CIRCA ENTERPRISES INC ANNUAL REPORT

Transcription

1 CIRCA ENTERPRISES INC ANNUAL REPORT MD&A 1

2 Corporate Profile Circa s operations consist of two distinct business lines the first being telecommunications surge protection and related products, sold primarily to the United States market (through Circa Telecom USA Inc., a wholly-owned subsidiary of the Company) and the second being fabricated metal products (through the Company s operating division, 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 equipment against voltage surges. Circa Metals provides custom metal fabrication services to Circa Enterprises itself and to third parties. Circa Metals also designs, manufactures, markets and sells fabricated enclosures, pole line hardware and other products to the Canadian electrical industry through its Hydel product line. Circa is headquartered in Calgary, Alberta and this location also houses design, engineering and manufacturing functions for the telecom line. Sales and marketing for the telecom business are handled out of Tampa, Florida, through its wholly owned subsidiary, Circa Telecom USA Inc. The Circa Metals business operates in Vaughan, Ontario. Circa is listed on the TSX Venture Exchange under the trading symbol CTO. Contents 1 MANAGEMENT S DISCUSSION AND ANALYSIS 11 INDEPENDENT AUDITORS REPORT 12 CONSOLIDATED FINANCIAL STATEMENTS 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IBC CORPORATE INFORMATION 2 MD&A

3 Management s Discussion and Analysis As at and for the year ended December 31, 2014 The following Management s Discussion and Analysis ( MD&A ) of the financial condition and results of operations of Circa Enterprises Inc. ( Circa or the Company ) is dated March 19, 2015 and has been prepared taking into consideration information available to March 19, This MD&A should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended December 31, References in this MD&A to the Company s financial position or results of operations are presented on a consolidated basis and include its wholly-owned subsidiary, Circa Telecom (USA), Inc. ( Circa USA ). The Company and its wholly-owned subsidiary are sometimes referred to in this MD&A as the Circa Group. The consolidated financial statements of the Company (and the financial information presented in this MD&A) have been prepared in accordance with International Financial Reporting Standards ( IFRS ) 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 within the meaning of applicable Canadian securities laws. 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 words or expressions suggesting future activities or outcomes. In particular, this MD&A includes forward-looking statements relating to: (i) the sales expectation to the Company s telecom OEM customer (as set out under the heading Sales ), (ii) the expectation of Circa Metals sales remaining steady (as set out under the heading Sales ), (iii) the ability of the Company to generate funds from operations to meet its financial obligations (as set out under the heading Consolidated Statements of Financial Position ); (iv) anticipated 2015 capital expenditures and the funding of such capital expenditures (as set out under the heading Consolidated Statements of Financial Position ) and (v) expectations concerning the sales forecast in 2015 (as set out under the heading Outlook ). 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. Although Circa believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions and that information received from or disseminated by third parties is reliable, it can give no assurance that those expectations will prove to be correct. Forward-looking statements are subject to certain risks and uncertainties that could cause actual events or outcomes to differ materially from those anticipated or implied by such forward-looking statements. These factors include, but are not limited to, changes in general economic conditions in Canada, the United States and elsewhere, fluctuations in currency and interest rates, the existence of competition and the potential for intensification of that competition, the emergence of new technologies, the reliance on manufacturing facilities, the availability of financial resources, the availability of equipment, materials and personnel in a timely manner and on commercial terms acceptable to the Company, and new laws and regulations (domestic and foreign). In respect of the ability of the Company s expectation of sales to its telecom OEM customer, those risks, uncertainties and factors include, but are not limited to, the continued demand for the technology associated with the product sales. In respect of the ability of the Company to continue to generate steady Circa Metals sales, those risks, uncertainties and factors include, but are not limited to, the economic activity in Canada, the ability of its manufacturing facility and offshore suppliers to supply inventory and the ability of the Company s sales force to generate new sales. In respect of the ability of the Company to generate funds from operations to meet its financial obligations, those risks, uncertainties and factors include, but are not limited to, such things as the continuation or intensification (or both) of the current economic slowdown in North America, the continuing demand for the Company s products at existing price levels, the ability of the Company to maintain current levels of sales of its products or increase sales and the solvency and ability of the Company s MD&A 1

4 customers to pay their obligations as they become due. In respect of anticipated 2015 capital expenditures and the funding of such capital expenditures, those risks, uncertainties and factors include, but are not limited to, such things as the necessity to incur capital spending if other outsourcing alternatives are more economical, the ability to control capital spending (such that it is in line with management s estimates), the Company s ability to generate cash flow in amounts consistent with recent financial years and internal management forecasts and continued access to existing credit facilities. In respect of the sales levels of sales for 2015, those risks, uncertainties and factors include, but are not limited to, the continued market demand for its product lines and the ability of the Company to manufacture and deliver product to the customer s specifications. Accordingly, readers should not place undue reliance upon forwardlooking information contained herein. Forward-looking information respecting: (i) the sales expectation of the Company s telecom OEM customer is based on information received and discussions held with the customer; (ii) the expectation of Circa Metals sales remaining steady is based on various assumptions and factors, including management s discussions with Circa Metals customers concerning their anticipated product requirements, market information and management s forecast and estimate of Circa Metals sales; (iii) the ability of the Company to generate funds from operations to meet its financial obligations is based on the financial position of the Company, its ability to access cash through its debt facility and management s forecast and estimate of sales and operating expenses; (iv) anticipated 2015 capital expenditures and the funding of such capital expenditures, is based on various assumptions and factors, including management s estimate of the anticipated volume of business, required capital resources and anticipated cash flows in 2015; and (v) expected sales for 2015, is based on various assumptions and factors, including management s discussions and communications concerning the anticipated product requirements of that customer and forecasts concerning anticipated product requirements. Circa does not assume responsibility for the accuracy and completeness of the forward-looking statements set out in this MD&A and such forward-looking statements should not be taken as guarantees of future results or outcomes. Subject to applicable securities laws, the Company does not undertake any obligation to publicly revise the forwardlooking statements included in this MD&A 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 the foregoing cautionary statement. GENERAL AND OVERVIEW Circa s operations consist of two distinct business lines: Telecommunications surge protection and related products ( Telecom ), sold primarily to the United States market through Circa Telecom (USA) Inc., a wholly-owned subsidiary of the Company, and Metal fabrication ( Circa Metals ), an operating division of the Company based in Vaughan, Ontario. The Telecom business consists of the design, manufacture, marketing and sale of surge protection products, which provide primary protection to telephone systems and data transmission equipment against voltage surges. The Circa Metals segment provides custom metal fabrication services to the Telecom segment and to third-party customers. Circa Metals also designs, manufactures, markets and sells fabricated enclosures, pole line hardware and other products to the Canadian electrical industry through its Hydel product line. 2 MD&A

5 SELECTED ANNUAL FINANCIAL INFORMATION The following table sets out selected annual financial information for the Company for each of the years indicated. ($000s, except per share amounts) Sales 27,932 24,175 22,636 Profit for the period from operations attributed to shareholders of the Company 1, Basic and diluted earnings per share Total comprehensive income for the period 1,400 1, Total assets 12,207 11,726 9,904 Non-current liabilities For the year ended December 31, 2014, total sales increased to $27.9 million, compared to $24.2 million in The $3.8 million, or 15.5% sales, improvement primarily reflects a 26.1% increase in Telecom sales during fiscal Profit from operations attributable to shareholders increased to $1,151,000 in 2014, from a profit of $818,000 in 2013 and a profit of $553,000 in The significant increase in 2014 profit is the result of higher overall sales, mainly from the Telecom segment as a result of a project underlying the original equipment manufacturer ( OEM ) sales. There has also been modest growth in Circa Metals sales over this time period. These increases have been partially offset by a decline in regular telecom sales and profitability. DISCUSSION OF 2014 OPERATIONS Operating Results by Segment ($000s) Telecom Metals Total Sales 14,535 13,397 27,932 Cost of sales (10,999) (10,754) (21,753) Gross profit 3,536 2,643 6,179 Selling, general and administrative expenses (2,308) (2,301) (4,609) Operating profit 1, ,570 ($000s) Telecom Metals Total Sales 11,521 12,654 24,175 Cost of sales (8,489) (10,062) (18,551) Gross profit 3,032 2,592 5,624 Selling, general and administrative expenses (2,367) (2,141) (4,508) Operating profit ,116 Telecom Segment For the year ended December 31, 2014, sales revenue in the Telecom segment increased 26.2% to $14.5 million, from $11.5 million in This $3.0 million increase reflects a $3.2 million increase in sales to an OEM customer, partially offset by a $0.2 million decrease in regular Telecom sales. Operating profit from the Telecom segment increased 40.7% to $1.6 million in 2014, from $1.1 million in The $0.5 million improvement in operating profit reflects the positive impact of higher sales, partially offset by an increased proportion of lower margin OEM sales in the product mix. Operating profit also benefited from the Company s successful efforts to maintain stable selling, general and administrative ( SG&A ) expenses, despite increased sales activity MD&A 3

6 Circa Metals Segment Circa Metals sales increased 5.9% for the year ended December 31, 2014 compared to the prior year. Custom metal fabrication sales improved as a result of strong customer demand, combined with a modest increase in sales of Hydel branded products. The Company experience slightly lower gross margin as a result of the product mix during the year. Management anticipates Circa Metals sales will remain steady into Operating profit from the Circa Metals segment decreased to $342,000 in 2014, from $451,000 in This decrease is a result of product mix. In addition, SG&A expenses increased during the year, reflecting higher sales commissions as the Company captured new sales. SUMMARY OF QUARTERLY RESULTS The following table sets out selected sales and comprehensive income (loss) information for the periods indicated. ($000s except per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Sales 6,562 6,986 7,058 7,326 6,862 7,119 5,637 4,557 Profit (loss) before tax (246) Profit (loss) for the year from operations attributed to shareholders of the Company (204) Basic and diluted earnings (loss) per share (0.02) Total comprehensive income (loss) (158) The quarterly results above represent the significant increase of OEM Telecom sales combined with the seasonality of the business as described below. The increase in sales since the second quarter of 2013 is largely due to the increase in demand from a project underlying the Telecom OEM sales. The resulting improvement in profitability is consistent with this increase in sales. Sales Product sales in the Telecom and Hydel businesses historically peak during the summer months, which is the high point for commercial construction activity. Sales secured under supply agreements and custom fabrication sales are typically less seasonal and occur throughout the calendar year. The second and third quarters are traditionally Circa s strongest sales periods based on historical sales patterns. For the year ended December 31, 2014, total sales increased $3.8 million to $27.9 million, from $24.2 million in Telecom sales for 2014 increased $3.0 million compared to The year-over-year improvement reflects increased orders to an OEM customer as the project underlying the sales to the customer continued through the first half of the year and then declined in the second half of Circa Metals achieved a solid 5.6% improvement in overall segment sales in 2014 as compared to For the three months ended December 31, 2014, total sales decreased $0.3 million, or 4.4%, compared to the same period in This included a $0.5 million, or 16.7%, decrease in Telecom segment sales which was partially offset by a $0.1 million, or 3.4% increase in Circa Metals, compared to the fourth quarter of Management expects Telecom OEM sales to decline as the demand for certain products has continued to slow down, consistent with the underlying project. Sales in the Circa Metals segment are anticipated to remain steady into 2015 and the Company continues to utilize distributor representatives to increase its sales representation across Canada. 4 MD&A

7 The following table sets out additional information relating to sales by geographic market for the periods indicated. ($000s) United States 12,690 45% 9,909 41% 8,429 37% Canada 15,242 55% 14,266 59% 14,207 63% 27, % 24, % 22, % The year-over-year change in Circa s Canada/U.S. sales ratio is a result of the significant increase in Telecom OEM sales in the U.S. combined with a stronger U.S. dollar compared to the Canadian dollar. U.S. sales as a percentage of the Company s total sales increased to 45% in 2014, from 41% in Telecom division sales are primarily to U.S. customers, while Circa Metals sales are almost exclusively to Canadian customers. Gross Profit Gross profit increased 9.9% to $6.2 million in 2014, from $5.6 million in The improvement in gross profit reflects higher overall sales. In general, higher sales yield stronger gross profit margins as there are significant fixed costs in the Company s manufacturing operations. In 2014, Telecom gross margins were lower compared to the previous year due to the impact of product mix on sales, as margins from the OEM business are lower than regular Telecom sales. For the three months ended December 31, 2014, gross profit decreased to $1.4 million from $1.7 million during the same period in Fourth quarter gross profit, as a percentage of sales, was 20.8%, compared to 24.6% in the fourth quarter of Selling, General and Administrative Expenses SG&A expenses increased $0.1 million in 2014, compared to The year-over-year increase reflects higher external selling commissions as a result of increased sales and is partially offset by small decreases in the other categories of general and administrative expenses. Fourth quarter SG&A expenses increased to $1.3 million, compared to $1.2 million in the three months ended December 31, The increase was mainly attributable to higher selling commissions, as well as salaries and related costs. Profit for the Year from Operations Attributable to Shareholders of the Company For the year ended December 31, 2014, profit from operations increased to $1.2 million, from $0.8 million in As noted above, the increase was due to stronger sales, primarily in the Telecom OEM segment. For the three-month period ended December 31, 2014, profit from operations decreased to $166,000, from $389,000 during the same period in Total Comprehensive Income Total comprehensive income increased to $1.4 million in 2014, from $1.0 million in The increase in comprehensive income reflects higher operating profit noted above, combined with a foreign currency translation gain of $0.2 million. Other comprehensive income for the fourth quarter of 2014 consisted of a foreign exchange gain, which was attributable to translation of the accounts of the Company s U.S. subsidiary. During the fourth quarter, movement in the U.S./Canadian dollar exchange rate created a gain when the accounts of the Company s U.S. subsidiary were translated into Canadian dollars. MD&A 5

8 OUTSTANDING SHARE INFORMATION The following table sets out information concerning the authorized and outstanding shares of the Company as at March 19, Authorized Unlimited number of voting common shares ( Common Shares ) Unlimited number of first preferred shares, issuable in series Unlimited number of second preferred shares, issuable in series Issued and Outstanding 9,751,765 Common Shares Under the Share Acquisition Plan approved by the shareholders in June 2007 (the Acquisition Plan ), each director of the Company is entitled to purchase Common Shares utilizing all or a portion of the annual retainer otherwise payable to the director. Common Shares acquired by a director under the Acquisition Plan can be issued from the treasury of the Company or purchased in the market by the administrator appointed under the Acquisition Plan. On the initial adoption of the Acquisition Plan, 100,000 Common Shares were reserved for issuance and all 100,000 Common Shares were subsequently issued. At the Annual and Special Meeting of Shareholders in June 2010, the Acquisition Plan was amended to allow for an additional 200,000 Common Shares to be authorized for issuance and at the Annual and Special Meeting of Shareholders in June 2013, the Acquisition Plan was amended to allow for an additional 200,000 Common Shares for a total maximum number of shares of 500,000 Common Shares. During the year ended December 31, 2014, 20,232 Common Shares were issued by the Company under the Acquisition Plan for total consideration of $15,000, representing the weighted average trading price of the Common Shares calculated in accordance with the Acquisition Plan. Under the Amended and Restated Stock Option Plan approved by the shareholders (the Option Plan ), the Company may grant options to purchase Common Shares to its officers, directors, employees and consultants. Options granted under the Option Plan have a maximum term of ten years, with vesting terms and conditions determined by the board of directors at the time of grant. The price at which Common Shares may be acquired upon the exercise of options granted under the Option Plan may not be less than the market price of the Common Shares at the date of grant. At December 31, 2014, 975,010 Common Shares remained reserved under the Option Plan. The Company did not issue any options during the year and there were 271,667 Options outstanding at December 31, CONSOLIDATED STATEMENTS OF FINANCIAL POSITION At December 31, 2014, the Company s working capital (current assets less current liabilities) was $8.0 million, compared to $7.4 million at December 31, There were no unusual changes to consolidated current assets and current liabilities during the fourth quarter of The accounts receivable balance decreased from $4.3 million at December 31, 2013, to $3.6 million at December 31, The decrease is attributed to the decline in sales, particularly in the latter part of the fourth quarter of 2014 compared to the same period in The accounts payable balance also decreased to $2.5 million at December 31, 2014, from $3.0 million at December 31, The year-over-year decline reflects lower purchases of inventory needed based on the lower sales and production levels. The Company has historically relied on cash from operations and access to a line of credit in order to meet its financial obligations, fund working capital and pursue its investment objectives. Management expects to continue to generate sufficient funds from operations to meet the Company s obligations as they become due in both the short and long term. Circa maintains access to additional funds through its line of credit, which is available to meet short-term operating and capital requirements. 6 MD&A

9 The current business plan of the Company contemplates approximately $0.3 million in 2015 capital expenditures related to property, plant and equipment. None of these capital expenditures have been committed. It is expected that these expenditures will be funded with operating cash flow. CONTRACTUAL OBLIGATIONS At December 31, 2014, the Company had entered into contractual obligations as detailed below. ($000s) Payments Due by Period Less than 1 year 1 2 years 3 4 years After 4 years Total Operating leases 1,228 1,969 1,876 1,249 6,322 Finance leases During the year, the Company invested $0.6 million in capital expenditures (2013 $30,000). At December 31, 2014, the Company had no outstanding commitments to purchase property, plant and equipment. CONSOLIDATED STATEMENTS OF CASH FLOWS The net cash inflow from operating activities in 2014 was $1.6 million, compared to a cash inflow of $1.0 million in This increase in operating cash was due to higher operating profits and changes in non-cash working capital. The Company experienced a surge in sales late in 2013 and as a result, accounts receivable increased considerably at December 31, This was reversed in 2014 as the Company returned to lower sales levels near the end of 2014, resulting in a decrease in accounts receivable and accounts payable related to the purchase of inventory. The Company s accounts payable also increased as a result of the higher purchasing and increased production during the quarter. The cash generated by operating activities enabled the Company to fund its capital additions of $0.6 million during the year and pay a cash dividend of $0.5 million. The Company maintains access to a credit facility of up to $5.0 million. The credit facility is subject to borrowing base requirements and reporting and general covenants that may restrict the amount the Company can borrow at any given time. At December 31, 2014, the full $5.0 million was available under this facility. The Company did not enter into any financing arrangements in the year ended December 31, The net outflow of funds for investing activities in 2014 reflects the purchase of office and production equipment in the normal course of business. The cash outflow from these investing activities was $0.6 million in OFF-BALANCE SHEET ARRANGEMENTS The Company had no outstanding off-balance sheet arrangements as at December 31, RELATED PARTY TRANSACTIONS The Company did not undertake any material related party transactions during the year ended December 31, RISKS AND UNCERTAINTIES Ongoing business risks and uncertainties that may have an effect on the Company s business include the following: Economic Climate Circa s Telecom business in the U.S. is substantially driven by economic conditions and any weakness in the U.S. economy has historically represented a business risk for Circa. The past several years is an example of weakness in the U.S. economy that has had a negative effect on Circa s sales. Persistent weakness in certain sectors and regions in the North American economy (the U.S. residential and commercial construction sectors in particular) and the impact MD&A 7

10 of changing lending rates affecting construction activity may have an adverse effect on sales of equipment by the Telecom segment to U.S. markets and that effect may be material. Foreign Currency Exchange Circa is exposed to foreign currency risk due to its export of Canadian manufactured goods and the import of inventory. The timing of foreign exchange rate fluctuations can have an impact on Circa s operating results, the effect and magnitude of which depend on the product mix of sales and materials purchased. During the year ended December 31, 2014, the U.S./Canadian dollar exchange rate fluctuated between $1.06 and $1.17, compared to an average of $1.03 in the same period in Movement in the U.S. dollar can affect sales reported in Canadian dollars and resulting gross profits. The strengthening of the Canadian dollar relative to the U.S. dollar can negatively impact sales as the Company sells to many U.S. customers and ultimately converts and reports its currency in Canadian funds. However, the movement in sales is partially hedged by a corresponding impact on cost of sales as the Company makes a significant portion of its purchases in U.S. dollars. In addition, Circa must translate the accounts of Circa USA to Canadian dollars for financial reporting purposes. Product Market Sales of Telecom 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 certain types of products supplied by members of the Circa Group, while other forms of communication transmission, such as voice over internet, wireless and fiber optic cable, may not require the installation of equipment of the type distributed by the Telecom segment. 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 Telecom products sold by members of the Circa Group and could materially adversely affect the financial condition, liquidity and results of operations of the Company. 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 the Company and its financial condition, liquidity and results of operations. Reliance on Manufacturing Facilities Members of the Circa Group manufacture a significant percentage of the products sold by them at facilities owned by the Company and Circa Metals. 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 to those operations. Any interruption of operations at a manufacturing facility could have a material adverse effect on Circa s ability to manufacture products in a timely manner and, in turn, on its consolidated financial condition, liquidity and results of operations. Members of the Circa Group utilize certain contract manufacturers in China to manufacture certain products, including various components and sub-assemblies of certain products, sold by Circa in North America. While the Company maintains contact with alternative manufacturers in China that could produce products, components and sub-assemblies for members of the Circa Group, the inability of any of the current contract manufacturers of products, components and sub-assemblies to supply Circa with products, components or sub-assemblies, could significantly impair the capacity of members of the Circa Group to manufacture products and deliver products to customers in a timely manner, which, in turn, could disrupt relationships between members of the Circa Group and their customers, result in the cancellation of product orders or a reduction in the volume of products ordered by one or more customers, and adversely affect the Company s reputation as a reliable supplier. Any of the foregoing developments could have a material adverse effect on the Company s consolidated financial condition, liquidity and results of operations. 8 MD&A

11 Customer Concentration and Customer Credit The wide range of customers that purchase products from members of the Circa Group has helped to mitigate the Circa Group s exposure to any one customer or small group of customers. As a result, the top five customers of the Circa Group accounted for 52% of consolidated sales for the year ended December 31, Weakness in the Canadian or United States economies may adversely affect the financial condition of certain Circa Group customers, which, in turn, could create uncertainty with respect to the collection of receivables. Competition The markets for products manufactured and distributed by members of the Circa Group are highly competitive, and a number of competitors in those markets have longer operating histories, greater name recognition, larger customer bases and greater financial, technical, engineering, product development and marketing resources than members of the Circa Group. These resources may allow them to respond more quickly than members of the Circa Group 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 the business, financial condition, liquidity and results of operations of the Company and the effect may be material. Raw Materials The price of raw materials, in particular plastic, steel and copper, represents a significant portion of the manufacturing costs incurred by members of the Circa Group. There is volatility in the price of these products, which is outside the control of members of the Circa Group. Significant price volatility or raw materials disruptions or shortages would be detrimental to the operations of the Circa Group, and the effect could be material. Reliance on Telecommunications Industry The Company s core Telecom 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 products distributed by the Telecom segment 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 indirectly affect the Company s operations. The ongoing economic slowdown in North America 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 the Company s business, financial condition, liquidity and results of operations and the 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 the Company. 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. Further risks to which the Company and other members of the Circa Group are exposed in the conduct of their business are discussed in the Company s Annual Information Form, which is available (under the Company s profile) on SEDAR at MD&A 9

12 OUTLOOK The Company experienced a modest decline in sales for the fourth quarter but improved overall in 2014 on the strength of Telecom OEM sales and improved Circa Metals sales. Telecom OEM product sales decreased later in the third and fourth quarters of 2014 and are anticipated to level out at more historical levels for Sales of Canadian Telecom products are expected to continue at current levels. U.S. Telecom sales remain challenged by slow market demand, however this slowdown is partially offset by a more favorable currency exchange rate. Within the Circa Metals segment, the first half of 2014 sales were relatively consistent compared to the prior year. The unusually cold and prolonged winter and low utility activity in Western Canada hampered sales of Hydel brand products early in 2014, however demand improved considerably in the second half of Demand for Hydel products are expected to increase through 2015 as the Company expands its portfolio and markets. Custom metal work with both new and existing customers remained strong throughout The Company is committed to identify and develop more custom metal opportunities in The Company is continuing to emphasize marketing programs with its distributor sales representative network to increase sales. Management is evaluating its product lines with the goal of offering new products to its customers in order to boost sales and profitability. The Company is also looking for opportunities to expand its products to the US market to further grow sales of the Hydel product line and is seeking strategic acquisition candidates in order to diversify the business. 10 MD&A

13 Independent Auditors Report To the Shareholders of Circa Enterprises Inc.: We have audited the accompanying consolidated financial statements of Circa Enterprises Inc. and its subsidiary, which comprise the consolidated statements of financial position as at December 31, 2014 and December 31, 2013, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and 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 International Financial Reporting Standards, and for such internal control as management 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 consolidated financial statements. The procedures selected depend on the auditors 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, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity 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 financial position of Circa Enterprises Inc. and its subsidiary as at December 31, 2014 and December 31, 2013, and their financial performance and their cash flows for the years then ended, in accordance with International Financial Reporting Standards. March 19, 2015 Calgary, Alberta Chartered Accountants INDEPENDENT AUDITOR REPORT 11

14 Consolidated Statements of Comprehensive Income For the years ended December ($000s) Sales 3 27,932 24,175 Cost of sales 3 (21,752) (18,551) Gross profit 6,180 5,624 Selling, general and administrative expenses 4 (4,609) (4,508) Operating profit 1,571 1,116 Gain on sale of assets 1 Other income 8 Finance costs (2) (16) Profit before tax 1,577 1,101 Income tax expense 5 (426) (283) Profit for the year from operations attributable to shareholders of the Company 1, Other comprehensive income: Exchange differences on translating foreign operations, net of tax Total comprehensive income for the year attributable to shareholders of the Company 1,400 1,002 Earnings per share (in $s) Basic and diluted Note The accompanying notes are an integral part of these consolidated financial statements 12 CONSOLIDATED FINANCIAL STATEMENTS

15 Consolidated Statements of Financial Position As at December ($000s) Note Assets Current assets Cash 1, Accounts receivable 6 3,573 4,255 Inventory 7 5,361 5,217 Prepaid expenses ,591 10,422 Non-current assets Other assets Property, plant and equipment 9 1, Intangible assets Deferred taxes ,207 11,726 Liabilities Current liabilities Accounts payable 2,524 3,000 Income taxes payable ,549 3,009 Non-current liabilities Finance leases Deferred expenses 7 9 2,566 3,035 Shareholders equity Share capital 13 2,796 2,781 Contributed surplus Accumulated other comprehensive income Retained earnings 6,466 5,803 9,641 8,691 12,207 11,726 Commitments 14 The accompanying notes are an integral part of these consolidated financial statements APPROVED BY THE BOARD: Grant Reeves Warren White Director Director March 19, 2015 March 19, 2015 CONSOLIDATED FINANCIAL STATEMENTS 13

16 Consolidated Statements of Changes in Equity ($000s) Share capital Contributed surplus Accumulated other comprehensive income Retained earnings At December 31, ,771 - (78) 4,985 7,678 Profit for the year Exchange on translation of foreign operations, net of tax Total comprehensive income for the year ,002 Share-based payment transactions Issue of share capital At December 31, , ,803 8,691 Profit for the year ,151 1,151 Exchange on translation of foreign operations, net of tax Total comprehensive income for the year ,151 1,400 Share-based payment transactions (Note 13) Issue of share capital (Note 13) Dividends paid (Note 13) (488) (488) At December 31, , ,466 9,641 The accompanying notes are an integral part of these consolidated financial statements Total 14 CONSOLIDATED FINANCIAL STATEMENTS

17 Consolidated Statements of Cash Flows For the years ended December ($000s) Operating activities Profit for the year from operations attributable to shareholders of the Company Add back items not affecting cash: Note 1, Depreciation Amortization of intangible assets Share-based compensation expense Gain on sale of assets - (1) Deferred taxes Directors fees paid in shares Non-cash working capital items: Decrease (increase) in accounts receivable 682 (800) Increase in inventory (144) (524) (Increase) decrease in prepaid expenses (9) 22 Decrease in other assets - 10 (Decrease) increase in accounts payable (476) 1,151 Increase in income taxes payable 16 5 Cash generated from operating activities 1, Financing activities Decrease in bank indebtedness - (335) Decrease in finance leases (7) (11) Decrease in deferred expense (2) (1) Dividends paid (488) - Cash used in financing activities (497) (347) Investing activities Purchase of property, plant and equipment 9 (606) (30) Additions to intangible assets 10 (15) - Proceeds from sale of property, plant and equipment - 1 Cash used in investing activities (621) (29) Foreign exchange translation differences Net increase in cash Cash, beginning of year Cash, end of year 1, Taxes paid Interest paid 2 16 The accompanying notes are an integral part of these consolidated financial statements CONSOLIDATED FINANCIAL STATEMENTS 15

18 Notes to the Consolidated Financial Statements December 31, 2014 Note 1 I NATURE AND DESCRIPTION OF THE COMPANY Circa Enterprises Inc. (the Company or Circa ) is a publicly traded company listed on the TSX Venture Exchange and is incorporated under the Business Corporations Act of the province of Alberta. The address of its registered office is #206, 5 Richard Way SW, Calgary, Alberta, Canada, T3E 7M8. The consolidated financial statements of the Company for the year ended December 31, 2014 comprise the Company and its subsidiary. The consolidated financial statements were authorized for issue by the Board of Directors on March 19, Circa s operations consist of two distinct business lines, the first being telecommunications surge protection and related products ( Telecom ) (sold primarily to the United States market) and the second being metal fabrication, ( Circa Metals ) (through the Company s Ontario-based division). Prior to February 1, 2013 the Circa Metals operations were carried on under a wholly-owned subsidiary, Circa Metals Inc. On February 1, 2013, Circa Metals Inc. was amalgamated with Circa Enterprises Inc., and the amalgamated company was continued as Circa Enterprises Inc. The Telecom business consists of the design, manufacture, marketing and sale of surge protection products, which provide primary protection to telephone systems and data transmission equipment against voltage surges. Circa Metals designs, manufactures, markets and sells fabricated enclosures, pole line hardware and other products to the Canadian electrical industry through its Hydel product line and provides custom metal fabrication services. Note 2 I SIGNIFICANT ACCOUNTING POLICIES Statement of compliance and basis of presentation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and the interpretations of the International Financial Reporting Interpretations Committee under the historical cost convention except for availablefor-sale financial assets which are measured at fair value. Any standards and interpretations that have been issued but are not yet effective, and that are available for early application, have not been applied to the Company in these consolidated financial statements. Application of the majority of these standards and interpretations is not expected to have a material effect on the consolidated financial statements in the future. Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary at December 31, 2014, Circa Telecom U.S.A. Inc. ( Circa U.S.A. ). Businesses acquired or disposed during the year are consolidated from the effective date of acquisition or until the effective date of disposal. All intra-company transactions, balances, income and expenses are eliminated on consolidation. Foreign currency translation The presentation and functional currency of the Company is the Canadian dollar. Transactions in currencies other than the Canadian dollar are recorded at the rates of exchange prevailing on the dates of transactions. At the end of each reporting period, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at that date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19 Foreign exchange gains and losses resulting from the settlement of transactions and the translation of monetary assets and liabilities in currencies other than the Canadian dollars are recognized in the Consolidated Statements of Comprehensive Income. Assets and liabilities of foreign operations with functional currencies other than Canadian dollars are translated at the period end rates of exchange, and the results of their operations are translated at average rates of exchange for the period. The resulting translation adjustments are included in accumulated other comprehensive income in Shareholders equity. Significant accounting estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates, assumptions and judgments are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes can differ from these estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements are: Useful lives of property, plant and equipment The Company estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property, plant and equipment are based on internal evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property, plant and equipment would increase the recorded expenses and decrease the non-current assets. Fair value of financial instruments The estimated fair value of financial assets and liabilities, by their very nature, are subject to measurement uncertainty. Impairment of non-financial assets Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The estimated future cash flows are derived from management estimates, budgets and past performance and do not include activities that the Company is not yet committed to or significant future investments that will enhance the asset s performance of the cash generating unit being tested. The recoverable amount is sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. Taxes Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17