Circa Enterprises Inc.

Transcription

1 First Quarter Report for the period ended March 31, 2009 MANAGEMENT S DISCUSSION AND ANALYSIS The following Management s Discussion and Analysis ( MD&A ) of the financial condition and results of operations of ( Circa or the Company ) has been prepared taking into consideration information available to May 6, 2009 and should be read in conjunction with the interim financial statements of the Corporation as at and for the three-month period ended March 31, 2009 (including the notes thereto). The interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and are reported in Canadian dollars. Additional information, including the Company s Annual Information Form, is available on SEDAR at FORWARD-LOOKING STATEMENTS Certain information set out in this MD&A constitutes forward looking information, including information respecting the sources of funding to satisfy operating requirements and the quantum of estimated 2009 capital expenditures (as set out under the heading Consolidated Balance Sheets ). Readers should review the cautionary statement respecting forward-looking information that appears below. Forward-looking statements are often, but not always, identified by the use of words such as seek, anticipate, hope, plan, continue, estimate, expect, may, will, intend, could, might, should, believe and similar expressions. Forward-looking statements are based upon the opinions, expectations and estimates of management as at the date the statements are made and, in some cases, information received from or disseminated by third parties, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or outcomes to differ materially from those anticipated or implied by such forward-looking statements. These factors include such things as changes to existing business plans and budgets developed by Circa, intensification of competition within the product markets in which members of the Circa Group are active, continuation or intensification of the current economic slowdown (which has negatively affected both commercial or residential construction), the emergence of new technologies, the availability of internally generated cash flow or external financing to fund future operating and other needs, significant variations in the exchange rate between the United States dollar and the Canadian dollar, changes in laws or regulations (domestic or foreign) and changes in building codes in Canada and the United States, the exposure of members of the Circa Group to litigation for product liability and other claims, and the other risk factors noted below under the heading Risks and Uncertainties. Accordingly, readers should not place undue reliance upon forward-looking information contained herein. Forward-looking information respecting the sources of funding to satisfy operating requirements and the quantum of estimated 2009 capital expenditures is based upon the Company s consolidated working capital position as at March 31, 2009 and management s estimates of cash flows for various periods in Although Circa believes that the assumptions underlying such forward looking statements are reasonable, and information received or disseminated by third parties is reliable, it can give no assurance that such expectations will prove to have been correct. Circa does not assume responsibility for the accuracy and completeness of the forward-looking statements and such forward-looking statements should not be taken as guarantees of future outcomes. Subject to applicable securities laws, the Company does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. The forward-looking statements of the Company contained in this MD&A are expressly qualified, in their entirety, by this cautionary statement. GENERAL AND OVERVIEW Circa s operations consist of two distinct business lines. The first being the provision of surge protection and related products, primarily to the United States market (through Circa Telecom (USA) Inc., a wholly-owned subsidiary of the Company) and the second business line being metal fabrication (through Circa Metals Inc., a wholly-owned subsidiary of the Company ( Circa Metals )). The surge protection business consists of the design, manufacture, marketing and sale of surge protection products, which provide primary protection to telephone systems and data transmission against voltage surges. Demand for these products is driven primarily by the installation of telecommunication infrastructure, which in turn is strongly influenced by commercial construction activity. Circa Metals provides custom metal fabrication services; as well, Circa Metals supplies fabricated enclosures, pole line hardware and other products to the Canadian electrical industry via its Hydel Enterprises ( Hydel ) operation. In the first quarter of 2009, Circa s loss position was the result of weak sales from the telecom business and low margins on the Circa Metals business. Sales in the U.S. were off considerably as compared to first-quarter sales in 2008, principally as a result of the downturn in the economy. The first quarter loss was $0.6 million or $0.07 per share, compared to 2008 first quarter income of $0.1 million or $0.01 per share.

2 Management s Discussion and Analysis 2 First Quarter Selected Financial Information ($000 s except per share figures) Sales 6,019 8,675 7,764 Net (Loss) Earnings (647) 75 (190) Basic and Diluted (Loss) Earnings Per Share (0.07) 0.01 (0.02) Total Assets 14,912 16,798 17,201 Long-Term Liabilities Sales volumes in the telecom business were considerably lower as a result of the economic slowdown in North America, as overall demand for the Company s products decreased and customers reduced their inventories. In addition, the Company recorded a non-cash write-down in respect of Circa Metals inventory, following a thorough assessment by management of the recoverability of slower moving inventory. This write-down of $0.2 million is the result of the recent application of more stringent criteria and a more conservative approach for identifying and classifying obsolete inventory. Management continues to review Circa Metals inventory valuation on an ongoing basis. During the quarter, the Company assessed the impact of the new CICA Handbook Section 3064 Goodwill and Intangible Assets, which provides guidance on the accounting for the deferred charges on the Company s balance sheet. The new accounting standard specifies the recognition, measurement, presentation and disclosure of intangible assets. The adoption of Section 3064 has not materially affected the Company s financial statements, however it did result in the Company writing off $9,036 of deferred development costs during the quarter. Sales and Net Earnings ($000 s except per share figures) Q4 Q3 Q2 Q4 Q3 Q2 Sales 6,019 8,193 8,744 8,805 8,675 7,095 8,433 8,194 7,764 Net (Loss) Earnings before after tax impairment charge and foreign currency translation gain/loss (688) (425) (205) (263) 40 (340) (183) (115) (208) After tax impairment charge (1,770) (292) Foreign currency translation gain (loss) (115) (183) (218) 18 Net (Loss) Earnings (647) (1,648) (186) (157) 75 (747) (366) (333) (190) Basic and Diluted (Loss) Earnings Per Share (0.07) (0.17) (0.02) (0.02) 0.01 (0.08) (0.04) (0.04) (0.02) CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS AND RETAINED EARNINGS Sales Circa s sales, primarily in its telecom and Hydel businesses, have historically tended to peak in the summer months with the commercial construction cycle, while supply agreements and custom fabrication sales can occur throughout the year, as evidenced by the trend of higher sales in the second and third quarters of 2008 and Sales for the quarter ended March 31, 2009 decreased significantly from $8.7 million in 2008 to $6.0 million in The decrease was mainly in the telecom business and primarily due to a drop in sales of surge protection under a third party agreement. These sales decreased from $2.4 million in the first quarter of 2008 to $0.4 million in the first quarter of Sales generated by Circa Metals decreased to $3.6 million in the quarter compared to $3.9 million for Sales in the Circa Metals / Hydel business were slightly lower than the prior year, however were in line with management s expectations due to the economic slowdown in Canada.

3 Management s Discussion and Analysis 3 The geographic sales market ratio between Canada and the United States reflects 63% of sales to Canadian customers as compared to 49% in the first quarter of The shift in geographic sales from the prior year is mainly the result of the significant decline in the telecom division sales experienced in the first quarter of As the proportion of telecom sales is much higher in the U.S. (as compared to Canada), the decrease in the division s sales had a significant effect on the ratio. First Quarter Sales by Geographic Market ($000 s) 2009 % 2008 % 2007 % United States 2, , , Canada 3, , , ,019 8,675 7,764 Gross Profit Circa s 2009 first quarter gross profit was lower than the first quarter of 2008 as a result of lower sales of higher margin telecom products as well as higher overhead costs due to a significant reduction in manufacturing production over the prior year in the Circa Metals division. As the volume of products manufactured by Circa Metals at its Ontario facility decreased due to the decision to purchase high volume, low margin product from offshore suppliers, the amount of overhead relative to production has increased considerably. Management has taken steps to reduce labour costs and increase pricing in an effort to reverse this trend going forward. In addition, management has identified additional opportunities for overhead reductions with the goal of improving margins. Expenses Operating expenses for the first quarter of 2009 were generally consistent with General and administrative, marketing and selling, and engineering expenses totaled $1.5 million for the quarter ended March 31, 2009, $0.1 million lower than the first quarter of During the quarter and early in the second quarter of 2009, the Company made significant staff reductions in order to cut costs and streamline operations. The costs incurred as a result of these measures will be recognized and reported for accounting purposes in the appropriate time periods. The 2009 reported foreign exchange gain of $0.04 million resulted from the continued upward trend in the Canadian/U.S. dollar exchange rate during the first part of As at March 31, 2009, the Canadian/U.S. dollar exchange rate was $1.26, versus $1.22 at December 31, This translation has resulted in a non-taxable gain, thereby reducing the effective income tax expense in the period. Net Loss Circa reported a net loss for the quarter ended March 31, 2009 of $0.6 million, compared to a net income of $0.1 million in the first quarter of The loss includes an inventory write-down of $0.2 million, as management evaluated the provision for slow moving inventory and decided to increase the allowance based on more strict criteria for potentially obsolete inventory. Outstanding Share Information as at May 6, 2009 Authorized Unlimited number of voting common shares Unlimited number of first preferred shares, issuable in series Unlimited number of second preferred shares, issuable in series Issued and Outstanding 9,537,083 Common shares

4 Management s Discussion and Analysis 4 Under a share acquisition plan approved by the shareholders on June 11, 2007, each director of the Company may purchase common shares of the Company utilizing the proceeds of the annual retainer paid to the director. The common shares acquired by a director under this plan may be issued from the treasury of the Company or may be purchased in the market by the plan s administrator. The maximum number of common shares issuable under the plan is 100,000. During the quarter, nil common shares (2008 8,000) were issued under the share acquisition plan for total consideration of $nil ( $5,920), representing the weighted average trading price of the common shares in accordance with the plan. Under the stock option plan approved by the shareholders on June 11, 2007, the Company may grant options to its officers, directors, employees and consultants. Options granted under the plan have a maximum term of ten years, with vesting terms and conditions determined by the board of directors when granted. The exercise price of each option shall be no less than the market price of the Company s shares at the grant date of the options. At March 31, 2009, there were 950,375 common shares reserved for this purpose. At March 31, 2009, 5,000 options were exercisable (2007 nil) and none of the stock options were exercised during the quarter. CONSOLIDATED BALANCE SHEETS At March 31, 2009, the Company s working capital, defined as current assets less current liabilities, stood at $3.7 million. The reduction in net working capital from the December 31, 2008 balance of $4.6 million was primarily the result of a reduction in accounts receivable and an increase in the accounts payable of the Company. The working capital ratio of 1.5, calculated as current assets divided by current liabilities, demonstrates Circa s continuing financial stability, even with a sub par earnings performance for Circa s bank indebtedness at March 31, 2009 was $3.8 million, an increase in the operating line of credit of $0.1 million from the balance outstanding as of December 31, Included in bank indebtedness is $1.0 million, which is attributable to the repayment, in 2007, of the outstanding current balance owing on the Company s term loan facility, which enabled Circa to consolidate its current borrowings under one facility and eliminated the requirement of fixed repayment terms. The increase in bank indebtedness is the result of the first quarter operating losses and is partially offset by a decrease in accounts receivable and an increase in accounts payable. Circa maintains access to capital through its line of credit facility, which is available to meet short term operating and capital requirements. The Company has relied upon this line to fund its operating losses and meet its obligations as they become due. Circa is undertaking a number of initiatives that are intended to increase the cash from operations and boost profitability, such as significant cost reduction measures and the introduction of new product lines. At March 31, 2009, the Company had entered into contractual obligations as detailed below. Contractual Obligations ($000 s) Payments Due by Period Less than 1 year 1 3 years 4 5 years After 5 years Total Operating Leases 1,444 3,858 1,973 1,061 8,336 During the first quarter of 2009, the Company incurred $25,000 in capital expenditures ( $0.1 million) and had no outstanding commitments to purchase property, plant and equipment at March 31, Total 2009 capital expenditures are estimated to be $0.35 million. CONSOLIDATED STATEMENTS OF CASH FLOWS The net outflow from operating activities for 2009 was $0.1 million. This outflow was the result of operating losses, which were offset by an inflow of cash from the change in the working capital of the Company. The operating cash flow decrease, as compared to the first quarter of 2008, was the result of the decrease in sales in the telecom business and the decrease in margins in the Circa Metals business.

5 Management s Discussion and Analysis 5 The cash generated by the change in working capital was mainly due to the accounts receivable balance decreasing by $0.7 million as the Company collected on its fourth quarter sales. The Company maintains access to a credit facility of up to $5.0 million, which is subject to borrowing base requirements and reporting and general covenants that may act to restrict the amount the Company can borrow at any given time. At March 31, 2009, the amount available under this facility was approximately $5.0 million, of which $3.8 million was drawn. There were no material financing activities undertaken in the first quarter of 2009 or first quarter The net outflow of funds for investing activities was the result of the purchase of property, plant and equipment along with an addition to deferred charges for new product development. The cash outflow from these activities was $0.1 million in the quarter ended March 31, OFF-BALANCE SHEET ARRANGEMENTS The Company has no outstanding off-balance sheet arrangements. RELATED PARTY TRANSACTIONS The Company had no material related party transactions during the first quarter of ACCOUNTING CHANGES Effective January 1, 2008, the Company adopted the following new standards issued by the Canadian Institute of Chartered Accountants. Financial Instruments and Capital Disclosures The issuance of Section 3862 Financial Instruments Disclosures and Section 3863 Financial Instruments Presentation replace Section 3861 Financial Instruments Disclosure and Presentation, and revise disclosures related to financial instruments, including hedging instruments, and carry forward unchanged presentation requirements. Section 1535 Capital Disclosures requires the Company to disclose its objectives, policies, and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. These standards apply to interim and annual financial statements related to fiscal years beginning on or after October 1, The adoption of these new accounting standards did not impact the amounts reported in the Company s financial statements, however it did result in expanded note disclosure. Inventory Section 3031 Inventories provides guidance on the determination of cost, including the allocation of overheads and other costs of inventory. The new accounting standard specifies that inventories are to be valued at the lower of cost and net realizable value. The standard requires the reversal of previously recorded write-downs to realizable value when there is clear evidence that net realizable value has increased. This standard applies to interim and annual financial statements for fiscal years beginning on or after January 1, The adoption of Section 3031 has not materially impacted the Company s financial statements and as a result, no adjustment to opening retained earnings was recorded. Recent accounting pronouncements that have been issued but are not yet effective, and have a potential implication for the Company, are as follows. Effective January 1, 2009, the Company adopted the following new standards issued by the Canadian Institute of Chartered Accountants.

6 Management s Discussion and Analysis 6 Financial Statement Concepts CICA Handbook Section 1000, Financial Statement Concepts has been amended to focus on the capitalization of costs that truly meet the definition of an asset and de-emphasizes the matching principle. The revised requirements are effective for annual and interim financial statements relating to fiscal years beginning on or after October 1, The Company is currently evaluating the impact of the adoption of this change on the disclosure within its financial statements. Goodwill and Intangible Assets CICA Handbook Section 3064 incorporates guidance to clarify the recognition of intangible assets and address and recognition and measurement of internally developed intangible assets. The new standards are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, The Company is has assessed the impact of the new standards and concluded that there is no material impact on the financial statements. However, the Company wrote off $9,036 during the quarter, which was included in amortization expense. No adjustment to opening retained earnings has been made. International Financial Reporting Standards On February 13, 2008, the Canadian Accounting Standards Board confirmed that publicly accountable profit-oriented enterprises will be required to use International Financial Reporting Standards ( IFRS ) in 2011 replacing Canada s current generally accepted accounting principles. The transition date for Circa is interim and annual financial statements relating to fiscal years beginning on or after January 1, As a result, Circa will be required to restate 2010 financial statements for comparative purposes. While the Company has begun assessing the adoption of IFRS for 2011, the financial reporting effect of the transition to IFRS cannot be reasonably estimated at this time. CRITICAL ACCOUNTING ESTIMATES The Company s significant accounting policies are described in Note 2 to the consolidated financial statements. The preparation of the Company s financial statements requires the use of estimates and judgments that affect the reported revenues, assets, liabilities, and shareholders equity. Those estimates and judgments are based on historical experience and various assumptions, which management believes to be reasonable in the circumstances. Future events cannot be anticipated with certainty and as such, these estimates and assumptions may change as additional evidence is gathered, new circumstances arise and as the Company s operating environment changes. The accounting estimates believed to require the most difficult, subjective or complex judgments and which are material to the Company s financial reporting results are as follows. Impairment of Long-Lived Assets Long-lived assets, which include property, plant and equipment, deferred charges, intangible assets and goodwill comprise a significant portion of the Corporation s assets. The carrying value of these assets is annually reviewed for impairment or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. This requires management to forecast future cash flows to be derived from the utilization of these assets based upon assumptions about future business conditions or technological developments. Significant, unanticipated changes in circumstances could make these assumptions invalid and require changes to the carrying value of the Company s long-lived assets. Inventory Obsolescence and Valuation The Company reviews the nature and quantities of inventory on hand and makes provisions for obsolete inventory items based on historical usage patterns, known changes to equipment or processes, and customer demand for specific products. In addition, the Company also reviews the valuation of inventory on hand for significant fluctuation in raw material prices along with changes in manufacturing processes. Significant or unanticipated changes in business conditions could affect the magnitude and timing of the provisions for inventory obsolescence and valuation adjustments.

7 Management s Discussion and Analysis 7 Income Taxes The Company follows the asset and liability method of accounting for income taxes. Under this method, the Company records future income taxes based on differences between the accounting and income tax basis of an asset or liability. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in earnings in the period that the change occurs. A valuation allowance is established to reduce future income tax assets if, on the basis of available evidence, it is more likely than not that all or a portion of any future tax asset will not be realized. Changes in circumstances and assumptions may require the valuation allowance to change. DISCLOSURE CONTROLS Disclosure controls and procedures are intended to provide reasonable assurance that information required to be disclosed in the Company s annual and interim filings and other reports filed or submitted by it under applicable securities legislation in Canada is recorded, processed, summarized and reported within the time periods set out in such securities legislation. Among other things, the Company s disclosure controls and procedures include processes designed to provide reasonable assurance that information required to be disclosed by it in annual and interim filings and other reports is communicated to management, including the Chief Executive Officer ( CEO ) and the Chief Financial Officer ( CFO ), so as to allow for timely decisions regarding required disclosure under applicable securities legislation in Canada. INTERNAL CONTROLS OVER FINANCIAL REPORTING The processes comprising the Company s internal control over financial reporting are intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Those processes include policies and procedures respecting the maintenance of records, the recording of transactions and the prevention or timely detection of any unauthorized acquisitions, uses or dispositions of assets of the Company that could have a material effect on its annual or interim financial statements. There was no change in the Company s internal control over financial reporting during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company s internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Senior management assesses the Company s internal control policies and procedures on an ongoing basis, with a view to improving those policies and procedures. RISKS AND UNCERTAINTIES Ongoing business risks and uncertainties that may have an effect on the Company s business include the following. Foreign Currency Exchange Circa is exposed to foreign currency risk due to its export of Canadian manufactured goods. The timing of foreign exchange rate fluctuations can have a significant effect on Circa s operating results, the effect and magnitude of which depends on the product mix of sales and materials purchased. During the quarter ended March 31, 2009, the Canadian/U.S. dollar exchange rate fluctuated between $0.77 and $0.85 as compared to an average of $1.00 in Movement in the U.S. dollar can affect sales reported in Canadian dollars and resulting gross profits. As well, Circa must translate the accounts of its wholly-owned subsidiary, Circa USA, to Canadian dollars for financial reporting purposes. The significant non-monetary foreign currency translation gain recorded in 2008 illustrates the exposure to this particular risk. Economic Climate Circa s surge protection business in the U.S. is substantially driven by economic conditions and any downturn in the U.S. economy has historically represented a business risk for Circa. The current weakness in the U.S. economy is an example of a situation having a

8 Management s Discussion and Analysis 8 significant negative effect upon Circa s marketing and sales efforts. Continued weakness in the North American economy in general, the U.S. residential and commercial construction sectors in particular and the impact of changing lending rates and other interest rates affecting construction activity are expected to have a adverse effect on sales of surge protection equipment to U.S. markets and that effect may be material. Additional Capital Requirements Circa may be required to raise additional capital in the future to fund operations or acquisitions. The availability of future borrowings and access to capital markets depends on prevailing market conditions and the acceptability of financing terms offered to Circa. There can be no assurance that future borrowings or equity financing will be available to Circa, or available on acceptable terms, in amounts sufficient to fund its needs. Customer Concentration and Customer Credit The wide range of customers that purchase products from Circa USA and Circa Metals has helped to mitigate the Company s exposure to any one customer or small group of customers. Nonetheless, the top five customers of Circa accounted for 47% of consolidated sales in the first quarter of Economic weakness may adversely effect the financial condition of Circa s customers, which could create uncertainty with respect to Circa s ability to collect receivables. Raw Materials The price of raw materials, in particular plastic, steel and copper represent a significant portion of Circa s manufacturing costs. There is considerable volatility in the price of these products, which is outside Circa s control. Circa has experienced significant increases in the costs of such materials in recent years. Significant price volatility or raw materials disruptions or shortages would be detrimental to Circa s operations. Product Market Sales of surge protection equipment and related devices continue to be a significant contributor to overall consolidated sales and net earnings. Electrical codes in Canada and the United States require the use of the types of products that Circa supplies, while other forms of communication transmission, such as voice over internet, wireless and fiber optic cable, may not require the installation of surge protection equipment. Changes in building codes or the widespread adoption of forms of communication transmission that do not entail the use of surge protection equipment could materially adversely affect the volumes of surge protection products sold by members of the Circa Group and could materially adversely affect the financial condition, liquidity and results of operations of Circa Enterprises. Although many applications continue to rely upon copper-based solutions, a significant shift to communication transmission systems that do not use copper infrastructure could have a material adverse effect on the business of Circa. Circa s Canadian operations are primarily focused on providing custom metal fabrication services and Hydel branded products to the electrical utility industry in Canada. These varied product lines have allowed Circa to diversify and reduce its exposure to any one geographic location or market. The custom fabrication business focuses on customer service and concentrates on operational efficiency whereas the Hydel business provides a variety of products, most of which are required to meet building and electrical codes in Canada. Reliance on Telecommunications Industry Circa s core surge protection business is dependent on the North American telecommunications industry and sales are influenced by economic and other factors affecting that industry. In particular, demand for Circa s telecom products is driven primarily by the installation of telecommunications infrastructure, which in turn is strongly influenced by commercial construction activity. Accordingly, the strength of the North American economy, job growth, the level of consumer confidence, availability of consumer credit, fluctuations in interest rates, demographics and migration of populations all have an indirect effect on Circa s operations. The current economic

9 Management s Discussion and Analysis 9 slowdown has had, and the continuation or intensification of that slowdown will have, an adverse effect on commercial building activity, particularly in the United States. Any sustained slowdown in commercial building activity will adversely affect Circa s business, financial condition, liquidity and results of operations and that effect may be material. Competition The market for Circa s products is highly competitive, and some of Circa s competitors have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, engineering, product development and marketing resources than Circa. These resources may allow them to respond more quickly than Circa to new or emerging technologies and to changes in customer requirements. It also allows them to devote greater resources to the development, promotion and sale of their products. An inability to compete with other suppliers in the markets in which members of the Circa Group are active will adversely affect Circa s business, financial condition, liquidity and results of operations and that effect may be material. Reliance on Manufacturing Facilities Members of the Circa Group manufacture a significant percentage of the products sold by them at facilities owned by Circa Enterprises and Circa Metals. Management expects that members of the Circa Group will continue to expand their manufacturing capabilities by adding production lines (through the purchase of new equipment from manufacturers or third-party acquisition transactions), which could result in disruptions to existing manufacturing operations. The manufacturing operations of Circa Group members use certain equipment, which, if damaged or otherwise rendered inoperable or unavailable, could result in a material disruption in those operations. Any interruption of operations at a manufacturing facility could have a material adverse effect on Circa s consolidated financial condition, liquidity and results of operations. Further risks are disclosed in the Company s Annual Information Form which is available on SEDAR at OUTLOOK The Canadian manufacturing sector faces significant challenges, primarily as a result of the weak economy. During the first quarter of 2009 the Company undertook cost cutting programs and made significant staffing reductions in an effort to improve operating results. Those initiatives have continued into the second quarter of Circa is making efforts to leverage its existing capabilities and distribution networks into generating further sales and new opportunities. The Company is pursuing a new product line in the Hydel business, which is complementary to its existing capabilities and is trying to retain profitable current business. The Company is optimistic that the changes made will have favourable results and establish a platform for a return to profitability.

10 10 CONSOLIDATED BALANCE SHEETS Unaudited March 31, December 31, (Thousands of Canadian dollars) $ $ ASSETS Current Cash Accounts receivable 3,218 3,874 Income taxes recoverable Inventory (Note 4) 7,584 7,413 Prepaid expenses ,415 11,998 Property, plant and equipment (Note 5) 1,473 1,545 Deferred charges (Note 6) Intangible assets (Note 7) 9 5 Future income taxes (Note 9) 1,661 1,402 14,912 15,284 LIABILITIES Current Bank indebtedness (Note 8) 3,780 3,665 Accounts payable and accrued liabilities 3,919 3,745 7,699 7,410 Future income taxes (Note 9) ,835 7,560 SHAREHOLDERS EQUITY Share capital (Note 10) 2,699 2,699 Contributed surplus 2 2 Retained earnings 4,376 5,023 7,077 7,724 14,912 15,284 Commitments (Note 12) See accompanying notes to the consolidated financial statements Notice of No Auditor Review of Interim Consolidated Financial Statements In accordance with National Instrument released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited interim consolidated financial statements as at and for the three month periods ended March 31, 2009 and March 31, 2008.

11 11 CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS AND RETAINED EARNINGS Unaudited Three months ended Three months ended March 31, 2009 March 31, 2008 (Thousands of Canadian dollars, except per share amounts) $ $ SALES 6,019 8,675 COST OF SALES Direct costs 5,258 6,854 Depreciation and amortization ,688 General and administrative Marketing and selling Engineering Depreciation and amortization Interest current Foreign currency translation gain (41) (35) 1,596 1,651 LOSS BEFORE INCOME TAXES (880) 37 PROVISION FOR INCOME TAXES (Note 9) Current Future (273) (101) (233) (38) NET (LOSS) EARNINGS AND COMPREHENSIVE (LOSS) EARNINGS (647) 75 RETAINED EARNINGS, BEGINNING OF PERIOD 5,023 6,939 RETAINED EARNINGS, END OF PERIOD 4,376 7,014 (LOSS) EARNINGS PER SHARE (Note 11) Basic and diluted (0.07) 0.01 See accompanying notes to the consolidated financial statements

12 12 CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Three months ended Three months ended March 31, 2009 March 31, 2008 (Thousands of Canadian dollars) $ $ CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net (loss) (647) 75 Adjustments for: Depreciation and amortization Loss (gain) on disposal of property, plant and equipment (2) 2 Future income taxes (273) (101) (816) 196 Changes in non-cash working capital (Note 15) 720 (832) (96) (636) FINANCING Proceeds from issuance of share capital (Note 10) 6 Increase in bank indebtedness Repayment of long-term debt INVESTING Purchase of property, plant and equipment (Note 5) (25) (99) Proceeds from sale of property, plant and equipment 6 Additions to intangibles (5) Additions to deferred charges (32) (45) Changes in non-cash working capital (Note 15) (22) 4 (78) (140) NET INCREASE (DECREASE) IN CASH (59) 39 CASH, BEGINNING OF PERIOD CASH, END OF PERIOD See accompanying notes to the consolidated financial statements Supplementary cash flow information (Note 15)

13 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts expressed in thousands of Canadian dollars, except per share amounts) Periods ended March 31, 2009 and DESCRIPTION OF BUSINESS (the Company or Circa ) was incorporated under the Business Corporations Act of the province of Alberta. The Company s operations consist of two distinct business lines. The first being the provision of surge protection and related products, primarily to the United States market, the second business line being metal fabrication through its Ontario based subsidiary, Circa Metals Inc. ( Circa Metals ). The surge protection business consists of the design, manufacturing, marketing and sale of surge protection products which provide primary protection to telephone systems and data transmission against voltage surges. Circa Metals provides custom metal fabrication services as well as fabricated enclosures, pole line hardware and other products to the Canadian electrical industry. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries, Circa Telecom (U.S.A.), Inc. ( Circa U.S.A. ) and Circa Metals. Certain comparative figures have been reclassified to conform to the current year presentation. All intercompany transactions are eliminated on consolidation. Measurement uncertainty The valuation of accounts receivable, inventory, property, plant and equipment, intangible assets, goodwill, and deferred charges is based upon management s best estimate of the future recoverability of these assets. The amounts recorded for amortization of the property, plant and equipment, intangible assets, and deferred charges are based upon management s best estimate of the remaining useful life, period of future benefit of the related assets, future profitability and salvage value. The amounts recorded for future income taxes are based on estimates of the Company s ability to utilize undeducted tax pools and loss carry-forwards. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of future changes in such estimates could be material. Foreign currency translation The Company s foreign subsidiary, Circa U.S.A., is considered financially and operationally dependent on the parent Company and, as such, is accounted for as an integrated operation whereby its accounts are translated into Canadian dollars using the temporal method. All monetary assets and liabilities denominated in United States ( U.S. ) currency are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historic exchange rates. Revenue and expense items, excluding depreciation and amortization, are translated at the average rate of exchange for the period. Depreciation and amortization is translated at the same rates as the related assets. Translation exchange gains and losses are reflected in operations. Cash Cash represents cash on hand, and balances with banks. Inventory Raw materials are valued at the lower of standard cost, which approximates actual cost, and net realizable value. Finished goods and work in process are valued at the lower of standard cost and net realizable value. Standard cost, which approximates actual cost, includes raw material, labour, and manufacturing overhead. Property, plant and equipment Property, plant and equipment are initially stated at cost. Depreciation and amortization of these assets has been calculated over the estimated useful lives on the basis and rates indicated below: Basis Rate Building Straight-line 10 years Equipment Declining-balance and straight-line 6-20% or 3-15 years Office equipment Declining-balance and straight-line 20-30% or 3 years Leasehold improvements Straight-line Over the term of the lease

14 Notes to the Consolidated Financial Statements 14 The Company evaluates the carrying value of property, plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized when the carrying amount of property, plant and equipment exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition, and is measured as the amount by which the carrying amount exceeds its fair value. Asset retirement obligation The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurred a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets and when a reasonable estimate of the fair value can be made. The obligation will be measured initially at fair value using present value methodology, and the resulting costs capitalized into the carrying amount of the related asset. In subsequent periods, the liability will be adjusted for any changes in the amount or timing of the underlying future cash flows. Capitalized asset retirement costs will be depreciated on the same basis as the related asset and any discount accretion of the liability is included in determining the results of future operations. The Company has obligations with respect to the retirement of leasehold improvements at maturity of facility leases and the restoration of facilities to their original state at the end of the lease term. Accruals are made based on management s estimates of current market restoration costs and represent fair value. The obligations are not significant to the financial statements and have been grouped with accounts payable and accrued liabilities. Deferred charges a) Deferred development costs Deferred development costs are expensed in the period incurred unless the Company believes the development project meets Canadian generally accepted accounting criteria for deferral and amortization. In evaluating these criteria the Company considers among other factors technological feasibility and evidence to support clearly defined market prospects. Deferred costs not yet commercialized are not amortized. Costs which are deferred and have been commercialized are amortized on a straight-line basis over the product s estimated economic life or seven years, whichever is lower. Deferred development costs are reduced by related government grants and investment tax credits available on qualifying scientific research and experimental development expenditures. Investment tax credits are recorded when realized. b) Pre-operating period costs During 2006, the Company adopted the recommendations of Emerging Issues Committee ( EIC ) 27 Revenues and Expenditures During the Pre-operating Period issued by the Canadian Institute of Chartered Accountants ( CICA ). In accordance with these recommendations, pre-operating costs incurred during the start-up of Circa Metals new manufacturing facility were deferred until the commencement of commercial operations. Amortization of these charges commenced upon completion of the pre-operating period and is over a period of five years, which is the expected period of benefit of these expenditures. The carrying values and corresponding amortization periods of deferred development costs and deferred charges are reviewed annually, or more frequently whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of deferred charges exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition, and is measured as the amount by which the carrying amount exceeds its fair value. Intangible assets The Company amortizes patents and product certification costs over 5 to 17 years on a straight-line basis, relating to the life of the patents and product certificates. The carrying value and corresponding amortization period of these assets are reviewed annually, or more frequently whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of patents and product certification costs exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition, and is measured as the amount by which the carrying amount exceeds its fair value. Revenue recognition The Company recognizes revenue when the product is shipped and ownership is transferred to the customer and the price charged to customers is fixed and determinable and collectability is reasonably assured.

15 Notes to the Consolidated Financial Statements 15 Transfer pricing The Company has conducted a study of its internal policies with respect to cross-border transfer pricing on surge protection sales between Canada and the United States. The consolidated income tax provision provided herein has been based on management s best estimate of the pricing as documented in its transfer pricing study. All other intersegment sales are recorded at the exchange amount which approximates amounts charged to or by unrelated parties. Income taxes The Company follows the asset and liability method of accounting for income taxes. Under this method the Company records future income taxes based on differences between the accounting and income tax basis of an asset or liability. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in operations in the period that the change occurs. A valuation allowance is established to reduce future income tax assets if, on the basis of available evidence, it is more likely than not that all or a portion of any future tax asset will not be realized. Stock-based compensation plans Stock options granted to directors, officers, employees and consultants are accounted for using the fair value method. Under this method, the fair value of the stock option is estimated at the grant date and the total fair value of the options is amortized over the vesting period as compensation expense with an offset to contributed surplus. When options are exercised, contributed surplus is reversed and the amounts for the shares issued are credited to share capital. Share acquisition plan Under the terms of the share acquisition plan, common shares may be issued at fair value from the treasury of the Company or may be purchased in the market by a plan administrator under the direction of the board of directors. If the shares are issued from treasury, the fair value is calculated as the weighted average trading price per share for the common shares for the 10 consecutive trading days preceding the date the director provides notification to the Company in accordance with the plan. Earnings (loss) per share Basic earnings (loss) per share is calculated based on the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated based on the treasury stock method which takes into consideration the dilutive effect of the potential exercise of stock options as though they occurred at the beginning of the year. Comprehensive Income Comprehensive Income is comprised of net earnings and other comprehensive income OCI, which represents changes in retained earnings during a period arising from transactions and other events with non-owner sources. OCI generally would include unrealized gains and losses on financial assets classified as available-for-sale, unrealized foreign currency translation adjustments arising from self-sustaining foreign operations and changes in the fair value of the effective portion of cash flow hedging instruments. For the years ended December 31, 2008 and 2007, there were no other comprehensive income items. Financial instruments All financial instruments must initially be recognized at fair value on the balance sheet. The Corporation has classified each financial instrument into the following categories: Financial assets and financial liabilities held for trading; Loans or receivables; Held to maturity; Financial assets available for sale; and Other financial liabilities. Subsequent measurement of the financial instruments is based on their classification. Financial assets and financial liabilities held for trading are measured at fair value and changes in those fair values are recognized in operations. Financial assets available for sale are measured at fair value, with changes in those fair values recorded directly in operations. Loans or receivables and other financial liabilities are measured at amortized cost using the effective interest rate method of amortization. The Company has classified all financial assets as loans or receivables, with the exception of cash which has been classified as held-for-trading. The Company has classified all financial liabilities as other financial liabilities.