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									Mission stateMent
To provide the best safety services in the world


Core Values
We always work safely
We invest in our people
We keep our promises
We operate with trust, mutual respect and integrity
We strive for constant improvement
We know our customers are our future
annual General MeetinG oF sHareHolDers
Monday, May 16, 2011, 3:00 pm
Calgary Petroleum Club
319 – 5th Avenue SW
Calgary, Alberta


taBle oF Contents
Report to Shareholders ........................................................................................ 2
Management Discussion and Analysis ................................................................. 5
Management’s Report ........................................................................................ 23
Independent Auditors’ Report ............................................................................. 24
Consolidated Financial Statements .................................................................... 25
Notes to Financial Statements............................................................................ 29
Corporate Information................................................................ Inside Back Cover
report to sHareHolDers
By DaViD yaGer, CHairMan anD CHieF exeCutiVe oFFiCer
Fellow Shareholders,                        We have such confidence in our people,      4.6% EBITDA margin is not at historical
                                            equipment, and processes that our new       levels (the three-year average EBITDA
The 2010 fiscal year saw a transition                                                   from 2006 to 2008 was 10.5% on aver-
                                            corporate Mission Statement is, “To
from the deep recession of 2009 to a                                                    age revenues of $103.9 million), this
                                            provide the best safety services in the
more normal business environment                                                        significant increase in EBITDA from flat
                                            world”. HSE is certainly not the biggest,
in 2011. While the total revenue for                                                    revenues illustrates that the Company
                                            but we know none of our competitors
2010 doesn’t reflect a material change                                                  understands the challenge and is deliv-
                                            do it better. It is from this position of
in the business from 2009, in the lat-                                                  ering improved margin performance.
                                            technical and operational strength that
ter half of the year the message from
                                            the Company is confident it will deliver    Until the fourth quarter, profits re-
clients about their spending plans and
                                            for its three key stakeholders: clients,    mained elusive. For the 2010 fiscal
HSE’s role in these plans was the most
                                            employees, and capital providers.           year our Company reported a loss of
positive since the financial meltdown
began in mid-2008.                                                                      $1.2 million or ($0.03) per fully diluted
                                                                                        share. This is a significant improvement
However, the marketplace in which our                                                   over a loss of $6.6 million or ($0.18)
Company operates has changed. Be-                                                       per fully diluted share in 2009. Regard-
cause of rising operating costs and oth-                                                less, HSE must be profitable for it to
er macroeconomic challenges, there is                                                   succeed.
continued pressure to deliver health
and safety services as economically as           We have such confidence                The bright spot for the year was the
                                                                                        fourth quarter. Revenues rose 17.5% to
possible. Meanwhile, rising costs for           in our people, equipment                $22.4 million, $3.3 million higher than
labour and fuel are putting continued
pressure on operating margins. It’s a             and processes that our                $19.1 million in Q4 2009. EBITDA rose
different world, and HSE must be re-              new corporate Mission                 246.2% from $0.5 million to $1.7 mil-
lentless in its pursuit of increased rev-                                               lion. Improved operating performance,
                                                Statement is, ‘To provide               combined with a favorable gain on the
enue, optimal efficiency, and improved
operating margins.                               the best safety services               expiration of debt obligation related to
                                                                                        a purchase in 2006, resulted in a profit
Nevertheless, 2010 saw other events                    in the world’.                   of $0.7 million for the quarter com-
that will impact the safety services in-                                                pared to $2.2 million loss for the same
dustry. The massive Macondo blowout                                                     period in 2009.
in the Gulf of Mexico resulted in cor-
porations, their shareholders and the                                                   The balance sheet remains strong. At
                                                                                        December 31 working capital was $15.8
public demanding that asset owners
                                                                                        million, up from $14.1 million at De-
and resource developers do whatever
                                                                                        cember 31, 2009. Long-term debt (bank
they can to protect workers, assets,
and the community.                          tHe nuMBers                                 debt, equipment leases, capital leases,
                                                                                        and FCTC) stood at $4.3 million, down
This means that the overall opportunity     Operating margin grew 28.8% to $11.7        from $6.4 million at the end of the prior
for HSE’s future and growth in share-       million from $9.1 million in 2009. This     year. To augment working capital and
holder value remains stronger than          was accomplished despite the fact rev-      to pursue a more aggressive capital
ever. HSE emerged from the recession        enue in fiscal 2010 was up only 0.5%        program for 2011, HSE raised $2.0 mil-
as an undisputed industry leader in the     from 2009; $82.0 million compared           lion by way of a convertible debenture
delivery of quality health and safety       to $81.6 million. SG&A declined 3.5%        in late 2010 and early 2011. With HSE
services. This view is based on custom-     from $8.2 million to $7.9 million. The      shares trading above the debenture-
er feedback, the number of health and       result of these operating improve-          conversion price of $0.50 per share
safety professionals that want to work      ments and cost reductions was EBITDA        since final closing in January, the de-
at HSE, and the employees that leave        increasing 343.8% from $0.8 million in      benture has been treated as equity for
for greener grass then ask to come back.    2009 to $3.8 million in 2010. Although a    the purposes of this financial overview.


2    HSE Integrated Ltd. 2010 Annual Report                                                           Report to Shareholders
tHe eConoMy                                   • The non-resource industrial sectors
                                                (such as manufacturing and pro-
                                                                                          our recruiting and staff development
                                                                                          capabilities remained intact and we
Although it felt like 2010 was going to         cessing) that HSE serves in Ontario,      found most of the people we needed.
be materially better than 2009, signs           Atlantic Canada and the industrial        We could have done more work with
of true recovery didn’t take place until        midwest U.S. are varied in terms of       more personnel, but bringing on new
the latter half of the year. There were         challenges. Newfoundland-Labrador         hires had to be done in a manner con-
several pivotal macroeconomic factors           is growing because of major resource      gruent with our overall corporate ob-
that affected business both positively          capital projects. Ontario, Nova Sco-      jectives and new Mission Statement.
and negatively. These are summarized            tia and New Brunswick are stable or
                                                                                          One of the most positive developments
below.                                          recovering, but the U.S. industrial
                                                                                          of the downturn was a focus on quality.
                                                heartland is still struggling to return
• Because of the development of mas-                                                      Downsizing during the recession meant
                                                to historic activity levels because of
  sive shale gas deposits, the North                                                      trying to keep the most talented and
                                                the prolonged recession.
  American natural gas glut became                                                        committed personnel. A highly com-
  semi-permanent with depressed
  prices (on a BTU-equivalent basis to        tHe Business                                petitive marketplace meant that doing
                                                                                          good work was essential for economic
  oil) – a fact of life for the foreseeable   HSE’s revenue averaged $20.0 million        survival. We continued to improve and
  future. This created a major shift for      per quarter in 2010 with two signifi-       standardize our internal operating pro-
  HSE’s Oilfield business as activity                                                     cedures and new-hire training and ori-
  shifted from gas to oil.                                                                entation programs. We also ensured
                                                                                          that service quality and technical ca-
• In May the Alberta government for-                                                      pability were consistent at all service
  malized a major reversal of its New                                                     locations across the country.
  Royalty Framework from 2007. The
  improved economics removed un-                                                          This undertaking was made more chal-
  certainty about investing in Alberta                                                    lenging by the way HSE came together.
  and resulted in land sales for devel-          We continued to improve                  The Company has consolidated 20 own-
  opment rights in Alberta rising to           and standardize our internal               er-operated safety companies over the
  the highest in history. This is a strong                                                past 10 years. When our business was
                                               operating procedures and...                expanding through acquisitions and or-
  driver for future business.
                                               ensured that service quality               ganic growth, integration was the first
• Oil prices stabilized at levels that                                                    priority. But when the business shrank
  encourage development in western               and technical capability
                                                                                          in 2009, we had an opportunity to bet-
  Canada of both conventional oil and          were consistent at all service             ter focus on quality and consistency.
  oilsands. Combined with Alberta’s            locations across the country.              Evidence of this was clear in 2010.
  royalty changes and new technolo-
  gies perfected for shale gas (horizon-                                                  A big year-over-year turnaround took
  tal drilling and multi-stage fracturing)                                                place in the United States with Boots
  and applied to oil-bearing reservoirs,                                                  & Coots HSE Services, LLC (“BCHSE”).
  the latter half of 2010 saw a resur-                                                    Launched in early 2009, this operation
  gence in investment and activity in                                                     consumed cash until the second quarter
  the upstream oil and gas industry. In                                                   of 2010. The combination of improved
  2010 HSE’s Oilfield revenues rose for       cant swings: about $2.0 million under       business and expense controls helped
  the first time since 2006.                  in Q2, which resulted in poor perfor-       turn BCHSE cash flow-positive for the
                                              mance, and about $2.0 million over in       remainder of the year. Because of a
• Capital markets have stabilized. The                                                    post-Macondo business growth and a
                                              Q4, when we experienced the best op-
  important elements are public and                                                       renewed interest in health and safety in
                                              erating quarter since 2008.
  private capital for equity invest-                                                      the U.S., BCHSE is expected to be a posi-
  ments, low interest rates, and stabi-       However, in terms of staffing and man-      tive contributor in 2011 and beyond.
  lized debt markets. While the cost of       power this was relatively stable com-
  capital (defined by share valuations
  and availability as well as cost of
                                              pared to the dramatic downturn in
                                              business in 2009. Pay cuts instituted to
                                                                                          tHe opportunity
  debt) is higher than the pre-reces-         survive in 2009 were reversed. Hiring       While health and safety is an essential
  sion period, deals are getting done.        resumed. When business did pick up in       service, it is not a business character-
  This allows our clients to proceed          the third quarter of 2009, HSE quickly      ized by high margins. Depending on
  with capital expenditures.                  found itself short-staffed. Fortunately     how asset owners and resource devel-


Report to Shareholders                                                            HSE Integrated Ltd. 2010 Annual Report        3
opers value the service internally, they      fair prices. In this context, “fair” is de-   ity, quality, capacity, and service diver-
will spend what they must on health           fined as delivering higher margins and        sity. This is the type of contract HSE
and safety, particularly if they risk being   profits for our capital providers.            was created to pursue.
shut down by government regulations.
                                              As HSE comes out of the recession, our        This contract is particularly valuable
But their primary focus is growing their
                                              mix of quality, clients, and pricing isn’t    because the next client to embrace the
business and creating wealth for own-
                                              where it should be. Our quality is high       concept doesn’t have to be first. There
ers and shareholders. While history has
                                              but in some cases we’re locked into           are a number of large Canada-wide cli-
proven that safe companies are more
                                              certain large-client pricing agreements       ents that value the concept of ensuring
successful than those that aren’t, the
                                              that commit some of our capacity to           quality health and safety services and
value placed on workers, assets, and
                                              lower-value opportunities than those          consistent delivery in multiple loca-
community protection varies from cli-
                                              emerging in an improving marketplace.         tions. HSE is the only company that can
ent to client. Some invest heavily; some
                                              Shifting to clients that care more (as        pursue this type of growth and our in-
spend the bare minimum.
                                              measured by paying more) – or having          ternal business development and mar-
The Company’s focus on quality in the         existing clients better understand the        keting processes have been realigned
past two years and our new Mission            HSE value proposition – are strategies        to fulfill this objective.
Statement give us a clearer direction         HSE plans to pursue.
                                                                                            One of the realities of this business is
on how to maximize our global health
                                                                                            that we must be in the area to win the
and safety opportunity.
                                                                                            work. There are major gaps in HSE’s
A field operations visit to BCHSE in                                                        footprint: the lower mainland of B.C.;
early 2011 was very illuminating. After                                                     the mining and forestry belt that runs
the Gulf of Mexico disaster, responsible                                                    across northern Saskatchewan, Mani-
oil companies – and there are many –                                                        toba and Ontario; and the heavily in-
have realized they must do better or                 The Company’s focus                    dustrialized province of Quebec. More
they will lose what has come to be                   on quality in the past                 locations means more opportunities
known as their “social license to oper-                                                     for more national contracts.
ate”. This is the combined expectations             two years and our new
                                                                                            With internally generated expansion
of government, the public, and share-              Mission Statement give                   capital available for the first time since
holders that corners cannot be cut on              us a clearer direction on                2008, HSE is undergoing a major inter-
protection to increase profits.
                                                     how to maximize our                    nal strategic planning review to deter-
What we’re offering with BCHSE is a                                                         mine where to take our Company in
trusted brand (Boots & Coots), new
                                                   global health and safety                 the next few years.
equipment (there’s not much new                          opportunity.
safety equipment in West Texas!), and
top-quality service and expertise led by
                                                                                            tHe people
the two Canadian career safety experts                                                      People are implicit in the word “ser-
we sent south to run the operation.                                                         vice” in health and safety services. HSE
This is what responsible clients want                                                       continues to attract and retain some
and need in this market at this time.                                                       of the most capable and dedicated
The demand for our services compared
to our capacity is such that we should
                                              tHe GrowtH                                    people in health and safety and busi-
                                                                                            ness management and administration.
be able to high-grade our clients, cre-       HSE can and will grow. We must grow           It’s impossible for our Company to suc-
ate opportunities going forward, and in       revenue, we must grow margins, and            ceed without their hard work and dedi-
doing so, make good on our Mission.           we must grow shareholder value.               cation. On behalf of the Board of Direc-
                                                                                            tors and the executive team, thank you
The same philosophy will be applied in        In early 2011 HSE was awarded its             very much.
Canada. The total market remains con-         first national contract with a major re-
siderably larger than our capacity and        source company that truly values the          On Behalf of the Board of Directors,
it always will. With a focus on quality       importance of quality health and safe-
and expertise, over time we can work          ty services. This contract will see HSE
with our customers to identify those          support the client’s operations in three
that truly appreciate good people,            provinces for several years. HSE was          David L. Yager,
good equipment and good service at            awarded the work because of proxim-           Chairman and CEO


4    HSE Integrated Ltd. 2010 Annual Report                                                                Report to Shareholders
ManaGeMent DisCussion anD analysis (“MD&a”)
For tHe years enDeD DeCeMBer 31, 2010 anD 2009
The following Management discussion and analysis is dated            accounting principles (“GAAP”) and takes into consideration
March 23, 2011 and is a review of the financial results of HSE       information available to Management up to March 23, 2011.
Integrated Ltd. (“HSE”, “We”, “Our”, or the “Corporation”)           Unless otherwise stated, dollar figures presented are expressed
for the fiscal years ended December 31, 2010 and 2009. This          in thousands of Canadian dollars and per-share figures in dollars
MD&A should be read in conjunction with HSE’s other docu-            per weighted-average common share. The following MD&A
ments filed on SEDAR at www.sedar.com. Unless otherwise dis-         contains forward-looking information and statements. Please
closed, the financial information presented in this discussion has   refer to the end of the MD&A for the disclaimer on forward-
been prepared in accordance with Canadian generally accepted         looking statements.


Selected Financial inFormation
                                                                      Year-over-                         Year-over-
                                                       Year ended        year %          Year ended          year%          Year ended
                                                     Dec. 31, 2010       change        Dec. 31, 2009        change        Dec. 31, 2008
Revenue                                          $         82,028          0.5%    $         81,601         -28.3%    $        113,763
Operating and materials                                    70,341          -3.0%             72,530         -21.7%              92,673
Operating margin                                           11,687         28.8%               9,071         -57.0%              21,090
Operating margin %                                          14.3%                             11.1%                              18.5%
Selling, general and administrative                          7,936         -3.5%              8,226         -23.1%              10,699
Net earnings (loss)                                        (1,157)                           (6,634)                               248
    Per-share basic                                         (0.03)                            (0.18)                              0.01
    Per-share diluted                                       (0.03)                            (0.18)                              0.01
EBITDA (1)                                       $           3,751       343.8%    $            845         -91.9%    $         10,391
EBITDA %                                                     4.6%                              1.0%                               9.1%
Total assets                                     $         49,912          -1.6%   $         50,722         -26.4%    $         68,934
Total long-term liabilities                      $           7,906        45.6%    $          5,429         -69.4%    $         17,731

(1) See Non-GAAP Measures



Financial review
overview                                                             For the 2010 fiscal year, total revenues increased 0.5% to $82.0
                                                                     million from $81.6 million in 2009. The fiscal 2010 operating
HSE operates in two geographic segments – Canada and the             margin was $11.7 million or 14.3% of revenues, up 28.8% from
United States – providing health and safety services to industry.    $9.1 million or 11.1% of revenues in 2009. Selling, general and
The Corporation offers a package of integrated asset, worker and     administrative expense (“SG&A”) decreased to $7.9 million from
community health and safety protection services including: onsite    $8.2 million in the prior year. As a percentage of revenue, SG&A
safety supervision; gas detection; fixed and mobile air quality      decreased from 10.1% of revenue in fiscal 2009 to 9.7% in 2010.
monitoring; breathing equipment rentals and services; fixed and      HSE reported a loss of $1.2 million or ($0.03) per share for the
mobile firefighting and fire protection services and equipment;      2010 fiscal year compared to a loss of $6.6 million or ($0.18)
worker shower (decontamination) services; onsite medical servic-     per share in 2009. EBITDA (see “Non-GAAP Measures” page
es; first aid; emergency medical response; worker safety training;   20) for the period was $3.8 million or 4.6% of revenue in 2010, a
industrial hygiene services; and safety management.                  343.8% increase from $0.8 million or 1.0% of revenue in 2009.


Management Discussion and Analysis                                                  HSE Integrated Ltd. 2010 Annual Report           5
revenue                                                                 to permanent production, manufacturing, processing facilities or
                                                                        other operations that operate 24/7/365.
The Corporation provides health and safety services to customers
in two main business areas: Industrial and Oilfield. The differen-      Oilfield operations are associated exclusively with conventional
tiation takes place primarily because of the industries served and      upstream oil and gas activity, which is often short-term, mobile
activity drivers that affect demand.                                    and temporary because they are related to interruptible explora-
                                                                        tion, drilling, completion and workover activities. Demand for
Industrial health and safety services are those provided to all         Oilfield health and safety services is historically highly cycli-
other industries and include a vast array of clients including          cal due to external factors such as commodity prices, currency
fixed facilities that operate continuously on a year-round basis.       exchange, capital markets, weather, and government policy. With
The customers operate in a wide variety of industries and the           all other factors stable, demand for Oilfield health and safety
public sector including: non-conventional upstream oil develop-         services is highly seasonal in Canada because field activity is
ment and production (including oilsands extraction); oil and gas        greatly affected by weather and road access.
processing and refining; petrochemicals; pulp and paper; utili-
ties; power generation; agriculture food and beverage; offshore         The Corporation tracks billings to customers by defined revenue
operations; and diverse manufacturing industries. Industrial also       groupings, but uses a common pool of equipment and manpower
includes worker safety training and safety management services.         resources to provide these services. Management and administra-
Industrial health and safety services are in most cases delivered       tion services are provided from a common personnel pool.

The revenue for these business areas is shown below:

                                                                     Year ended                     Year ended               Year-over-year
                                                                   Dec. 31, 2010                  Dec. 31, 2008                   % change
Industrial                                         $                     47,274    $                     54,298                      -12.9%
Oilfield                                                                 34,754                          27,303                       27.3%
Total Revenue                                      $                     82,028    $                     81,601                        0.5%
As a percentage of revenue:
    Industrial                                                            57.6%                          66.5%
    Oilfield                                                              42.4%                          33.5%
Total Revenue                                                           100.0%                          100.0%

During the year, the Corporation had one customer representing               curement criteria. One significant HSE client in prior years
more than 10% of revenue (2009 – one). The Corporation had                   chose to staff its shutdown and turnaround with staff person-
sales of $8.5 million to the customer, mostly related to callout             nel, a cost-reduction measure and a departure from the grow-
Oilfield health and safety services. In 2009, the Corporation had            ing trend to outsourcing this service. Other projects were
sales of $8.9 million to a single Industrial client related to ongo-         delayed into the future as a cash-conservation initiative.
ing long-term industrial projects and plant turnarounds.
                                                                             Due to the factors cited above, Industrial revenue decreased
    Industrial                                                               $7.0 million (12.9%) to $47.3 million in 2010 from $54.3
                                                                             million in the prior year. Industrial health and safety services
    The Industrial health and safety services component of the
                                                                             comprised 57.6% of total revenues, down from 66.5% in
    Corporation’s total revenue declined in 2010 due to the delay
                                                                             2009.
    of plant shutdown and turnaround services until later years
    and a highly competitive operating environment. Although                 On a regional basis, Industrial revenues varied. Revenue in
    there was a general recovery in the industries and geographi-            the oilsands region of northeastern Alberta declined primar-
    cal markets in which HSE operates, services supplied to                  ily due to pricing pressure and increased competition. The
    conventional and non-conventional hydrocarbon processing                 rest of western Canada remained stable. Central Canada
    and extraction facilities were subject to pricing pressure that          grew sharply in 2010 while Atlantic Canada declined primar-
    included price reductions to key clients in several markets              ily because of the re-pricing of a major industrial contract.
    due to lower commodity prices or project cost escalation.                HSE’s operation in the industrial midwest of the United
    The oil and gas processing plant shutdown and turnaround                 States enjoyed substantial growth.
    services that typically take place during the second and third
    quarters in western Canada were subject to pricing pressure              Oilfield
    caused primarily by increased focus on this market by HSE                Oilfield revenues in the 2010 fiscal year increased by 27.3%
    competitors that in the past have predominantly serviced the             in 2010 compared to 2009. This significant year-over-year
    Oilfield sector as more clients used price as the major pro-             increase is due to higher overall activity levels in western


6     HSE Integrated Ltd. 2010 Annual Report                                                  Management Discussion and Analysis
    Canada in the conventional upstream, or “wellhead”, sector          Operating and materials expense for the year ended December
    of the oil and gas industry: oil and natural gas well explora-      31, 2010 declined to $70.3 million or 85.8% of revenue com-
    tion, drilling, completion and workover operations in the           pared to $72.5 million or 88.8% of revenue in 2009. Operating
    Western Canadian Sedimentary Basin and the southern Unit-           margin for the year increased to $11.7 million (14.3% of rev-
    ed States. The factors behind this recovery include stable oil      enue) in 2010 from $9.1 million (11.1 % of revenue) in 2009.
    prices, improved development economics in Alberta due to a
    revised royalty regime, increased well stimulation (hydraulic       The increase in operating margin is due to a significant improve-
    fracturing) activities requiring worker and asset protection,       ment in the profitability of the Corporation’s U.S. operations,
    and a trend towards deeper wells requiring more drilling            rigorous control over all expenses, the impact of higher-margin
    days. This increased the number of days on which medical            Oilfield health and safety services because of increased equip-
    services may be required, or the likelihood that sour gas may       ment rentals, and a full year of the positive financial impact of
    be encountered (whether or not the target reservoir is sour),       the cost-reduction initiatives undertaken in the first half of 2009.
    requiring breathing air and gas detection services.                 This improvement was achieved despite the removal of salaried
                                                                        employee pay reductions in 2010 brought in to offset the impact
    Besides an increase in overall activity, there has been a ma-       of the recession in 2009.
    jor shift in the type of drilling being undertaken. According
    to figures provided by the Canadian Association of Oilwell          The provision for doubtful accounts receivable was $1.1 mil-
    Drilling Contactors (“CAODC”), from 1992 to 2008 about              lion (5.7% of trade accounts receivable) at the end of the year
    70% of the total wells drilled had natural gas as the target.       compared to $1.3 million or 7.2% of trade accounts receivable at
    This included safety intensive “sour gas” containing hydro-         December 31, 2009.
    gen sulphide. Due to a North American glut in natural gas
    supplies caused by the successful development of shale gas,         Selling, general and
    gas prices are much lower than they have been in recent             adminiStrative expenSe
    years. This has caused a reduction in natural gas production
    and development expenditures.                                       Selling, general and administrative (“SG&A”) expense consists
                                                                        of costs not directly attributable to the delivery of services to cus-
    However, the application of extended-reach horizontal drill-        tomers. These include executive management; corporate head-
    ing and multi-stage fracturing – and assisted by attractive         office functions and support services; administrative personnel;
    royalty fiscal regimes in all four western provinces – has          corporate sales and marketing costs; liability insurance; profes-
    caused the E&P companies to increasingly focus their spend-         sional fees; and investor-relations expenses.
    ing on oil. For the 2010 calendar year the CAODC reported
    that 48.0% or 6,250 of 13,575 wells drilled had oil as the          SG&A for the year ended December 31, 2010 totaled $7.9
    target, a 105.3% increase from 3,176 or 34.0% of the 9,342          million (9.7% of revenue), down from $8.2 million (10.1%
    total wells drilled in calendar 2009. The increase in total         of revenue) in the prior year. This improvement was achieved
    drilling and oilwell drilling was particularly significant in the   despite the removal of salaried employee pay reductions in 2010.
    fourth quarter, a period in which a disproportionate amount         The Corporation continues to work diligently to minimize SG&A
    of the total 2010 drilling took place. In the last three months     expenses without impairing financial performance.
    of the 2010 fiscal year 5,352 wells were drilled, an increase
    of 207.1% from 1,743 in 2009. The number of wells that had          Included in SG&A expenses for 2010 is $0.7 million related to the
    oil as a target increased to 2,608, 161.8% higher than 996 in       Corporation’s transition to the International Financial Reporting
    2009.                                                               Standards (“IFRS”) with which HSE was required to comply at
                                                                        the beginning of the 2011 fiscal year. Contained in 2009 SG&A
    In the United States, Boots & Coots HSE Services LLC                expenses is $0.5 million ($0.3 million in the first quarter of the
    (“BCHSE”), the Corporation’s venture with Boots & Coots             year and $0.2 million in the second quarter) related to cost-reduc-
    Services (a division of Halliburton), contributed $1.5 million      tion initiatives undertaken by the Corporation in response to the
    to revenue in 2010 compared to $0.5 million in the same pe-         global recession and commodity price collapse and a commensu-
    riod of 2009. BCHSE continues to gain customer acceptance           rate decline in overall demand for HSE’s services.
    as a capable provider of worker and asset protection services.
                                                                        eBitda and net earningS
operating and materialS expenSe
                                                                        EBITDA (see “Non-GAAP Measures”) in the 2010 fiscal year
and operating margin                                                    increased 343.8% to $3.8 million from $0.8 million in 2009. The
Operating and materials expense consists of costs directly at-          significant EBITDA increase was due to several factors includ-
tributable to the delivery of health and safety services to custom-     ing increased revenue, reduced operating expense, and reduced
ers. These include: wages and benefits for field employees and          SG&A.
contractors; equipment rentals and leases; field service center         Total amortization for the year was $5.7 million, down from $6.7
property costs; transportation; fuel; consumables; equipment            million in 2009. Property and equipment amortization decreased
repairs and maintenance; and field office administration includ-        to $5.2 million in 2010 compared to $6.2 million in the prior
ing field sales.


Management Discussion and Analysis                                                      HSE Integrated Ltd. 2010 Annual Report             7
year. HSE pursued a cautious strategy on capital spending to            Fourth Quarter 2010 reSultS
maintain a strong balance sheet and to ensure the recovery was
underway and the rate of return on invested capital going forward       verSuS Fourth Quarter 2009
would justify the investment. Amortization of intangible assets         In the fourth quarter of 2010, total revenues were $22.4 million,
was constant at $0.5 million in 2010 and 2009.                          an increase of $3.3 million (17.4%) over revenues of $19.1 mil-
Stock-based compensation for the year was $0.2 million (2009            lion for the same period in 2009. Revenue from Oilfield health
– $0.3 million). The year-over-year decline is due to a reduction       and safety services increased by $3.8 million (58.3%) over the
in the number of outstanding unvested options. Deferred share           same period last year. Offsetting this was a decrease in Industrial
unit (“DSU”) expense for the year was $0.02 million (2009 –             revenues of $0.5 million (3.9%) from 2009 to 2010.
$0.1 million), due to most directors taking their fees in the form      Operating expenses increased by $2.1 million to $18.6 million
of DSUs offset by the redemption of DSUs by directors retiring          from $16.5 million in the fourth quarter of 2009. However, as a
from the Board.                                                         percentage of revenue, operating costs declined to 83.2% of rev-
Interest on long-term debt and other interest and bank charges          enue from 86.5% of revenue in Q4 2009. Operating cost changes
decreased slightly to $0.49 million in 2010 from $0.54 mil-             reflect the increase in activity year over year. Operating-margin
lion in 2009. Debt declined in 2010 as scheduled principal debt         improvements are due partly to increases in Oilfield activity that
payments totaling $0.7 million were made in the second half of          typically have a higher proportion of higher-margin equipment
2010. Offsetting this, interest rates on the Corporation’s variable-    rental revenue, as well as ongoing cost-containment activities.
rate bank debt increased year over year due to increases in prime       SG&A decreased to $2.0 million (8.9% of revenue) in the fourth
lending rates and to a higher adjustment to prime under the Cor-        quarter of 2010, from $2.1 million (10.9% of revenue) in 2009.
poration’s debt facility entered into in April 2010.                    While there was some gain in the reduction of legal fees related
For the year ended December 31, 2010, the gain on disposal              to an unsolicited takeover bid in 2009, this was to some degree
of property and equipment was $0.1 million with proceeds on             diminished by reversing the salaried staff wage cuts instituted in
sale of $0.6 million. This compared to a loss on disposal of $0.3       2009 to help offset the impact of the recession.
million on proceeds of $0.9 million in 2009. In both years, the         EBITDA increased by 246.0% from $0.5 million in Q4 2009
amount includes amortization of a deferred gain on sale/lease-          to $1.7 million in the fourth quarter of 2010. The increase in
back of real estate assets as discussed in the 2008 annual MD&A         EBITDA was due to a significant increase in Oilfield revenue,
($0.1 million – 2010; $0.1 million – 2009). Asset divestitures          which has a larger proportion of high-margin equipment rent-
consisted of retirement of vehicles replaced through the Corpora-       als than Industrial. The Corporation had a profit of $0.7 million
tion’s fleet-management program.                                        in the fourth quarter of 2010 versus a loss of $2.2 million in the
At year end 2009, the Corporation reviewed its long-lived assets        fourth quarter of 2009.
to determine whether changes in the business climate indicated
that future cash flows generated by the long-lived assets would         Fourth Quarter 2010 reSultS
be sufficient to recover their carrying value. As part of the im-
pairment review, Management identified certain assets that were         verSuS third Quarter 2010
disposed of subsequent to year end at a point significantly before      In the fourth quarter of 2010, total revenues were $22.4 mil-
the end of their previously estimated useful lives. The disposal        lion, a 10.2% increase over revenues of $20.3 million for the
of these assets confirmed that their carrying values exceeded the       third quarter. Revenues from Oilfield health and safety services
amounts recoverable from them and accordingly an impairment             increased by $1.4 million over the third quarter of 2010 as the
loss of $1.6 million was recorded with respect to these assets. In      year-over-year increase in Oilfield activity continued. Industrial
2010, Management performed a test for impairment of long-lived          health and safety revenues increased by $0.6 million from $11.4
assets. Based on Management’s assessment, no impairment of              million in the third quarter to $12.0 million in the fourth quarter.
long-lived assets existed at December 31, 2010.                         This indicates a trend towards overall revenue recovery because
At December 31, 2010 the Corporation reversed a liability for con-      the third quarter traditionally experiences more activity as plant
tingent consideration related to an acquisition in 2006 as the period   shutdown and turnaround services usually take place prior to the
over which the consideration could be earned had expired. This          onset of winter.
resulted in a gain of $0.8 million that has been recorded as income.    Operating expenses increased by $1.6 million from $17.1 million
HSE had a $0.6 million income tax recovery for the year versus an       to $18.7 million for the fourth quarter reflecting higher sales.
income tax recovery of $2.0 million for 2009. The change can be at-     However, operating margin increased to 16.8% from 15.8% in
tributed primarily to the decrease in taxable income between years.     Q3 2010 because of higher sales volumes and a higher percent-
                                                                        age of work from the higher-margin Oilfield business segment.
Net loss for the year was $1.2 million or ($0.03) per share versus
$6.6 million or ($0.18) per share in 2009. The year-over-year           SG&A remained consistent with the third quarter at $2.0 million,
decline was due to improvements in revenue, increased EBITDA,           but declined as a percentage of revenue to 9.1% from 10.0%.
reduced amortization charges, and overall reductions in operating
costs as described above.


8     HSE Integrated Ltd. 2010 Annual Report                                                  Management Discussion and Analysis
liQuidity and capital reSourceS
The Corporation’s principal sources of capital are cash flows from operations, borrowings under an established credit facility with its
senior lender, convertible debentures, and equity financing.
The Corporation, through the conduct of its operations, has undertaken certain contractual obligations as noted in the following table:

 Years ended December 31                                    2011        2012           2013           2014          2015           Total
 Capital lease obligations                          $        111   $       15   $          2   $         –   $          –   $       128
 Vehicle and equipment operating leases                    2,146          952           146              8              –         3,252
 Rental facilities                                         3,383        3,135         2,705          2,301          1,809        13,333
 Long-term debt (1)                                        1,304        1,304         1,304          2,361              –         6,273
 Total contractual obligations                      $      6,944   $    5,406   $     4,157    $     4,670   $      1,809   $    22,986

(1) Principal portion only
     Liquidity
     At December 31, 2010, the Corporation had cash on hand of            On November 9, 2010 HSE announced the issue of up to
     $1.5 million.                                                        $2.0 million in Subordinated Secured Convertible Deben-
                                                                          tures (the “Debentures”). The Debentures mature on Janu-
     On April 27, 2010 the Corporation entered into a $15.0 mil-          ary 15, 2014 and bear interest at 10.0% per annum, payable
     lion credit facility with a regional financial institution. The      quarterly in arrears on April 15, July 15, October 15 and
     facility consists of a $10.0 million operating revolving loan        January 15 in each year beginning April 15, 2011.
     facility for general operating purposes and a $5.0 million
     non-revolving reducing loan facility. The two facilities were        On December 21, 2010, HSE completed the first closing
     used to retire the $5.3 million of bank debt with another            with total proceeds of $1.9 million. On January 18, 2011,
     lender that existed at the time.                                     HSE completed the final closing with proceeds of an addi-
                                                                          tional $0.1 million. The proceeds of the offering will be used
     The $5.0 million non-revolving term facility is repayable in         to fund part of the Corporation’s 2011 capital program.
     monthly payments of $109 starting July 1, 2010. The facil-
     ity is payable in full 48 months after initial drawdown. The         The Debentures consist of both debt and equity components
     operating facility is renewable annually and is margined to          that are presented separately in the Corporation’s consoli-
     accounts receivable. Both facilities bear interest at prime          dated balance sheet. The debt component is measured by
     plus a fixed percentage. A standby fee is also required on           calculating the present value of both the quarterly interest
     any unused portion of the operating facility. Both facilities        obligations and the principal payment due at maturity, us-
     are subject to certain covenants including a working-capital         ing the rate of interest that would have been applicable to a
     covenant, a debt-to-equity covenant, a fixed-charge-coverage         non-convertible debt instrument of comparable term and risk
     ratio, and other positive and negative covenants. The facili-        at the date of issue. The residual portion of the Debenture
     ties are collateralized under a general security agreement that      proceeds is allocated to equity. As a result, the debt compo-
     includes accounts receivable and property and equipment.             nent of the Debentures is less than the principal amount that
                                                                          would be paid at maturity, assuming no conversion occurs.
     HSE was compliant with all debt covenants at December 31,            The discount to face value of the debt component presented
     2010. As at December 31, 2010, the total outstanding on the          on the consolidated balance sheet will be accreted using the
     term-loan facility was $4.3 million of which $1.3 million was        effective-interest method over the term of Debenture.
     current. During the year the Corporation made scheduled
     principal long-term debt payments of $0.7 million. At the end        The equity component represents the difference between the
     of the fourth quarter, there were no draw amounts against the        face value of the Debentures ($1.9 million) and the value
     Corporation’s $10.0 million revolving operating facility.            assigned to the debt component of the Debentures at the
                                                                          date of issue as described above. This equity component
     The Corporation’s existing long-term debt agreements con-            amount will remain constant over the term of the Deben-
     tain a clause to address the transition of accounting standards      tures unless a conversion occurs. If Debentures are con-
     to IFRS. Although there is a risk that the Corporation’s fi-         verted into common shares, a proportionate amount of both
     nancial reporting under IFRS could result in a breach of an          the debt and equity components will be transferred to share
     existing financial covenant, the Corporation expects that it         capital. Interest and accretion expense on the Debentures is
     will be able to amend the existing long-term debt agreements         included within interest on long-term debt in the consoli-
     to make any changes covenant neutral, however no absolute            dated statements of loss.
     assurances can be made in this regard.


Management Discussion and Analysis                                                   HSE Integrated Ltd. 2010 Annual Report           9
     Provision for Conversion                                          year due to the higher activity levels in the fourth quarter.
                                                                       Days-sales-outstanding (“DSO”) remained relatively con-
     The Debentures are convertible at the holder’s option
                                                                       stant at 74 days at December 31, 2010 compared to 76 days
     into common shares (“Shares”) of the Corporation at a
                                                                       at December 31, 2009.
     conversion price of $0.50 per Share (the “Conversion
     Price”) at any time prior to the close of business on the         Cash Provided by (Used in)
     earlier of the business day prior to the maturity date and        Financing and Investing
     the business day immediately preceding the date fixed
                                                                       As described above, during 2010 the Corporation negotiated
     for redemption of the Debentures, subject to adjust-
                                                                       a new $15.0 million credit facility with a regional lender,
     ments in certain events including dividend protection
                                                                       which it used to pay out the facility that was outstanding at
     for the declaration of dividends outside of the normal
                                                                       the end of 2009. During the year, the Corporation made pay-
     course. Holders converting their Debentures will receive
                                                                       ments totaling $0.7 million against this facility. As well, the
     accrued and unpaid interest thereon to the date of con-
                                                                       Corporation issued convertible debentures for proceeds of
     version. The ability to convert the Debentures would
                                                                       $1.9 million.
     cease immediately prior to a “Change of Control” as de-
     fined in the offering document. In the event Debentures           During the year the Corporation made scheduled debt reduc-
     are converted prior to maturity, the difference between           tions of $0.3 million towards capital leases.
     the carrying amount of such Debentures and their face
     value would be charged to interest expense.                       Purchases of property and equipment for the year amounted
                                                                       to $2.3 million, the majority of which was revenue-generat-
     Provision for Redemption                                          ing health safety services rental equipment. Proceeds from
     The Debentures will not be redeemable before January              the disposal of property and equipment were $0.6 million.
     15, 2012 except in the event of the satisfaction of cer-
     tain conditions after a Change of Control has occurred.       working capital
     On and after January 15, 2012 and prior to January 15,
     2013, provided that the current market price (as calcu-       At December 31, 2010, the Corporation had working capital
     lated pursuant to the indenture) of the Shares is at least    (not including current portions of long-term debt obligations and
     133% of the conversion price, the Debentures may be           deferred gains) of $15.8 million. This compares to $14.1 mil-
     redeemed at the option of the Corporation in whole or         lion December 31, 2009. The increase from December 31, 2009
     in part from time to time at a redemption price equal to      is a result of cash received from the convertible debenture as
     their principal amount plus accrued and unpaid inter-         described above, combined with activity-related increases in ac-
     est thereon up to (but excluding) the redemption date.        counts receivable and accounts payable and accrued liabilities.
     On and after January 15, 2013 and prior to the maturity           Outlook
     date, the Debentures may be redeemed at the option of
     the Corporation in whole or in part from time to time             In the first quarter of 2009 the economic world in which
     at a redemption price equal to 105% of their principal            HSE operated had radically changed due to the collapse of
     amount plus accrued and unpaid interest thereon up to             the commodities and world capital markets, as well as the
     (but excluding) the redemption date. If HSE wishes to             introduction of punitive new royalty policies by the Govern-
     redeem any Debentures, it must provide not more than              ment of Alberta. HSE spent the remainder of 2009 reducing
     60 or fewer than 40 days prior notice of redemption.              costs in every possible manner while maintaining the core
                                                                       delivery capacity of the company in terms of personnel,
     Notwithstanding the foregoing, in the event of a Change           equipment, and field service locations. HSE’s primary focus
     of Control, the Debentures will be redeemable at the              in 2009 was cutting costs, paying down debt, and finding
     Corporation’s option, in whole or in part, at a price             a way to again achieve positive cash flow from operations.
     equal to 125% of the principal amount thereof plus ac-            This was achieved in the second half of the year after signifi-
     crued and unpaid interest for the first two years; thereaf-       cant cost cutting and restructuring.
     ter, this amount will decline by 1.5% per month.
                                                                       One year ago at this time HSE was cautiously optimistic
 Cash Provided by Operations                                           that the recovery was underway. However, the Corporation’s
 Cash provided by operations in the year was $2.1 million in           client base were cautious about the speed at which they re-
 2010 compared to $6.7 million in 2009. Improved revenue               sumed spending. Many of the clients delayed projects pend-
 levels during the year resulted in higher operating cash flow         ing stabilization of oil prices and capital markets, and con-
 excluding changes in working capital. This was offset by a            firmation of positive and permanent adjustments to Alberta’s
 reduction in cash provided by changes in non-cash working             new royalty framework. Alberta confirmed its new royalty
 capital related to receivables of $0.7 million in 2010 com-           structure in May of 2010.
 pared to an increase in cash provided by changes in non-cash          Early in the third quarter of last year we saw a gradual but
 working capital of $5.5 million in 2009. Changes in both              consistent increase in spending in multiple markets and in-
 years were primarily due to changes in receivables and pay-           dustries. This continued throughout the year. The rig count
 ables. Receivables and payables both increased year over


10   HSE Integrated Ltd. 2010 Annual Report                                             Management Discussion and Analysis
   began to climb as the combination of stable oil prices, new          improves profits rather than by working on unprofitable jobs
   technology, and an improved royalty regime caused E&P                simply because they are available.
   company clients to resume spending in western Canada.
   Oilsands construction projects resumed. Some plant main-             HSE’s clients’ focus on quality health and safety services
   tenance activity that had been delayed in 2009, was under-           appears to have improved since the economic recovery, re-
   taken in the third and fourth quarters of 2010. The Corpora-         suming a trend towards outsourced expert health and safety
   tion’s financial performance in the fourth quarter of the 2010       services that had been growing for 20 years and was only
   fiscal year showed that for the first time in two years, HSE         interrupted by the severe economic recession of 2009 and
   had returned to more traditional levels of EBITDA and op-            the first half of 2010.
   erating margins that it had enjoyed in the 2005 through 2008         In 2011 HSE assembled its first formal Business Develop-
   period.                                                              ment (“BD”) group to focus on expanding its client base
   With 2011 well underway, the Corporation’s clients have              for Industrial health and safety services. A core strength
   been more willing to provide guidance about the amount of            of HSE is its capacity, diversity of services, and delivery
   upcoming work and projects requiring HSE’s services for              footprint, particularly in the major hydrocarbon processing,
   the first time since 2008. At the time of writing, HSE’s “or-        refining, and distribution centers of Fort McMurray and Fort
   der book” – measured by plant shutdowns and turnaround               Saskatchewan/Edmonton in Alberta; Sarnia and Hamilton
   projects awarded to HSE and other contracts in which HSE             in Ontario; Dartmouth, Saint John and St. John’s in Atlantic
   is engaged 24/7/365 – is higher than the same time last year.        Canada; and the industrial midwest of the U.S. through a
                                                                        location in Taylor, Michigan. The BD team has been focus-
   In a people-driven service business like health and safety,          ing on plant owners and operators, engineering, procurement
   managing HSE’s labour force is a major commitment. Two               and construction companies; and maintenance contractors
   years ago the Corporation was dealing with shrinking its hu-         with operations in one or more of these locations.
   man resources to fit the business. One year ago the challenge
   was keeping HSE’s core team busy and engaged. In 2011 a              In the first quarter of 2011 HSE was awarded a five-year
   preoccupation of HSE’s Management and the HR team is                 national contract for four facilities in the above-noted loca-
   finding enough trained, qualified and motivated personnel to         tions. A condition of this contract was that HSE not disclose
   do all the upcoming work. This is one problem everyone at            the name of the client, however, the precedent has been set.
   HSE is excited to help solve.                                        The next customer to embrace this “single-source” concept
                                                                        will also recognize that, until HSE was created, safety ser-
   Industrial                                                           vices were either delivered internally or by several contrac-
                                                                        tors in different geographical markets. Such contractors are,
   The major change for the Industrial health and safety ser-
                                                                        by nature, unable to offer the same national standards of
   vices portion of HSE’s business in 2011 is a sharp increase
                                                                        quality, service, and price that HSE delivers.
   in client demand in multiple markets, particularly for plant
   shutdown and maintenance services. It is difficult to discern        Securing single-client national contracts in multiple loca-
   whether the Corporation is being asked to do work that               tions has been the foundation of HSE’s strategic plan for the
   wasn’t done during the recession; whether the focus on price         past six years. The recession of 2009 was a major setback in
   in the past is being replaced by a focus on quality; or wheth-       executing this strategy. However, with the recovery under-
   er clients are simply planning their maintenance activities          way and a major national contract in hand, HSE believes the
   well in advance. Regardless, the amount of work that HSE             Industrial side of its business is back on the path to growth.
   has scheduled for late Q1 and the subsequent three quarters
   in the current fiscal year is greater than at this time last year.   In 2011 HSE will be expanding into the new business area
                                                                        of safety consulting, whereby the Corporation will provide
   The “order book” is in all markets from field hydrocarbon            expert safety supervisors to projects on a contract basis.
   processing facilities in northwest Alberta, to oilsands plants       While HSE has done some work in this area in the past, the
   in northeast Alberta, to processing plants in multiple indus-        Corporation formalized its expansion into this business with
   tries in Ontario and the U.S. midwest, to refineries in Atlan-       the January 2011 acquisition of Taylored Safety Services
   tic Canada.                                                          Inc. (“Taylored”) of Halifax. Having clients seek contract
                                                                        safety supervisors is an extension of two trends: outsourc-
   HSE’s chosen position in the Industrial safety market is that
                                                                        ing of safety expertise to an expert third party; and a grow-
   of quality and capacity, not price. HSE is not and will never
                                                                        ing emphasis on quality safety supervision for all types of
   be the lowest-cost provider of these services. The Corpora-
                                                                        safety-intensive operations. Taylored provides HSE with
   tion is focused on national standards, consistent operating
                                                                        domain expertise in safety consulting by formalizing the re-
   procedures, trained personnel, quality equipment, and the
                                                                        quirements for qualified safety personnel, creates a database
   capacity to take on larger projects and expand ongoing as-
                                                                        of safety consultants available on a project basis, and for-
   signments as required. The Corporation has lost work in the
                                                                        malizes internal career paths for HSE personnel that wish to
   past two years on price. However, Management’s view is
                                                                        apply their training and job experience to more lucrative and
   that HSE’s key stakeholders – employees, clients, and capi-
                                                                        rewarding careers.
   tal providers – will be better served by taking on work that



Management Discussion and Analysis                                              HSE Integrated Ltd. 2010 Annual Report           11
 Oilfield                                                          Any increase in gas prices and gas drilling will further en-
                                                                   hance the opportunities for HSE’s Oilfield health and safety
 The Oilfield component of HSE’s business is where the             services.
 Corporation started and was the dominant business area for
 many years. However, this segment peaked in terms of reve-        HSE is participating in this new type of drilling in several
 nue in 2006 and declined every year until 2009. This decline      areas. Extensive hydraulic fracturing during completion uses
 is due in part to reduced drilling activity levels in western     acid or hydrocarbon frac fluids, which has increased de-
 Canada. It is also due to greater competition caused by in-       mand for the Corporation’s fire and shower protection units.
 creased equipment capacity by competitors, who believed           Every rig operating more than 40 minutes from a hospital
 that demand for these services would continue to grow.            emergency ward requires onsite first aid, a core HSE service.
                                                                   While the target reservoirs may not contain poisonous sour
 Nevertheless, the signals for increased business are the          gas, the deeper a well is drilled, the more likely it is that the
 strongest they have been since before the recession. In fiscal    wellbore will pass through a sour-gas-bearing reservoir. This
 2010 the Corporation enjoyed its first year-over-year growth      has increased demand for HSE’s air quality monitoring and
 as revenues increased 27.5% from $27.3 million to $34.8           breathing protection services, both key components of the
 million. The momentum increased in the fourth quarter as          Corporation’s suite of health and safety services.
 revenues increased 58.3% to $10.4 million from $6.6 million
 in the prior year. Based on the 207.1% increase in total wells    The impact on HSE’s traditional Oilfield service locations
 drilled in Q4 from 1,743 in 2009 to 5,352 in 2010, total          has been positive and appears sustainable. These include:
 spending in this area has increased to a new level. Record        Weyburn, Brooks, Sylvan Lake, Whitecourt, and Grande
 drilling rights sales in Alberta in 2010 will likely perpetuate   Prairie. The only major year-over-year decline on a station
 this level of activity through 2011. The Corporation believes     basis was in Fort St. John. The growth in activity in this area
 that in 2011 Oilfield revenues will be higher again than in       has been primarily driven by shale gas plays such as the
 2010.                                                             Montney and Horn River. While these plays still look prom-
                                                                   ising for the future, clients have reduced expenditures in
 There are several elements driving this new level of activ-       these areas due to continued low natural gas prices.
 ity that appear sustainable. The price of oil has remained
 relatively stable at $US 90 per barrel. Alberta’s new royalty     United States
 regime introduced in the second quarter of 2010 is said to
                                                                   HSE has reported segmented financial information for its
 be stable for the foreseeable future. The application of new
                                                                   two U.S. operations: CRS Technologies Inc. (“CRS”), which
 drilling techniques involving extended-reach horizontal
                                                                   operates from Taylor, Michigan (a suburb of Detroit), and
 wells and multi-stage fracturing drilled into previously un-
                                                                   Boots & Coots HSE Services LLC (“BCHSE”), which oper-
 economic but extensive oil-bearing reservoirs appears to
                                                                   ates from a head office in Houston, Texas. Both locations
 have created a new and sustainable source of reserve and
                                                                   enjoyed growth in 2010. On a consolidated basis revenues
 production growth for HSE’s E&P company clients.
                                                                   for 2010 were $4.3 million or about 5% of total revenue.
 The trend in drilling for western Canada for 2011 and be-         This was an increase of 152.8% from $1.7 million in the
 yond is a move from numerous vertical shallow wells for           2009 fiscal year.
 natural gas and oil, to longer, deeper, complex and expensive
                                                                   In 2008 HSE entered into a partnership with Boots & Coots
 horizontal wells. While the total number of wells drilled
                                                                   Services, a division of Halliburton, to supply Oilfield health
 has likely declined on a permanent basis, total spending on
                                                                   and safety services to upstream oil and gas clients in the
 conventional oil and gas is approaching levels similar to
                                                                   continental United States. In early 2009, HSE’s new BCHSE
 those in 2005 based on data published by ARC Financial on
                                                                   business unit began operations in West Texas. BCHSE
 February 7, 2011. ARC estimates that in 2011 total spending
                                                                   struggled through 2009 as it tried to introduce a new service
 on conventional oil and gas in western Canada will be $33.8
                                                                   to a shrinking market. However, the long-term opportunity
 billion, down from $34.8 billion in 2005.
                                                                   remained positive, so HSE stayed with the investment. In the
 Natural gas prices remain a challenge. The realignment of         second quarter of 2010 BCHSE turned cash-flow positive, a
 North American gas markets to higher volumes and lower            trend that continued through the rest of the year.
 prices has been caused by the development of shale gas re-
                                                                   In the second quarter of 2010 the Macondo blowout in the
 sources in places that did not previously yield commercial
                                                                   Gulf of Mexico occurred. This was a major disaster for the
 quantities of natural gas. Extensive drilling in the United
                                                                   U.S. upstream oil and gas industry, and caused E&P compa-
 States in the face of rising production and flat demand has
                                                                   ny clients to re-examine their procedures to ensure that they
 further exacerbated the gas glut and flattened prices. How-
                                                                   were operating in a safe and secure manner. In the second
 ever, in recent months the number of rigs drilling for natural
                                                                   quarter of 2010 Boots & Coots, Inc., formerly an indepen-
 gas has declined, which will eventually bring supply and
                                                                   dent company, was acquired by Halliburton.
 demand closer to balance. Also promising are long-term
 markets for natural gas to further replace coal for electricity   The outcome of the two events is a renewed interest in work-
 generation.                                                       er, asset, and community protection by BCHSE clients, and
                                                                   a new corporate partner for HSE: Halliburton. This company


12   HSE Integrated Ltd. 2010 Annual Report                                         Management Discussion and Analysis
    has vastly expanded resources in terms of clients and deliv-              tunity. Many of the industries served in the U.S. industrial
    ery footprint. In January the Board of Directors of BCHSE                 midwest remain depressed. This forces facility operators to
    re-affirmed their commitment to the BCHSE business unit                   be cost-conscious, which includes contracting health and
    and approved a $0.8 million rental equipment expansion                    safety services to third parties. As a mature market, it is also
    budget for 2011. BCHSE has a compelling service offering                  competitive with numerous suppliers.
    to clients: a trusted brand in Boots & Coots; new equipment
    designed by HSE; and expert safety capability and manage-                 Nevertheless, this market is not a drain on HSE’s overall
    ment through the personnel seconded to BCHSE by HSE                       performance and it enjoyed its best financial performance
    in Canada. Going forward, the Corporation believes that                   ever in 2010. Many of the clients are in the petroleum in-
    BCHSE will be a positive contributor to revenues and cash                 dustry operating refineries and petrochemical plants. They,
    flow.                                                                     too, will be affected by the overall trend to enhance worker,
                                                                              asset, and community protection after the Macondo blow-
    The Taylor, Michigan location was part of an acquisition in               out in the Gulf of Mexico. Many of the clients that operate
    Sarnia, Ontario in 2005. It has always been a modest per-                 hydrocarbon-processing facilities are also drilling offshore
    former and a contributor to cash flow but has never really                in the Gulf of Mexico, and will be reviewing their health and
    broken through in a meaningful way considering the density                safety procedures and commitments. For this reason, in 2011
    of heavy, safety-intensive industry that exists in Michigan               HSE will stay the course and continue to deliver quality
    and nearby states such as Illinois, Ohio, New Jersey, and                 services at fair prices while augmenting sales and marketing
    New York. HSE has stayed with this market because it has                  efforts to grow the business.
    the characteristics of a profitable long-term growth oppor-

Quarterly reSultS
                                                                                   2010                                                   2009
                                            Q4           Q3             Q2           Q1            Q4           Q3            Q2            Q1
Revenue                             $ 22,422      $ 20,349      $ 18,350      $ 20,907     $   19,090    $   20,544   $   19,566    $   22,401
Net earnings (loss)                        683         (397)        (1,235)        (208)       (2,178)        (722)       (1,928)       (1,806)
EBITDA     (1)
                                         1,717        1,192          (380)        1,222           496         1,016        (451)         (216)
Income (loss) per share –
basic and diluted                   $      0.02   $   (0.01)    $    (0.03)   $   (0.01)   $   ( 0.06)   $   (0.02)   $    (0.05)   $    (0.05)

(1) See Non-GAAP Measures

HSE’s business has two offsetting seasonal components. Revenue for Oilfield health and safety services is historically highest in first
and fourth quarters and lowest in the second quarter because this sector uses equipment that can only access well locations during
certain times of the year, and because of the effects of weather on field activity. Industrial revenue includes a mix of year-round con-
tracts and “turnarounds” – scheduled major maintenance projects and repair activities on client facilities. These turnarounds tend to be
scheduled during the second and third quarters to avoid the possibility of adverse effects from freezing weather. As a result, Industrial
revenue tends to be highest in the second and third quarters.
Revenue by quarter for the last eight quarters is as follows:


                                                                                   2010                                                   2009
                                            Q4           Q3             Q2           Q1            Q4           Q3            Q2            Q1
Industrial                          $ 12,040      $ 11,384      $ 11,926      $ 11,924     $   12,533    $   14,375   $   15,249    $   12,141
Oilfield                                10,382        8,965          6,424        8,983         6,557         6,169        4,317        10,260
Total revenue                       $ 22,422      $ 20,349      $ 18,350      $ 20,907     $   19,090    $   20,544   $   19,566    $   22,401




Management Discussion and Analysis                                                    HSE Integrated Ltd. 2010 Annual Report              13
related-party tranSactionS                                                 when indicators of impairment are present. Estimates of
                                                                           undiscounted future net cash flows to be derived from the
During the year, the Corporation had the following transactions            long-lived assets over their remaining estimated useful lives,
with related parties all of which are measured at exchange amounts.        as well as any salvage values are calculated and compared
                                                                           to the carrying value of the long-lived assets to determine
•   In 2010, the Corporation paid rent and property taxes of
                                                                           whether the assets are deemed to be impaired. Parts of HSE’s
    $0.3 million (2009 – $0.3 million) for a regional office to a
                                                                           business are cyclical in nature and the estimate of future cash
    corporation related to a Director of the Corporation.
                                                                           flows requires the use of assumptions and judgment. Periods
•   In 2010, the Corporation also paid rent and property taxes of          of prolonged down cycles in the industry could have a sig-
    $0.3 million (2009 – $0.3 million) for a regional office to a          nificant impact on the carrying value of these assets and may
    corporation controlled by a senior manager of the Corporation.         result in impairment charges.
•   In 2010, the Corporation paid $0.3 million (2009 – $0)                 Amortization of Property and Equipment
    for supplies and commissions to a corporation related to a             Property and equipment is recorded at cost less accumulated
    Director of the Corporation pursuant to terms of an agreement          amortization. The useful lives of the depreciable assets are
    that pre-dates the directorship. Of this amount $0.1 million is        based on historical experience and judgment of Manage-
    included in accounts payable at year end.                              ment. This judgment includes an assessment of expected uti-
•   A placement of $0.3 million convertible debentures to related          lization, job-mix assumptions and preventative-maintenance
    parties for the year ended December 31, 2010.                          programs. Although Management believes that the estimated
                                                                           useful lives and salvage values are reasonable, there can be
                                                                           no certainty that the reduction in depreciable asset values
critical accounting                                                        over time matches amortization expense using estimated
policieS and eStimateS                                                     useful lives. If amortization estimates are not correct, the
                                                                           Corporation may record a disproportionate amount of gains
HSE prepares its consolidated financial statements in accordance           or losses on disposition of these assets. Management be-
with Canadian generally accepted accounting principles. In doing           lieves their estimates of useful lives to be materially correct.
so, Management is required to make various estimates and judg-
ments in determining the reported amounts of assets, liabilities,          Future Income Tax Liabilities
revenues, and expenses, as well as the disclosure of commit-
                                                                           The Corporation follows the liability method of accounting
ments and contingencies. Management bases its estimates and
                                                                           for income taxes. Under this method, future income taxes
judgments on historical experience and on various other assump-
                                                                           are recorded for the effect of any differences between the
tions that are believed to be reasonable under the circumstances.
                                                                           accounting and income tax basis of an asset or liability us-
Estimates and assumptions are reviewed periodically, and actual
                                                                           ing the substantively enacted tax rates. The Corporation
results may differ from those estimates under different assump-
                                                                           establishes valuation allowances to reduce future income
tions or conditions. Management must use its judgment related to
uncertainties in order to make these estimates and assumptions.            tax assets when Management believes it is more likely than
                                                                           not that some or all of a future tax asset will not be real-
The accounting policies and estimates believed to require the most         ized. Estimates of future taxable income are considered in
difficult, subjective or complex judgments, and which are material         assessing the utilization of available tax losses. Changes in
to the Corporation’s financial reporting results are as follows:           circumstances and assumptions may require changes to valu-
                                                                           ation allowances associated with the Corporation’s future tax
     Allowance for Doubtful Accounts Receivable                            assets.
     The Corporation assesses its accounts receivable through
     a continuous process of reviewing its receivables both on        Financial and other inStrumentS
     an individual-customer basis and on an overall basis. The
     review includes assessment of current-aging status of cus-       The Corporation’s financial instruments include cash and cash
     tomers, historical collection experience, financial condition    equivalents, accounts receivable, bank indebtedness, accounts
     of customers, industry economic trends, and other factors at     payable and accrued liabilities, long-term debt, and debentures.
     least monthly. Based on the review, allowances for specific      The carrying value of these instruments approximates their fair
     customers are determined. The process involves a high de-        value either because of their short maturities or because the inter-
     gree of judgment and can frequently involve significant dol-     est rates to which they are subject approximate market rates.
     lar amounts. Accordingly, the Corporation’s financial posi-
     tion, results of operations, and cash flows can be affected by   The Corporation is exposed to the following risks from its finan-
     adjustments to the allowance when actual write-offs differ       cial instruments:
     from estimates.                                                  •   Credit risk
     Impairment of Long-Lived Assets                                  •   Liquidity risk
     The Corporation evaluates potential impairment of prop-          •   Market risk
     erty and equipment and intangible assets with finite lives


14       HSE Integrated Ltd. 2010 Annual Report                                             Management Discussion and Analysis
These risks, and the Corporation’s method of mitigating the risks,           conditions without unacceptable losses or risking damage to
are described below:                                                         the Corporation’s reputation. The Corporation generally uses
                                                                             operating cash flow to provide liquidity to meet its financial
    Credit Risk                                                              obligations. As a result, the Corporation is exposed to a loss of
    Credit risk is the risk of financial loss to the Corporation if          liquidity if its customers delay their payments beyond the lev-
    a customer or counterparty to a financial instrument fails to            els that they have in the past. To mitigate this, the Corporation
    meet its contractual obligations, and arises principally from            has projected its operating cash flows under different scenarios
    the Corporation’s receivables from customers. The maxi-                  with respect to receivables aging to determine the effect on
    mum credit exposure associated with trade accounts receiv-               operating cash inflows. The Corporation monitors its receiv-
    able is the carrying value.                                              ables collections to ensure that, if collections are delayed, there
                                                                             are sufficient operating funds available to meet its financial
    The Corporation’s accounts receivable are due from custom-               obligations. As well, the Corporation has access to undrawn
    ers in a variety of industries including a significant proportion        operating lines of credit of $10.0 million to fund operations.
    with customers operating in the energy and manufacturing                 These credit lines are renewable annually and are margined
    industries. The ability of customers within the energy indus-            to accounts receivable. HSE believes it has sufficient funding
    try to pay the Corporation is partially affected by fluctuations         through these sources to meet its obligations as they come due.
    in the price they receive for various hydrocarbon products.
                                                                             Market Risk
    The Corporation follows a credit policy under which the
    Corporation reviews each new customer individually for                   Market risk is the risk that changes in market prices of finan-
    credit worthiness before the Corporation’s standard payment              cial assets and liabilities, including foreign exchange rates,
    and delivery terms and conditions are offered. The Corpora-              interest rates, and equity prices, will affect the Corporation’s
    tion’s review includes external ratings, where available, and            financial position, results of operations, and cash flows.
    trade references. Customers that fail to meet the Corpora-               HSE is exposed to currency risk on U.S.-dollar denominated
    tion’s credit worthiness criteria may transact with the Corpo-           financial assets and liabilities. The Corporation adjusts the
    ration only on a prepayment basis. On an ongoing basis, the              reported amounts of foreign-currency denominated financial
    Corporation also reviews the payment patterns of its existing            assets and liabilities to their Canadian-dollar equivalent at
    customers and the customers’ continued credit worthiness.                each balance sheet date. For amounts held directly by the
    Trade accounts receivable are recorded at the invoiced                   Corporation, any related foreign exchange gains and/or
    amount and do not bear interest. Standard payment terms are              losses are recognized in the consolidated statement of earn-
    net 30. However, these may be varied by agreements with                  ings. For amounts held by the Corporation’s self-sustaining
    particular customers. As well, industry practices, particularly          foreign operations, the amount is included in other compre-
    within the upstream oil and gas industry, allow for payment              hensive income. At December 31, 2010 the extent of this
    terms of up to 60 days.                                                  exposure was not material.

    The allowance for doubtful accounts is the Corporation’s                 HSE is exposed to interest-rate risk on its prime-based re-
    best estimate of the amount of probable credit losses in the             volving operating facility and its non-revolving reducing
    Corporation’s existing accounts receivable. The Corporation              loan facility. Based on amounts outstanding at December 31,
    determines the allowance by reviewing individual accounts                2010 a 1% increase in the average prime interest rate for the
    past due for collectability, historical write-off experience             year would cost the Corporation $0.04 million in additional
    adjusted for changes in both general and industry-specific               interest expense.
    economic conditions, and overall account aging. The Cor-
    poration reviews its allowance for doubtful accounts on an           BuSineSS riSkS
    ongoing basis, but at least monthly.
                                                                         The activities the Corporation undertakes involve a number of
    Liquidity Risk                                                       risks and uncertainties, some of which are: economic and market
    Liquidity risk is the risk that the Corporation will not be able     events including disruptions in international credit markets and
    to meet its financial obligations as they fall due. The Corpo-       reductions in macroeconomic activity; business cyclicality within
    ration requires liquidity to meet financial obligations as they      the industries in which HSE’s customers operate; competitive
    come due and to fund its operating and investing activities.         conditions including pricing pressures; risks of customer credit
    The Corporation’s contractual financial liabilities include          default; deterioration in the financial condition of financial
    interest payments, trade and other payables, income taxes            institutions and insurance companies with which HSE deals;
    payable, a revolving operating line of credit, a non-revolving       availability of financing at competitive rates; changes in foreign
    term-debt facility, a convertible debenture and capital leases       exchange rates and interest rates; and litigation and contingen-
    for equipment, and property and equipment.                           cies. Additional risks and uncertainties that the Corporation may
                                                                         be unaware of, or that were determined to be immaterial, may
    HSE manages its liquidity risk by ensuring, to the extent possi-     also become important factors that affect the Corporation. Fur-
    ble, that it has access to funding sources at competitive rates to   ther details regarding specific risks that may affect the Corpora-
    meet its liabilities when due, under both normal and distressed      tion are provided as follows:



Management Discussion and Analysis                                                   HSE Integrated Ltd. 2010 Annual Report               15
 Business Cyclicality                                               perform services that HSE currently provides. The Corpora-
                                                                    tion attempts to mitigate this risk by providing staff with
 The demand for HSE’s Oilfield services is highly dependent         more training and safety-service experience than the custom-
 upon the level of expenditures made by oil and gas companies       ers are able to provide on their own.
 on exploration, development and production activities. These
 expenditures are in turn affected by a number of factors:          While no one competitor in Canada provides the full suite of
                                                                    services that the Corporation provides, HSE has competitors
 •   The price received by HSE’s customers for crude oil and        in each area of service that we provide. These competitors
     natural gas directly impacts their cash flow available to      are typically privately owned, regionally based companies
     purchase the Corporation’s services. Fluctuations in crude     that provide a specialized set of services. These competitors
     oil and natural gas prices can produce periods of high and     may provide pricing pressure that may affect our margins
     low demand for the Corporation’s services. Alternatively,      and market position within particular lines of business. The
     a number of factors that are beyond the control of HSE’s       Corporation attempts to mitigate this risk by providing an
     customers, including weather, geopolitical conditions, and     integrated suite of services that our competitors cannot pro-
     the strength of the global economy, may reduce demand          vide, and by distinguishing ourselves through higher levels
     for their products, which in turn will reduce the price they   of service and expertise.
     receive.
                                                                    Recently, a larger private-equity-financed U.S. safety ser-
 •   Since crude oil and natural gas prices are normally            vices provider commenced operations in Canada. While this
     denominated in U.S. currency, fluctuations in the              provider is currently restricting its activities to providing
     Canadian-dollar exchange rate relative to the U.S.             Industrial safety services within a small portion of the indus-
     dollar can also affect the cash flow available to the          tries and geographic locations in which the Corporation pro-
     Corporation’s customers to purchase its services.              vides services, there is a risk that this competitor may begin
 •   Exploration, development and production activity levels        to market its services to a wider array of customers and
     within particular markets are influenced by factors            locations. As discussed above, Management is of the view
     including royalties, regulatory and taxation changes,          that this may provide an opportunity for additional busi-
     weather, and access to pipeline capacity.                      ness for the Corporation as customers may be more likely to
                                                                    outsource safety services work when there is more than one
 •   Changes in equity-and debt-financing markets                   provider available.
     independent of any individual company’s circumstances
     may reduce access to capital that is used to fund              Customer Credit
     exploration, development, and production activities.           HSE generally invoices its customers in arrears for its ser-
 These fluctuations in activity can cause cyclical demand           vices. Because of this, the Corporation is subject to the risk
 swings in the Corporation’s activity levels and operating          that its customers may delay payment of its invoices through
 results.                                                           a variety of means, or fail to pay the invoice at all. Changes
                                                                    in economic conditions, either in general or within a particu-
 The demand for HSE’s Industrial services is exposed to busi-       lar industry, may increase this risk.
 ness cycles and contraction risks in the oil and gas industry
 and other industrial sectors such as forestry, pulp and paper,     Customer Dependence
 automotive, manufacturing, mineral extraction, and other           The Corporation has ongoing contracts or master service
 segments of the economy that could experience reduced de-          agreements with a variety of customers. For certain custom-
 mand or significant fluctuations of the market value of their      ers, the volume of revenue generated approaches or exceeds
 finished goods. As well, a significant portion of the Corpora-     10% of the Corporation’s total revenue on a quarterly or
 tion’s Industrial services are provided to customers in the        annual basis. While there is no indication that any of these
 non-conventional upstream oil and gas industry, including          customers are likely to change safety service providers, if a
 oilsands extraction. These customers are exposed to similar        contract were cancelled and the Corporation were unable to
 risks with respect to crude oil pricing as customers for whom      replace the business with other existing or new customers,
 HSE provides Oilfield services.                                    the Corporation’s revenue, operating results and cash flows
                                                                    would be adversely affected. The Corporation attempts to
 Availability of Qualified Staff                                    mitigate this risk by providing an integrated suite of services
 The Corporation’s ability to provide reliable service is de-       that are not available from a single competitor, by providing
 pendent upon attracting and retaining skilled employees. The       access to our services on a country-wide basis, and by distin-
 demand for workers with particular skills used by the Corpo-       guishing itself through higher levels of service and expertise.
 ration is high and the supply remains limited.
                                                                    Customer and Government
 Competitive Conditions                                             Safety Requirements
 The Corporation’s main competitor is its own customer base.        All companies are required to track and publish safety sta-
 There is a risk, typically under distressed economic condi-        tistics. Certain customers require that their vendors maintain
 tions, that customers may elect to use their own personnel to      specific minimum standards with respect to safety in order to


16   HSE Integrated Ltd. 2010 Annual Report                                          Management Discussion and Analysis
   provide services as an accredited vendor. There is a risk that,        Litigation and Contingencies
   if the Corporation’s safety statistics fall below an acceptable
   level, it would not be allowed to provide services to these            In the ordinary course of business activities, the Corporation
   customers. If this occurred, the Corporation’s revenues and            may be contingently liable for litigation and claims with cus-
   profit levels would be adversely affected.                             tomers, suppliers, former employees and third parties. Man-
                                                                          agement believes that adequate provisions have been record-
   As well, there is a risk that customer safety requirements and         ed in the accounts where required. Although it may not be
   government regulations or legislation may change either as             possible to accurately estimate the extent of potential costs
   part of an ongoing review process, or in reaction to specific          and losses, if any, Management believes that the ultimate
   events such as the Macondo blowout in the Gulf of Mexico.              resolution of such contingencies would not have a material
   While changes in these requirements may provide opportuni-             adverse effect on the financial position of the Corporation.
   ties to provide health and safety personnel and equipment to
   the Corporation’s customers in order to address new require-       international Financial
   ments, these changes may also pose the following risks to
   the Corporation. First, there is a risk that additional expenses   reporting StandardS
   may need to be incurred to refit equipment or provide addi-        On February 13, 2008, the Canadian Accounting Standards
   tional training to staff. There is no guarantee that these costs   Board (“AcSB”) confirmed the requirement for all publicly ac-
   could be passed on to customers and, as a result, the Corpora-     countable enterprises to adopt International Financial Reporting
   tion’s profits may suffer if unanticipated changes are made.       Standards (“IFRS”) for fiscal years beginning on or after January
   Second, there is a risk that additional regulations could make     1, 2011. Effective January 1, 2011 HSE is required to report its
   an activity or line of business unprofitable for our customers.    interim and annual financial statements in accordance with IFRS
   This could cause them to exit the activity, causing a reduction    including comparative information for the 2010 period with an
   in the Corporation’s revenues as customer activity decreases.      opening balance sheet dated January 1, 2010 (“Transition Date”).
   The Corporation mitigates these risks by ensuring that its         HSE commenced a process to transition from current Canadian
   field personnel are trained to levels that meet or exceed          GAAP to IFRS. A project team led by Finance was established.
   “best-practices” levels and that its equipment meets any           Representatives from other areas of HSE participate as required.
   requirements specified by the equipment manufacturer. The          A Steering Committee comprised of HSE Executives monitors
   Corporation’s industry technical specialists monitor indus-        the IFRS project on a monthly basis. Regular reporting to the
   try sources to keep the Corporation apprised of potential          Audit Committee and the Board of Directors on the status of the
   changes to regulations. As well, the Corporation maintains         IFRS project was also implemented.
   a comprehensive internal safety program including regular
   senior management and Board of Directors review of safety          HSE developed a project plan that consisted of three major
   results, the use of standardized best-practices procedures for     phases: initial assessment, detailed assessment and design, and
   all work performed, and specific procedures requiring that         implementation.
   all incidents be investigated to determine root causes of the
   incident and to recommend what, if any, changes to the Cor-            Initial assessment – This phase involved performing a high-
   poration’s procedures are necessary to prevent recurrence.             level impact assessment to identify the areas that would be
                                                                          affected by the transition to IFRS. As a result of these proce-
   Availability of Financing                                              dures, the potentially impacted areas were identified as high,
   Historically, the Corporation has funded the growth of its             medium, and low impact. The level of impact was determined
   operations and its acquisitions from bank debt, share issues,          based on the relative significance of the account balance and
   and convertible debentures, in addition to cash generated              the nature of the differences between current HSE accounting
   from operations. Continued access to bank debt at competi-             policies and the accounting policies required by IFRS.
   tive rates requires that the Corporation meet various financial        Detailed assessment and design – This phase involved the
   and non-financial covenants. There is no certainty HSE will            identification of changes required to existing accounting policies,
   continue to be able to obtain sufficient financing at competi-         information systems, and business processes, together with an
   tive rates. The Corporation’s ability to grow as planned may           analysis of policy alternatives allowed under IFRS and the de-
   be limited if sources of competitively priced financing are            velopment of a template for IFRS financial statements and notes.
   unavailable.
                                                                          Implementation – This phase includes execution of changes
   Foreign-Exchange Exposure                                              to information systems and business processes, completing
   HSE’s consolidated financial statements are presented in Ca-           authorization processes to formally approve recommended
   nadian dollars, but include the results of its U.S. subsidiaries       accounting policy changes, completion of the opening bal-
   for which the functional currency is the U.S. dollar. Changes          ance sheet and training programs for the finance group and
   in the U.S.-dollar exchange rate versus the Canadian-dollar            other areas of the company as required. HSE is implement-
   rate may have material effects on net income and other                 ing the identified changes to business processes, financial
   comprehensive income reported by the Corporation’s U.S.                systems, accounting policies, disclosure controls and proce-
   subsidiaries.                                                          dures and internal controls over financial reporting.



Management Discussion and Analysis                                                 HSE Integrated Ltd. 2010 Annual Report              17
IFRS requires significantly more disclosures than current Cana-           the application of IFRS except where necessary to reflect
dian GAAP for certain standards. IFRS also requires, in certain           any differences in accounting policies.
instances, different presentation on the financial statements. HSE
believes it has performed an appropriate level of analysis in se-      2. Non-controlling interests – The Corporation has applied
lecting its IFRS accounting policies; however, actual quantitative        IAS 27 “Consolidated and Separate Financial State-
results may reveal additional impacts that were not anticipated.          ments” prospectively from the date of transition, such
                                                                          that total comprehensive income is attributed to the own-
The Corporation is required to meet various financial covenants           ers of the parent and to the non-controlling interests. The
included in its credit facility. These covenants will likely be af-       non-controlling interest at January 1, 2010 will be zero.
fected by the required IFRS transition. A clause is included in the
credit agreement allowing for a period of time to renegotiate any      Leases – IAS 17
covenants affected by the IFRS transition.                             HSE currently leases certain light vehicles, office equipment,
                                                                       and land and buildings.
Most adjustments required on transition to IFRS will be made,
retrospectively, against retained earnings on the opening January      Under Canadian GAAP, a lease is classified as a finance
1, 2010 balance sheet. However, IFRS 1 “First Time Adoption            lease if it transfers substantially all of the risks and rewards
of International Financial Reporting Standards” provides enti-         relating to ownership to the lessee. All other leases are op-
ties adopting IFRS for the first time with a number of optional        erating leases. Although the qualitative criteria of operating
exemptions and mandatory exceptions, in certain areas to the           and finance leases are similar under Canadian GAAP and
general requirement for full retrospective application of IFRS.        IFRS, Canadian GAAP contains quantitative thresholds to be
                                                                       applied in the lease classification test.
Described below are the changes to the consolidated financial
statements that HSE believes will be the most significant in           IFRS does not provide any quantitative thresholds that need
transitioning to IFRS. The list below should not be regarded as a      to be met when determining the classification of a lease.
complete list of changes that HSE will be required or may elect        Under IFRS, a lease is classified as a finance lease when the
to make.                                                               lease meets the qualitative criteria specified in IAS 17 “Leas-
                                                                       es”. These criteria include: provisions allowing or requiring
    IFRS Optional Exemptions
                                                                       the transfer of ownership of the asset to the lessee by the end
    1. Business combinations – IFRS 1 provides the option to           of the lease term; lease agreements where the lease term is
       apply IFRS 3 “Business Combinations” retrospectively            for the major part of the economic life of the asset even if
       for all business combinations from a particular pre-tran-       title is not transferred; leases where the leased assets are of
       sition date elected by the Corporation or prospectively         a specialized nature; and provisions specifying that, where
       from the transition date. The Corporation has elected not       a lessee can cancel the lease, the lessor’s losses associated
       to retrospectively apply IFRS 3 to business combinations        with the cancellation are borne by the lessee.
       that occurred prior to the Transition Date and such busi-
       ness combinations have not been restated.                       Under IFRS, the Corporation expects that its light vehicle
                                                                       leases will be treated as finance leases. At January 1, 2010,
    2. Share-based payments – IFRS 1 provides companies                the net book value of property and equipment is expected to
       with an optional exemption not to apply IFRS 2 “Share-          increase by approximately $7.1 million, lease liabilities will
       Based Payments” to equity-settled share-based payments          increase by approximately $5.5 million, and opening deficit
       granted after November 7, 2002 that vested before the           will decrease by approximately $1.6 million (approximately
       transition date. The Corporation has elected to take this       $1.2 million net of tax). Operating expenses will decrease
       exemption and has not restated its historical share-based       approximately $2.2 million to $2.8 million per year depend-
       payments that were granted after November 7, 2002 and           ing upon the number of leases, interest expense will increase
       vested prior to January 1, 2010.                                approximately $0.1 million to $0.3 million per year, and
                                                                       depreciation will increase by approximately $1.5 million to
    3. Currency translation differences – Retrospective applica-       $2.0 million per year.
       tion of IFRS would require the Corporation to determine
       cumulative currency translation differences in accordance       Impairment of Assets – IAS 36
       with IAS 21 “The Effects of Changes in Foreign Ex-
                                                                       HSE is required to apply IAS 36 “Impairment of Assets” on
       change Rates” from the date a subsidiary was acquired.
                                                                       the January 1, 2010 Transition Date. At Tansition Date, HSE
       IFRS 1 allows cumulative translation gains or losses to be
                                                                       had property and equipment and definite-life intangibles.
       reset to zero at transition date. The Corporation has elected
       to reset all cumulative translation gains and losses to zero    There are several recognition and measurement differences
       in the opening retained earnings at the transition date.        between Canadian GAAP and IFRS regarding the impair-
                                                                       ment of assets. Unlike Canadian GAAP where there is no
    IFRS Mandatory Exceptions
                                                                       single accounting standard that deals with impairment, IAS
    1. Estimates – Hindsight has not been used to create or            36 specifically addresses the issues relating to the impair-
       revise estimates. The estimates made previously by the          ment of assets. IAS 36 applies to both tangible and intan-
       Corporation under Canadian GAAP were not revised for            gible assets, including goodwill.


18      HSE Integrated Ltd. 2010 Annual Report                                          Management Discussion and Analysis
   Canadian GAAP impairment testing first compares the                  Property, Plant and Equipment – IAS 16
   asset-carrying values with undiscounted future cash flows to
   determine whether impairment exists. If the carrying amount          Under IFRS, property and equipment is required to be
   exceeds the undiscounted future cash flows, an impairment            componentized and depreciated separately if significant
   is deemed to exist and the carrying value is written down to         components within an asset have different economic lives.
   estimated fair value. IFRS uses a one-step approach for both         If an asset has incurred a capital repair, the equivalent net
   testing for and measurement of impairment, with carrying             book value of the part of the asset repaired is required to be
   values compared directly to the higher of fair value less costs      derecognized. In the absence of specific criteria to define
   to sell and value-in-use (calculated using discounted cash           “significant”, Management uses its judgment in determining
   flows).                                                              which costs are significant in relation to the property and
                                                                        equipment.
   Fair value less costs to sell is the amount obtainable from the
   sale of an asset or cash-generating unit in an arm’s-length          HSE believes that the componentization of required assets
   transaction between knowledgeable, willing parties less              under IFRS will result in a decrease of approximately $0.3
   costs of disposal. Value-in-use is the present value of the          million in net book value of property and equipment to the
   future cash flows expected to be derived from the continuing         balance sheet at January 1, 2010, with a corresponding in-
   use of an asset and from its ultimate disposal or from a cash-       crease in opening deficit (approximately $0.2 million net of
   generating unit.                                                     tax).

   Under IFRS, property and equipment and definite-life intan-
                                                                        Provisions, Contingent Liabilities
                                                                        and Contingent Assets – IAS 37
   gibles are tested for impairment at the asset or cash-generat-
   ing-unit (“CGU”) level. A CGU is the smallest group of as-           Under IFRS, if a corporation has onerous contracts, the pres-
   sets that generates cash inflows that are largely independent        ent obligation under the contract must be recognized and
   of the cash inflows from other assets or groups of assets.           measured as a provision. An onerous contract is a contract in
   HSE has identified its “Canada” and “USA” operating seg-             which the unavoidable costs of meeting the obligations un-
   ments as its cash-generating units.                                  der the contract exceed the economic benefits expected to be
                                                                        received under the contract. Provisions are discounted where
   A significant difference between IFRS and Canadian GAAP              amounts are material.
   stems from the application of a discount rate to future cash
   flows. Under IFRS, the estimated future cash flows used in           As part of a prior acquisition, HSE assumed a long-term op-
   calculating value-in-use are discounted using the rate that re-      erating lease for a building. The building is not required for
   flects the market’s assessment of risks specific to the asset or     HSE operations at this time and is not currently subleased.
   cash-generating unit. Under Canadian GAAP, the estimated             HSE has identified this lease as an onerous contract. HSE
   future cash flows are not discounted. Due to the discounting         expects to record approximately $2.0 to $2.2 million as a
   of cash flows, it is more difficult to pass the impairment test      provision at January 1, 2010 with a corresponding increase
   under IFRS than under Canadian GAAP.                                 to opening deficit (approximately $1.6 million net of tax).
                                                                        On an annual basis HSE expects operating expense to de-
   A significant factor in determining whether HSE had im-              crease by approximately $0.2 million per year.
   paired assets at January 1, 2010 was the fact that the carrying
   value of its net assets exceeded its market capitalization. The
   recoverable amount was based on fair value less costs to sell,     internal control over
   and as a result HSE expects to recognize an impairment loss        Financial reporting
   to property and equipment and definite-life intangibles of ap-
   proximately $7.0 million and an equivalent pre-tax increase          Disclosure Controls and Procedures
   to opening deficit (approximately $5.0 million net of tax).          An evaluation was performed under the supervision and with
   Depreciation expense will decrease by approximately $1.0 to          participation of the Corporation’s Management, including
   $1.2 million per year. IAS 36 requires that impairment losses        the Chief Executive Officer (“CEO”) and Chief Financial
   be first applied against goodwill, and then to other assets on       Officer (“CFO”), of the effectiveness of the design and oper-
   a pro-rata basis.                                                    ation of the Corporation’s disclosure controls and procedures
   At the end of each reporting period HSE will be required to          as defined in National Instrument 52-109. Based on that
   assess whether there is any indication that an impairment            evaluation, the Corporation’s Management, including the
   loss recognized in prior periods for an asset other than good-       CEO and CFO, concluded that the Corporation’s disclosure
   will or a cash generating unit may no longer exist or may            controls and procedures were designed to provide a reason-
   have decreased. An impairment loss can only be reversed to           able level of assurance over disclosure of material informa-
   the extent that it does not increase the asset’s carry amount        tion, and are effective as at December 31, 2010.
   above the carrying amount that would have been determined
   for the asset had no impairment loss been recognized in pre-
   vious reporting periods.



Management Discussion and Analysis                                              HSE Integrated Ltd. 2010 Annual Report           19
   Management’s Report on Internal                                    common ShareS and convertiBle
   Control Over Financial Reporting
                                                                      deBentureS outStanding
   The Corporation’s Management, including the CEO and
   CFO, have assessed and evaluated the design and effective-         At December 31, 2010 and March 23, 2011, 37,575,675 com-
   ness of the Corporation’s internal control over financial          mon shares of HSE were outstanding. At December 31, 2010, the
   reporting as defined in National Instrument 52-109 as at De-       Corporation had options outstanding to issue 2,279,165 shares
   cember 31, 2010. In making this assessment, the Corporation        at a weighted-average exercise price of $1.24 per share. Of these
   used the criteria established by the Committee of Sponsoring       options, 1,154,479 were exercisable. At March 23, 2011 there
   Organizations (“COSO”) in the “Internal Control – Inte-            were 2,195,000 options outstanding at a weighted average price
   grated Framework”. The Corporation’s assessment included           of $1.19 per share. Of these options, 1,070,814 were exercisable.
   documentation, evaluation, and testing of its internal con-        At December 31, 2010 the Corporation had $1.925 million of
   trols over financial reporting. Based on that evaluation, the      convertible debentures outstanding that were convertible to
   Corporation’s Management, including the CEO and CFO,               3.85 million shares based on the applicable conversion price. At
   concluded that the Corporation’s internal controls over finan-     March 23, 2011 there were $2.0 million of convertible deben-
   cial reporting are effective and provide reasonable assurance      tures outstanding that were convertible to 4.0 million shares at
   regarding the reliability of the Corporation’s financial report-   the applicable conversion price.
   ing and its preparation of financial statements for external
   purposes in accordance with Canadian generally accepted
   accounting principles, as at December 31, 2010.                    non-gaap meaSureS
   Internal control over financial reporting, no matter how well      This report makes reference to EBITDA, a measure that is not
   designed, has inherent limitations. Therefore, internal con-       recognized under generally accepted accounting principles.
   trol over financial reporting determined to be effective can       Management believes that, in addition to net earnings, EBITDA
   provide only reasonable assurance with respect to financial        is a useful supplementary measure. EBITDA provides investors
   statement preparation and may not prevent or detect all mis-       with an indication of earnings before provisions for interest and
   statements.                                                        bank charges, taxes, amortization, foreign exchange gains or
                                                                      losses, gains or losses on the disposal of property and equipment,
   Changes in Internal Controls Over                                  and the non-cash effect of stock-based compensation expense.
   Financial Reporting During 2010                                    Investors should be cautioned that EBITDA should not be con-
   There have been no significant changes in the Corporation’s        strued as an alternative to net earnings determined by GAAP as
   internal control over financial reporting during the year          an indication of the Corporation’s performance. HSE’s method
   ended December 31, 2010 that have materially affected, or          of calculating EBITDA may differ from that of other companies’
   are reasonably likely to materially affect, its internal control   and, accordingly, may not be comparable to measures used by
   over financial reporting.                                          other companies.

eBitda calculation
Years ended December 31                                                               2010                  2009                  2008
Net earnings (loss)                                                     $           (1,157)    $          (6,634)   $              248
Add (deduct):
   Amortization                                                                       5,680                 6,699                 7,265
   Impairment of property and equipment                                                   –                 1,641                     –
   Impairment of goodwill and intangible assets                                           –                     –                  100
   Stock-based compensation                                                             210                   293                  408
   Interest and bank charges                                                            487                   544                 1,116
   Foreign exchange gain                                                                 (4)                    –                  (31)
   (Gain) loss on disposal of property and equipment                                  (102)                   311                  648
   Expiry of contingent consideration liability                                       (810)                     –                     –
   Income tax                                                                         (553)               (2,009)                  637
EBITDA                                                                  $             3,751    $              845   $           10,391



20       HSE Integrated Ltd. 2010 Annual Report                                            Management Discussion and Analysis
Quarterly eBitda calculation
                                                                                               2010                                         2009
                                                          Q4            Q3            Q2         Q1          Q4         Q3         Q2         Q1
Net earnings (loss)                                 $    683 $     (397) $ (1,235) $           (208) $ (2,178) $     (722) $ (1,928) $ (1,806)
Add (deduct):
     Amortization                                       1,355      1,359            1,396      1,570      1,618      1,650      1,692      1,739
     Impairment of property and
     equipment                                              –             –             –          –      1,641          –           –          –
     Impairment of goodwill and
     intangible assets                                      –             –             –          –          –          –           –          –
     Stock-based compensation                              56            26            87         41         43        101         99         50
     Interest and bank charges                           155             74          140         118        135        140        120        149
     Foreign exchange loss (gain)                           –             2           (1)         (5)        (8)        (3)        12         (1)
     (Gain) loss on disposal of
     property and equipment                              290            213         (218)      (387)         57         35        126         93
     Expiry of contingent consideration liability       (810)             –             –          –          –          –           –          –
     Income taxes                                        (12)       (85)            (549)         93      (812)      (185)       (572)      (440)
EBITDA                                              $   1,717 $    1,192 $          (380) $    1,222 $      496 $    1,016 $     (451) $    (216)


Forward-looking StatementS                                                        to do all the upcoming work. This is one problem everyone at
                                                                                  HSE is excited to help solve. (page 11)
Certain statements in this MD&A constitute forward-looking
information and statements (collectively “forward-looking state-              •   Regardless, the amount of work that HSE has scheduled for
ments”) within the meaning of applicable securities laws. These                   late Q1 and the subsequent three quarters in the current fiscal
forward-looking statements concern, among other things, the                       year is greater than at this time last year. The “order book”
Corporation’s prospects, expected revenues, expenses, profits, fi-                is in all markets from field hydrocarbon processing facilities
nancial position, strategic direction, and growth initiatives, all of             in northwest Alberta, to oilsands plants in northeast Alberta,
which involve known and unknown risks, uncertainties and other                    to processing plants in multiple industries in Ontario and the
factors that may cause actual results, performance or achieve-                    U.S. midwest, to refineries in Atlantic Canada. (page 11)
ments of the Corporation to be materially different from any                  •   HSE’s clients’ focus on quality health and safety services
future results, performance or achievements expressed or implied                  appears to have improved since the economic recovery,
by such forward-looking statements. When used in this MD&A,                       resuming a trend towards outsourced expert health and safety
such forward-looking statements use such words as expect, an-                     services that had been growing for 20 years and was only
ticipate, estimate, believe, may, will, would, could, might, intend,              interrupted by the severe economic recession of 2009 and the
plan, continue, ongoing, project, objective, should, and other                    first half of 2010. (page 11)
similar terms and phrases. This forward-looking information
reflects the Corporation’s current expectations regarding future              •   In the first quarter of 2011 HSE was awarded a five-year
events and operating performance based on assumptions and                         national contract for four facilities in the above-noted
analyses made by the Corporation based on its experience and an                   locations. A condition of this contract was that HSE not
assessment of current conditions, known trends, expected future                   disclose the name of the client, however, the precedent
developments and other factors that Management believe to be                      has been set. The next customer to embrace this “single-
appropriate under the circumstances. These forward-looking                        source” concept will also recognize that, until HSE was
statements include among others:                                                  created, safety services were either delivered internally or by
                                                                                  several contractors in different geographical markets. Such
•   At the time of writing, the Corporation’s “order book” –                      contractors are, by nature, unable to offer the same national
    measured by plant shutdown and turnaround projects awarded                    standards of quality, service and price that HSE delivers.
    to HSE and other contracts in which HSE is engaged 24/7/365                   (page 11)
    – is higher than the same time last year. (page 11)
                                                                              •   Securing single-client national contracts in multiple locations
•   In 2011 a preoccupation of HSE’s Management and HR team                       has been the foundation of HSE’s strategic plan for the past
    is finding enough trained, qualified and motivated personnel


Management Discussion and Analysis                                                          HSE Integrated Ltd. 2010 Annual Report           21
    six years. The recession of 2009 was a major setback in           The forward-looking statements contained in this MD&A reflect
    executing this strategy. However, with the recovery underway      several material factors, expectations and assumptions includ-
    and a major national contract in hand, HSE believes the           ing, without limitation: economic conditions within Canada and
    Industrial side of its business is back on the path to growth.    the United States, both in general and within specific industries;
    (page 11)                                                         demand for the Corporation’s services by customers in various
                                                                      industries and geographic locations; pricing levels for the Corpo-
•   In 2011 HSE will be expanding into the new business area          ration’s services; commodity prices; foreign currency exchange
    of safety consulting, whereby the Corporation will provide        rates; interest rates; access to financing; the Corporation’s future
    expert safety supervisors to projects on a contract basis.        operating results and financial condition; and competition within
    While HSE has done some work in this area in the past, the        particular markets or for particular services.
    Corporation formalized its expansion into this business with
    the January 2011 acquisition of Taylored Safety Services          Forward-looking statements involve significant risks and uncer-
    Inc. (“Taylored”) of Halifax. Having clients seek contract        tainties and should not be read as a guarantee of future perfor-
    safety supervisors is an extension of two trends: outsourcing     mance or results, and will not necessarily be an accurate indica-
    of safety expertise to an expert third party; and a growing       tion of whether or not such results will be achieved. A number
    emphasis on quality safety supervision for all types of safety-   of factors could cause actual results to differ materially from the
    intensive operations. Taylored provides HSE with domain           results discussed in the forward-looking statements including, but
    expertise in safety consulting by formalizing the requirements    not limited to, the factors discussed above and other risk factors
    for qualified safety personnel, creates a database of safety      discussed herein and listed from time to time in the Corporation’s
    consultants available on a project basis, and formalizes          reports and public disclosure documents including its annual
    internal career paths for HSE personnel that wish to apply        report, annual information form and other filings with securi-
    their training and job experience to more lucrative and           ties commissions in Canada as reported under the Corporation’s
    rewarding careers. (page 11)                                      profile at www.sedar.com.
•   Record drilling rights sales in Alberta in 2010 will likely       The Corporation cautions that the foregoing list of assumptions,
    perpetuate a high level of drilling activity through 2011. The    risks and uncertainties is not exhaustive. The forward-looking
    Corporation believes that in 2011 Oilfield revenues will be       statements contained in this MD&A speak only as of the date
    higher than they were in 2010. (page 12)                          of this MD&A, and the Corporation assumes no obligation to
                                                                      publicly update or revise them to reflect new events or circum-
•   The application of new drilling techniques involving              stances, except as may be required pursuant to applicable laws.
    extended-reach horizontal wells and multi-stage fracturing
    drilled into previously uneconomic but extensive oil-bearing
    reservoirs appears to have created a new and sustainable          additional inFormation
    source of reserve and production growth for HSE’s E&P             Additional information relating to HSE is available under the
    company clients. (page 12)                                        Corporation’s profile on the SEDAR website at www.sedar.com
•   The outcome of two events (the Macondo blowout in the             and www.hseintegrated.com.
    Gulf of Mexico and the acquisition of Boots & Coots,
    Inc. by Halliburton) is a renewed interest in worker, asset,
    and community protection by BCHSE clients, and a new
    corporate partner for HSE: Halliburton. This company has
    vastly expanded resources in terms of clients and delivery
    footprint. In January the Board of Directors of BCHSE
    reaffirmed their commitment to the BCHSE business unit and
    approved a $0.8 million rental equipment expansion budget
    for 2011. BCHSE has a compelling service offering to clients:
    a trusted brand in Boots & Coots; new equipment designed by
    HSE; and expert safety capability and management through
    the personnel seconded to BCHSE by HSE in Canada. Going
    forward, the Corporation believes that BCHSE will be a
    positive contributor to revenues and cash flow. (pages 12-13)
•   Many of the clients that operate hydrocarbon-processing
    facilities are also drilling offshore in the Gulf of Mexico,
    and will be reviewing their health and safety procedures and
    commitments. For this reason, in 2011 HSE will stay the
    course and continue to deliver quality services at fair prices
    while augmenting sales and marketing efforts to grow the
    business. (page 13)



22       HSE Integrated Ltd. 2010 Annual Report                                             Management Discussion and Analysis
ManaGeMent’s report
To the Shareholders of HSE Integrated Ltd.:
The accompanying consolidated financial statements of HSE Integrated Ltd. and all of the information in this
annual report are the responsibility of Management and have been approved by the HSE Board of Directors.
Management has prepared the consolidated financial statements in accordance with Canadian generally accept-
ed accounting principles and where alternative accounting methods exist, Management has chosen those that it
deems most appropriate.
Financial statements are not precise since they include amounts based on estimates and judgments. Such
amounts have been determined on a reasonable basis to ensure the financial statements are presented fairly in all
material respects. Management has prepared the financial information in this annual report and has ensured it is
consistent with the consolidated financial statements.
The Corporation maintains internal accounting and administrative controls designed to provide reasonable
assurance that the financial information is relevant, reliable and accurate and that the Corporation’s assets are
appropriately accounted for and adequately safeguarded.
The HSE Board of Directors is responsible for ensuring Management fulfills its responsibilities for financial
reporting and for reviewing and approving the financial statements. This is carried out principally through the
Audit Committee. HSE’s auditors have full access to the Audit Committee.




David L. Yager                                            Lori McLeod-Hill, CA
Chairman and Chief Executive Officer                      Chief Financial Officer
March 23, 2011




Management’s Report                                                   HSE Integrated Ltd. 2010 Annual Report   23
inDepenDent auDitors’ report
To the Shareholders
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of HSE Integrated Ltd. (“the Company”),
which comprise the consolidated balance sheets as at December 31, 2010 and 2009, the consolidated state-
ments of loss, other comprehensive loss, deficit and accumulated other comprehensive loss, and cash flows for
the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory
information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with Canadian generally accepted accounting principles, and for such internal control as manage-
ment determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the con-
solidated financial statements. The procedures selected depend on our judgment, including the assessment of the
risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making
those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation
of the consolidated financial statements in order to design audit procedures that are appropriate in the circum-
stances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Company as at December 31, 2010 and 2009, and the results of its consolidated opera-
tions and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.




Chartered Accountants
Calgary, Canada
March 23, 2011


24     HSE Integrated Ltd. 2010 Annual Report                                       Independent Auditors’ Report
ConsoliDateD BalanCe sHeets
(stated in thousands of dollars)
Years enDeD December 31                                                                      2010                      2009
asseTs
Current
   Cash and cash equivalents                                              $                 1,479    $                460
   Accounts receivable (note 14)                                                           18,099                  16,156
   Inventory                                                                                  171                     199
   Prepaid expenses and other assets                                                        1,675                   1,654
   Income taxes recoverable                                                                   705                     398
                                                                                           22,129                  18,867
Property and equipment (note 5)                                                            25,051                  28,595
Intangible assets (note 4)                                                                  2,732                   3,260
                                                                          $                49,912    $             50,722
LIabILITIes
Current
   Accounts payable and accrued liabilities                               $                 5,911    $              4,667
   Income taxes payable                                                                       423                      72
   Current portion of obligations under capital leases (note 8)                               104                     233
   Current portion of long-term debt (note 6)                                               1,304                   5,222
   Current portion of deferred gain (note 15)                                                 137                     137
                                                                                            7,879                  10,331
Deferred gain (note 15)                                                                       182                     319
Obligations under capital leases (note 8)                                                      16                     122
Long-term debt (note 6)                                                                     2,919                     818
Convertible debentures – debt component (note 7)                                            1,628                       –
Future income taxes (note 9)                                                                3,161                   4,170
                                                                                           15,785                  15,760
sHareHOLDers’ eQUITY
    Share capital (note 10)                                                                 60,040                 60,040
    Convertible debentures – equity component (note 7)                                         221                       –
    Contributed surplus (note 11)                                                            4,948                  4,755
    Deficit                                                                               (30,927)               (29,770)
    Accumulated other comprehensive loss                                                     (155)                    (63)
                                                                                            34,127                 34,962
                                                                          $                 49,912   $             50,722
Commitments and contingencies (note 15 and note 18)
Subsequent event (note 19)
See accompanying notes to the consolidated financial statements.

On behalf of the Board:




David L. Yager, Director                                          Martin Hall, Director


Consolidted Financial Statements                                              HSE Integrated Ltd. 2010 Annual Report   25
ConsoliDateD stateMents oF loss
(stated in thousands of dollars except per-share amounts)
Years enDeD December 31                                                  2010                     2009

reVenUe                                                            $   82,028     $             81,601

cOsTs
    Operating and materials                                            70,341                   72,530
    Selling, general and administrative                                 7,936                    8,226
    Amortization of property and equipment                              5,152                    6,171
    Amortization of intangible assets                                     528                      528
    Stock-based compensation (note 12)                                    210                      293
    Interest on long-term debt                                            339                      471
    Other interest and bank charges                                       148                       73
    Foreign exchange gain                                                  (4)                       –
    (Gain) loss on disposal of property and equipment                   (102)                      311
                                                                   $   84,548     $             88,603

LOss beFOre THe UnDernOTeD ITems                                   $   (2,520)    $             (7,002)

    Expiry of contingent consideration – liability (note 6)               810                         –
    Impairment of property and equipment (note 5)                           –                   (1,641)
                                                                          810                   (1,641)

LOss beFOre IncOme TaX                                                 (1,710)                  (8,643)

Income taxes (note 9)
   Current provision (recovery)                                           423                     (928)
   Future reduction                                                     (976)                   (1,081)
                                                                        (553)                   (2,009)

neT LOss                                                           $   (1,157)    $             (6,634)

Loss per share
   Basic                                                           $    (0.03)    $              (0.18)
   Diluted                                                         $    (0.03)    $              (0.18)
Weighted average shares outstanding
   Basic                                                               37,576                   37,576
   Diluted                                                             37,576                   37,576
See accompanying notes to the consolidated financial statements.




26      HSE Integrated Ltd. 2010 Annual Report                         Consolidated Financial Statements
ConsoliDateD stateMents oF otHer
CoMpreHensiVe loss
(stated in thousands of dollars)
Years enDeD December 31                                                            2010                         2009

neT LOss                                                           $             (1,157)     $             (6,634)

Unrealized loss on translating financial statements
of self-sustaining foreign operations                                               (92)                        (187)

cOmPreHensIVe LOss                                                 $             (1,249)     $             (6,821)




ConsoliDateD stateMents oF DeFiCit anD
aCCuMulateD otHer CoMpreHensiVe loss
(stated in thousands of dollars)
Years enDeD December 31                                                            2010                         2009

DEFICIT, BEGINNING OF YEAR                                         $           (29,770)      $            (23,136)

Net Loss                                                                         (1,157)                   (6,634)

DeFIcIT, enD OF Year                                               $           (30,927)      $            (29,770)

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME,
beGInnInG OF Year                                                  $                (63)     $                   124
Unrealized loss on translating financial statements
of self-sustaining foreign operations                                               (92)                        (187)
accUmULaTeD OTHer cOmPreHensIVe LOss,
enD OF Year                                                        $               (155)     $                   (63)
See accompanying notes to the consolidated financial statements.




Consolidated Financial Statements                                      HSE Integrated Ltd. 2010 Annual Report    27
ConsoliDateD stateMents oF CasH Flows
(stated in thousands of dollars)
Years enDeD December 31                                                    2010                     2009

casH PrOVIDeD bY OPeraTIOns
    Net loss                                                         $   (1,157)    $             (6,634)
       Charges to income not involving cash:
           Amortization                                                   5,680                     6,699
           Stock-based compensation (note 12)                               210                       293
           Future income tax reduction                                    (976)                   (1,081)
           (Gain) loss on disposal of property and equipment              (102)                       311
           Expiry of contingent consideration – liability (note 6)        (810)                         –
           Property and equipment impairment                                  –                     1,641
                                                                          2,845                     1,229
    Net change in non-cash working capital (note 16)                      (702)                     5,511

Cash provided by operations                                               2,143                    6,740

FInancInG
    Repayment of obligations under capital leases                          (235)                    (936)
    Non-revolving term loan facility                                       5,000                        –
    Issue of convertible debenture (note 7)                                1,925                        –
    Repayment of long-term debt                                          (5,986)                  (5,686)
    Deferred financing fees                                                 (97)                        –

Cash provided by (used by) financing activities                             607                   (6,622)

InVesTInG
    Purchase of property and equipment                                   (2,319)                  (1,644)
    Proceeds from disposal of property and equipment                         601                      865

Cash used in investing activities                                        (1,718)                    (779)

Cash flow from operating, financing and investing activities              1,032                     (661)
Effect of exchange rate on foreign currency held                           (13)                         7

neT cHanGe In casH anD casH eQUIVaLenTs                                   1,019                     (654)

Cash and cash equivalents, beginning of year                                460                    1,114

Cash and cash equivalents, end of year                               $    1,479     $                460

Supplementary cash flow information
   Interest paid                                                     $      308     $                468
   Income taxes paid                                                 $      271     $                 53
See accompanying notes to the consolidated financial statements.



28     HSE Integrated Ltd. 2010 Annual Report                            Consolidated Financial Statements
notes to FinanCial stateMents
note 1 – nature oF BuSineSS                                               sidiary Boots & Coots HSE Services LLC (note 17), all subsidiaries
                                                                          are wholly owned. All intercompany balances and transactions
HSE Integrated Ltd. (“HSE” or the “Corporation”) is incorporated          have been eliminated on consolidation.
under the laws of the province of Alberta. The Corporation
provides health and safety services to a range of customers in            Cash and cash equivalents
the energy, manufacturing, construction, and other industries             Cash and cash equivalents include bank balances and highly liquid
including: safety supervision and rescue personnel; rental of             short-term money market instruments with original maturities of
breathing apparatus and associated equipment for person-                  three months or less. Cash and cash equivalents are classified as a
nel operating in high hazard environments; fixed and mobile               liability on the balance sheet (described as “Bank indebtedness”)
firefighting and fire protection services and equipment; worker           when the amount of the cheques written but not cleared by
shower (decontamination) services; onsite medical services;               the bank exceeds the amount of the cash and temporary invest-
worker safety training; hazardous gas detection; industrial hy-           ments. Amounts drawn on the Corporation’s operating facility are
giene services; and safety management.                                    disclosed as a separate line on the financial statements (note 6).

note 2 – SigniFicant                                                      Inventory
accounting policieS                                                       Inventory consists of products held for sale to customers or for
                                                                          consumption in the rendering of services provided by the Cor-
The following is a summary of significant accounting policies used        poration. Inventory is carried at the lower of cost, determined
in the preparation of these consolidated financial statements:            under the first-in, first-out method, and net realizable value.
Basis of presentation                                                     Property and equipment
These consolidated financial statements are prepared in accordance        Property and equipment is stated at cost less accumulated
with Canadian generally accepted accounting principles (“GAAP”).          amortization. Major betterments are capitalized. Repairs and
In preparing these consolidated financial statements, Management          maintenance expenditures which do not extend the useful life of
is required to make estimates and assumptions that affect reported        the property and equipment are expensed.
amounts of assets and liabilities and disclosure of contingent as-
sets and liabilities as at the date of the financial statements and the   Amortization expense includes amortization of leasehold im-
reported amounts of revenue and expenses during the reported              provements and vehicles and equipment under capital leases.
period. Actual results could differ from these estimates.                 Amortization is calculated using the straight-line method over
                                                                          the estimated useful life of the assets as follows:
Measurement uncertainty                                                   Buildings and improvements ...................................... 5 – 20 years
These financial statements, prepared in accordance with Cana-             Safety equipment ....................................................... 5 – 20 years
dian GAAP, include amounts determined by, in part, estimates              Vehicles ...................................................................... 7 – 20 years
made by Management. These estimates include:                              Vehicles and equipment under capital lease .............. 7 – 10 years
• The allowance for doubtful accounts;                                    Other property and equipment .................................. 2 – 10 years
• The allowance for inventory obsolescence;                               Intangible assets
• The estimated useful lives of assets;
• The recoverability of property and equipment;                           Intangible assets, consisting of acquired customer relationships,
• The recoverability of intangible assets;                                technological knowledge and intellectual property, are carried at
                                                                          cost less accumulated amortization. Amortization is calculated
• Contingencies and litigation;                                           on a straight-line basis over a period of one to 10 years depend-
• The amount and composition of income tax assets and in-                 ing upon the asset’s estimated useful life.
    come tax liabilities, including the amount of unrecognized
    tax benefits on an ongoing basis.                                     Impairment of long-lived assets
The Corporation bases its estimates on historical experience and          Long-lived assets, such as property and equipment and intan-
on various other assumptions that are believed at the time to be          gible assets subject to amortization, are reviewed for impair-
reasonable under the circumstances. Under different assumptions           ment whenever events or changes in circumstances indicate
or conditions, the actual results may differ, possibly materially, from   that the carrying amount of an asset may not be recoverable.
those previously estimated. Many of the conditions affecting these        Recoverability of an asset’s carrying value is initially tested by
assumptions and estimates are outside of the Corporation’s control.       comparing the carrying amount of the asset group to estimated
                                                                          undiscounted future cash flows expected to be generated by the
Consolidation                                                             group. If the carrying amount of an asset exceeds its estimated
These consolidated financial statements include the accounts of           future cash flows, the asset is considered to be impaired, and an
the Corporation and its subsidiaries (from the date of acquisition        impairment charge is recognized for the amount by which the
or formation). With the exception of the Corporation’s U.S. sub-          carrying amount of the asset exceeds its fair value.



Notes to Financial Statements                                                              HSE Integrated Ltd. 2010 Annual Report                             29
Revenue recognition                                                   DSUs are revalued to a value equal to the closing price of the Cor-
                                                                      poration’s common shares, with any increase or decrease in value
The Corporation derives most of its revenues from the provision       being charged or credited to stock compensation expense. When
of services and the rental of equipment. The Corporation rec-         a Director tenders his resignation, the Director is paid a cash
ognizes service and rental revenue as the service is provided to      amount equal to the number of DSUs awarded times the Corpo-
the customer, provided that the sales price has been fixed or is      ration’s closing share price on the redemption date specified by
determinable, and that collectability is reasonably assured. Sales    the Director. This redemption date must be a date which is after
of goods are recognized when the product has been delivered           the date on which the notice of redemption is filed with the Cor-
provided that collectability is reasonably assured. Generally ser-    poration and within the period beginning on the Director’s termi-
vices are provided over a relatively short time period.               nation date and ending on December 15 of the first calendar year
Income taxes                                                          commencing immediately after the Director’s termination date.
The Corporation follows the liability method of accounting for        Per-share amounts
income taxes. Under this method, the Corporation records fu-          Basic per-share amounts are calculated using the weighted aver-
ture income taxes for the effect of any differences between the       age number of common shares outstanding during the year. Di-
accounting and income tax basis of an asset or liability, using       luted per-share amounts are calculated using the treasury-stock
the substantially enacted tax rates and laws that will be in ef-      method for stock options and the “if-converted” method for
fect when the differences are expected to reverse. The effect         Debentures. Under the treasury-stock method, the weighted-
on future tax assets and liabilities of a change in the tax rate is   average number of shares issued and outstanding during the year
recognized in income in the period in which the change occurs.        is adjusted by the total of the additional common shares that
The Corporation records a valuation allowance in each report-         would have been issued assuming exercise of all stock options
ing period when Management believes that it is more likely            with exercise prices at or below the average market price for the
than not that any future tax asset created will not be realized.      year, offset by the reduction in common shares that would be
The computation of the provision for income taxes involves the        purchased with the exercise proceeds plus the related unamor-
interpretation of tax legislation and regulations that are continu-   tized stock-based compensation costs. Under the if-converted
ally changing. There are tax matters that have not yet been con-      method, the weighted-average number of shares issued and out-
firmed by taxation authorities; however, Management believes          standing during the year is adjusted by the number of common
that the provision for income taxes is reasonable.                    shares that would be issued if all debenture holders converted
Foreign currency translation                                          their debenture holdings to common shares at the earliest date
                                                                      which the debenture’s Trust Indenture allows for conversion. Net
All of the Corporation’s foreign operations are considered to         income and other comprehensive income are adjusted to add
be self-sustaining. Accordingly, the Corporation translates as-       back the after-tax impact of interest and accretion expense re-
sets and liabilities at year-end exchange rates and income and        lated to the debentures. No adjustment is made to basic earnings
expense accounts at average exchange rates for the year. Adjust-      per share if the result of the calculation would be anti-dilutive.
ments resulting from these translations are reflected in the con-
solidated statement of other comprehensive income.                    Financial instruments – recognition
Stock-based compensation plans                                        and measurement
                                                                      The Corporation has estimated the fair value of its financial assets
The Corporation applies the fair-value method of accounting to
                                                                      and liabilities, which include cash and cash equivalents, accounts
all equity-classified stock-based compensation arrangements
                                                                      receivable, bank indebtedness, accounts payable and accrued li-
for both employees and non-employees. Compensation cost of
                                                                      abilities, long-term debt, and debentures. The fair value of all fi-
equity-classified awards to employees are measured at fair value
                                                                      nancial assets and liabilities approximates their carrying amounts
at the grant date and recognized over the vesting period with a
                                                                      due to their current maturities or market rates of interest.
corresponding increase to contributed surplus. Compensation
cost of equity-classified awards to non-employees are initially       Financial instruments are initially recorded at fair value, then
measured at fair value, and remeasured to fair value until the        classified into one of five categories, based on the characteristics
non-employee’s performance is complete, and recognized over           and purpose of the instrument: (i) held-for-trading; (ii) held-
the vesting period with a corresponding increase to contributed       to-maturity; (iii) loans and receivables; (iv) available-for-sale;
surplus. Upon the exercise of the award, consideration received,      and (v) other financial liabilities. Subsequent to initial recogni-
together with amounts previously recognized in contributed sur-       tion, each category of financial instrument is measured based
plus, is recorded as an increase to share capital.                    on its classification. Held-for-trading financial instruments are
                                                                      measured at fair value with changes in fair value recognized in
The Corporation has adopted a deferred share unit (“DSU”) plan
                                                                      earnings. Available-for-sale financial instruments are measured
for non-executive Directors. Under the terms of this plan, the
                                                                      at fair value with changes in fair value recognized in comprehen-
Corporation awards DSUs to Directors from time to time. The
                                                                      sive income until the investment is derecognized or impaired,
DSUs granted under this plan vest immediately. At the time the
                                                                      at which time the amounts would be recorded in net earnings.
DSU is awarded, an expense equal to the number of units issued
                                                                      Held-to-maturity financial instruments, loans and receivables,
multiplied by the Corporation’s closing stock price on the trading
                                                                      and other financial liabilities are measured at amortized cost us-
day immediately preceding the award date is recorded as stock
                                                                      ing the effective-interest-rate method.
compensation expense. Subsequent to the date awarded, the



30      HSE Integrated Ltd. 2010 Annual Report                                                       Notes to Financial Statements
The Corporation has designated accounts receivable as “loans           International Financial Reporting Standards
and receivables”. Accounts payable and accrued liabilities, long-
term debt, and the liability component of the convertible deben-       In 2008, the Canadian Accounting Standards Board (AcSB) con-
tures are classified as “other financial liabilities”. Unamortized     firmed that publicly accountable enterprises will be required to
debt-issue costs are offset against the long-term debt to which        adopt IFRS, for interim and annual reporting purposes, beginning on
they relate. The carrying value of long-term debt is accreted us-      or after January 1, 2011. The adoption date of January 1, 2011 will
ing the effective-interest-rate method.                                require the restatement of the Corporation’s consolidated financial
                                                                       statements, for comparative purposes for its year ended December
Transaction costs associated with financial liabilities are recog-     31, 2010, and of the opening balance sheet as at January 1, 2010.
nized against its carrying value and are being amortized over the
term of the financial liabilities.

note 3 – capital management
Management’s policy is to maintain an appropriate capital base that allows the Corporation to maintain investor, creditor and market
confidence and to sustain future development of the business. The Corporation seeks to manage its capital structure to ensure that it
has the financial capacity and liquidity to fund its operating and investment activities. The Corporation generally relies on operating cash
flows to fund capital expenditures, but may occasionally need to use external sources to facilitate acquisition or expansionary activities.
To ensure that the Corporation maintains an appropriate balance between debt and shareholders’ equity, it monitors the ratio of
debt to total capital. As at December 31, 2010 and 2009, these ratios were as follows:

Years enDeD December 31                                                                               2010                           2009
Bank debt                                                                      $                     4,223 $                        6,040
Convertible debentures – debt component                                                              1,628                               –
                                                                               $                     5,851                          6,040


Shareholders’ equity                                                                               34,369                         34,962
Convertible debentures – equity component                                                              221                               –
Total capitalization                                                           $                   40,441 $                       41,002
Debt to total capitalization                                                   $                      0.14 $                         0.15
The Corporation is subject to various financial covenants (note 6) associated with its existing debt facility. These covenants are moni-
tored on a regular basis and controls are in place to maintain ongoing compliance with these covenants. The Corporation was in com-
pliance with all debt covenants at December 31, 2010.

note 4 – intangiBle aSSetS
                                                                                                                  December 31, 2010
                                                                                             accumulated
                                                                      cost                                                net book Value
                                                                                             Amortization
Customer relationships                                               5,579                          2,899                           2,680
Technical knowledge                                                    104                              52                              52
                                              $                      5,683 $                        2,951 $                         2,732


                                                                                                                  DECEMBER 31, 2009
                                                                                             Accumulated
                                                                       Cost                                               Net Book Value
                                                                                             Amortization
Customer relationships                                               5,579                          2,382                           3,197
Technical knowledge                                                    104                              41                              63
                                              $                      5,683 $                        2,423 $                         3,260


Notes to Financial Statements                                                        HSE Integrated Ltd. 2010 Annual Report           31
note 5 – property and eQuipment
                                                                                                                 December 31, 2010
                                                                                                accumulated
                                                                              cost              Amortization             net book Value
Buildings and improvements                                 $                1,366 $                       938 $                      428
Safety equipment                                                          40,254                      24,207                     16,047
Vehicles                                                                  12,110                       6,319                       5,791
Vehicles and equipment under capital lease                                  2,271                      1,598                         673
Furniture and equipment                                                     1,516                         975                        541
Other property and equipment                                                5,981                      4,410                       1,571
Total property and equipment                               $              63,498 $                    38,447 $                   25,051


                                                                                                                 DECEMBER 31, 2009
                                                                                                Accumulated                     Net Book
                                                                              Cost              Amortization                       Value
Buildings and improvements                                 $                1,137 $                       606 $                      531
Safety equipment                                                          41,657                      23,595                     18,062
Vehicles                                                                  13,713                       8,264                       5,449
Vehicles and equipment under capital lease                                  3,331                      1,923                       1,408
Furniture and equipment                                                     1,343                         639                        704
Other property and equipment                                                7,027                      4,586                       2,441
Total property and equipment                               $              68,208 $                    39,613 $                   28,595
At December 31, 2010 the Corporation reviewed its property and equipment for indicators of impairment. Management determined
that no impairment of long-lived assets existed at December 31, 2010. For the year ended December 31, 2009, Management identi-
fied certain assets that were disposed of subsequent to the year end. The disposal of the property and equipment confirmed that
the proceeds were less than the carrying value. Accordingly, an impairment of $1.641 related to these specific assets was recorded at
year end. No other impairment of long-lived assets existed at December 31, 2009.

note 6 – operating FacilitieS                                           rity agreement which includes accounts receivable and property
                                                                        and equipment.
and long-term deBt
                                                                        HSE was compliant with all debt covenants at December 31,
On April 27, 2010 the Corporation entered into a $15,000 credit         2010. As at December 31, 2010, the total outstanding on the
facility with a regional financial institution. The facility consists   loan facility was $4,300, of which $1,300 was current.
of a $10,000 operating revolving loan facility for general operat-
ing purposes and a $5,000 non-revolving reducing loan facility.         Deferred financing costs associated with the financing facilities
The two facilities were used to retire the $5,300 existing bank         have been shown as a reduction of the carrying value of the
debt.                                                                   long-term debt and are being amortized over the term of the
                                                                        debt using the effective-interest-rate method.
The $5,000 non-revolving term facility is repayable in monthly
payments of $109 starting July 1, 2010. The facility is payable         The Corporation’s existing long-term debt agreements contain a
in full 48 months after initial drawdown. The operating facility        clause to address the transition of accounting standards to IFRS.
is renewable annually and is margined to accounts receivable.           Although there is a risk that the Corporation’s financial report-
Both facilities bear interest at prime plus a fixed percentage. A       ing under IFRS could result in a breach of an existing financial
standby fee is also required on any unused portion of the op-           covenant, the Corporation expects that it will be able to amend
erating facility. Both facilities are subject to certain covenants      the existing long-term debt agreements to make any changes
including a working-capital covenant, a debt-to-equity covenant,        covenant neutral, however no absolute assurances can be made
a fixed-charge coverage ratio and other positive and negative           in this regard.
covenants. The facilities are collateralized under a general secu-


32      HSE Integrated Ltd. 2010 Annual Report                                                        Notes to Financial Statements
Years enDeD December 31                                                                          2010                             2009
Equipment financing contracts                                              $                         –       $                       33
Non-revolving term loan facility                                                               4,347                            5,300
                                                                                               4,347                            5,333
Accrued consideration on share-purchase acquisition                                                  –                             810
                                                                                               4,347                            6,143
Less unamortized debt-issue costs                                                               (124)                            (103)
Less current portion                                                                         (1,304)                          (5,222)
                                                                           $                   2,919         $                     818
Outstanding principal repayments are due as follows:

Years enDeD December 31                                                                          2010                             2009
2010                                                                       $                         –       $                  5,325
2011                                                                                           1,304                               818
2012                                                                                           1,304                                  –
2013                                                                                           1,304                                  –
2014                                                                                              435                                 –
                                                                                               4,347                            6,143
Less current portion and unamortized debt-issue costs                                        (1,428)                          (5,325)
                                                                           $                   2,919         $                     818

The accrued consideration on a share-purchase acquisition of $810 was derecognized at December 31, 2010. The derecognition has
been recorded as a separate line on the Consolidated Statements of Loss and Consolidated Statements of Cash Flows since all good-
will from the purchase was derecognized at December 31, 2007.

note 7 – convertiBle SuBordinated                                   assuming no conversion occurs. The discount to face value of the
                                                                    debt component presented on the consolidated balance sheet
Secured deBentureS                                                  will be accreted using the effective-interest method over the
On November 9, 2010 HSE announced the issue of up to $2,000         term of the Debentures.
in Subordinated Secured Convertible Debentures (the “Deben-         The equity component represents the difference between the
tures”). The Debentures mature on January 15, 2014 and bear         face value of the Debentures ($1,925) and the accounting value
interest at 10.0% per annum, payable quarterly in arrears on        assigned to the debt component of the Debentures at the date
April 15, July 15, October 15 and January 15 in each year begin-    of issue as described above. This equity component amount
ning April 15, 2011.                                                will remain constant over the term of the Debentures unless a
On December 21, 2010, HSE completed the first closing with to-      conversion occurs. If Debentures are converted into common
tal proceeds of $1,925. On January 18, 2011, HSE completed the      shares, a proportionate amount of both the debt and equity
final closing with proceeds of an additional $75.                   components will be transferred to share capital. Interest and ac-
                                                                    cretion expense on the Debentures is included within interest on
The Debentures consist of both debt and equity components,          long-term debt in the consolidated statements of loss.
which are presented separately in the Corporation’s consolidat-
ed balance sheet. The debt component is measured by calculat-       Related parties purchased $335 (17%) of the Debentures for the
ing the present value of both the quarterly interest obligations    year ended December 31, 2010.
and the principal payment due at maturity, using the rate of        Provision for conversion
interest that would have been applicable to a non-convertible
debt instrument of comparable term and risk at the date of is-      The Debentures are convertible at the holder’s option into common
sue. The residual portion of the Debentures’ proceeds is allocat-   shares of the Corporation at a conversion price of $0.50 per share
ed to equity. As a result, the debt component of the Debentures     (the “Conversion Price”) at any time prior to the close of business
is less than the principal amount that would be paid at maturity,   on the earlier of the business day prior to the maturity date and the



Notes to Financial Statements                                                    HSE Integrated Ltd. 2010 Annual Report            33
business day immediately preceding the date fixed for redemption      may be redeemed at the option of the Corporation in whole or
of the Debentures, subject to adjustments in certain events includ-   in part from time to time at a redemption price equal to their
ing dividend protection for the declaration of dividends outside of   principal amount plus accrued and unpaid interest thereon up
the normal course. Holders converting their Debentures will receive   to (but excluding) the redemption date. On and after January
accrued and unpaid interest thereon to the date of conversion. The    15, 2013 and prior to the maturity date, the Debentures may be
ability to convert the Debentures would cease immediately prior to    redeemed at the option of the Corporation in whole or in part
a “Change of Control” as defined in the offering document. In the     from time to time at a redemption price equal to 105% of their
event Debentures are converted prior to maturity, the difference      principal amount plus accrued and unpaid interest thereon up
between the carrying amount of such Debentures and their face         to (but excluding) the redemption date. If HSE wishes to redeem
value would be charged to interest expense.                           any Debentures, it must provide not more than 60 or fewer than
                                                                      40 days prior notice of redemption.
Provision for redemption
                                                                      Notwithstanding the foregoing, in the event of a Change of Con-
The Debentures will not be redeemable before January 15, 2012
                                                                      trol, the Debentures will be redeemable at the Corporation’s op-
except in the event of the satisfaction of certain conditions af-
                                                                      tion, in whole or in part, at a price equal to 125% of the principal
ter a Change of Control has occurred. On and after January 15,
                                                                      amount thereof plus accrued and unpaid interest for the first two
2012 and prior to January 15, 2013, provided that the current
                                                                      years; thereafter, this amount will decline by 1.5% per month.
market price (as calculated pursuant to the indenture) of the
Shares is at least 133% of the conversion price, the Debentures

note 8 – oBligationS under capital leaSe
Amounts due under capital lease arrangements are repayable in blended monthly payments of $8 (2009 – $30) and bear interest at
rates averaging 6.2% (2009 – 7.8%) per annum. On certain leases, the Corporation has options to acquire the leased assets at various
times throughout the term to 2013.

Years enDeD December 31                                                                           2010                             2009
2010                                                                         $                         –      $                     255
2011                                                                                               111                              112
2012                                                                                                 15                               15
2013                                                                                                   2                               3
                                                                             $                      128       $                     385
Less interest                                                                                        (8)                            (30)
                                                                             $                     120        $                     355
Less current portion                                                                             (104)                            (233)
                                                                             $                       16       $                     122




34      HSE Integrated Ltd. 2010 Annual Report                                                       Notes to Financial Statements
note 9 – income taxeS
Years enDeD December 31                                                                  2010                         2009
a) Provision for income taxes:
    Loss before income taxes                                             $             (1,710)      $            (8,643)
    Expected income tax recovery at 28.0% (2009 – 29.8%)                 $               (479)      $            (2,576)
    Non-deductible/non-taxable amounts                                                   (137)                         171
    United States start-up losses                                                            –                         378
    United States rate differences                                                        132                            3
    Other                                                                                 (69)                          15
    Income tax recovery                                                  $               (553)      $            (2,009)
b) Future income tax assets and liabilities are as follows:
    Canada
       Property and equipment                                            $              3,228       $                 3,598
       Intangible assets                                                                    14                         671
       Share-issue and financing costs                                                    (81)                         (99)
                                                                         $              3,161       $                 4,170
    United States
       Property and equipment                                            $                   1      $                 (103)
       Intangible assets                                                                 (604)                        (558)
                                                                         $               (603)      $                 (661)
       Less United States valuation allowance                                             603                          661
                                                                         $                   –      $                    –
Future income tax liability                                              $              3,161       $                 4,170

note 10 – Share capital
a) Authorized:
   Unlimited number of common shares without par value
   Unlimited number of preferred shares, issuable in series
b) Issued and outstanding:

                                                                               2010                                   2009
                                                            shares                                Shares
Common shares                                       (in thousands)           amount       (in thousands)          Amount
balance, January 1                                            37,576 $       60,040              37,576 $         60,040
Changes (net of share-issue costs)                                –                –                    –                –
balance, December 31                                          37,576 $       60,040              37,576 $         60,040




Notes to Financial Statements                                                HSE Integrated Ltd. 2010 Annual Report    35
note 11 – contriButed SurpluS
                                                                                                   2010                        2009
balance, January 1                                                            $                   4,755 $                     4,559
Stock compensation expense – employee options                                                        193                         196
balance, December 31                                                          $                   4,948 $                     4,755

note 12 – Stock-BaSed compenSation planS
Incentive stock-option plan
The weighted average fair value of options issued for the year ended December 31, 2010 was $0.37 (2009 – $0.36). The fair value of
each option granted was estimated on the date of grant using the Merton Black-Scholes option-pricing model with the following as-
sumptions:

                                                                                                   2010                          2009
Vesting period (years)                                                                                  3                              3
Risk-free interest rate                                                                           2.20%                         1.69%
Expected life (years)                                                                                   5                              5
Price volatility                                                                              100.00%                         92.78%
Pursuant to the stock-option plan, a maximum of 10% of the issued and outstanding common shares of the Corporation are reserved
from time to time for issue to eligible participants. The Directors determine option prices and vesting terms at the time of granting at
an exercise price no less than market on the grant date. The term of options granted does not exceed five years.
Information about outstanding stock options is as follows:

                                                                                  2010                                           2009
                                                                      Weighted average                              Weighted Average
                                                      Options             exercise Price               Options          Exercise Price
Outstanding, beginning of year                    2,375,333 $                      1.56          2,533,499 $                      1.88
Granted                                             890,000                        0.49             650,000                       0.36
Forfeited/expired                                 (986,168)                        0.76           (808,166)                       1.62
Outstanding, end of year                          2,279,165 $                      1.24          2,375,333 $                      1.56
Exercisable at end of year                        1,154,479 $                      1.96          1,360,315 $                      2.18
The following table summarizes information about stock options outstanding at December 31, 2010:

                                                                                  Weighted average
Options Outstanding                             exercise Prices ($)                 remaining Life                number exercisable
1,509,165                                            0.25 – 1.19                                 3.6                         385,812
342,000                                              1.20 – 2.14                                 1.1                         340,667
58,000                                               2.15 – 3.09                                 0.6                           58,000
370,000                                              3.10 – 4.04                                 0.3                         370,000
2,279,165                                                    1.24                                2.6                       1,154,479




36      HSE Integrated Ltd. 2010 Annual Report                                                      Notes to Financial Statements
Deferred share unit plan
For the 2010 and 2009 years, the majority of Directors’ retainers and meeting fees were paid with deferred share units (“DSUs”). The
units are revalued quarterly based on the Corporation’s stock price on the last day of the quarter and any change in value is included
as an increase or decrease in stock-based compensation expense and accrued liabilities. The expense recognized was $17 (2009 – $97).

                                                                                2010                                                  2009
Deferred Share Units                       Deferred share Units              amount            Deferred Share Units                Amount
balance, January 1                                      195,442 $                104                         27,000 $                     7
Granted                                                 204,424                    70                       168,442                      97
Redeemed                                              (142,838)                  (53)                                –                    –
balance, December 31                                    257,028 $                121                        195,442 $                  104

note 13 – related-party tranSactionS                                  Credit risk
During the year, the Corporation had the following transactions       Credit risk is the risk of financial loss to the Corporation if a cus-
with related parties, all of which are measured at exchange           tomer or counterparty to a financial instrument fails to meet its
amounts.                                                              contractual obligations, and arises principally from the Corpora-
                                                                      tion’s receivables from customers.
•   In 2010, the Corporation paid rent and property taxes of
    $275 (2009 – $275) for a regional office to a corporation re-     The Corporation’s accounts receivable are due from customers
    lated to a Director of the Corporation.                           in a variety of industries including a significant proportion with
                                                                      customers operating in the energy and manufacturing industries.
•   In 2010, the Corporation also paid rent and property taxes of
                                                                      The ability of customers within the energy industry to pay the
    $347 (2009 – $343) for a regional office to a corporation con-
                                                                      Corporation is partially affected by fluctuations in the price they
    trolled by a senior manager of the Corporation.
                                                                      receive for various hydrocarbon products. The maximum credit
•   In 2010, the Corporation purchased $265 (2009 – $0) for           exposure associated with trade accounts receivable is the carry-
    supplies and commissions to a corporation related to a Di-        ing value.
    rector of the Corporation pursuant to the terms of an agree-
                                                                      The Corporation follows a credit policy under which the Corpora-
    ment that pre-dates the directorship. Of this amount, $55 is
                                                                      tion reviews each new customer individually for credit worthi-
    included in accounts payable at year end.
                                                                      ness before the Corporation’s standard payment and delivery
•   Related parties purchased $335 (17%) of the Debentures for        terms and conditions are offered. The Corporation’s review
    the year ended December 31, 2010.                                 includes external ratings, where available, and trade references.
                                                                      Customers that fail to meet the Corporation’s credit worthiness
note 14 – Financial riSk management                                   criteria may transact with the Corporation only on a prepayment
                                                                      basis. On an ongoing basis, the Corporation also reviews the
Overview                                                              payment patterns of its existing customers and the customers’
The Corporation is exposed to the following risks from its finan-     continued credit worthiness.
cial instruments:                                                     Trade accounts receivable are recorded at the invoiced amount
•   Credit risk                                                       and do not bear interest. The allowance for doubtful accounts is
                                                                      the Corporation’s best estimate of the amount of probable credit
•   Liquidity risk                                                    losses in the Corporation’s existing accounts receivable. The Cor-
•   Market risk                                                       poration determines the allowance by reviewing individual ac-
                                                                      counts past due for collectability, historical write-off experience,
The Board of Directors has overall responsibility for the estab-      and overall account aging. The Corporation reviews its allowance
lishment and oversight of the Corporation’s risk-management           for doubtful accounts on an ongoing basis, but at least monthly.
framework. The Corporation’s Audit Committee oversees how
Management monitors compliance with the Corporation’s risk-
management practices and reviews the adequacy of the risk-
management framework in relation to the risks faced by the
Corporation. The Corporation’s risk-management practices are
established to identify and analyze the risks faced by the Corpo-
ration, to set appropriate risk limits and controls, and to monitor
risks and adherence to limits.




Notes to Financial Statements                                                       HSE Integrated Ltd. 2010 Annual Report             37
 Years enDeD December 31                                                                        2010                                 2009
Trade accounts receivable                                          $                         19,199 $                              17,416
Allowance for doubtful accounts                                                             (1,100)                               (1,260)
Total trade accounts receivable                                    $                         18,099 $                              16,156
The aging of trade receivables from the invoice date is as follows:

 Years enDeD December 31                                                                        2010                                 2009
                                                                             Gross        Allowance               Gross         Allowance
0 – 30 days from invoice date (current)                            $      10,962 $                  – $          7,938 $                  –
31 – 60 days from invoice date                                              4,764                   –            5,135                    3
61 – 120 days from invoice date                                             2,493                120             3,433                 347
More than 120 days from invoice date                                          980                980                910                910
Total                                                              $      19,199 $            1,100 $           17,416 $            1,260
The movement in the allowance for doubtful accounts receivables in respect of trade receivables during the year is as follows:

                                                                                                2010                                 2009
Balance, January 1                                                 $                          1,260 $                               1,405
Bad-debt provision                                                                               258                                   257
Write-offs net of recoveries                                                                   (418)                                 (402)
Balance, December 31                                               $                          1,100 $                               1,260

Liquidity risk                                                          ed amounts of foreign-currency denominated financial assets
                                                                        and liabilities to their Canadian-dollar equivalent at each bal-
Liquidity risk is the risk that the Corporation will not be able to     ance sheet date. For amounts held directly by the Corporation,
meet its financial obligations as they fall due. The Corporation        any related foreign exchange gains and/or losses are recognized
requires liquidity to meet financial obligations as they come due       in the consolidated statement of earnings. For amounts held by
and to fund its investing activities.                                   the Corporation’s self-sustaining foreign operations, the amount
The Corporation’s contractual financial liabilities include interest    is included in other comprehensive income. At December 31,
payments, trade and other payables, income taxes payable, a             2010, the extent of this exposure was not material.
revolving operating line of credit margined to accounts receiv-         HSE is exposed to interest rate risk on its prime-based revolv-
able, a non-revolving term debt facility, a convertible debenture       ing operating facility and its non-revolving reducing loan facility.
and capital leases for equipment and property and equipment             Based on amounts outstanding at December 31, 2010, a 1% in-
(notes 6 and 7).                                                        crease in the average prime interest rate for the year would cost
The Corporation’s approach to managing liquidity is to ensure, to       the Corporation $43 annually in additional interest expense.
the extent possible, that it will always have sufficient liquidity to
meet its liabilities when due, under both normal and distressed
conditions, without unacceptable losses or risking damage to
the Corporation’s reputation. The Corporation generally relies
on operating cash flow to provide liquidity to meet its financial
obligations. At December 31, 2010, the Corporation had cash on
hand of $1,479 and undrawn operating lines of credit totaling
$10,000 (note 6).
Market risk
Market risk is the risk that changes in market prices, such as for-
eign exchange rates, interest rates and equity prices will affect
the Corporation’s income.
HSE is exposed to currency risk on U.S.-dollar denominated fi-
nancial assets and liabilities. The Corporation adjusts the report-


38      HSE Integrated Ltd. 2010 Annual Report                                                          Notes to Financial Statements
note 15 – commitmentS
The Corporation leases certain shop and office space and vehicles and equipment under operating leases for periods ending between
2011 and 2015. Payments under these leases in each of the next five years are as follows:

                                                                         Rental Facilities    Operating Leases                  Total
2011                                                                 $            3,383 $                   2,146 $            5,529
2012                                                                              3,135                      952               4,087
2013                                                                              2,705                      146               2,851
2014                                                                              2,301                        8               2,309
2015                                                                              1,809                        –               1,809
Thereafter                                                                        3,671                        –               3,671

In May 2008, the Corporation sold three of its buildings as part of a sale/lease-back arrangement. The net proceeds on the sale were
$1,712, resulting in gains on sale of $683. The resulting gains were deferred and are being amortized over the 60-month lives of the
leases.

note 16 – Supplementary caSh Flow inFormation
Years enDeD December 31                                                                        2010                             2009
Changes in non-cash working capital from operations
Accounts receivable                                                  $                       (1,995) $                         9,563
    Inventory                                                                                    28                               22
    Prepaid expenses and other assets                                                          (41)                              164
    Accounts payable and accrued liabilities                                                  1,254                          (3,547)
    Income tax payable (recoverable)                                                             52                            (691)
Net change                                                           $                        (702) $                          5,511


note 17 – Segment inFormation
The Corporation operates in two main geographic areas: Canada        as well as public Corporation costs.
and the United States (U.S.). Each geographic area has a Presi-
dent responsible for the operations and strategy of his area’s       For the year ended December 31, 2010, one customer provided
business. Personnel working within a particular region report to     more than 10% of the Corporation’s revenue. Sales to this cus-
the President, and the President reports to the Chief Executive      tomer amounted to $8,500 during the year. For the year ended
Officer.                                                             December 31, 2009, one customer provided more than 10% of
                                                                     the Corporation’s revenue. Sales to this customer amounted to
Within each geographic segment, the Corporation uses common          $8.900 during the year related to ongoing long-term industrial
resources to provide services to a variety of customer industries.   projects located entirely in Canada.
The Corporation groups these customer industries into two
categories. “Oilfield” services are provided to customers in the     The U.S. operations for Oilfield safety services are conducted
conventional upstream, or “wellhead”, sector of the oil and gas      through CRS Technologies Inc. and Boots & Coots HSE Services
industry. “Industrial” services are provided to customers in a       LLC (“BCHSE”). CRS Technologies Inc. is wholly owned by the
variety of other industries including: non-conventional upstream     Corporation. The Corporation owns 100% of the shares of HSE
oil development and production (including oilsands extraction);      Integrated Inc. (“INC”), a Delaware corporation that in turn owns
oil and gas processing; petrochemicals; pulp and paper; utilities;   a 90% interest in BCHSE, a Delaware Limited Liability Corpora-
power generation; and manufacturing. It also includes worker         tion. Boots & Coots Services, a division of Halliburton, owns the
safety training and safety management services.                      remaining 10% interest.

Corporate division expenses consist of salary expenses, stock        A non-controlling interest has not been recorded as BCHSE has
compensation, and office costs related to corporate employees,       incurred losses.




Notes to Financial Statements                                                     HSE Integrated Ltd. 2010 Annual Report         39
                                                                                                                   December 31, 2010
                                                                 canada                    U.s.            corporate                   Total
Revenue
    Oilfield                                         $           33,247 $                1,507 $                    – $            34,754
    Industrial                                                   44,464                  2,810                      –              47,274
Total revenue                                        $           77,711 $                4,317 $                    – $            82,028
Revenue minus operating and SG&A
expenses                                             $           10,403 $                1,284 $             (7,936) $               3,751
Interest expense                                                      –                       –                  487                    487
Amortization of property and equipment and
intangibles                                                       5,562                    118                      –                5,680
Property and equipment                                           23,788                  1,263                      –              25,051
Intangibles                                                       2,732                       –                     –                2,732
Capital expenditures    (1)
                                                                  1,576                    743                      –                2,319
(1) Property and equipment for Corporate is included in Canada

                                                                                                                   DECEMBER 31, 2009
                                                                 Canada                     U.S.           Corporate                   Total
Revenue
    Oilfield                                         $           26,850 $                  453 $                    – $             27,303
    Industrial                                                   53,043                  1,255                      –               54,298
Total revenue                                        $           79,893 $                1,708 $                    – $             81,601
Revenue minus operating and SG&A
expenses                                             $            9,747 $                (676) $             (8,226) $                  845
Interest expense                                                      –                       –                  544                    544
Amortization of property and equipment and
intangibles                                                       6,608                      91                     –                6,699
Property and equipment                                           27,534                  1,061                      –               28,595
Intangibles                                                       3,260                       –                     –                3,260
Capital expenditures (1)                                          1,347                    297                      –                1,644
(1) Property and equipment for Corporate is included in Canada

note 18 – contingencieS                                                   note 19 – SuBSeQuent event
In the ordinary course of business activities, the Corporation            On January 24, 2011, the Corporation completed the acquisition
may be contingently liable for litigation and claims with custom-         of Taylored Safety Services Inc. (“Taylored”). Taylored provides
ers, suppliers, former employees, and third parties. Manage-              safety consulting services and industrial health, and safety train-
ment believes that adequate provisions have been recorded in              ing to industry in Atlantic Canada. At closing, HSE acquired 100%
the accounts where applicable. Although it may not be possible            of the Taylored shares through the issue of 1,137,532 common
to estimate accurately the extent of potential costs and losses, if       shares of HSE valued at $0.54 per share on January 24, 2011.
any, Management believes that the ultimate resolution of such             The results of operations will be included in the accounts from
contingencies would not have a material effect on the financial           date of acquisition.
position of the Corporation.




40       HSE Integrated Ltd. 2010 Annual Report                                                         Notes to Financial Statements
Corporate inForMation
Corporate HeaD oFFiCe, sales stoCk exCHanGe listinG                  leGal Counsel
oFFiCe, inVestor inForMation Toronto Stock Exchange                  Blake, Cassels and Graydon LLP
#1000, 630 – 6th Avenue SW       Symbol: HSL                         Calgary, Alberta
Calgary, Alberta T2P 0S8
Phone: 403-266-1833
                                 auDitors                            transFer aGent
Fax: 403-266-1834                KMPG LLP Chartered Accountants      anD reGistrar
Email Address:                   Calgary, Alberta                    Canadian Stock Transfer
information@hseintegrated.com
                                                                     Company, Inc.
Website: www.hseintegrated.com   Bankers                             Calgary, Alberta
                                 ATB Financial
                                 Calgary, Alberta



oFFiCers anD DireCtors
oFFiCers                         BoarD oF DireCtors
David Yager                      Kenneth Bagan (3)                   Douglas Robinson (1)
Chief Executive Officer          Chairman, Corporate                 Lead Director
                                 Governance Committee                Calgary, Alberta
Thomas Hickey
                                 Calgary, Alberta
President                                                            David Yager (4)
                                 James Brewster     (2, 4)
                                                                     Chairman of the Board
Lori McLeod-Hill                                                     Calgary, Alberta
                                 Bowden, Alberta
Chief Financial Officer
                                 Martin Hall (2)
Glenn Roberts
                                 Chairman, Audit Committee           (1) Member of Audit Committee
Chief Operating Officer
                                 Canmore, Alberta                    (2) Member of Governance and
Ian Hamilton                                                             Nominating Committee
                                 James Hill (3)
Vice President,                                                      (3) Member of Compensation
                                 Chairman, Health and
Human Resources                                                          Committee
                                 Safety Committee                    (4) Member of Health and Safety
                                 Calgary, Alberta                        Committee

                                 Bruce Levitt (1)
                                 Chairman, Compensation
                                 Committee
                                 Toronto, Ontario



                                                             HSE Integrated Ltd. 2010 Annual Report    41
#1000, 630 – 6th Avenue SW
 Calgary, Alberta T2P 0S8
   Phone: 403-266-1833
    Fax: 403-266-1834
  www.hseintegrated.com

								
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