CALGARY, May 15 /CNW/ -
Corporate Highlights
- $1 million domestic coating equipment project for ShawCor Ltd
commenced in the first quarter of 2007.
Summary of Results Three months ended
(In thousands, except per share data, March 31, March 31,
unaudited) 2007 2006
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Revenue $ 7,245 $ 18,810
Margin 1,466 3,882
Margin % 20.2% 20.6%
Earnings (loss) before income taxes (828) 1,870
Net earnings (loss) (701) 1,130
Earnings (loss) per share - basic (0.06) 0.10
Earnings (loss) per share - diluted (0.06) 0.09
This report includes forward looking statements that are based on the Corporation's current expectations and therefore are subject to uncertainties such as the level of industry drilling and coating activity, foreign exchange fluctuations and world wide economic conditions that may cause actual results to differ materially.
This analysis should be read in conjunction with the unaudited interim consolidated financial statements of the Corporation for the three months ended March 31, 2007 and 2006 and in conjunction with the audited consolidated financial statements and Annual Management Discussion and Analysis for the year ended December 31, 2006.
MANAGEMENT DISCUSSION & ANALYSIS
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Financial
First quarter revenue for the period ended March 31, 2007, totaled $7.2 million which was a 61.7% decrease from the $18.8 million recorded for the comparative quarter ended March 31, 2006, a direct result of decreased Camrose coating activity and Nisku manufacturing activity experienced in the first quarter.
Manufacturing revenues for the quarter ended March 31, 2007 totaled $2.5 million, a decrease of $1.2 million from the quarter ended March 31, 2006. Manufacturing activity decreased during the first quarter of 2007 as industry activity slowed down.
Pipeline revenues for the quarter ended March 31, 2007, totaled $4.7 million, a decrease of $10.4 million from the quarter ended March 31, 2006. Small diameter coating activity decreased, as overall industry activity was curtailed significantly. Also, the mainline ACCESS project was completed during the third quarter of 2006.
Garneau margin for the first quarter ended March 31, 2007 totaled $1.5 million, which is $2.4 million below the $3.9 million recorded for the comparative period. The margin decrease is directly attributed to decreased revenue generated from both segmented operations as overall industry activity slowed down significantly.
Manufacturing margins of $0.2 million (8.9%) for the quarter ended March 31, 2007 was below the $1.2 million (31.9%) recorded for the period ended March 31, 2006. Pricing pressure on new project bids is now being experienced as overall activity decreases in the industry. Cost overruns on the large international order also contributed to lower overall manufacturing margins.
Pipeline gross margins of $1.2 million (26.2%) for the quarter ended March 31, 2007 are $1.5 million below the comparative period ended March 31, 2006. Decreased small diameter revenue during the first quarter of 2007 together with completion of the ACCESS mainline project in 2006, resulted in decreased overall gross margins in the Pipeline division.
The Corporation's selling, general and administrative expenses totaled $1.6 million for the three month period ended March 31, 2007, an increase of $0.5 million from the expenses recorded at March 31, 2006. Increased office expenses, investor relations expenses, wages, consulting and professional fees were incurred during the first quarter of 2007 as more stringent public reporting requirements are being met and new strategic initiatives are being evaluated.
Amortization expense for the period ended March 31, 2007 showed an increase and totaled $538 thousand, an increase of $44 thousand over the $494 thousand recorded for the comparative period ended March 31, 2006 and reflects increased amortization as a result of capital expenditures incurred during the 2006 year.
Funds used by operations for the quarter ended March 31, 2007 totaled $257 thousand, compared to the $2.4 million generated for the comparative period, a decrease attributed to decreased overall operational revenue and margins generated by both segments of the Corporation in the first quarter of 2007.
Interest costs on the operating loan and the loan payable of $123 thousand for the period ended March 31, 2007 was $24 thousand below the $147 thousand recorded for the period ended March 31, 2006. Interest costs decreased during the first quarter as usage of operating facilities and loans to finance working capital requirements decreased as a result of the decreased revenue generated during the first quarter.
Other income totaled $10 thousand for the three month period ended March 31, 2007, an increase from the $194 thousand expense for the comparative period. This change is primarily a result of 2006 transaction expenses incurred by the Corporation pertaining to the terminated Plan of Arrangement agreement with ShawCor Ltd. being eliminated in 2007 operations.
The decrease in coating revenue and gross margin there-from resulted in net losses totaling $0.7 million for the three month period ended March 31, 2007, a decrease of $1.8 million from the $1.1 million net earnings reflected in the comparative period ended March 31, 2006. A future income tax recovery of $127 thousand was recorded in the first quarter of 2007 primarily as a result of deductible temporary differences recognized in relation to the net losses recorded for the first quarter of 2007.
Net losses before tax for the Manufacturing division for the period ended March 31, 2007 totaled $490 thousand as compared to the $560 thousand of net earnings for the comparative period. The $1.1 million reduction reflects the decreased revenue generated in the first quarter of 2007 and cost overruns incurred on the large international project.
Net losses before tax for the Pipeline division totaled $0.3 million for the period ended March 31, 2007, a decrease of $1.6 million from the $1.3 million net earnings generated for the comparative period. This net loss is attributed to the decreased revenue and margins generated from coating products together with increased operating costs incurred by the Corporation during the first quarter charged to the coating operations.
No comprehensive income or loss and no opening or closing balances for accumulated comprehensive income or loss is recorded for the period ended March 31, 2007.
Accounts Receivable totaled $5.1 million at March 31, 2007, a decrease of $9.2 million over the $14.3 million recorded at December 31, 2006, and is attributed to receivables carried on domestic coating revenue and domestic manufacturing revenue reducing as overall revenue generated reduced in the first quarter. Unbilled revenue totaled $1.8 million at March 31, 2007, an increase of $0.6 million over the $1.2 million recorded at December 31, 2006 and pertains to increased work in progress on manufacturing projects at March 31, 2007.
At March 31, 2007, operating and loan payable credit facilities available to the Corporation included a demand revolving operating line of credit of $6.3 million ($2.2 million utilized), which includes contingent letter of credit liabilities, a demand revolving evergreen loan of $5.0 million ($2.5 million utilized), a loan lease facility for $0.5 million pertaining to the manufacture of polyethylene pipe and acquisition of forklifts and term loans in the amount of $2.0 million. The operating line of credit continues to fluctuate within authorized limits. At March 31, 2007, the Corporation was not in compliance with the debt service covenant related to its bank credit facility. The covenant is determined quarterly based on the trailing four quarters ending on each determination date. The Corporation has obtained a waiver from the lenders for the quarter ended March 31, 2007. There is uncertainty with respect to the ability of the Corporation to comply with its debt covenants during the next twelve months without an amendment or waiver of the covenants. Management expects them to be modified, if they are not, future violation of the covenants could result in a requirement to immediately repay the operating and demand loans.
Net additions to capital equipment were $315 thousand for the quarter end March 31, 2007, compared to $451 thousand for the period ended March 31, 2006. Capital expenditures for 2007 were primarily related to additional fabrication, mobile equipment under construction, and coating equipment betterments required in the normal course of business to support operations during the first quarter of 2007.
The Corporation's bank working capital covenants have been adjusted. For the purposes of the working capital covenant calculation, principal payments on the loans payable scheduled to be repaid after 12 months are not included in the working capital.
Selected Quarterly Information
(In thousands, except per share data)
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Three Months Ended (unaudited)
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March December September June March
31/07 31/06 30/06 30/06 31/06
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Total Revenues $ 7,245 $14,134 $11,078 $13,020 $18,810
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Net Earnings (loss) (701) 37 53 (273) 1,130
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Basic Earnings (loss)
per Share (0.06) 0.00 0.00 (0.02) 0.10
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Diluted Earnings (loss)
per Share (0.06) 0.00 0.00 (0.02) 0.09
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Total Assets 30,501 39,571 34,709 38,424 38,635
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Long Term Capital Lease
Obligations 211 241 353 414 475
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December September June
31/05 30/05 30/05
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Total Revenues $16,472 $11,456 $ 7,953
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Net Earnings (loss) 993 511 (990)
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Basic Earnings (loss)
per Share 0.08 0.05 (0.09)
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Diluted Earnings (loss)
per Share 0.08 0.05 (0.09)
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Total Assets 38,141 33,499 30,372
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Long Term Capital Lease
Obligations 535 660 372
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The seasonality of the pipe coating business and project nature of international contracts results in wide quarterly fluctuations in revenue generated by the Corporation and net earnings (loss) there from. The second quarter ended June 30 is historically the slowest period for the Corporation with the quarter ended March 31 the most active. The ACCESS coating project continued in progress during the second quarter of 2006 and contributed to improved second quarter performance. Quarterly net earnings (loss) reported were negatively affected by transaction costs incurred totaling $1.1 million for the year ended December 31, 2006. Fourth quarter earnings for the period ended December 31, 2006 were also negatively affected by the retirement allowance and corporate bonuses declared. Manufacturing activity remained active throughout 2006, however, manufacturing and coating activity experienced a significant slow down in the first quarter of 2007 which resulted in losses being recorded in the first quarter of 2007.
Outstanding Shares Data
Outstanding options issued by the Corporation totaled 920,550 (214,050 vested), at December 31, 2006. During the period ended March 31, 2007, 15,000 options were cancelled at a weighted average price of $1.48. Options outstanding at March 31, 2007 totaled 905,550 (214,050 vested) with a weighted average exercise price of $1.31. Outstanding common shares of the Corporation at December 31, 2006 totaled 12,048,527. No options have been exercised to date in 2007 with outstanding common shares totaling 12,048,527 at the date of this report.
New Accounting Policies
As disclosed in the December 31, 2006 annual audited Consolidated Financial Statements, on January 1, 2007, the Corporation adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530 "Comprehensive Income", Section 3251 "Equity", Section 3855 "Financial Instruments-Recognition and Measurement", Section 1506 "Accounting Changes", Section 3865 "Hedges" and Section 3861 "Financial Instruments-Disclosure and Presentation".
The adoption of these standards has had no material impact on the Corporation's net earnings or cash flows. The other effects of the implementation of the new standards are discussed in the notes to the consolidated interim financial statements contained herein.
Internal Controls over Financial Reporting
The Corporation has historically operated with an implemented system of internal controls over financial reporting that it believes adequately protects the assets of the Corporation and is appropriate for the nature of its business and the size of its operations. These internal controls include disclosure controls and procedures designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
It should be noted that while the Corporation's Chief Executive Officer and Chief Financial Officer believe that the Corporation's disclosure controls and procedures historically in place provide a reasonable level of assurance that the system of internal controls are sufficient, they do not guarantee that the disclosure controls and procedures, will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
The Chief Executive Officer and Chief Financial Officer of the Corporation are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles.
Management of the Corporation commenced an evaluation of these existing internal controls over financial reporting.
This evaluation was not fully completed at March 31, 2007.
The Corporation's Chief Executive Officer and Chief Financial Officer have concluded based on their evaluation that, partially due to the limited number of staff and resources at Garneau, inherent weaknesses in areas of internal controls over financial reporting are present, including segregation of duties, lack of financial expertise at certain levels in the finance functions, documented review of financial reporting entries and reconciliations, controlled use of spreadsheets, information technology safeguards, risk assessment processes, physical controls, documentation controls and controls at the entity level. The Corporation does not have fully disciplined and developed processes and procedures in place to support accounting estimates and documented accounting policies and procedures in accordance with generally accepted accounting principles. As a result of these weaknesses there is no guarantee that a material misstatement would be prevented or detected.
The evaluation of existing internal controls over financial reporting is continuing with a view to identifying control weaknesses. Implementation of strengthened financial reporting controls will occur during 2007, where required.
Disclosure, Confidentiality and Trading Policy
The Corporation has formal disclosure controls and procedures in place which promotes an understanding of the legal requirements among the Corporation's directors, officers and employees as it pertains to the timely, factual and accurate communications with the public for Garneau Inc., together with compliance of trading requirements of Corporation securities and confidentiality of non public disclosed information. The effectiveness of the Corporation's disclosure controls and procedures at March 31, 2007 have been evaluated by senior management and are in compliance with reporting requirements at March 31, 2007. Furthermore, these disclosure controls and procedures are in the process of being enhanced further in 2007.
Critical Accounting Estimates
The Corporation recognizes revenues related to equipment fabrication contracts based on the percentage-of-completion of the individual contracts. At March 31, 2007, significant fabrication contracts in progress include domestic orders for coating equipment, oilfield tanks, buildings and catwalks totaling $4.3 million. The international coating equipment contract in progress at March 31, 2007 totaled $3.5 million. Revenues from contracts are determined on the percentage-of-completion method, based on the ratio of costs incurred to date over estimated total costs. The Corporation has a process whereby progress on jobs is reviewed by management on a regular basis and estimated costs to complete are updated. However, due to unforeseen changes in the nature or cost of the work to be completed or performance issues, contract profit can differ from earlier estimates.
The Corporation provides an estimate for amortization of assets based on the expected useful life of assets with coating and extrusion equipment calculated based on a straight-line method. These estimates are made using historical experience and knowledge of current market conditions, however, are subject to change as market conditions shift or technological advances are made.
The Corporation evaluates the probability of collection of accounts receivable and records an allowance for doubtful accounts, which reduces the receivables to the amount management reasonably believes will be collected. In determining the amount of allowance, the following factors are considered: the length of time the receivable has been outstanding, specific knowledge of each customer's financial condition and historical experience.
The Corporation also provides estimates pertaining to the valuation of long-lived assets, valuation of inventory, valuation of future income taxes and other estimates provided in the normal course of business operations.
Disclosure of Contractual Obligations
At March 31, 2007, there were no significant changes to the contractual obligations disclosed by the Corporation which were outlined in the Management Discussion and Analysis for the year ended December 31, 2006.
Contingencies
During the period ended March 31, 2007, the Corporation remained a named defendant in a lawsuit with claims in the aggregate amount of $1.5 million. In the opinion of management, this matter is without substantial merit and no provisions have been made for this claim in the accounts.
Business Risks
At March 31, 2007, there are no significant changes to the business risks outlined in the Management Discussion and Analysis for the year ended December 31, 2006.
Operational
Small diameter coating activity for the first quarter of 2007 was well below the activity recorded in 2006 as both coating lines were in partial operation for most of the first quarter with only two shifts employed. The order book softened in the fourth quarter of 2006 and continued during the first quarter of 2007 as clients indicated that short term activity would be curtailed. Initial design and fabrication work commenced on the plant upgrades capital program announced in the fall of 2006 for the Camrose plant.
Domestic manufacturing activity also reduced in the first quarter of 2007 as project bidding and activity were curtailed in Nisku. Garneau manufacturing operations plant hours were reduced to 8 hour shifts with a reduction in overtime premiums as project activity decreased.
Outlook
Although 2006 drilling activity exceeded 23,400 wells, a softening of commodity prices and activity was experienced in the third and fourth quarters which resulted in decreased coating activity. This noticeable slowdown has continued into the first quarter of 2007 with both coating and manufacturing activity being curtailed significantly. The slowdown in industry activity impacted Garneau's first quarter substantially as both coating and manufacturing revenue recorded were well below 2006 comparisons.
Load out activity has continued in excess of incoming bare pipe in the first quarter of 2007, reducing client coated inventory in stock. Although our clients project this curtailed activity to represent a short term market correction, steps continue to be taken by management to reduce infrastructure costs accordingly.
Initial design and fabrication on the major Camrose capital expenditure program continued during the first quarter of 2007 and is progressing as originally planned. This major upgrade to the Camrose facility is projected to improve production efficiencies and reduce downtime and maintenance costs in the plants. We project improved capabilities for future client orders through these upgrades.
Installation and commissioning on the large international order commenced during the first quarter and is expected to be completed during the second quarter of 2007. Cost overruns were incurred during the installation stage to meet customer requirements. A further $1 million coating equipment order was secured from ShawCor Ltd. for domestic coating equipment fabrication during the first quarter. This order is expected to be completed and shipped in the second quarter.
Discussions on proceeding with the CCSI joint venture agreement signed in the fall of 2005 were held during the first quarter of 2007. The venture is working towards bringing cold weather application to the coating process and will resume activity in 2007. If proven successful, this could lead to new revenue streams for the Corporation on future large diameter projects.
Garneau will continue to invest in research and development, while actively pursuing potential new markets and focusing on profitable growth by offering specialty products and services to complement our core coating and manufacturing operation.
Strategic initiatives are currently being discussed and implementing a new strategic plan with new strategic initiatives during fiscal 2007 will be a primary focus of the Corporation. Additionally, management will focus on controlling infrastructure costs during this market slowdown.
On behalf of the Board of Directors
(signed)
Glen Garneau,
President and Chief Executive Officer
May 15, 2007
Garneau Inc.
Consolidated Balance Sheets
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at at
(In thousands of Canadian dollars) March 31, December 31,
(unaudited) 2007 2006
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Assets
Current Assets:
Accounts receivable $ 5,081 $ 14,293
Unbilled revenue 1,774 1,162
Inventory (note 5) 2,806 3,067
Prepaid expenses and deposits 25 16
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9,686 18,538
Other assets 57 56
Property, plant and equipment 20,758 20,977
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$ 30,501 $ 39,571
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Liabilities and Shareholders' Equity
Current Liabilities:
Operating loan $ 2,219 $ 5,224
Accounts payable and accrued liabilities 2,669 7,207
Billings in excess of costs incurred and
estimated earnings on uncompleted contracts - 204
Customer deposits 112 112
Loans payable (note 7) 4,495 4,918
Current portion of capital lease obligations 264 343
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9,759 18,008
Capital lease obligations 211 241
Future income taxes 479 606
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10,449 18,855
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Shareholders' Equity:
Share capital (note 6) 21,401 21,401
Contributed surplus 136 99
Deficit (1,485) (784)
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20,052 20,716
Contingencies (note 8)
Basis of presentation
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$ 30,501 $ 39,571
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See accompanying notes to unaudited interim consolidated financial
statements.
Garneau Inc.
Consolidated Statements of Operations and Comprehensive Income (loss)
and Deficit
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Three months Three months
ended ended
(In thousands of Canadian dollars except March 31, March 31,
per share data, unaudited) 2007 2006
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Revenue $ 7,245 $ 18,810
Operating costs 5,779 14,928
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1,466 3,882
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Other operating expenses (income):
Selling, general and administrative 1,587 1,124
Amortization 538 494
Research and development 39 67
Foreign exchange loss (gain) 12 (14)
Gain on disposal of property, plant and
equipment (4) -
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2,172 1,671
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(706) 2,211
Financing:
Interest on operating loan 38 54
Interest on loans payable 85 93
Other 9 -
Other expenses (income), net (10) 194
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Earnings before income taxes (828) 1,870
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Income taxes:
Future (127) 740
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(127) 740
Net earnings (loss) and comprehensive income
(loss) (701) 1,130
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Deficit, beginning of period (784) (1,731)
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Deficit, end of period $ (1,485) $ (601)
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Earnings (loss) per share:
Basic $ (0.06) $ 0.10
Diluted $ (0.06) $ 0.09
Weighted average common shares:
Basic 12,048,527 11,606,131
Diluted 12,048,527 12,021,696
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See accompanying notes to unaudited interim consolidated financial
statements.
Garneau Inc.
Consolidated Statements of Cash Flows
(In thousands, of Canadian dollars,
unaudited) Three months Three months
ended ended
March 31, March 31,
2007 2006
Cash provided by (used in):
Operations:
Net earnings (loss) $ (701) $ 1,130
Items not involving cash:
Amortization 538 494
Stock-based compensation expense 37 3
Gain on disposal of property, plant and
equipment (4) -
Future income taxes (127) 740
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(257) 2,367
Changes in non-cash operating working capital 4,110 (2,020)
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3,853 347
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Financing:
Proceeds from exercise of share purchase
options - 49
Increase (decrease) in operating loan (3,005) 947
Repayment of loans payable (423) (812)
Advances under loans payable - -
Repayment of capital lease (109) (80)
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(3,537) 104
Investments:
Other assets (1) -
Proceeds from disposal of property, plant
and equipment 27 -
Additions to property, plant and equipment (342) (451)
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(316) (451)
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Change in cash - -
Cash, beginning of period - -
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Cash, end of period $ - $ -
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See accompanying notes to unaudited interim consolidated financial
statements.
Garneau Inc.
Notes to the Consolidated Interim Financial Statements (unaudited)
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(Tabular amounts in thousands of Canadian dollars)
For the three months ended March 31, 2007 and 2006
Basis of Presentation:
The Corporation is incorporated under the Business Corporations Act of
Alberta. Its principal business activities are the coating of pipe and
manufacturing of equipment for use in the oil and gas industry. The
Corporation is subject to seasonal fluctuations in operating results that
impact quarter-to-quarter operating results and, thus, one quarter's
operating results are not necessarily indicative of a subsequent
quarter's operating results.
These unaudited interim consolidated financial statements have been
prepared by management in accordance with Canadian generally accepted
accounting principles for interim financial statements. These
consolidated interim financial statements have been prepared on a going
concern basis in accordance with Canadian generally accepted accounting
principles, which assumes that the future operations will allow for the
realization of assets and discharge of liabilities in the normal course
of business. There is uncertainty with respect to the ability of the
Corporation to comply with its debt service covenant related to its
operating loan and loans payable during the next twelve months without an
amendment. Management expects the bank credit facility related to these
loans to be modified, but there can be no assurance that management will
obtain such modification. The application of the going concern concept is
dependent upon the ability of the Corporation to generate profitable
operations and the ongoing support of its lender. These consolidated
interim financial statements do not include any adjustments to the
carrying value of assets and liabilities that might be necessary should
the Corporation not continue operating in the normal course of business.
1) Significant Accounting Policies:
These unaudited consolidated interim financial statements follow the same
accounting policies and methods of application as the most recent annual
consolidated financial statements, except as described in note 2. Notes
to the consolidated interim financial statements for the period ended
March 31, 2007 do not include all disclosures required by Canadian
Generally Accepted Accounting Principles for annual financial statements.
For further detailed information, the reader is advised to refer to
Garneau Inc.'s 2006 audited financial statements.
2) Changes in Accounting Policies and Practices
As disclosed in the December 31, 2006 annual audited Consolidated
Financial Statements, on January 1, 2007, the Corporation adopted the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section
1530 "Comprehensive Income", Section 3251 "Equity", Section 3855
"Financial Instruments - Recognition and Measurement", Section 1506
"Accounting Changes", Section 3865 "Hedges" and Section 3861 "Financial
Instruments-Disclosure and Presentation".
The adoption of these standards has had no material impact on the
Corporation's net earnings or cash flows. The other effects of the
implementation of the new standards are discussed below.
Comprehensive Income
The new standards introduce comprehensive income, which consists of net
earnings and other comprehensive income ("OCI"). The Corporation has no
OCI transactions recorded for the period ended March 31, 2007. The
adoption of Comprehensive Income has been in accordance with the
applicable transitional provisions.
Section 3251 establishes standards for the presentation of equity and for
the changes in equity during the reporting period. The cumulative changes
in OCI are included in accumulated other comprehensive income ("AOCI"),
which is presented as a new category within shareholders' equity. The
Corporation has no opening or closing balances for accumulated other
comprehensive income or loss.
Financial Instruments
The financial instruments standard establishes the recognition and
measurement criteria for financial assets, financial liabilities and
derivatives. All financial instruments are required to be measured at
fair value on initial recognition of the instrument, except for certain
related party transactions. Measurement in subsequent periods depends on
whether the financial instrument has been classified as "held-for-
trading", "available-for- sale financial assets", "held-to-maturity
investments", "loans and receivables", or "other financial liabilities"
as defined by the standard.
Financial assets and financial liabilities "held-for-trading" are
measured at fair value with changes in those fair values recognized in
net earnings. "Available-for-sale financial assets" are measured at fair
value, with changes in those fair values recognized in OCI. "Held-to-
maturity investments", "loans and receivables" and "other financial
liabilities" are measured at amortized cost using the effective interest
method.
Cash and cash equivalents are designated as "held-for-trading". Accounts
receivable and unbilled revenue are designated as "loans and
receivables". Accounts payable and accrued liabilities, operating loans,
customer deposits, loans payable and capital lease obligations are
designated as "other financial liabilities".
Section 3855 requires that the Corporation records non-financial
derivatives as assets or liabilities at their fair value unless exempted
from derivative treatment as normal purchase or sale. The Section also
requires the Corporation to identify embedded derivatives that need
separation from the related host contract and measure those embedded
derivatives at fair value. Subsequent change in fair value of embedded
derivatives is recognized in the consolidated statement of operations and
deficit in the period the change occurs. The Corporation has elected to
apply this accounting treatment for all embedded derivatives in host
contracts entered into on or after January 1, 2003 and has determined
there are no material embedded derivatives that must be separated from
the host contract and accounted for separately and there are no non-
financial derivative instruments.
Transactions costs that are directly attributable to the acquisition or
issuance or disposal of financial assets or liabilities are expensed at
the time of occurrence.
Section 3861 (replaces Handbook Section 3860, Financial Instruments-
Disclosure and Presentation) establishes standards for presentation of
financial instruments and non-financial derivatives, and identifies
information that should be disclosed. There was no material effect on the
Corporation's financial statements when we adopted the Section 3861 on
January 1, 2007.
Hedges
Section 3865 specifies circumstances under which hedge accounting is
permissible and how hedge accounting may be performed. The Corporation
currently does not have any hedges.
Accounting Changes
In July 2006, the Accounting Standards Board ("AcSB") issued a
replacement of The Canadian Institute of Chartered Accountants' Handbook
("CICA Handbook") Section 1506, Accounting Changes ("Section 1506"). The
new standard allows for voluntary changes in accounting policy only when
they result in financial statements providing reliable and more relevant
information, requires changes in accounting policy to be applied
retrospectively unless doing so is impracticable, requires prior period
errors to be corrected retrospectively and calls for enhanced disclosures
about the effects of changes in accounting policies, estimates and errors
on the financial statements. The impact that the adoption of Section 1506
will have on the Company's results of operations and financial condition
will depend on the nature of future accounting changes. The adoption of
Section 1506 effective January 1, 2007 has had no impact on these
unaudited interim consolidated financial statements.
Recent Accounting Pronouncements Issued and Not Yet Applied
a) Financial instruments and capital disclosure:
In October 2006, the AcSB approved disclosure and presentation
requirements for financial instruments that revise and enhance the
disclosure requirements of Section 3861. These requirements included
Sections 3862- Financial Instruments-Disclosure ("Section 3862"),
which replaces Section 3861 and Section 1535, Capital Disclosures
("Section 1535"), which establishes standards for disclosing
information about an entity's capital and how it is managed. Section
1535 requires disclosure of an entity's objectives, policies and
processes for managing capital, quantitative data about the entity in
regards to capital and whether the entity has compiled with any
capital requirements and if it has not complied, the consequences of
such non-compliance. This standard is effective for the Corporation
for interim and annual financial statements beginning on January 1,
2008. Early adoption is permitted at the same time an entity adopts
other standards relating to accounting for financial instruments. The
Corporation does not expect the adoption of this standard to have a
material impact on its consolidated financial position and results of
operations.
Section 3862 is based on IFRS 7, Financial Instruments: Disclosures,
and places an increased emphasis on disclosures about the risks
associated with both recognized and unrecognized financial
instruments and how these risks are managed.
Section 3862 requires disclosures, by class of financial instrument
that enables users to evaluate the significance of financial
instruments for an entity's financial position and performance,
including disclosures about fair value. In addition, disclosure is
required of qualitative and quantitative information about exposure
to risks arising from financial instruments, including specified
minimum disclosures about credit risk, liquidity risk and market
risk. The quantitative disclosures must also include a sensitivity
analysis of each type of market risk to which an entity is exposed,
show how net income and other comprehensive income would have been
affected by reasonably possible changes in the relevant risk
variable.
This standard is effective for the Corporation for interim and annual
financial statements beginning on January 1, 2008. The Corporation
does not expect the adoption of this standard to have a material
impact on its financial position and results of operations.
b) Financial instruments presentation:
In October 2006, the AcSB approved Section 3863-Financial
Instruments-Presentation, which replaces Section 3861, Financial
Instruments-Disclosure and Presentation. The existing requirements on
presentation of financial instruments have been carried forward
unchanged to Section 3863, Financial Instruments-Presentation.
This standard is effective for the Corporation for interim and annual
financial statements beginning on January 1, 2008. The Corporation
does not expect the adoption of the standard to have a material
impact on its financial position and results of operation.
3) Segment Disclosures
Management has determined that the Corporation operates in two
reportable business segments which were Manufacturing and Pipeline.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Three months ended Three months ended
March 31, 2007 March 31, 2006
Manufacturing Pipeline Manufacturing Pipeline
Revenue $ 2,496 $ 4,749 $ 3,678 $ 15,132
Gross margin 223(8.9%) 1,243(26.2%) 1,172(31.9%) 2,710(17.9%)
Amortization 43 495 32 462
Interest
expense - 123 - 147
Other expenses
and income
before income
taxes (670) (963) 580 791
Earnings (loss)
before income
taxes (490) (338) 560 1,310
Property, plant
and equipment 2,151 37,976 2,216 35,885
Accumulated
amortization 1,598 17,771 1,863 15,894
Net book value 553 20,205 353 19,991
Capital
expenditures - 315 44 407
Total assets 3,436 27,065 3,695 34,940
Gross margin is determined by deducting operating costs from revenue.
Operating costs consist of all direct material, labor and plant overhead
costs.
4) Supplementary Cash Flow Information
Three Months Ended
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March 31, March 31,
2007 2006
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Interest paid $ 123 $ 147
Income taxes paid - -
Property, plant and equipment in the amount of Nil (2006 - Nil) were
acquired by way of capital lease during of the three month period ended
March 31, 2007.
5) Inventory
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Inventory consists of As at As at
the following: March 31, December 31,
2007 2006
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Raw Materials $ 2,006 $ 1,986
Finished goods 800 1,081
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$ 2,806 $ 3,067
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6) Share Data
At December 31, 2006, the Corporation had 12,048,527 outstanding common
shares and 920,550 outstanding options to acquire common shares. 214,050
of these options were vested and exercisable. During the quarter ended
March 31, 2007, no options were exercised. Options totaling 15,000 were
forfeited during the quarter ended March 31, 2007 with 905,550 options
outstanding at March 31, 2007 (214,050 vested). Diluted shares at
March 31, 2007 total 12,048,527 and include the dilutive impact of
options outstanding at March 31, 2007 on overall shares outstanding.
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Share Continuity Schedule Number of
------------------------- shares
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Common shares outstanding at December 31, 2006
and March 31, 2007 12,048,527 $ 21,401
-------------------------
7) Loans Payable
Loans payable to the Corporation's bank are payable upon demand and are
classified as a current liability. Scheduled repayments are as follows:
As at As at
March 31, December 31,
2007 2006
Due within 12 months $ 1,436 $ 1,556
Due after 12 months $ 3,059 $ 3,362
8) Contingencies
The Corporation has been named defendant in a lawsuit and has received
claims in the aggregate amount of $1.5 million. In the opinion of
management, this matter is without substantial merit and no provision has
been made for the claim in the accounts.
9) Comparative Figures
Certain of the comparative figures have been reclassified to confirm with
the current period's presentation.