULTIES ASSOCIATED WITH EXPOSING UNDERGROUND
PIPELINES, UTILITIES AND OTHER BURIED INFRASTRUCTURE.
BADGER ALSO OFFERS RELATED SERVICES THROUGH SEVERAL OTHER DIVISIONS. THE DELTA OILFIELD CONSTRUCTION DIVISION PROVIDES SMALL INCH PIPELINE CONSTRUCTION SERVICES; THE
NEWLY FORMED BADGER SUBSURFACE TECHNOLOGY DIVISION DEALS WITH PIPELINE INTEGRITY
AND REPAIR; THE HEWLETT SHORING SYSTEMS DIVISION DESIGNS, MANUFACTURES AND RENTS
EXCAVATION SHORING SYSTEMS AND BOMEGA MANUFACTURING DIVISION PRODUCES AND MARKETS
A WIDE VARIETY OF LIGHT AND HEAVY INDUSTRIAL EQUIPMENT FOR THE OIL AND GAS, UTILITIES
AND CONSTRUCTION INDUSTRIES WITHIN NORTH AMERICA AND INTERNATIONALLY.
IN KEEPING WITH ITS NAMESAKE, BADGER HAS ALSO COMMITTED TO
HELP PRESERVE THE BADGER’S HABITAT BY MAKING A DONATION TO
THE CANADIAN PARKS AND WILDERNESS SOCIETY.
CONTENTS
1 Highlights 2 President’s Message 5 Review of Operations 7 Management’s Discussion and Analysis 10 Financial Statements 17 Corporate Information
• January 7, 1997: 3.6 million special warrants were issued at $2.10 per special warrant. These special warrants were
exchanged for common shares effective March 31, 1997. Gross proceeds from the offering were $7.6 million ($7.0
million net).
• January 15, 1997: Hewlett Shoring Systems Ltd. was acquired for $1.0 million. Consideration for this transaction comprised of $800,000 cash and 80,000 special warrants. The special warrants have been converted into common shares.
h i g h l i g h t s
1997 HIGHLIGHTS
• June 5, 1997: The Company began trading on the Toronto Stock Exchange under the symbol “BAD.”
• November 1, 1997: The Company acquired the assets of Delta Oilfield Construction for $20 million. Consideration for
this transaction was comprised of $10 million cash and 2 million shares, issued at $5.00 per share.
• November 30, 1997: 22 Badger hydrovac units were constructed, bringing the total number of units in operation to 42.
• The Company’s earnings per share have grown consistently over time. Earnings per share were as follows: $0.05/share
in 1995, $0.10/share in 1996 and $0.17/share in 1997.
• The acquisition of the assets of Delta Oilfield Construction, combined with the licensing of Baseline Technologies
Pipeline Information Control (PIC) system, positions the Company to enter the pipeline construction, integrity and
repair business.
• Badger entered into a commercial lending facility with the Company’s bank on December 17th, 1997.Total credit available from the bank is $26.8 million.
• Badger consolidated its operations under one Company-owned facility, located at 6740 – 65 Avenue, Red Deer, Alberta.
FINANCIAL RESULTS
Years ended November 30, ($ thousands, except per share information)
Revenue
Net Income
Earnings per share
basic
fully diluted
Cash flow per share
basic
fully diluted
Cash flow from Operations
Long term debt
Shareholders equity
1997
26,067
2,155
1996
5,249
558
1995
2,803
173
1994
1,896
(130)
$0.17
$0.10
$0.05
($0.04)
$0.17
$0.10
$0.05
($0.04)
$0.42
$0.39
5,368
12,907
25,541
$0.20
$0.18
1,158
795
5,871
–
–
491
1,042
521
–
–
145
1,177
248
FINANCIAL SUMMARY
Shares Outstanding:
13,428,233
Fully Diluted Shares:
Fiscal Year End:
52-week High/Low:
EPS Fiscal 1996:
Fiscal 1997:
16,155,065
November 30
$7.00/ $2.70
$0.10
$0.17
1
m e s s a g e
p r e s i d e n t ’ s
PRESIDENT’S MESSAGE
In 1997 Badger moved to the Toronto Stock Exchange. It
recent years. As new infrastructure is put in place and exist-
was a big step for the Company and I take the account-
ing infrastructure ages, Badger will be there to “unearth
ability that goes along with being a public company seri-
solutions for industry”.
ously. The financial picture for Badger was very much on
track for 1997. Return on average equity (pre-Delta) was
20% for the year. Gross margin and net margins for this
The following are key indicators for Badger’s
continued success:
past year were 27% and 8% respectively. Net income grew
by 286% in 1997 resulting in $.17 basic earnings per
1. Record activity levels in the oil and gas industry have
share compared to $.10 the prior year. Badger continues to
resulted in a demand for construction of new infrastruc-
grow and grow very profitably.
ture and the repair and upgrade of existing facilities.
Badger benefits from these activities in two ways.
In last year’s annual report, our direction for 1997
i. When new infrastructure is put in place, opportu-
was clearly articulated.The goals and plans were very aggres-
nities exist for the Daylighting, Delta, Hewlett and
sive, but were the catalyst for another exceptional year. In
Bomega divisions.
many cases we surpassed these goals and in one we elected to
ii. As infrastructure ages and requires maintenance,
take time to re-evaluate our target. In last years message the
upgrade or replacement, the Daylighting,
stated goal was production of 20 additional Badger hydrovac
Subsurface Technologies and Delta divisions are
units. Badger produced 22 units in 1997. These additional
positioned to provide the required service.
units have been put to work in existing operating areas as well
2. Expansion into the large Ontario market has diversified
as four new geographical areas in Western Canada (as
Badger both geographically and into the utilities and
planned) and in Ontario. The intended expansion into the
construction industries.
United States has been deferred until 1998.The decision was
made to expand the Western Canadian market and carefully
3. Planned expansion into the United States will further
diversify Badger geographically.
grow into the Ontario market, which now has four units. The
lessons learned in the expansion into the utility based Ontario
Badger’s services continue to gain acceptance in the oil and
market will serve as a model as we expand into the United
gas and utilities industries.To meet increasing demands from
States and other international markets.
existing and new customers, the Daylighting Division will add
24 hydrovac units in 1998. Badger Subsurface Technology
Integration of the two acquisitions made in 1996, Hewlett
plans to move from start-up and development into the
Shoring Systems and Bomega Manufacturing, has been com-
growth phase. Delta Oilfield will continue its historic growth
pleted. Badger’s newly constructed head office and manufac-
rate and will assist in the Company’s move into pipeline
turing facility in Red Deer, Alberta now houses Badger
integrity and repair work. Bomega Manufacturing will meet
Daylighting, Badger Subsurface Technology, and Bomega
the fabrication needs of the Daylighting Division as well as
Manufacturing (Sales & Service) divisions. All accounting
servicing our retail equipment customers.
and administration is run from the Red Deer office.
1997 has been a great year for the Company. It is the efforts
Delta Oilfield Construction was acquired effective
of our people that have led to this success and I would like
November 1, 1997, and will continue to be based in Sylvan
to thank all involved for their efforts. Please join Badger’s
Lake, Alberta. Hewlett Shoring Systems Ltd. continues to
Board of Directors and Officers for the Annual Shareholders
be headquartered in Surrey, British Columbia.
Meeting, April 16, 1998 in Red Deer.
LOOKING AHEAD
2
Badger is extremely well positioned to take advantage of the
Kenneth C. Rose,
record activity levels in the oil & gas industry experienced in
President & Chief Executive Officer
“BADGER IS EXTREMELY WELL
POSITIONED TO TAKE ADVANTAGE OF THE RECORD ACTIVITY
LEVELS IN THE OIL AND GAS
INDUSTRY EXPERIENCED IN
RECENT YEARS.”
GARY LAYDEN, V.P. MANUFACTURING, BRIAN ANDERSON, V.P. CORPORATE DEVELOPMENT,
MERVIN FALKENBERG, V.P. FINANCE AND C.F.O., KEN ROSE, PRESIDENT AND C.E.O
1997 has been a year of expansion and integration. Badger
This permits accurate identification of the depth and orien-
has grown both internally and through acquisition.
tation of the infrastructure so that repairs or modifications
achieved and will continue to be
operations and the sharing of
resources. The Company has been
positioned to take advantage of
and grow with the construction
associated with the anticipated
additions to oil and gas production
in the coming years. Badger will
THE COMPANY HAS BEEN POSITIONED TO TAKE ADVANTAGE OF
units are mobile hydrovac excavating systems that use either
hot or cold water under high
AND GROW WITH THE CONSTRUC-
pressure to agitate the soil cover.
TION ASSOCIATED WITH THE THE
The resulting slurry is then
ANTICIPATED ADDITIONS TO THE
OIL AND GAS INDUSTRY IN THE
COMING YEARS.
sucked up by a powerful vacuum
system leaving a clean hole and
a clear view of the buried structure. For 1997 the Daylighting
also be well positioned to provide
division achieved an equipment
ongoing repair and maintenance
utilization rate of 73% while
to the existing and aging pipeline infrastructure.
o p e r a t i o n s
realized through the combining of
can be completed. The “Badger”
o f
Economies of scale have been
r e v i e w
REVIEW OF OPERATIONS
performing general trenching, daylighting and specialized
excavation services.
Badger Daylighting Inc.’s operations have been organized
within three operating divisions:
The operations of the Manufacturing Divisions of Bomega
and Badger were consolidated into one 55,000 square foot
1. Daylighting will include the operations of the Badger
Daylighting Division and Badger Line Locating.
facility in Red Deer, Alberta. Badger’s goal of manufacturing 20 hydrovac units was surpassed with 22 units being
produced, an increase of 12 units over 1996. Bomega’s
2. Manufacturing will include the operations of Bomega for
equipment sales, parts and service.
total number of custom designed and manufactured units
fabricated in 1997 was 115, up from 104 in 1996. This
increased production resulted from the consolidation of the
3. Construction will include the operations of Delta
manufacturing operations. The economies of scale realized
Oilfield Construction, Hewlett Shoring and Badger
were clearly demonstrated with the man-hours to construct
Subsurface Technologies.
a Badger unit reduced by half.
The Badger Daylighting Division provides services to the utility
The Construction Division has been formed as a result of the
and petroleum sectors. “Daylighting” refers to the process of
acquisition of Delta Oilfield Construction, Hewlett Shoring
exposing pipelines, utility lines or other buried infrastructures.
Systems and the licensing of Baseline Technologies Inc.’s
DELTA OILFIELD CONSTRUCTION DIVISION
5
o p e r a t i o n s
o f
r e v i e w
PIC system. This Division will service the pipeline industry
accuracy on a buried pipeline through utilization of the PIC
by providing construction of new pipelines, as well as integri-
system. The excavation in preparation for the repair of the
ty repairs and upgrades of existing pipelines.The services of
pipeline will be completed by a Badger unit and shoring will
shoring and the application of the
PIC System will be offered through
Badger Subsurface Technologies.
be installed to secure the walls of
BADGER SUBSURFACE TECHNOLOGIES IS OUR NEWEST
the excavated site. This combination results in a safe, cost effective
access to the pipeline with minimal
Delta was acquired effective
DIVISION WHICH BEST EXEM-
environmental impact. Inspection
November 1, 1997 thus one
PLIFIES THE INTEGRATION OF
of the pipeline will be provided by
month of operations was included
for fiscal 1997. Delta constructs
OUR OPERATIONS TO PROVIDE
a third party and repair or
replacement of the damaged piece
pipelines and related facilities
A FULL SUITE OF SERVICES TO
of the pipeline will be performed
throughout western Canada.
OUR CUSTOMERS.
utilizing equipment and personnel
from Delta.
Badger Subsurface Technologies
will be providing turnkey services for pipeline integrity
Badger Subsurface Technologies is our newest division and
and repair work. The suite of services offered by BST
exemplifies the integration of our operations to provide a full
begins with the pinpointing of an anomaly to sub meter
suite of services to our customers.
BADGER’S NEW 55,000 SQ. FT. MANUFACTURING FACILITY IN RED DEER, ALBERTA
6
Discussion and analysis of Badger Daylighting Inc. includes
million in 1996 to $7.5 million in 1997. The remaining
the assets and operations purchased from Bomega Metals
increase is due to the acquisitions made during 1997.
Ltd., Delta Energy Ltd. and Hewlett Shoring Services Ltd.
Effective December 1, 1998, Hewlett will be amalgamated
Direct Costs by Division:
into Badger Daylighting Inc., and the Company will report
financial results under three Divisions as follows:
1996
Daylighting
$7,508,418
$3,370,802
Manufacturing
$8,097,232
-
Construction
$3,526,435
-
Total Directs Costs $19,132,085
$3,370,802
2. Manufacturing—includes the Bomega division’s operations
Operating Margin increased to $7.0 million from $1.9 million
3. Construction—includes the Delta division’s operations and
those of Hewlett Shoring Services Ltd.
in 1996 due to the increased activity and acquisitions. The
d i s c u s s i o n
1. Daylighting—includes the Daylighting division’s operations
1997
m a n a g e m e n t ’ s
MANAGEMENT’S DISCUSSION & ANALYSIS
operating margin percentage has decreased slightly due to the
Revenues increased to $26.1 million in 1997 from $5.2
Operating Margin by Division:
million in 1996, a five fold increase.The increase is a result
1997
1996
of increased activity in Badger’s business of Daylighting to
Daylighting
$5,173,925 40.8% $1,877,962 35.8%
$12.7 million in 1997 from $5.2 million in 1996. The
Manufacturing $1,164,410 12.6%
-
-
remaining increase is attributable to acquisitions made dur-
Construction
-
-
ing 1997.
Total Operating
Margin
$6,934,739 26.6% $1,877,962 35.8%
$596,404 14.5%
a n a l y s i s
REVENUES
&
lower percentage margins on the expanded business activity.
Revenues by Division:
Daylighting
Manufacturing
Construction
EXPENSES
1997
1996
$12,682,343
$5,248,764
$9,261,642
-
due to the Daylighting units at the end of 1996 now attract-
$4,122,839
-
ing a full year’s depreciation and the additional units added
$26,066,824
$5,248,764
during 1997 being depreciated from the month they were
The Company’s depreciation has increased by $1.2 million
put into service. The Manufacturing and Construction
Total Revenue
assets were depreciated from the month of acquisition.
Daylighting operated for the full 12 month period and
reflects the activity of the 20 units operating at the start of
a) Depreciation
the year and the addition of 22 units through the year.
Daylighting
Manufacturing includes Bomega for the full 12-month period.
Construction included Hewlett for 11 months and Delta for
1997
1996
$1,026,945
$457,214
Manufacturing
$386,704
-
Construction
$268,094
-
Total Depreciation $1,681,743
$457,214
one month.
b) Interest
DIRECT COSTS AND OPERATING MARGIN
The Company’s interest expense decreased by 4% due to
Direct costs increased from $3.4 million in 1996 to $19.1 mil-
debt being restructured and decreased during the year.
lion in 1997, a five fold increase. This is due to the increased
activity in Badger’s base business of Daylighting from $3.4
7
a n a l y s i s
&
d i s c u s s i o n
m a n a g e m e n t ’ s
c) General & Administrative
assist in the financing of the construction of 13 Badger
The Company’s general and administrative expense
Hydrovac units is also in place.
increased from $0.6 million in 1996 to $1.4 million in
1997. This increase is a result of the Company’s expansion
Subsequent to November 30, 1997, the Company has
and acquisitions. Selling efforts were expanded into Ontario
arranged a credit facility in the form of a Canadian bank
and British Columbia during 1997. General and adminis-
revolving operating loan of up to $10 million subject to mar-
trative expense increased as a result of additional staff and
gin requirements. This credit facility replaced the Canadian
expenses related to the growth of the Company. As a per-
bank revolving operating loan of $2.5 million in place at
centage of revenue these expenses are 5.4% in 1997 com-
November 30, 1997. The Company also has arranged a
pared to 11.8% in 1996.
credit facility in the form of a Canadian bank non-revolving
term loan in the amount of $10 million to finance the acqui-
d) Income Taxes
sition of the assets of Delta Oilfield Construction.
The Company had an effective tax rate of 20.3% for the
year 1996.
Interest on the Company’s bank debt ranges from the
bank’s prime rate plus 0.5 percent to the prime rate plus
For the year 1997, this increased to 42.7%. This increase
1.0 percent. At November 30, 1997, the interest rate range
is due to a large corporation tax expense of $75,000
was 4.5% to 5.0%.
(2.0%) and increased income from operations not eligible
for the manufacturing processing deduction.
BUSINESS RISKS & UNCERTAINTY
The Company’s revenues continue to be sourced from cus-
NET INCOME AND CASH FLOW FROM OPERATIONS
tomers in the oil and gas, utilities, and construction indus-
Net income and operating cash flow increased substantial-
tries for new infrastructure projects and repair and main-
ly during 1997 due to the increased business activity and
tenance of existing infrastructure. The oil and gas industry
the profitability of our acquisitions. Net income increased
is subject to seasonal and industry cycles and fluctuations.
to $2.2 million in 1997 from $0.6 million in 1996 while
It is the Company’s intentions to continue to develop the
operating cash flow increased to $5.4 million in 1997 from
utilities and construction industry customer base to mini-
$1.2 million in 1996.
mize the impact of the oil and gas industry cycles. In order
to do this, the Company’s services have been extended to
LIQUIDITY AND CAPITAL RESOURCES
Vancouver and Toronto during 1997. Plans are in place to
At November 30, 1997, the credit facility available to the
expand these operations in 1998 and to extend the
Company and its subsidiaries included a Canadian bank
Company’s services to other urban centres.
revolving operating loan of up to $2.5 million, subject to
8
margin requirements. A non-revolving demand loan facility
SUBSEQUENT EVENTS
was also in place for up to $1.75 million to assist in the
In the month of December 1997, the Company entered into
financing of the construction costs associated with a new
an exclusive licensing agreement with Baseline Technologies
shop and office addition, all located at the Company’s
Inc. to use Baseline’s Pipeline Information Control System
premises at Red Deer, Alberta. At November 30, 1997, the
(PIC System) for Canada, with an option on North America
Company had drawn on $621,464 of this facility. It is the
and a further option on the World. These options are exer-
Company’s intention to replace this loan with a commercial
cisable during 1998 and 1999 respectively. This license will
mortgage upon completion of the construction. A non-
enable the Company to provide a fully integrated service to
revolving demand loan facility of up to $3.0 million to
the pipeline and utility industries.
REVENUE GROWTH
Revenue
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$0.00
1995
1996
1997
NET INCOME GROWTH
$2,500,000
Net Income
$2,000,000
$1,500,000
$1,000,000
$500,000
$0.00
1995
1996
1997
G&A AS % OF REVENUE
20%
% Revenue
15%
10%
5%
0%
1995
1996
1997
EARNINGS/SHARE GROWTH
Basic
$0.20
Fully Diluted
$0.15
$0.10
$0.05
$0.00
1995
1996
1997
s t a t e m e n t s
f i n a n c i a l
MANAGEMENT’S STATEMENT OF RESPONSIBILITY
The accompanying financial statements of Badger
reporting and is ultimately responsible for reviewing and
Daylighting Inc. have been prepared by management in
approving the financial statements. The Board carries out
accordance
this responsibility principally through its Audit Committee.
with
generally
accepted
accounting
principles.The financial information contained elsewhere
in this report has been reviewed to ensure consistency
with the financial statements.
The Audit Committee of the Board of Directors and the
President of the Company have reviewed the financial
statements with management and the external auditors.
Management maintains systems of internal accounting
Ernst & Young, an independent firm of chartered
control designed to provide reasonable assurance that the
accountants, appointed as external auditors by the
assets are safeguarded, all transactions are authorized
shareholders, have audited the financial statements and
and duly recorded and financial records are properly
their report is included herein.
maintained to facilitate statements in a timely manner.
The Board of Directors is responsible for ensuring that
Kenneth C. Rose,
management fulfills its responsibilities for financial
President and Chief Executive Officer
AUDITORS’ REPORT
November 30, 1997 and 1996
To the Shareholders of Badger Daylighting Inc.
assessing the accounting principles used and significant
estimates made by management, as well as evaluating
We have audited the consolidated balance sheets of
the overall financial statement presentation.
Badger Daylighting Inc. as at November 30, 1997 and
1996 and the consolidated statements of income and
In our opinion, these financial statements present fairly,
retained earnings and changes in financial position for
in all material respects, the financial position of the
the years then ended. These financial statements are the
Company as at November 30, 1997 and 1996 and the
responsibility of the Company’s management. Our
results of its operations and the changes in its financial
responsibility is to express an opinion on these financial
position for the years then ended in accordance with gen-
statements based on our audits.
erally accepted accounting principles.
We conducted our audits in accordance with generally
Calgary, Canada
accepted auditing standards. Those standards require
January 16, 1998
that we plan 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. An audit also includes
10
Chartered Accountants
As at November 30
1997
$
Capital assets [note 6]
Goodwill [note 3]
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Bank indebtedness [note 7]
Accounts payable and accrued liabilities [note 13]
Large corporations tax payable
Payable on acquisition [note 4]
Current portion of long term debt [note 8]
Current portion of deferred revenue
Long term debt [note 8]
Payable on acquisition [note 4]
Deferred income taxes
Deferred revenue
Commitments [note 12]
Shareholders’ equity
Shares issued and outstanding [note 9]
Shares to be issued [note 4]
Retained earnings
320,557
9,078,865
2,080,799
53,142
11,533,363
32,010,655
8,165,405
51,709,423
278,163
2,411,876
658,175
6,759
3,354,973
6,408,157
4,988,049
14,751,179
2,591,547
7,873,619
75,000
—
1,156,263
100,563
11,796,992
2,906,607
10,000,000
1,394,393
70,518
214,024
1,730,644
—
5,630,338
381,089
227,496
8,183,591
414,136
—
74,289
208,069
12,817,726
10,000,000
2,723,187
25,540,913
51,709,423
2,802,630
2,500,000
568,464
5,871,094
14,751,179
s t a t e m e n t s
ASSETS [notes 7 and 8]
Current
Cash
Accounts receivable
Inventories [note 5]
Prepaid expenses
1996
$
f i n a n c i a l
CONSOLIDATED BALANCE SHEETS
See accompanying notes
On Behalf of the board:
Ken Rose
Martin Margolis
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended November 30
1997
$
Revenues [note 13]
Daylighting
Manufacturing
Construction
Direct costs
Daylighting
Manufacturing
Construction
Expenses
Depreciation and amortization
Interest on long-term debt
General and administrative [note 13]
Income before income taxes
Income taxes [note 11]
Large corporation tax
Deferred
Net income for the year
Retained earnings, beginning of year
Retained earnings, end of year
Net income per share [note 10]
Basic
Fully diluted
1996
$
12,682,343
9,261,642
4,122,839
26,066,824
5,248,764
—
—
5,248,764
7,508,418
8,097,232
3,526,435
19,132,085
6,934,739
3,370,802
—
—
3,370,802
1,877,962
1,681,743
95,083
1,397,190
3,174,016
3,760,723
457,214
98,603
621,668
1,177,485
700,477
75,000
1,531,000
1,606,000
2,154,723
568,464
2,723,187
—
142,289
142,289
558,188
10,276
568,464
0.17
0.17
0.10
0.10
See accompanying notes
11
s t a t e m e n t s
f i n a n c i a l
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
For the years ended November 30
1997
$
OPERATING ACTIVITIES
Operations
Net income for the year
Add items not affecting cash:
Depreciation and amortization
Deferred income taxes
Loss on disposal of capital assets
Funds flow from operations
Net change in non-cash working capital related to operating activities
FINANCING ACTIVITIES
Shares issued, net of share issue costs
Common shares to be issued [note 4]
Repayment of long term debt
Proceeds from long term debt
Payable on acquisition [note 4]
Deferred revenue
INVESTING ACTIVITIES
Purchase of capital assets
Proceeds on disposal of capital assets
Acquisitions [note 4]
Net change in non-cash working capital related to investing activities
(Decrease) increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash and cash equivalents is comprised of
Cash
Bank indebtedness
Funds flow from operations per share [note 10]
Basic
Fully diluted
1996
$
2,154,723
558,188
1,681,743
1,531,000
1,158
5,368,624
(1,619,800)
3,748,824
457,214
142,289
—
1,157,691
(987,844)
169,847
7,247,096
10,000,000
(395,290)
3,654,616
4,369,662
(264,484)
24,611,600
2,223,210
2,500,000
(246,287)
—
5,630,338
212,345
10,319,606
(9,636,730)
187,355
(21,020,335)
(225,843)
(30,695,553)
(2,335,129)
64,139
(2,270,990)
(2,833,316)
70,375
(8,130,338)
506,851
(10,386,428)
103,025
(38,886)
64,139
320,557
(2,591,547)
(2,270,990)
278,163
(214,024)
64,139
0.42
0.39
0.20
0.18
See accompanying notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1997 and 1996
1. NATURE OF BUSINESS
The Company is a public company incorporated under the laws of the province of Alberta, which operates as a service company in the
petroleum and utility industries. The Company manufactures hydo-vacuum trucks (the “Badger”) which have been designed to reduce
the inherent difficulties and dangers involved with exposing underground pipelines and utilities. The capabilities of the Badger include
daylighting, which is the exposing of live utility and pipelines by digging and excavating around them. The Company also provides construction shoring and pipeline construction services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements necessarily
involves the use of estimates and approximations which have been made using careful judgment. The consolidated financial statements
have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below:
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Hewlett Shoring Systems Ltd.
Inventories
Materials are valued at the lower of cost (weighted average) and net realizable value. Work-in-progress is valued at the lower of cost and
replacement cost.
Capital Assets
Capital assets are recorded at cost. Depreciation is provided on a straight line basis over the estimated useful life of the assets.The annual rates of depreciation are as follows:
12
f i n a n c i a l
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
10%
5%
10%
10%
10%
15%
20%
15%
25%
Depreciation of equipment under construction is not recorded until such time as the construction is completed and the assets have been
put to use.
Marketing Agreements Revenue Recognition
The Company has entered into revenue sharing contracts with operators of the hydro-vacuum trucks. The terms of the contract require
an initial payment by the operators to the Company. The Company has the right to terminate the contract during the first three years. If
that right is exercised, a prorata share of the payment must be repaid to the operator. The initial payments are recorded as deferred revenue and are recognized as contract revenue over the first three years of the contracts.
s t a t e m e n t s
Land improvements
Buildings
Shoring equipment
Small tools
Shop and office equipment
Trucks and trailers
Leasehold improvements
Automotive equipment
Computers
Construction Revenue Recognition
Profits from construction contracts are recognized using the percentage of completion method. The percentage of completion is determined by relating the actual cost of work performed to date to the current estimated total cost of respective contracts. When the current estimated costs to complete indicate a loss, such a loss is recognized immediately. Revisions in costs and earnings or loss estimates
during the course of the work are reflected during the accounting period in which the facts which cause the revision become known.
The profits recorded for construction contracts are based on estimates. By their nature, these estimates are subject to measurement
uncertainty and the effect on the financial statements of changes in such estimates in future years could be significant.
Manufacturing Revenue Recognition
The Company recognizes revenue for manufacturing using the completed contract method, whereby income is recognized when the contracts are completed or virtually completed.
Goodwill
Goodwill arising from the business acquisitions is being amortized on a straight line basis over twenty years commencing at the time of
the acquisition. The evaluation for impairment of goodwill is based on a comparison of the carrying values of goodwill and associated
operating assets to the future net cash flows. No writedown was required at November 30, 1997 and 1996.
Financial Instruments
Financial instruments of the Company consist mainly of accounts receivable, bank indebtedness, accounts payable and accrued liabilities, payable on acquisition and long term debt. Except where disclosed otherwise, as at November 30, 1997 and 1996, there are no significant differences between the carrying values of these amounts and their estimated market values.
3. GOODWILL
1997
$
8,423,000
(257,595)
8,165,405
Cost
Accumulated amortization
1996
$
4,988,049
—
4,988,049
4. ACQUISITIONS
a) Bomega Metals Ltd.
Effective November 30, 1996, the Company purchased substantially all of the assets of Bomega Metals Ltd. ("Bomega"). Bomega’s principal business activities included the manufacturing and sale of hydro-vac, tank, vacuum and lubrication systems, asphalt silos and feed
bins. The purchase was accounted for using the purchase method. The purchase price was allocated as follows:
Working capital
Capital assets
Goodwill
$
852,289
2,290,000
4,988,049
8,130,338
Consideration consists of the following:
Cash
1,515,000 common shares
$
5,630,338
2,500,000
8,130,338
b) Hewlett Shoring Systems Ltd.
Effective January 15, 1997 the Company acquired 100% of the shares of Hewlett Shoring Systems Ltd. (“Hewlett”). Hewlett’s principal business activity is the rental of shoring equipment.The purchase was accounted for using the purchase method.The purchase price
was allocated as follows:
13
s t a t e m e n t s
f i n a n c i a l
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Working capital deficiency
Capital assets
Deferred income taxes
Long term debt
$
(79,229)
1,164,987
(57,104)
(8,319)
1,020,335
Consideration consists of the following:
Cash
80,000 common shares
$
820,335
200,000
1,020,335
c) Delta Energy Ltd.
Effective November 1, 1997, the Company purchased substantially all of the assets of Delta Oilfield Construction (“Delta”), a division
of Delta Energy Ltd. Delta’s principal business activity is the construction of small diameter oil and gas pipelines. The purchase was
accounted for using the purchase method. The purchase price was allocated as follows:
Working capital
Capital assets
Goodwill
$
151,607
16,413,442
3,434,951
20,000,000
Consideration consists of the following:
Payable on acquisition
2,000,000 common shares to be issued
$
10,000,000
10,000,000
20,000,000
The amount payable on acquisition was settled with a Bank of Montreal non-revolving term loan payable, repayable in monthly principal
payments of $150,000, commencing October 1, 1998 until November 30, 2002, with the balance of principal outstanding retired on
maturity of the term in the amount of $2,350,000. The loan bears interest at bank prime plus .625% [see note 8 for collateral].
5. INVENTORIES
1997
$
1,306,775
774,024
2,080,799
Materials
Work-in-progress
1996
$
541,349
116,826
658,175
6. CAPITAL ASSETS
Land
Land improvements
Buildings
Equipment under construction
Shoring equipment
Small tools
Shop equipment
Office equipment
Trucks and trailers [see notes 7 and 8]
Leasehold improvements
Automotive equipment
Computers
Land
Buildings
Equipment under construction
Small tools
Shop equipment
Office equipment
Trucks and trailers [see notes 7 and 8]
Leasehold improvements
Automotive equipment
Computers
14
Cost
$
1,200,836
366,643
4,275,890
395,196
1,511,224
502,186
1,349,370
308,139
24,018,786
44,182
100,975
152,211
34,225,638
1997
Accumulated Depreciation
$
—
1,217
76,019
—
81,250
11,515
73,721
18,684
1,913,724
15,540
5,079
18,234
2,214,983
Net Book Value
$
1,200,836
365,426
4,199,871
395,196
1,429,974
490,671
1,275,649
289,455
22,105,062
28,642
95,896
133,977
32,010,655
Cost
$
600,000
1,200,000
389,646
17,530
405,567
117,211
4,358,473
42,685
40,000
75,000
7,246,112
1996
Accumulated Depreciation
$
—
—
—
5,254
20,489
3,495
802,687
6,030
—
—
837,955
Net Book Value
$
600,000
1,200,000
389,646
12,276
385,078
113,716
3,555,786
36,655
40,000
75,000
6,408,157
7. BANK INDEBTEDNESS
A general assignment of accounts receivable and capital assets are pledged as collateral for the operating demand bank loans which bear
interest at bank prime plus 1% (November 30, 1997 - 5%; November 30, 1996 - 4 3/4%) per annum.
8. LONG TERM DEBT
1997
$
1996
$
287,825
451,027
GE Capital Canada equipment loan payable, repayable in monthly principal and interest
payments of $15,566 until July 26, 1998, bearing interest at bank prime plus 1 1/2%
and collateralized by chattel mortgages on Badger units.
120,429
288,098
Bank of Nova Scotia small business loan payable, repayable in monthly principal
payments of $2,125 plus interest until November 21, 1997, bearing interest at bank
prime plus 1% and collateralized by a chattel mortgage on a Badger unit.
—
25,500
Bank of Nova Scotia small business loan payable, repayable in monthly principal
payments of $2,125 plus interest until July 21, 1997, bearing interest at bank prime
plus 1% and collateralized by a chattel mortgage on a Badger unit.
—
17,000
Bank of Nova Scotia small business loan payable, repayable in monthly principal
payments of $1,700 plus interest until July 21, 1997, bearing interest at bank prime and
collateralized by a chattel mortgage on a Badger unit.
—
13,600
33,152
—
621,464
—
3,000,000
4,062,870
1,156,263
2,906,607
—
795,225
381,089
414,136
GMAC of Canada Limited truck loan payable, repayable in monthly principal and
interest payments of $906 until February 10, 2001, bearing interest at 3.9% and
collateralized by a truck.
Bank of Montreal commercial mortgage on the land and building, repayable in monthly
principal payments of $8,783 plus interest until November 30, 2003, bearing interest
at bank prime plus 1% (November 30, 1997 - 5%).
Bank of Montreal non-revolving demand loan payable, repayable in monthly principal
payments of $62,500 until November 30, 2001, bearing interest at bank prime
plus 1/2% (November 30, 1997 - 4 1/2%).
Current portion of long term debt
s t a t e m e n t s
GE Capital Canada equipment loan payable, repayable in monthly principal and
interest payments of $15,802 until August 24, 1999 bearing interest at 8.5% and
collaterialized by chattel mortgages on Badger units.
f i n a n c i a l
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Principal repayments on the above loans in each of the next five years is as follows:
1998
1999
2000
2001
2002
Remainder
$
1,156,263
987,473
865,397
857,553
104,850
91,334
4,062,870
The Bank of Montreal mortgage and loans payable are collateralized by a general security interest over the Company’s assets, property
and undertaking, present and future, which includes a fixed and floating charge debenture on all assets and undertaking of the Company
and its subsidiaries in the amount of $30,000,000.
9. SHARE CAPITAL
Authorized
Unlimited number of common shares
Unlimited number of preferred shares
Number
of Shares
Amount
$
Balance November 30, 1995
Initial public offering
Private placement
Exercise of options
Share issue costs (net of deferred income taxes of $68,000)
4,000,733
2,000,000
1,733,333
227,500
—
511,420
1,000,000
1,300,000
113,750
(122,540)
Balance November 30, 1996
Exercise of warrants
Public offering
Shares issued for acquisitions [note 4]
Exercise of options
Share issue costs (net of deferred income taxes of $268,000)
7,961,566
26,667
3,600,000
1,595,000
245,000
—
2,802,630
29,334
7,560,000
2,700,000
136,225
(410,463)
Issued:
Balance November 30, 1997
13,428,233
12,817,726
15
s t a t e m e n t s
f i n a n c i a l
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Pursuant to an offering memorandum dated September 18, 1996, the Company offered for sale 1,733,333 units at $0.75 per unit. Each
unit consists of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder
thereof to acquire one additional common share at a price of $1.10 per share prior to September 18, 1998. As of November 30, 1997,
1,706,666 common share purchase warrants are still outstanding.
The Company has a adopted a stock option plan for directors, officers, employees and consultants. There were 1,020,166 options outstanding at November 30, 1997 at exercise prices from $0.50 to $3.25 and expiry dates from August 1, 2000 to May 5, 2002.
The Company has reserved 2,828,155 shares for issuance under the stock option plan and for the warrants outstanding.
10. NET INCOME AND FUNDS FLOW FROM OPERATIONS PER SHARE
Basic net income and funds flow from operations per share was calculated on the basis of the weighted average number of shares outstanding for the year of 12,775,241 (1996 - 5,864,555).
Fully diluted net income and funds flow from operations per share reflect the dilutive effect of the exercise of the stock options and share
purchase warrants outstanding as at November 30, 1997. The number of shares for the fully diluted calculation was 15,042,740
(1996 - 6,825,943).
11. INCOME TAXES
The provision for income taxes recorded on the consolidated financial statements differs from the amount which would be obtained by
applying the statutory income tax rate to income before income taxes as follows:
1997
$
3,760,723
44.62%
1,678,035
(192,035)
75,000
45,000
—
1,606,000
Income before income taxes
Statutory Canadian corporate tax rate
Calculated expected income tax expense
Benefit of manufacturing processing deduction
Large corporations tax
Non deductible expenses
Application of loss carryforward
1996
$
700,477
44.62%
312,553
(56,038)
—
7,231
(121,457)
142,289
The Company has non-capital losses for income tax purposes of approximately $399,000 which are available for application against
future taxable income and which expire as follows:
$
1999
21,000
2000
111,000
2001
176,000
2003
61,000
2004
30,000
12. COMMITMENTS
The Company has the following annual commitments under operating leases for office equipment, office and shop rent and vehicles.
$
1,015,711
53,447
1,069,158
1998
1999
13. RELATED PARTY TRANSACTIONS
The Company had business transactions with a number of entities subject to common management control as follows:
Daylighting
Direct
Costs
$
Professional
Fees
$
Amounts in Accounts
Payable and Accrued
Liabilities
$
Year ended November 30, 1997
A Company owned 50% by a director of the Company
A partner of a partnership who is a director of the Company
856,689
—
—
134,206
106,752
12,377
Year ended November 30, 1996
A Company owned 50% by a director of the Company
A Company owned 100% by a director of the Company
A partner of a partnership who is a director of the Company
760,245
—
—
—
5,076
19,777
114,965
—
—
These transactions have been recorded at their fair market value amounts in the normal course of operations.
14. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform with the current year’s financial statement presentation.
16
CORPORATE INFORMATION
DIRECTORS
David Calnan, LL.B
Partner, Shea Nerland Calnan
Martin Margolis, CA
Chartered Accountant
William R. McMahan B.A., MSc.
President & C.E.O Oxbow Capital Corporation
Ken Rose , P.Eng.
President & C.E.O
Badger Daylighting Inc.
Gary Layden
Vice President, Manufacturing
Badger Daylighting Inc.
AUDITORS
Ernst & Young
Chartered Accountants
Calgary AB
SOLICITORS
Shea Nerland Calnan
Calgary AB
STOCK EXCHANGE LISTING
Toronto Stock Exchange
Trading Symbol “BAD”
OFFICERS AND MANAGEMENT
Ken Rose P.Eng.
President & C.E.O.
Brian Anderson, CA
Vice President, Corporate Development
Gary Layden
Vice President, Manufacturing
Mervin H. Falkenberg, CMA
Vice President Finance & C.F.O.
BANKERS
Bank of Montreal
Red Deer AB
REGISTER AND TRANSFER AGENT
Montreal Trust Company
Calgary AB
NOTICE OF ANNUAL GENERAL MEETING
The Annual General Meeting of the Shareholders of Badger Daylighting Inc. will be held at 3:00 p.m. on
Thursday April 16, 1998 at the Capri Hotel, Red Deer, Alberta. Shareholders unable to attend are
encouraged to complete and return the accompanying proxy.
HEAD OFFICE
6740 - 65 Ave. Red Deer, Alberta, Canada T4P 1A5
Tel: (403) 343-0303
Fax (403) 343-0401