Item 1.
Description of Business
Corporate Background and Overview
Creative Vistas, Inc. was incorporated in the state of Arizona on July 18, 1983. We are a leading provider of security-related technologies and systems. We also provide the deployment of broadband services to the commercial and residential market. We primarily operate through our subsidiaries AC Technical Systems Ltd. (“AC Technical Systems”) and Iview Digital Video Solutions Inc. (“Iview DVSI”), to provide integrated electronic security-related technologies and systems. AC Technical Systems is responsible for all of our revenues in the security sector for 2007. It provides its systems to various high profile clients including: government, school boards, retail outlets, banks, and hospitals. Iview DVSI is responsible for providing video surveillance products and technologies to the market.
On December 31, 2005, we acquired Cancable Inc. (“Cancable”) through our wholly owned Delaware subsidiary, Cancable Holding Corp. Cancable is in the business of providing the deployment and servicing of broadband technologies in both residential and commercial markets. Cancable has offices in Ontario, Canada. All related documents were disclosed in Form 8-K/A filed on January 6, 2006. In October 2007, we entered into an agreement, through our wholly owned newly formed Ontario subsidiary, Cancable XL Inc. (“Cancable XL”), to acquire all of the issued and outstanding shares of capital stock and any other equity interests of XL Digital Services Inc. (“XL Digital”), an Ontario corporation. All related documents were disclosed in Form 8K filed on October 17, 2007. During the year, we have incorporated 2141306 Ontario Inc. (“OSS-IM”) as a subsidiary of Cancable. OSS-IM specializes in research and development of proprietary BI software. The current version of BI software is a leading-edge program that can manage data from over a million multi-faceted transactions fulfilled annually by Cancable for its large cable-system customers. Wireless and web enabled, the software provides automated intelligent decision-making for managing customer transactions, vehicles, technicians, supply chains, HR-related functions and other activities.
Today, our operations are divided into two distinct operating segments: (a) security and surveillance products and services, and (b) broadband deployment and provisioning services. Through AC Technical Systems we provide integrated security solutions to our commercial customer base. Through Cancable, XL Digital and OSS-IM, we provide broadband deployment and provisioning services to residential, as well as web based support and small businesses markets.
The current corporate structure is as follows:
Security and Surveillance Products and Services
AC Technical Systems is focused on the electronic security segment of the security industry. Through our technology integration team of engineers, we integrate various security related products to provide single source solutions to our growing customer base. Our design, engineering and integration facilities are located in Ontario, Canada. We operate through our Iview DVSI subsidiary to build out Digital Video Management Systems (DVMS) to provide PC based video management systems to the surveillance market. Iview is a product company and sells to distributors and integrators in North America. Iview is in early stages of building a strong consistent sales and marketing team to start contributing revenues to us.
Industry Overview
We believe that the security industry is growing at a steady pace. There has been renewed focus on our industry since the events of September 11, 2001. The growth is spurred by the continuous evolution of new technologies and processes. We believe that the industry is growing for the following reasons:
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Increased global awareness due to the increased threats of terrorism;
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Older security devices such as the VCR have become obsolete and new technologies have provided much more efficient systems at a better price;
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Evolving digital technologies have started to replace antiquated analog technologies in the market space;
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Expansion of budgets due to increased awareness of the need for security;
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Increase in crime rates and shrinkage in industry;
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Integration of multiple devices has expanded the market for technically advanced integrators such as our firm; and
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Growing public concern about crime.
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Decreased cost of security technology.
The security industry is highly fragmented with a large number of manufacturers, dealers, distributors, integrators and service groups. All of these parties provide part of the entire solution to the customer. Customers prefer a one-stop shop that provides them with the entire solution and also designs and customizes a solution that fits their needs. This solution may include custom design of hardware, software, along with highly sophisticated integration work. In most cases the cost to the customer is higher when using a large number of parties as opposed to one efficient integrator. We believe that when many parties are involved in providing a solution to the customer, many needs of the customer may not be addressed. The amount of time a customer has to devote to build multiple relationships as opposed one relationship is substantial. There are also tendencies for different parties to “pass the blame” to the other party when it comes to technical and service issues with the project. As a result, the customer prefers dealing with one source that can handle all issues and be accountable for an entire project. There are a limited number of companies besides us that are capable of providing this entire integrated solution. Providing such a solution requires years of experience, infrastructure for performing all six core functions that we provide, access to technologies and a significant commitment to maintaining a satisfied customer.
A company that is implementing a new security system or enhancing an old system usually has to go through the following steps:
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Retain a consultant to appropriately outline its needs and design a system that satisfies those needs;
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Once the design is complete, a tender is released whereby a number of invited system integrators bid on the required system;
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System integrators work with various suppliers of hardware and software to meet the system requirements. They also engage these suppliers to complete subcomponents of the system;
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When security systems have to be installed in multiple locations, the company may have to tender the system requirements to different system integrators from various regions; and
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The customer, based on price and qualifications of the system integrator, will award the project to one or more system integrators.
The process described above can cause a number of issues for clients including client frustrations with project delays, cost inefficiencies, incompatible systems and lack of vendor accountability. It also makes it very difficult for the customer to make changes to the system. In addition, a customer looking to implement security systems in multiple locations may have to hire multiple integrators and suppliers to integrate systems. This usually results in systems that are not consistent with each other. These systems may also not communicate efficiently with a central system. In addition, as security systems become more technologically advanced, an experienced engineering team is required to understand the needs of the customer and satisfy those needs by incorporating the most efficient technologies available into the security system. This may also include some development of hardware and software to customize and integrate the system. Most system integrators are not capable of development, as they do not have a research and development department. Also, the manufacturers of different subsystems are usually not willing to provide custom solutions on a project basis. Customers are realizing the sophistication required in order to provide a good security system and recognizing that their in-house personnel lack the skills and time necessary to coordinate their security projects.
Our Strategy
We have identified four key markets to target with our solution described below. These are 1) government, 2) education, 3) healthcare, and 4) retail. We offer a one-stop-shop that provides a fully integrated technology based security system to meet the needs of the customer. We understand the needs of the customer and provide a custom solution to meet their needs. We expedite project completion, reduce costs to the customer, reduce manpower requirements of the customer and improve systems consistency in multiple locations.
We provide the following services:
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Consulting, audit, review and planning;
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Engineering and design;
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Customization, software development and interfacing;
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System integration, installation and project management;
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System training, technical support and maintenance; and
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Ongoing maintenance, preventative maintenance and service and upgrades.
We believe that the following key attributes provide us with a sustainable competitive advantage including:
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Experience and expertise in the security industry;
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In-house research and development departments;
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Dedicated service team;
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Access to and experience in a variety of product mix;
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Customized software and hardware products;
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Strong references; and
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Strong partnerships with suppliers and integrators.
Our strategy for growth and expansion is to:
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Expand our network of technology partners;
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Develop and maintain long-term relationships with clients;
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Open regional offices in key areas to expand revenue and service;
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Capitalize on our position as a leading provider of technologically advanced security systems; and
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Expand our marketing and sales program within our key vertical markets.
At the beginning of each new client relationship, we designate an account manager as the client service contact. This individual is the point person for communications between the client and us. The account manager usually has a number of years of experience in the industry and a good understanding of technologies and solutions that we provide. This person is also a trained salesperson who is able to build a long-term relationship with the customer. The account manager works with our project department, engineering department, marketing department, finance department and research and development department to provide an effective solution for the customer. Once the customer has engaged us to provide a solution, the engagement usually goes through one or more of the stages outlined below:
Consulting, audit, review and planning
We identify the client’s objectives and security system requirements. We then audit and review the client’s existing system. This audit of the existing system evaluates inventory counts and the existing infrastructure. Then we provide an audit report to outline current deficiencies and vulnerabilities. At this point we design a system alternative to meet the needs of the customer. The alternative system is prioritized based on the needs of the customer. We also include an efficient cost model to ensure that the customer understands the cost of the system. We provide a Return On Investment (ROI) model where applicable. We also provide a preliminary project implementation plan that contains a graphical model of the client’s premises with exact outlines of equipment locations. Our comprehensive planning process helps the customer to properly budget for its needs on a long-term basis.
Engineering and design
The engineering and design process involve preparation of detailed project specifications and working drawings by a team of our design engineers. These drawings lay out the entire property and provide a detailed map of all security equipment and the methodologies used to integrate the system. The specification and drawings also outline any needs for custom software or hardware design services, systems designers and computer-aided design system operators. These specifications and drawings detail areas of high sensitivity, the layout of the main control room, and the placement of cameras, card readers, monitors, switches and other equipment.
Once our system design has been completed, we provide a complete list of components and recommendations. We highly recommend off-the-shelf non-proprietary components in order to ensure that the customer is not tied into one supplier. When off-the-shelf components are not available or are not compatible with each other, we design software or hardware to provide compatibility.
Customization, software development, interface
In many cases, the customer’s needs may not be completely satisfied by the equipment available in the market place. The customer may request features or equipment that are not readily available. For example, a financial institution may request us to take information from their transaction records and an Automatic Teller Machine (ATM), and then integrate that information with a Digital Video Recorder (DVR). This would allow them to review video of an individual who has processed a transaction on an ATM. Normally a financial institution requiring this information would have to go through tapes of data in order to find it. Such a bank would have to search all the transactions that occurred during a period of time and then, based on that information, go over tapes of video. Sometimes the video may not be available if the tapes are only held for a short period of time. Our firm’s integrated system makes this search process instantaneous. Our system allows a bank to search by a number of criteria including time, date, transaction, number and withdrawal amount. A bank can also have video associated with such a search instantly.
Many times we provide an interface to bring multiple technologies together. In one project we integrated eleven different products into one system, thus allowing for a completely integrated system. This integrated system also has a very user-friendly interface that avoids having to deal with multiple monitors and Graphical User Interfaces (GUI).
System integration, installation, project management:
Once we determine that a project has passed through the consulting/audit, design/engineering and customization/software interfacing stage (if required) we can start the implementation of system. During this stage, we provide the following:
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Detailed schedule of integration
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List of components and labor assignments
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Officially assign the project to one of our project managers
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Production department starts procurement schedules
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Construction draw date schedules
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Progress billings and schedule site visits for quality control
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Tests of final terminations and technology components in-house in order to avoid product failure on site
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Hardware/software and network integration
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Validation and testing
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Final sign off and pass over to service department
During this stage the project manager manages the project and the projects are updated weekly to ensure that all components are working efficiently. During certain projects the project manager may opt to use subcontractors to provide services that are not highly advanced technically. These services may include standard wiring and cabling. The customer is updated on the status of the project weekly. These updates may include Gantt charts. During this stage, many customers see the need for additional enhanced equipment, which increases the value of the contract to us.
System training, technical support, maintenance
When a project has been completed through system integration, the customer is provided with a complete training program. We train the customer on how to use the system and also provide them with manuals from manufacturers as well as training guides put together by us. Once the training is complete the system will go on line and there is a transfer process to the service department from the projects department. Ongoing technical support and maintenance are provided by our dedicated service team.
Ongoing maintenance, preventative maintenance and service, upgrades:
This is the final stage of our process and it is an ongoing stage. We provide various types of maintenance contracts, which vary depending on the level of response required by the customer. We also provide a service plan suitable to the customer. If the customer does not require a service contract, we provide them with service on an incident by incident basis.
The entire six steps process continues for each customer. Once a project is complete, there are upgrades that are required. Depending on the value of the upgrades, they may initiate a new project. During every stage an account manager is updated on the process. Account managers have regular meetings with the customers after projects are complete in order to help set budgets for the following years and also educate customers on new products and technologies that may be available in the market.
Research and Development
We have our own in-house research and development programs which are supported by the National Research Council of Canada. We may receive grants and tax credits for customers on projects and product development if they qualify for the program. Our product development department develops new products and also enhances existing products. We have the capability to build various forms of hardware and software modules. Once a product is designed, the underlying technologies are used on an ongoing basis to enhance future projects and develop new products. This is one of the differentiating factors between our competitors and us. Our research and development expenses were approximately $289,800 in fiscal year 2007 and $400,600 in fiscal year 2006. Expenses include engineering salaries, costs of development tools and equipment. None of the expenses were borne directly by customers.
Warranties and Maintenance
We offer maintenance and service on all our products, including parts and labor, which range from one year to six years depending upon the type of product concerned and the type of contract signed by the customers. In addition, we provide a one-year warranty on equipment and a 90 day warranty all installation projects completed by us. We receive the same warranty on equipment from our other external suppliers.
On non-warranty items, we perform repair services for our products sold at our main office in Ontario, Canada or at customer locations. For the years ended December 31, 2007 and December 31, 2006, our revenue from service and maintenance were $1,544,435 and $1,284,000 respectively.
Marketing
Our marketing activities are conducted on both national and regional levels. We obtain engagements through direct negotiation with clients, competitive bid processes, referrals and direct sales calls. Our marketing plan is derived with input from all our account managers and senior management. Our plan is to grow vertically within targeted markets where we have a superior level of expertise. Our marketing is very target specific. We market within our four key markets. We also find niche markets where our technologies can provide effective solutions to the customer. Some of our marketing activities include:
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Trade Shows
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Mailers
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Direct sales calls
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Web promotions
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Seminars
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Collaborations with manufacturers
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Collaborations with consultants and architects
We also collaborate with providers of complementary technologies and products who are not competitive with us. For example, there is a convergence of IT services and the security industry. We are evaluating the possibility of partnering with an IT services provider in order to provide our existing and potential customers with an expanded scope of services. We are also doing the same within the building automation industry as we see a convergence of building automation technologies and services with the security industry.
We are evaluating several opportunities to expand our operations via joint ventures and partnerships with regional and international companies that can provide us with additional expertise and an expanded presence. In addition we are evaluating the possibility of acquiring similar businesses and expanding our operations.
Customers
We provide our products and services to customers in five markets:
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Government
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Healthcare
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Education
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Retail
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Commercial Property Management
We also provide our products and services to various other sectors including corporate facilities, mining, entertainment and the automobile industry through direct sales to end-users and through subcontracting agreements.
Backlog
Our backlog consists of written purchase orders and contract, we have received for product deliveries and engineering services that we expect to deliver or complete within 12 months. All of these orders and contracts are subject to cancellation at any time. As of December 31, 2007, our backlog was approximately $2,500,000 on contract revenue.
Competition
The security industry is highly fragmented and competitive. We compete with a number of different companies regionally and nationally. We have various different types of competitors including consultants, integrators, and engineering and design firms. Our main competitors include Siemens, ADT, Simplex, Intercon and Diebold. Our competitors also include equipment manufacturers and vendors that provide security services. Some of our competitors have greater name recognition and financial resources than we do. However, we believe that we have a well-respected name and are known for our quality work and technical expertise. We may face future competition from potential new entrants into the security industry and increased competition from existing competitors that may attempt to develop the ability to offer the full range of services offered by us. We cannot assure that we will be able to compete successfully in the future against existing or potential competitors.
Employees
As of December 31, 2007, Cancable has a staff of over 400 employees and A.C. Technical Systems has a staff of 49 full time employees including our officers, of whom 32 were engaged in systems installation and repair services, 11 in administration and financial control and 6 in marketing and sales.
None of our employees are covered by a collective bargaining agreement or represented by a labor union. We consider our relationship with our employees to be satisfactory.
The design and implementation of our equipment and the installation of our systems require substantial technical capabilities in many different disciplines from computer science to electronics with advanced hardware and software development. As a company, we encourage and provide training for new and existing technical personnel. In addition we conduct training courses and also send our technical persons to various technical courses offered by manufacturers of various products. We have various incentive programs for our employees to improve their skills within all departments. These include reimbursements for training fees and raises based on skill sets.
Broadband deployment and provisioning services
We operate through our subsidiaries Cancable Inc. and XL Digital Services Inc. (together the “Cancable Group”), located in Ontario, Canada to provide and deploy broadband services. Cancable Inc. and XL Digital Services Inc. were subsequent acquisitions.
Cancable Inc. is a growing Canadian based leader in providing and servicing broadband technologies to both residential and commercial markets. The Cancable service offering, network deployment, IT integration, and support services enable the cable television and telecommunications industries to deliver a high quality broadband experience to their customers. Cancable’s clients rely on Cancable’s knowledge and expertise to rapidly deploy the latest technologies to support advanced cable services, cable broadband Internet access and DSL. Services provisioned include new installations, reconnections, disconnections, service upgrades and downgrades, inbound technical call center sales and trouble resolution for cable Internet subscribers, and network servicing for broadband video, data, and voice services for residential, business, and commercial marketplaces.
Cancable has a long history as a field services organization. It has been successful in developing long-term relationships with its clients and is highly regarded in the industry for quality. This is evidenced by its status as the largest service provider to Rogers Cable Inc., Canada’s largest cable company and the exclusive supplier to Cogeco Cable Inc. in the Windsor, Ontario area. Cancable’s central appeal to its customers is its ability to deliver its quality services and at a cost which they cannot match internally.
XL Digital Services Inc. (“XL Digital”), incorporated in 2007, is a Canadian-based company provisioning the deployment and servicing of broadband technologies in the residential market for Canada’s largest cable television provider, Rogers Cable. XL Digital, with over 70 employees, provides its deployment and provisioning services for Rogers within two territories where the Company currently did not have a presence. The acquisition enables the Company to further expand its services into these two growing territories. XL Digital also brings the Company a number of years of significant management experience within the cable and telecommunications sector.
Senior Management
Cancable Group has a proven team with over 70 years of cable TV contracting/technical deployment and support experience.
Ross Jepson, President and CEO, has successfully completed a number of senior executive assignments in the cable and telecommunications sector since 1985. He was appointed President and CEO in January 2003 after serving one year as the EVP, Operations. In addition to having led the purchase and sale of numerous companies during his executive career, he is also deeply experienced in sales, marketing, operations and new business development.
Mark Thompson, MBA (Finance & Human Resources) VP, Fin & Admin, joined Cancable in November 2004, bringing over 10 years of Finance and Consulting experience in entrepreneurial, high growth and turnaround situations. He has held senior roles in the high-tech, distribution and financial services industries. Mr. Thompson is responsible for all finance, accounting, is-it, and human resources functions for Cancable.
Robert R. Newell, Senior Vice President,, US Operations, joined Cancable in October 2007. He was chief operating officer and chief business development officer of 180 Connect Inc., a national cable and satellite fulfillment service, based in Denver, CO., that he co-founded in 2000 and helped build into a company with $300 million in annual revenues. Customers of 180 Connect included Comcast, Cox, Time Warner, Cablevision, Hughes Network Services and DirecTV. He has particular expertise in start-up, turnaround and integration of acquired companies and his addition to the Cancable team significantly improves our capability to execute on our U.S. expansion strategy.
Paul Saabas, MBA, President, Dependable Home Support Services, has sales and operational management experience with a wide range of companies, including cable services (Rogers Cable) and security products and services (Honeywell Ltd.). Most recently, he was a principal of PMJ Consulting, a company that provided business planning and other strategic services to start-up companies. Among his clients was Bell New Ventures, the group created in 2006 by Bell Canada, Canada's largest communications provider, to initiate new products and services based on Bell Canada's wireless, Internet, voice and web-based capabilities.
Paul Markovsky, MBA, General Manager, Canadian Field Operations, joined Cancable in October 2006 as District Manager, GTA East and was promoted to his current position in March 2008. His previous position was Manager of Operations at QX Locates, a division of Aecon Group Inc., where he was chosen to head the growth of an expanding business whose customers included Bell Canada, Enbridge Gas and Union Gas. Mr. Markovsky is responsible for the management of all Canadian operations and field service management in the utilities and cable sectors.
Cheryl Lewis, Director, DependableIT, began her career at Cancable in 1998 managing the dispatch group and building the original team of technicians. Ms. Lewis later assumed responsibility for the DependableIT division, a call center managing all incoming tech support calls and sales leads, as well as on-site technicians resolving computer support issues.
Steve Skrlac, CFA, MBA, BA, Vice President Sales and Business Development. Mr. Skrlac joined the Cancable group in February 2008 and brings with him both a marketing and finance background in the telecommunications, home service, and business fields. He has worked for Mountain Cablevision for the past 4 years in a senior leadership position and was with Bell Canada for the 4 years prior to this. Mr. Skrlac is responsible for the sales planning and field execution.
Our Strategy
Cancable believes that there is a large and growing market for its services and the demand for its services is growing as:
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The increase in popularity of the Internet and in the complexity of Internet sites has increased demand for high-speed Internet access from both residential and commercial consumers;
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Technological advances, including the shift from an analog to a digital network environment and the ability to leverage existing network infrastructure to deploy high-speed services such as IP networking technologies, have accelerated the availability of advanced services such as digital video and high-speed Internet access;
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Cable and telecommunications service providers have made significant investments to build and upgrade their wired and wireless networks, creating a substantial opportunity to deliver advanced services to commercial and residential consumers;
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End-users increasingly demand access to integrated video, voice and data services, advanced set top boxes, high-speed digital modems, telephone lines, voice mail, computer networks, video conferencing and other technologies. Cancable’s clients must rapidly deploy these technologies in order to maximize their revenue per end-user, realize a return on their investments and maintain or gain competitive advantages; and
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The availability of multiple choices for end-users to receive advanced services has led broadband service providers to focus increasingly on end-user satisfaction to control turnover and to rely on technology enabling companies for some of their non-core activities, such as installation, integration, fulfillment, maintenance, warranty and support services.
Key Client Relationships
Cancable has two main customer relationships, Rogers Cable Inc. and Cogeco Cable. Rogers Cable Inc. is the most significant.
Rogers Cable Inc.
Rogers Cable Inc. is Cancable Group’s largest customer employing greater 250 of our field technicians (Mississauga Primary contractor with 85, Scarborough Primary with 60, Toronto Secondary with 40) as of December 31, 2007. In addition to its in-house capability, Rogers currently utilizes eight contractors to manage its cable TV activity. This number is down from 22 contractors three years ago. Over the past two years, as a result of the vendor consolidation and its top rated performance, Cancable Group has emerged as Rogers’ primary contractor in the Greater Toronto Area greater than 40% share of completed work orders
In addition to installation and service work, Cancable has finalized a new three year agreement that extends the types of services it will be performing. As evidence of Rogers growing dependency on Cancable, Rogers has requested that Cancable supplement its Tier 2 and Tier 3 customer service programs, something that is presently handled only by Rogers personnel. In this service, a call is transferred from Rogers’ customer service department to DependableIT, Cancable’s branded technical support centre, after Rogers determines that it is not directly a Rogers cable related problem. DependableIT’s remote diagnostic tools provide it with a complete situational review of the customer’s site. In these instances, the charge is billed to the customer’s credit card before assistance is provided. With the Tier 3 service, a field service visit is required and a Cancable technician is dispatched to the customer’s location with rates charged on an hourly basis for residential and commercial customers. Again, this service is presently provided by Rogers personnel only.
Cogeco Cable Inc.
Cancable’s current field supporting work with Cogeco is limited to the Windsor, Ontario area. In November 2003, Cancable assumed exclusive responsibility for all Cogeco-related installation activity. Cancable is currently in discussions on a new two year contract. Under this contract, Cancable’s 20 technicians will be co-located in Cogeco’s facility and the current residential install business will be expanded to include commercial work including all Cogeco commercial Internet sales and technical calls. DependableIT will charge a per call fee for support, and most significantly, earn commission on services sold. In addition the service offering is expanding into Tier 2 service - residential, similar to that currently being provided to Rogers.
Cancable’s competition within its geographical segment is contained to a minimal number of firms. They include Wirecomm, Trinity Cable and J&P Cable among others. We believe that our contracted revenue is significantly higher than any of the other competitors in our geography and thus gain an advantage due to our size and internally efficient systems.
The Contract Field Technical Support Industry
Overview
In 2004, the cable television industry in Canada served 9.3 million homes of which 2.3 million were subscribers to digital cable. While direct to home satellite service providers have penetrated the video market, cable operators continue to maintain an overall 77% market share.
A significant development for both cable and telecom companies has been the acceptance of the internet as a mass medium for commerce and communications involving both residential and commercial consumers. A recent reported stated that, as of 2004, 44% of Canadian homes were connected to high-speed Internet services. Approximately 2.3 million homes connect via cable while 1.9 million connect via telco providers.
At present, Cancable’s management believes that there are approximately 25 providers of contract field technical support serving the Ontario cable television market. Management also believes that this number will be markedly reduced in the near future as evidenced by the vendor consolidation initiative recently completed by Rogers. Management believes that its cable television clients who operate in multiple geographic markets will prefer to align themselves with larger technology enablers, like Cancable, who are able to deploy consistent service on a wider scale and have the expertise and resources to deploy and maintain increasingly complex technologies.
Accordingly, management believes that its target market presents substantial growth opportunities due to:
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the increasingly competitive landscape in the areas of video, internet and telecom delivery, which are requiring cable operators to increase their commitment to quality customer service and strict quality standards;
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a drive for cost reductions on the part of the cable operators, caused by price competition due to “bundling” strategies by them and their competitors;
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the increasing demand by residential and commercial consumers for advanced broadband services such as high-speed internet access, digital video and telephone;
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the need to satisfy the demand for emerging broadband communications technologies such as web-based video conferencing;
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virtual private networks, which are networks run over the internet that provide privacy to the network users;
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Voice-Over-IP (VOIP), which will allow simultaneous two-way voice communication with high-speed data transmission over broadband; and
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the availability of multiple choices for consumers to receive these advanced services, which has led to intensifying competition for subscribers and an increased focus among BSPs on consumer satisfaction, and the need for BSPs to rapidly deploy technology and equipment capable of delivering advanced services to residential and commercial consumers to realize a return on the significant investments they have made to build and upgrade their networks.
Over the next three years Cancable’s management expects to see its industry change significantly for the following reasons:
Increasing Technological Complexity
Each of Cancable’s target market segments is experiencing rapid changes in technology. The convergence of previously separate technologies has produced newer, more complex technologies, such as bundled video, voice and data services. Delivering these services requires more highly trained technicians, cross-trained in several technologies, to provide installation, integration, fulfillment, and long-term maintenance and support services than in the past. For example:
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Cable Internet access. High-speed internet access requires that cable system operators provide initial installation and testing as well as on-going maintenance and support of new technologies, such as cable modems and network cards.
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VOIP. Cable operators are already in the process of utilizing their networks for the provision of local telephone. This area represents a potentially significant source of incremental activity for Cancable.
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Convergence of video and telecom services. Increasingly, traditional telecom carriers are entering the field of entertainment and data delivery, either through strategic investments in alternate technologies (see Direct Broadcast Satellite below) or through the adaptation of the existing telecom infrastructure.
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Direct to home Satellite. Programming services require installation of a satellite receiving antenna or dish and a digital receiver at the consumer premises. In order to facilitate high-speed internet access, additional coordination is required between the satellite technologies and the standard telephone line modem connections that handle outbound communications from the consumer. Although certain DTH equipment may be installed by the consumer, there is a growing trend toward professional installation of satellite equipment.
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Premise networking. Premise networking requires installation, certification and maintenance of high-speed data networks, including LANs/WANs, client/server networks, and video, audio and security networks meeting stringent industry requirements. Substantial resources must be committed to train and retain field technicians in the new technologies. Cancable believes that these increasing knowledge and training requirements present a significant competitive advantage for larger, well-capitalized enabling companies, and provide additional motivation for BSPs to rely on independent technology enablers thereby avoiding costly investments in internal service and fulfillment infrastructures.
Increased Reliance by BSPs on outsourcing
Technological advances and deregulation in the cable, telecommunications, satellite wireless and premise networking industries have provided residential and commercial consumers with multiple choices for receiving advanced services. The escalating competition for end-users has increased competitive pressures on BSPs, which is requiring them to focus more on consumer satisfaction. The providers' need to rapidly upgrade and expand existing systems, as a result of increased competition and growing demand for advanced services, should lead to a continued increase in the level of reliance on independent technology enablers for non-core activities, such as installation, integration, fulfillment, and long-term maintenance, warranty and support services. Management anticipates that BSPs will increase their reliance on independent technology enablers like Cancable to the extent that the enablers provide services that are of a higher quality and more cost efficient than existing, in-house infrastructure, in the same way that providers historically have relied on outside sources for other ancillary functions, such as design and manufacture of consumer premise equipment. Many emerging BSPs, such as DSL and DTH providers, often enter new markets where they have little or no local presence and limited resources to meet the growing demand for their advanced video, voice and data services. These providers typically have no in-house service infrastructure. Cancable believes these BSPs will continue to rely on independent technology enablers to meet their installation and maintenance needs. Cancable believes there will be an increased need for higher value-added services as the broadband industry continues to evolve and recurring upgrades and value-added improvements become more significant. Historically, large corporations with internal information technology departments have been primary users for such applications. However, the rapidly growing demand for such applications from small to medium-sized businesses and residential end-users, which do not have internal deployment and maintenance capabilities, presents additional growth opportunities for independent technology enablers like Cancable.
Emergence of Preferred Providers of Technology Enabling Services
Cancable believes that because of the increasing geographic scope of and complexity of technology deployed by BSPs, there is a growing trend towards long-term, strategic alliances with technology enabling companies, in contrast to the historic, contractual project-by-project arrangements. Cancable believes that its industry is highly fragmented and characterized by smaller, privately held companies that offer a limited range of industry-specific services to a small number of clients in concentrated geographic areas. In Cancable’s experience, BSPs in its target markets who rely on technology enabling companies prefer to align themselves with larger, better capitalized companies that:
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have the expertise and resources to deploy and maintain increasingly complex technologies over large networks;
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consistently deliver high quality service;
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provide regional coverage and have the capacity to work on multiple projects simultaneously; and
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have the ability and willingness to invest in infrastructure to enhance the deployment and maintenance of the advanced technologies demanded by residential and commercial customers.
Industry Trends Specific to the Contract Field Technical Support Industry
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Competition at the client level. Some of Cancable’s customers are in a monopolistic industrial environment. Today, these customers are faced with increasing competition which is forcing them to adapt the new reality. Part of this adaptation includes taking an in-depth review of their internal cost structure to determine which services must be performed by employees and which should be contracted out, at lower cost.
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Consolidation at the client level. The cable television industry in particular has been undergoing a trend towards consolidation for many years. This trend has resulted in changes in the manner in which services are contracted for and has changed the relationship between client and service provider. Relationships today are driven less by personal contacts and more by professional qualifications. Also important to industry relationships today are the service provider’s ability to provide a service level that is uniform across its work force and to integrate its management and reporting systems with those of the client.
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Trend towards contracting out. The above two drivers are causing cable television and telecommunications service providers to move increasingly towards contracting out services that are perceived to be non-core but are manageable through sophisticated systems and a high level of integration between their own internal systems and those of the support provider. While not a current client of Cancable, Bell Canada is leading the trend in this area with almost all of its field service activities contracted out. Cancable believes that its two largest clients, Rogers Cable and Cogeco Cable, contract out approximately two-thirds of their field installation and service call work. Cancable expects that this percentage will continue to increase and that the outsourcing trend will spread to these clients’ other field activities that are currently not outsourced.
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Consolidation among service providers. As an adjunct to consolidation at the client level, larger clients want to increase efficiency by reducing the number of vendors in each area. This trend tends to favor those service providers that are able to scale up to the demands of increased volumes and are able to meet the system integration requirements of the client.
RISK FACTORS
Described below are the material risks that we face. Our business, operating results or financial condition could be materially adversely affected by, and the trading price of our common stock could decline due to, any of these risks.
Competitive pressure from larger firms
The security industry is highly competitive. We compete with a number of large international firms, which have more extensive resources than we do. In addition, these competitors may have greater brand recognition, proprietary technologies and superior purchasing power as well as other competitive advantages.
Risks associated with budget constraints and cut back of customer spending:
We are dependent on large institutional and commercial customers and their budgets. If there are cut backs in budgets by its customers it will adversely impact our revenues.
Risks associated with possible delays of construction schedules
We have contracted to provide security systems to a number of new buildings. Delays in construction of these buildings could potentially delay revenues being realized.
Supplier product failures
We do not currently manufacture our own products and must purchase products from others. It could adversely impact our relationships with our customers if there are delays in receiving products from suppliers or if there are defects in these products.
Contracts with government agencies may not be renewed or funded
Contracts with government agencies accounts for some of our revenues. Many of these contracts are subject to annual review and renewal by the agencies and may be terminated at any time or on short notice. Each government contract is only valid if the agency appropriates enough funds for such contracts. Accordingly, we might fail to derive any revenue from sales to government agencies under a contract in any given future period. In addition, if government agencies fail to renew or terminate any of these contracts, it would adversely affect our business and results of operations.
We have a small number of customers from which we receive a large portion of our sales. Our experience has been that some of these substantial customers will be a source of significant sales in the succeeding year and some will not. Consequently, we are often required to replace one customer with one or more other customers in order to generate the same amount of sales. There can be no assurance that we will continue to be able to do so.
Key personnel losses
Competition for highly qualified technical personnel is intense and we may not be successful in attracting and retaining the necessary personnel, which would limit the rate at which we can develop products and generate sales. In particular, the departure of any of our senior management members or other key personnel could harm our business.
Intellectual property protection risks
Our intellectual property might not be protected. No new intellectual property has been acquired within the last three years. Despite our precautions, it may be possible for unauthorized third parties to copy our products or obtain and use information that we regard as proprietary to create products that compete against ours. If we fail to protect and preserve our intellectual property, we may lose an important competitive advantage. In addition, we may from time to time be served with claims from third parties asserting that our products or technologies infringe their intellectual property rights. If, as a result of any claims, we were precluded from using technologies or intellectual property rights, licenses to the disputed third-party technology or intellectual property rights might not be available on reasonable commercial terms, or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation, either as plaintiff or defendant, could result in significant expenses or divert the efforts of our technical and management personnel from productive tasks, whether or not the litigation is resolved in our favor. A successful claim against us, coupled with our failure to develop or license a substitute technology, could cause our business, financial condition and results of operations to be adversely affected.
We may not be able to increase our bonding
Many of our government contracts require that we obtain bonding. We may not be able to increase our bonding and, therefore, we may not be able to pursue larger projects as a primary contractor.
Fluctuation in quarterly results
Our quarterly results have varied over the past few years and will likely continue to do so. The results will vary based on the timing of the projects, construction schedules and customer budgets. Such fluctuations may contribute to volatility in the market price for our stock.
Lengthy sales cycle
The sale of our products and services frequently involves a significant commitment of resources to evaluate and propose a project. The approval process for our proposals usually involves multiple departments within our clients and may take several months. Accordingly, depending on the length of recording and processing time, a sale can take a prolonged period of time.
We may not be able to successfully make acquisitions or form partnerships as a means of fostering our growth
Our growth strategy involves successfully acquiring companies that will add value to our firm and also build partnerships with companies who can complement our core competencies. We may not be successful in identifying or consummating transactions with such companies.
Continued need for additional financing
To implement our growth plan, we may need additional financing. We will need additional financing upon, but not limited to, any of the following events:
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Changes in operating plans
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Lower than anticipated sales
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Increased costs of expansion
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Increase in competition relating to decrease in price
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Increased operating costs
·
Potential acquisitions
Additional financing may not be available on commercially reasonable terms or may not be available at all.
Cancable Group, one of our major subsidiaries, relies on certain large clients for a significant portion of our revenues
Cancable Group currently derives a significant portion of its revenues from a limited number of clients. For the fiscal year ended December 31, 2007, Rogers Cable TV Limited accounted for approximately 60% of Cancable’s revenues. The services required by any one client can be limited by a number of factors, including industry consolidation, technological developments, economic slowdown and internal budget constraints. Cancable Group’s clients are not obligated to purchase additional services and most of Cancable’s contracts are cancelable on short notice. As a result of these factors, the volume of work performed for specific clients is likely to vary from period to period and a major client in one period may not use Cancable’s services to the same degree in a subsequent period. A temporary or permanent loss of any of Cancable’s key clients could seriously harm its business. If any cancelled contracts were not replaced with contracts from other clients, Cancable’s revenues might decrease and its profitability could be adversely affected.
Cancable will be adversely affected by a decline in the growth of the cable and telecom industries
The broadband communications industry has experienced a high rate of growth. If the rate of growth slows, and broadband service providers reduce their capital investments in upgrades or expansion of their systems, Cancable’s clients may not require the same volume of services from Cancable and it may not be able to execute its growth strategy. In that case, Cancable’s profitability and its prospects could be adversely affected.
Our clients may not rely on the Contract Field Technical Support services we provide
Cancable’s success is dependent on the continued reliance by BSPs on independent companies like Cancable for performance of their installation, integration, fulfillment, and long- term maintenance and support services. If these providers elect to perform these services themselves, Cancable’s revenues may decline and its business could be harmed.
Consolidation of broadband service providers could result in fewer and smaller customers for us
The cable, telecommunications, satellite and wireless industries could experience significant consolidation activity. In addition, the consolidation of Cancable’s clients could have the effect of reducing the number of its current or potential clients, which could result in Cancable’s dependence on a smaller number of clients.
Cancable may face reduced customer demand due to new technologies
Cancable’s industry is subject to rapid changes in technology. Existing technologies for transmission of video, voice and data are subject to potential displacement by various new technologies. New technologies may be developed that allow broadband service providers to deliver their services to consumers without a significant upgrade of their existing systems. Furthermore, new technologies may be developed that enable consumers to perform more easily their own installation and maintenance of the equipment required for the delivery of these services at their premises. Cancable will need to be able to enhance its current service offerings to keep pace with technological developments and to address increasingly sophisticated client needs. Cancable may not be successful in developing and marketing service offerings that respond to technological advances in a timely manner, and its services may not adequately or competitively address the needs of the changing marketplace. If Cancable is not successful in responding in a timely manner to technological changes, market conditions and industry developments, it may lose current clients or be unable to obtain new clients and its business, prospects, operating results and financial condition could suffer.
Cancable may not be able to compete on price with our competitors
Cancable’s industry is fragmented and highly competitive. Accordingly, it cannot be assured of being able to maintain or enhance its competitive position. Historically, there have been relatively few barriers to entry into the markets in which Cancable operates. As a result, any organization that has adequate financial resources and access to technical expertise may become one of our competitors. Competition in the industry depends on a number of factors, including price. Cancable’s competitors may have lower cost structures and may, therefore, be able to provide their services at lower rates than it can. Cancable also faces competition from the in-house service organizations of its existing or prospective clients, which often employ personnel who perform some of the same types of services as it does. If Cancable is unable to maintain or enhance its competitive position, its business, prospects, operating results and financial condition may suffer materially.
Cancable may face an inability to attract and retain qualified employees
Cancable’s ability to provide high-quality services on a timely basis requires that it employ an adequate number of field technicians. Accordingly, its ability to meet the demand for its services will be limited by Cancable’s ability to attract, train and retain skilled personnel. Cancable’s industry is characterized by highly competitive labor markets and, like many of its competitors, historically Cancable has experienced high rates of employee turnover. Furthermore, its labor expenses may increase as a result of a shortage in the supply of skilled personnel and its efforts to improve its employee retention, which could adversely impact its profitability. Cancable cannot be certain that it will be able to improve its employee retention rates or maintain an adequate skilled labor force necessary to operate efficiently and to support its growth strategy. Failure to do so could impair its ability to operate efficiently and maintain its reputation for high quality service. This could also impair Cancable’s ability to retain current clients and attract new clients that could cause its financial performance to decline.
Mismatch of Staffing Levels and Contract Requirements
Since Cancable’s business is driven by large, and sometimes multi-year contracts, Cancable forecasts its personnel needs for future projected business. If Cancable increases its staffing levels in anticipation of a project that is subsequently delayed, reduced or terminated, it may underutilize these additional personnel, which would increase its expenses and could harm its business.
Cancable relies on key senior employees and management
Cancable’s success is substantially dependent upon the retention of, and the continued performance by, its senior management and other key employees, including key employees of companies that it may acquire in the future. If any member of Cancable’s senior management team becomes unable or unwilling to participate in its business and operations and it is not able to replace them in a timely manner, its business could suffer. Cancable does not maintain "key man" life insurance policies on any member of its senior management or any of its key employees.
Cancable is a growing business and may require additional financing which may not be available to us
Cancable may require additional financing, including access to a bank operating line and lease financing for vehicles, to fully implement its business strategy in a timely manner. Cancable’s future requirements will depend on many factors, including continued progress in its client development and expansion programs. There can be no assurance that additional funding will be available or, if available, that it will be available on acceptable terms. If such funding is not available, Cancable may be forced to reduce or eliminate expenditures for further development of its proposed new initiatives and contemplated acquisitions. There can be no assurance that Cancable will be able raise additional capital if its capital resources are exhausted. Cancable’s ability to arrange such financing in the future will depend in part upon prevailing capital market conditions as well as its business performance. Failure to obtain such financing could delay implementation of Cancable’s strategy and could have a material adverse effect on its ability to successfully develop its business. Such financing, if available, could result in dilution to existing shareholders.
We have issued a substantial number of warrants and options and other convertible securities, which may cause the trading price of our securities to decline and may limit our ability to raise capital from other sources:
As of December 31, 2007, there were 7,309,596 shares of common stock issuable upon the exercise of warrants and 3,351,155 shares issuable upon the exercise of options. 3,222,000 shares were related to the Employee Stock Options (see Note 13 in the Financial Statements). Also, included in the balance, 6,570,096 shares of common stock issuable upon the exercise of warrants and 129,155 shares issuable upon the exercise of options were issued to Laurus Master Fund, Ltd (“Laurus”). Additionally, there were 49 shares of common stock of Cancable issuable upon the exercise of options and 20 shares of common stock of Iview issuable upon the exercise of options to Laurus. While these securities are outstanding, the holders will have the opportunity to profit from a rise in the price of our securities with a resulting dilution (upon exercise or conversion) in the value of the interests of our other security holders. Our ability to obtain additional financing during the period these convertible securities are outstanding may be adversely affected and their existence may have a negative effect on the price of our securities. We may be obligated to issue additional shares in payment of accrued interest on our term notes as a result of adjustments to the conversion or exercise prices of our convertible securities. Additional shares of our common stock may be issued if additional amounts are funded under our existing financing arrangements with Laurus or if we obtain additional financings in the future. The happening of certain events such as stock splits, reverse stock splits, stock dividends or certain additional share issuances at prices below the then effective exercise or conversion price would trigger an adjustment in the exercise or conversion price (as applicable). The adjustment would be based upon a weighted average formula in the case of below exercise or conversion price issuances. The adjustment will depend on the number of shares issued and the difference between the issuance price and the then effective exercise or conversion price. Since no such transactions are currently contemplated, it is not presently possible to quantify possible future adjustments. The holders of these securities are likely to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital by a new offering of securities on terms more favorable to us than those of the outstanding warrants and options.
Because our directors own approximately 83% of our outstanding common shares, they could make and control corporate decisions that may be disadvantageous to minority shareholders
Our directors own approximately 83% of the outstanding common shares. Accordingly, they will have a significant influence in determining the outcome of all corporate transactions or other matters, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of our directors may differ from the interests of the other shareholders and thus result in corporate decisions that are disadvantageous to other shareholders.
Exchange rate fluctuations may have adverse effects on our revenues
A portion of our revenues and expenses are denominated in Canadian dollars. As a result, we will be exposed to currency exchange rate risk. Our reported earnings could fluctuate materially as a result of foreign exchange rate fluctuations.
Our substantial debt could adversely affect our financial position
Our substantial indebtedness could have important consequences to you. Our annual debt service requirements related to payments of principal on our $15,805,777 principal amount of term notes are approximately $2,240,356, $6,700,000, $100,000 and $6,765,421 from 2008 to 2011. In addition, interest on the notes is payable on a monthly basis. We also have a series of other notes payable totaling $1,803,030 as of December 31, 2007. The $1,500,000 promissory note included in other notes payable, which were issued by Creative Vistas Acquisition to The Burns Trust and The Navaratnam Trust in connection with the acquisition of AC Technical, have no fixed term of repayment. The note payable was transferred to Malar Trust during Fiscal Year 2006 with the same payment term. The remaining balance of other notes payable in the amount of $303,030 was issued by Cancable Inc. for the acquisition of XL Digital Services Inc. The balance is due in January 2008. The term notes are secured by all of our assets. Interest on term notes are settled in cash. However, in the event we are unable to generate sufficient cash flow from our operations, we may face difficulties in servicing our substantial debt load. In such event, we could be forced to seek protection from our creditors, which could cause the liquidation of the Company in order to repay the secured debt. In any liquidation of us, the holders of our debt (including The Malar Trust) would be required to be paid in full before any payments could be made to the holders of our common stock. In addition, our outstanding indebtedness could limit our ability to obtain any additional financing.
There is no active trading market in our securities
Although, our common stock is quoted on the NASD OTC Bulletin Board, there is no active trading in the stock. A trading market may not develop and stockholders may not be able to liquidate their investment without considerable delay. If a market should develop, the price of our stock may be highly volatile.
Penny Stock regulations apply to our securities:
Our securities are subject to the “penny” stock regulation of Rule 15g-9 of the Securities Exchange Act of 1934. Rule 15g-9 of the Exchange Act is commonly referred to as the “penny stock” rule and imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. A penny stock is any equity security with a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 of the Exchange Act provides that any equity security is considered a penny stock unless that security is: registered and traded on a national securities exchange and meets specified criteria set forth by the SEC; authorized for quotation in the National Association of Securities Dealers’ Automated Quotation System; issued by a registered investment company; issued with a price of five dollars or more; or issued by an issuer with net tangible assets in excess of $2,000,000. This rule may affect the ability of broker-dealers to sell our securities.
For transactions covered by Rule 15g-9, a broker-dealer must furnish to all investors in penny stocks a risk disclosure document, make a special suitability determination of the purchaser, and receive the purchaser’s written agreement to the transaction prior to the sale. In order to approve a person’s account for transactions in penny stocks, the broker-dealer must (i) obtain information concerning the person’s financial situation, investment experience, and investment objectives; (ii) reasonably determine, based on that information that transactions in penny stocks are suitable for the person and that the person has sufficient knowledge and experience in financial matters to reasonably be expected to evaluate the transactions in penny stocks; and (iii) deliver to the person a written statement setting forth the basis on which the broker-dealer made the determination of suitability stating that it is unlawful to effect a transaction in a designated security subject to the provisions of Rule 15g-9(a)(2) unless the broker-dealer has received a written agreement from the person prior to the transaction. Such written statement from the broker-dealer must also set forth, in highlighted format immediately preceding the customer signature line, that the broker-dealer is required to provide the person with the written statement and the person should sign and return the written statement to the broker-dealer only if it accurately reflects the person’s financial situation, investment experience and investment objectives.
Losing our status as a Canadian Controlled Private Corporation could adversely affect our financial position:
A Canadian Controlled Private Corporation (“CCPC”) is a corporation that is not controlled by a non-Canadian entity. If, in the future, more than 50% of the voting shares of AC Technical are owned by a non-Canadian entity, such as by Laurus exercising its rights under the Share Pledge Agreement, we would lose our status as a CCPC. Unless a company is a CCPC, it is not eligible for certain Canadian research and development tax credits. As a non-CCPC, the maximum Canadian research and development tax credits are 20% (for both Federal and Provincial Canadian taxes) of total eligible research and development expenditures. AC Technical is presently entitled to claim the maximum credits available to CCPCs of 41.5% (for both Federal and Provincial Canadian taxes) of the total eligible expenditures. During Fiscal Year 2007, this extra 21.5% totaled approximately $100,000.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Copies of this Annual Report on Form 10-KSB and each of our other periodic and current reports, and amendments to all such reports, that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website (http://www.creativevistasinc.com/) as soon as reasonably practicable after the material is electronically filed with, or furnished to, the SEC. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-KSB and should not be considered part of this Annual Report on Form 10-KSB.
In addition, you may read and copy any document we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our SEC filings are also available to the public at the SEC's web site at http://www.sec.gov , which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 2.
Item 2.
Description of Property
Our office is located at 2100 Forbes Street, Units 8-10, Whitby, Ontario, Canada L1N 9T3. The premises, which were purchased in 2002, consist of approximately 5,900 square feet on the ground floor and 2,200 square feet on the second floor. Additionally, we have another major office location at 2321 Fairview St. Burlington, Ontario L7R 2E3. The premise, which was rented in 2003, consist of approximately 7,600 square feet. The lease will be expired in 2009 with lease payment approximately $77,900 per year. We believe that these offices are adequate for our present purposes and planned expansion. Furthermore, we believe these offices are in good condition and adequately covered by insurance.
Item 3.
Item 3.
Legal Proceedings
None.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders during the fourth quarter of the fiscal year covered by this report.
Item 5.
Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted at the present time on the OTC Bulletin Board under the symbol “CVAS.” At December 31, 2007, the bid price was $2.56 per share and the ask price was $2.80 per share. The security is subject to Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, commonly referred to as the penny stock rule. See “Risk Factors-Penny Stock.” The following table shows the range of bid prices per share of common stock on the OTC Bulletin Board, as reported by Pink Sheets LLC, for the periods indicated. These quotations represent prices between dealers, do not include retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions.
Our securities may not qualify for listing on Nasdaq or any other national exchange. Even if our securities do qualify for listing, we may not be able to maintain the criteria necessary to ensure continued listing. Our failure to qualify our securities or to meet the relevant maintenance criteria after such qualification may result in the discontinuance of the inclusion of our securities on a national exchange. In such event, trading, if any, in our securities may then continue in the non-Nasdaq, over-the-counter market so long as we continue to file periodic reports with the SEC and there remain sufficient qualified market makers in our securities. As a result, a stockholder may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our securities.
We have not declared or paid any cash dividends.
As of December 31, 2007 there were 271 beneficial holders of our Common Stock. We have 34,494,623 outstanding shares of Common Stock.
Our agreements with Laurus prohibit us from declaring or paying any dividends on our Common Stock.
Item 6.
Item 6.
Selected Financial Data
Not applicable.
Item 7.
Item 7.
Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed therein. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties related to the need for additional funds, the rapid growth of the operations and our ability to operate profitably a number of new projects. Except as required by law, we do not intend to publicly release the results of any revisions to those forward-looking statements that may be made to reflect any future events or circumstances.
Overview and Recent Developments
In October 2007, the Company entered into an agreement, through our wholly owned newly formed Ontario subsidiary, Cancable XL Inc. (“Cancable XL”), to acquire all of the issued and outstanding shares of capital stock and any other equity interests of XL Digital Services Inc. (“XL Digital”), an Ontario corporation. The total consideration to be paid by Cancable XL Inc. for the shares of XL Digital will be an amount equal to the earnings before interest, taxes, depreciation and amortization derived from the carrying on of its business by XL Digital for the twelve month period after the completion of the acquisition times 2.5.
On January 22, 2008, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Erato Corporation (“Erato”) pursuant to which the Company purchased and acquired from Erato 2,674,407 shares of common stock, par value $0.0001 per share (the “Shares”), of 180 Connect Inc., a Delaware corporation, for an aggregate purchase price of $6,017,416 paid by the Company by delivery to Erato of (i) 2,195,720 duly and validly issued shares of common stock of the Company and (ii) a common stock purchase warrant, exercisable into up to 812,988 shares of common stock of the Company at an exercise price of $0.01 per share.
On January 22, 2008 the Company entered into a letter agreement with Erato for Erato to provide up to Twelve Million Dollars ($12,000,000) in financing to the Company on such terms and conditions as the Company and Erato shall mutually agree (the “Bridge Financing”). All proceeds from the Bridge Financing may only be used by the Company for the purpose of financing a third party. The Company does not currently have an agreement to provide financing to such third party. Erato is currently an investor in such third party and, through its parent, Laurus Master Fund Ltd., a current investor in the Company. In consideration of the letter agreement, the Company issued to Erato a warrant to purchase up to 1,738,365 shares of common stock of the Company at an exercise price of $0.01 per share.
On January 30, 2008, the Company entered into a Warrant Purchase Agreement with Laurus Master Fund, Ltd., Erato Corporation, Valens U.S. Fund, LLC and Valens Offshore SPV I, Ltd. (collectively, the “Sellers”) pursuant to which the Company purchased and acquired from the Sellers, warrants to purchase 450,000 shares of common stock at an exercise price of $0.01 per share of 180 Connect Inc., a Delaware corporation (the “180 Connect Warrants”).
Also on January 30, 2008, the Company entered into a non-binding letter of intent with Valens U.S. Fund, LLC (the “Letter Agreement”) in which Valens U.S. Fund, LLC confirmed its current intention to provide up to $4,000,000 in financing to a subsidiary of the Company. The Letter Agreement is only an expression of the present intentions of the parties and no binding legal obligation will exist until the parties sign a definitive agreement.
The aggregate purchase price paid by the Company in exchange for the 180 Connect Warrants and the Letter Agreement was $1,597,500 paid by the Company by delivery to the Sellers of common stock purchase warrants, exercisable in the aggregate into up to 798,750 shares of common stock of the Company at an exercise price of $0.01 per share. The purchase price was allocated by the Company as follows: (a) $1,012,500 or $2.25 per share was paid by the Company for the 180 Connect Warrants by delivery to the Sellers of warrants to purchase 506,250 shares of common stock of the Company at an exercise price of $0.01 per share and (b) the Company paid to the Sellers for the Letter Agreement warrants to purchase 292,500 shares of common stock of the Company.
Results of Operations
Comparison of Year Ended December 31, 2007
to Year Ended December 31, 2006
Sales: Sales for Fiscal Year 2007 increased to $39,991,100 from $30,456,900 for Fiscal Year 2006. This 31.3% increase reflects continued growth in revenue resulting from Cancable segment. The revenue from Cancable segment was $32,316,400 for Fiscal Year 2007.
(a) Cancable Segment - This segment included Cancable Inc., XL Digital and OSS-IM View (collectively, “Cancable Group”). The principal activity is the provisioning the deployment and servicing of broadband technologies in both residential and commercial markets. The Cancable Group service offering, network deployment, IT integration, and support services, enable the cable television and telecommunications industries to deliver a high quality broadband experience to their customers. In October 2007, we acquired XL Digital which is incorporated under the laws of Ontario and with the same principal business activity of Cancable Inc. XL Digital, with over 70 employees, provides its deployment and provisioning services for Rogers Cable Inc. within two territories where the Company currently does not have a presence. Total revenue of this segment for Fiscal Year 2007 was $32,316,400 from $23,779,400 for the Fiscal Year 2006. We continued to allocate resources to support the growth of our business. Rogers Cable Inc. is Cancable Group’s largest customer and the revenue from this customer for the Fiscal Year 2007 was approximately $24,397,000 or 75.5% of its total revenue compared to $18,695,200 or 78.6% for Fiscal Year 2006.
(b) AC Technical segment - Total revenue of AC Technical segment was $7,531,300 compared to $6,492,200 for Fiscal Year 2006. Contract revenue increased to $5,986,900 for Fiscal Year 2007 compared to $5,229,000 for Fiscal Year 2006. This increase was mainly due to an increase in the number of subcontracts for the provision of services to government and commercial contracts. Contract revenue from three of our major customers was $1,295,400 in 2007. Two major contracts for Fiscal Year 2007 were to supply and install two court houses in Canada. Total contract price of these two projects were approximately $1,200,000. The service revenue has increased to $1,544,400 for the year ended December 31, 2007 from $1,282,000 for the year ended December 31, 2006. Service revenue primarily represents the cumulative effect of the growth in contracts and number of customers over the past few years. We have experienced a significant increase in the number of inquiries for systems from the government and retail sector. This increased interest in security products and services may result in our achieving increased revenues in future periods if we are successful in attracting new customers or obtaining additional projects from existing customers. There is no assurance that the Company will be able to attract new customers.
(c) Iview DSI segment - Iview is a technology company that specializes in both security and digital video processing technologies. Expertise in both these areas enables us to address a broad spectrum of our customers' needs with intelligent and most importantly, reliable digital video security solutions. Total revenue for Fiscal Year 2007 was $140,000 compared to $157,600 for Fiscal Year 2006. Iview launched its digital video security product in Fiscal Year 2006.
Cost of Goods Sold: Cost of goods sold as a percentage of revenue for Fiscal Year 2007 was $28,329,200 or 70.8% of revenues compared to $20,511,000 or 67.3% of revenues for Fiscal Year 2006.
(a) Cancable segment - Cost of sales in this segment were $24,126,000 for Fiscal Year 2007 compared to $16,981,000 for Fiscal Year 2006. The increase was mainly due to the growth in our cable business. Costs were comprised principally of labor expenses of $18,368,900, vehicle expenses of $2,246,500 and material costs of $2,522,500.
(b) AC Technical segment - Cost of sales in this segment were $4,136,700. The material cost was $2,657,700 or 35.3% of the AC Technical revenue for Fiscal Year 2007 compared to $2,053,800 or 31.5% of revenues in Fiscal Year 2006. The increase in percentage of the material cost was mainly due to some contracts with higher percentage of materials. On the other hand, labor and subcontractor costs decreased to $1,414,900 or 18.8% of AC Technical revenues for Fiscal Year 2007 and $1,322,600 or 20.3% of AC Technical revenues for Fiscal Year 2006. The increase in labor and subcontractor cost was mainly due to the increase in revenue. The percentage of the labor and subcontractor cost remains stable for two fiscal years.
(c) Iview DSI - Cost of sales in this segment was $66,500. The balance mainly represents material and shipping cost.
Project, Selling, General and Administrative Expenses: Projects, selling, general and administrative expenses for Fiscal Year 2007 was $10,169,800 or 25.4% of revenues for Fiscal Year 2007 compared to $9,143,500 or 30.0% of revenues for Fiscal Year 2006. The balance is mainly comprised of the following:
Project cost was $1,311,600 or 3.2% of revenue for Fiscal Year 2007, compared to $1,272,900 or 4.2% for fiscal year 2006. Project cost was mainly related to AC Technical segment. The balance mainly includes the salaries and benefits of indirect staff amounting to $758,000 for Fiscal Year 2007 compared to $808,200 for Fiscal Year 2006 with no material difference. The decrease in balance was mainly due to the decrease in the staff headcount. The automobile and travel expenses were approximately $309,700 for Fiscal Year 2007 compared to $351,400 for Fiscal Year 2006. The decrease in balance was mainly due to less travel by the staff, a decrease in the number of vehicles, and a decrease in leasing cost.
Selling expenses were $797,800 or 2.0% of revenues for Fiscal Year 2007 compared to $679,600 or 2.2% of revenues for Fiscal Year 2006. Selling expenses were mainly related to AC Technical segment. As of December 31, 2007 we had 5 salespersons in the AC Technical segment, which is one more than we had on December 31, 2006. The balance for Fiscal Year 2007 is mainly comprised of salaries and commissions to salespersons of $504,000 compared to $540,600 for Fiscal Year 2006. The advertising, promotion and trade show expenses were $84,100 for Fiscal Year compared to $71,100 for Fiscal Year 2006 with no material fluctuation.
General and administrative expenses were $8,060,400 or 20.2% of revenues for Fiscal Year 2007 compared to $7,191,000 or 23.6% for Fiscal Year 2006. The balance for Fiscal Year 2007 is comprised of $850,000 of investor relations expenses compared to $486,300 fees for Fiscal Year 2006. Included in the balance for Fiscal Year 2007, there was $626,000 relating to non-cash expenses compared to $356,300 for the Fiscal Year 2006. Total salaries and benefits to administrative staff were $2,553,700 for Fiscal Year 2007 compared to $2,683,400 for last year. Total depreciation of property plant and equipment was $1,685,200 for Fiscal Year 2007 compared to $986,500 for Fiscal Year 2006. The increase was primarily attributable to the addition of capital assets in Cancable segment for the growth of the business. Additionally, the balance also included amortization of intangible assets in the amount of $637,500 for Fiscal Year 2007 compared to $600,000 for Fiscal Year 2006.
Interest and Other Expenses (Income): Interest and net other expenses for Fiscal Year 2007 was $2,073,700 compared to interest and other expenses of $6,344,200 for Fiscal Year 2006. The balance for Fiscal Year 2007 included amortization of deferred charges of $182,400 compared to $782,900 for Fiscal Year 2006. Last year’s balance was higher as we have written off the deferred financing costs amounting to $600,500 carried forward from Fiscal Year 2005. The Company has paid off the entire outstanding principal amount and all obligations due to Laurus under the Secured Convertible Term Note dated September 30, 2004, the Secured Convertible Minimum Borrowing Note dated September 30, 2004, and the Secured Revolving Note dated September 30, 2004 through a refinancing transaction in February 2006. Additionally, net financing expenses decreased to $2,955,100 or 7.3% of revenues compared to 4,617,800 or 15.2% of revenues for Fiscal Year 2006. The balance for Fiscal Year 2007 included $895,000 related to the warrants issued to Laurus as interest on deferred principal repayment of our term loan. Last year’s balance was higher as it included the 2,411,003 warrants issued to Laurus with market value of $1,913,600 at the date of issuance, and cash payments of $539,300 as the penalties of the prepayment of the entire loans to Laurus in the refinancing transaction. Interest payable to term notes was $1,645,100 for Fiscal Year compared to $1,683,900 for the Fiscal Year 2006. The decline in balance was due to the decrease in the outstanding balance of term notes to $15,805,800 as at December 31, 2007 from $16,869,900 as at December 31, 2006.
Income taxes: There is no income tax provision for Fiscal Year 2007, which was mainly due to losses carried forward to offset all income generated. All prior taxes have already been accounted for in the income tax recoverable and therefore, there is no additional provision for income taxes recoverable and deferred tax assets.
Net Income/Loss: As a result of the above, net loss for Fiscal Year 2007 was $581,600 compared to a net loss of $5,541,900 for Fiscal Year 2006. Our operating income was $1,492,100 for Fiscal Year 2007 compared to operating income $802,300 for Fiscal Year 2006. The increase was primarily attributed to the significant growth of Cancable and a decrease in financing costs.
Liquidity and Capital Resources
Since our inception, we have financed our operations through bank debt, loans and equity from our principals, loans from third parties and funds generated by our business. At December 31, 2007, we had $1,960,300 in cash. We believe that cash from operations and our credit facilities with Laurus will continue to be adequate to satisfy our ongoing working capital needs. During Fiscal Year 2008, our primary objectives in managing liquidity and cash flows will be to ensure financial flexibility to support growth and entry into new markets and improve inventory management and to accelerate the collection of accounts receivable.
Net Cash Used in Operating Activities. Net cash provided in operating activities amounted to $564,200 for Fiscal Year 2007. The changes in operating assets and liabilities resulted in net cash provided of $2,138,500, which included a $1,668,900 increase in accounts receivable, a $184,200 increase in inventory, a $59,600 decrease in prepaid expenses, a $322,400 decrease in accounts payable, a $33,400 decrease in income taxes recoverable and a $11,000 increase in deferred revenue.
Comparative balance sheet as at December 31, 2007 to December 31, 2006
Accounts Receivable
Our accounts receivable increased to $6,187,600 as of December 31, 2007 from $3,864,100 as of December 31, 2006. Accounts receivable of Cancable as at December 31, 2007 was $3,989,100 compared to $1,799,500 as at December 31, 2007. The increase was attributable to the increase in revenue for approximately 36%. Accounts receivable of the AC Technical segment was $2,083,200 as at December 31, 2007 compared to $2,040,800 as of December 31, 2006. There was no material fluctuation of the balances.
Inventory
Inventory on hand on December 31, 2007 increased to $1,043,800 compared to $764,100 as of December 31, 2006. Inventory of the AC Technical segment was $639,000 compared to $430,300 as of December 31, 2005. The increased level of inventory of the AC Technical segment was associated with more purchases were required for the sales expected in the first quarter of 2008. Inventory at Cancable segment was increased to $363,600 as at December 31, 2007 from $250,400 as at December 31, 2006. The increase was mainly due to the increase in revenue.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities increased to $6,074,200 compared to the balance as of December 31, 2006 of $4,655,000. The balance for the AC Technical segment was $2,245,000 as of December 31, 2007 compared to $1,826,000 as of December 31, 2006. Accounts payable for Cancable Group was $3,348,000 as at December 31, compared to $2,480,000 as at December 31, 2006. The increase in balance was mainly due to the increase in purchases of material in the last three months and the timing of payments to our suppliers.
Deferred Revenue
Deferred revenue increased to $91,900 at December 31, 2007 compared to the balance of $68,300 as at December 31, 2006. This increase was mainly due to the timing of payments by our customers. Deferred revenue primarily relates to payments associated with the contracts where revenue is recognized on a percentage of completion basis. (See summary of accounting policy in our condensed consolidated financial statements).
Incomes Taxes Recoverable
The income taxes recoverable were mainly due to the expected refund from losses carried back to prior years.
Net Cash Used in Investing Activities. Net cash used in investing activities was $719,200 for the twelve months ending December 31, 2007 compared to net cash received in investing activities of $1,209,500 for the twelve months ended December 31, 2006. The balance for the twelve months ending 2007 was mainly related to the acquisition of capital assets. Last year’s balance was mainly related to cash received during the acquisition of Cancable in the amount of $1,226,800 and proceeds of sales of property and equipment in the amount of $454,400.
Net Cash Used in Financing Activities. Net cash used in financing activities was $1,394,800 for the twelve months ending December 31, 2007 compared to net cash provided of $887,500 for the months ending December 31, 2006. Last year’s balance mainly represents the additional borrowings from Laurus from the refinancing transaction in 2006. The whole entire revolving loans and convertible debts entered in 2004 were repaid during the same period.
Our capital requirements have grown since our inception with the growth of our operations and staffing. We expect our capital requirements to continue to increase in the future as we seek to expand our operations. On September 30, 2004, we obtained additional funding through a series of agreements with Laurus. In 2006, through our wholly owned subsidiary, we acquired all of the issued and outstanding shares of capital stock and any other equity interests of Cancable. Simultaneously, Cancable entered into a series of agreements with Laurus whereby Cancable issued to Laurus a secured term note (the “Cancable Note”) in the amount of $6,865,000. Also, we completed the refinancing transaction in February 2006; we issued to Laurus a secured term note (the “Company Note”) in the amount of $8,250,000, Iview DSI issued to Laurus a secured term note (the “Iview Note”) in the amount of $2,000,000. Simultaneously with the closing of this refinancing transaction, we paid off the entire outstanding principal amount and all obligations due to Laurus under the Secured Convertible Term Note dated September 30, 2004, the Secured Convertible Minimum Borrowing Note dated September 30, 2004 and the Secured Revolving Note dated September 30, 2004 (collectively, the “2004 Notes”) and such 2004 Notes were subsequently cancelled.
Over the next twelve months we believe that our existing capital will be sufficient to sustain our operations. Management plans to seek additional capital in the future to fund operations, growth and expansion through additional equity, debt financing or credit facilities. We have had early stage discussions with investors about potential investment in our firm at a future date. No assurance can be made that such financing would be available, and if available it may take either the form of debt or equity. In either case, the financing could have a negative impact on our financial condition and our shareholders.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard establishes a standard definition for fair value, establishes a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption of this statement is not expected to have any material effect on our financial position or results of operations.
In September 2006, the FASB issued Financial Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R),” or FAS 158. This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to (a) recognize the funded status of a benefit plan-measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation-in its statement of financial position; (b) recognize, as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FAS 87, Employers’ Accounting for Pensions, or FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions; (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions); and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. This statement is not expected to have a significant effect on our financial statements.
In February 2007, the FASB issued Financial Accounting Standard No. 159 The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 or FAS 159. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of this Statement apply only to entities that elect the fair value option.
The following are eligible items for the measurement option established by this Statement:
1.
Recognized financial assets and financial liabilities except:
a.
An investment in a subsidiary that the entity is required to consolidate
b.
An interest in a variable interest entity that the entity is required to consolidate
c.
Employers’ and plans’ obligations (or assets representing net overfunded positions) for pension benefits, other postretirement benefits (including health care and life insurance benefits), post employment benefits, employee stock option and stock purchase plans, and other forms of deferred compensation arrangements.
d.
Financial assets and financial liabilities recognized under leases as defined in FASB Statement No. 13, Accounting for Leases.
e.
Deposit liabilities, withdrawable on demand, of banks, savings and loan associations, credit unions, and other similar depository institutions
f.
Financial instruments that are, in whole or in part, classified by the issuer as a component of shareholder’s equity (including “temporary equity”). An example is a convertible debt security with a noncontingent beneficial conversion feature.
2.
Firm commitments that would otherwise not be recognized at inception and that involve only financial instruments
3.
Nonfinancial insurance contracts and warranties that the insurer can settle by paying a third party to provide those goods or services
4.
Host financial instruments resulting from separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument.
The fair value option:
1.
May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
2.
Is irrevocable (unless a new election date occurs)
3.
Is applied only to entire instruments and not to portions of instruments.
The Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. We have not yet determined what effect, if any, adoption of this Statement will have on our financial position or results of operations.
SAB 108 - ‘Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements’
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on the consideration of the effects of prior year unadjusted errors in quantifying current year misstatements for the purpose of a materiality assessment. Adoption of this statement is not expected to have any material effect on our financial position or results of operations.
FIN 48 - ‘Accounting for Uncertainty in Income Taxes’
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, an interpretation of SFAS No. 109. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, we shall initially recognize tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. We shall initially and subsequently measure such tax positions as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include an annual tabular roll-forward of unrecognized tax benefits. We will adopt this interpretation as required in 2007 and will apply its provisions to all tax positions upon initial adoption with any cumulative effect adjustment recognized as an adjustment to retained earnings. Adoption of this statement is not expected to have any material effect on our financial position or results of operations.
EITF 00-19-2, "Accounting for Registration Payment Arrangements".
In December 2006, the FASB issued Staff Position FSP EITF 00-19-2, "Accounting for Registration Payment Arrangements". This statement is effective for existing registration payment arrangements as of January 1, 2007, with earlier application permitted in previously-unissued financial statements. As discussed in Note 8 and as permitted by the FSP, we adopted the provisions of this FSP in our fourth quarter of 2006, resulting in re-classification of certain of our outstanding warrants from derivative instrument liabilities to equity.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. The Company has not yet determined the impact, if any, of SFAS 160 on its consolidated financial statements.
Off Balance Sheet Arrangements
None
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified six critical accounting estimates: accounts receivable allowances, goodwill, revenue, inventory, accounting for income taxes and financial instrument.
Accounts receivable allowances are determined using a combination of historical experience, current information and management judgment. Actual collections may differ from our estimates. A 10% increase in the accounts receivable allowance would increase bad debt expense by $40,000.
Goodwill represents the excess of cost over the net tangible and identifiable assets acquired in business combinations and are stated at cost. Goodwill and intangibles with indefinite lives are not amortized but tested for impairment no less frequently than annually. Impairment is measured by comparing the carrying value to fair value using quoted market prices, a discounted cash flow model, or a combination of both.
We derive revenues from contract revenue and services revenue, which include assistance in implementation, integration, customization, maintenance, training and consulting. We recognize revenue for contract and services in accordance with Statement of Position (SOP) 81-1, “Accounting for Certain Construction Type and Certain Production Type Contracts,” and SEC Staff Accounting Bulletin (SAB) 104, “Revenue Recognition,” and EITF 00-21 Accounting for Revenue Arrangements with Multiple Deliverables. Contract revenue consists of fees generated from installation of security systems. Services revenue consists of fees generated by providing monitoring services, preventive maintenance and technical support, product maintenance and upgrades. Monitoring services and preventive maintenance and technical support are generally provided under contracts for terms varying from one to six years. A customer typically prepays monitoring services, preventive maintenance and technical support fees for an initial period. The related revenue is deferred and generally recognized over the term of such initial period. Rates for product maintenance and upgrades are generally provided under time and material contracts. Revenue for these services is recognized in the period in which the services are provided.
We record inventory at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. We write down our inventory for obsolescence, and excess inventories based on assumptions about future demand and market conditions. The business environment in which we operate is subject to customer demand. If actual market conditions are less favorable than those estimated, additional material inventory write-down may be required. A 10% increase in inventory reserve would increase expenses by $0.1 million.
Income taxes are calculated based on the expected treatment of transactions recorded in the consolidated financial statements. In determining current and deferred components of income taxes, we interpret tax legislation and make assumptions about the timing of the reversal of deferred tax assets and liabilities. If our interpretations differ from those of tax authorities or if the timing of reversals is not as anticipated, the provision for income taxes could increase or decrease in future periods.
We review the terms of convertible debt and equity instruments we issue to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. Generally, where the ability to physical or net-share settle the conversion option is deemed to be not within our control, the embedded conversion option is required to be bifurcated and accounted for as a derivative financial instrument liability.
In connection with the sale of convertible debt and equity instruments, we may also issue freestanding options or warrants. Additionally, we may issue options or warrants to non-employees in connection with consulting or other services they provide. Although the terms of the options and warrants may not provide for net-cash settlement, in certain circumstances, physical or net-share settlement is deemed to not be within the control of the company and, accordingly, we are required to account for these freestanding options and warrants as derivative financial instrument liabilities, rather than as equity.
Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, we use the Black-Scholes option pricing model to value the derivative instruments. Any discount from the face value of the convertible debt instrument is amortized over the life of the instrument through periodic charges to income, using the effective interest method. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
Commitments
We have entered into contracts for certain consulting services providing for monthly payments and are required to repay the principal of our convertible notes and promissory notes due to Laurus and other parties. In addition, we have also entered into an operating lease for our vehicles, computer and office equipment. The total minimum annual payments for the next five years are as follows:
Payments due by Period
* The balance represents monthly principal and interest payment
Except for capital leases, the above figures do not include interest cost.
Item 8.
Item 8.
Financial Statements
Creative Vistas, Inc.
Consolidated Financial Statements
For the years ended December 31, 2007 and 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Creative Vistas, Inc.
We have audited the accompanying consolidated balance sheets of Creative Vistas, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, and comprehensive (loss), stockholders’ (deficiency) and cash flows for the years ended December 31, 2006 and 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Creative Vistas, Inc. as of December 31, 2007 and 2006, and results of its operations and its cash flows for the years ended December 31, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has working capital and stockholder deficiencies. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Stark Winter Schenkein & Co., LLP
Denver, Colorado
March 31,
Creative Vistas, Inc.
Consolidated Balance Sheets
December
The accompanying notes are an integral part of these financial statements.
Creative Vistas, Inc.
Consolidated Statement of Stockholders’ (Deficiency)
For the years ended December 31, 2006 and 2007
The accompanying notes are an integral part of these financial statements.
For the years ended December 31
The accompanying notes are an integral part of these financial statements.
Creative Vistas, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
(a) In January 2006, the Company entered into a series of agreements with Laurus whereby Cancable Inc. issued to Laurus a secured term note in the amount of $6,865,000. The proceeds of the term note were used to pay off certain debts of Cancable Inc. to its previous stockholders, Covington and BMO, in the amount of $6,013,500 and professional fees in the amount of $650,600. Cancable Inc. has received cash $201,000 from this transaction. Part of the professional fees in the amount of $455,400 were recorded as deferred financing costs.
(b) In February 2006, the Company entered into a series of agreements with Laurus for the refinancing transaction whereby the Company issued Laurus a secured term note in the amount of $8,250,000. The proceeds of the term note were used to pay off outstanding revolving credit facilities and convertible term notes in the amount of $7,099,800, prepayment penalties in the amount of $539,300 and professional fees in the amount of $117,600. The professional fees were recorded as deferred charges. The Company has received cash $493,200 from this transaction.
(c) During the refinancing transaction mentioned above, the Company also issued a secured term note in the amount of $2,000,000. $500,000 was restricted cash which the Company has used it for the repayment of principal and interest of this term note. After the payment of professional fees in the amount of $148,000, the Company has received cash $1,425,902 from this transaction. The professional fees were recorded as deferred charges.
The accompanying notes are an integral part of these financial statements.
Creative Vistas, Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2007 and 2006
1.
Summary of Accounting Policies
Basis of presentation
The accompanying financial statements as at and for the years ended December 31, 2007 and 2006 have been prepared by management in accordance with United States generally accepted accounting principles (“GAAP”) applicable to the respective periods.
The consolidated balance sheets as at December 31, 2007 and statement of operations and cash flows for the year end December 31, 2007 include the accounts of Creative Vistas, Inc. (“CVAS”), Creative Vistas Acquisition Corp. (“AC Acquisition”), AC Technical Systems Ltd. (“AC Technical”), Cancable Holding Corp. (“Cancable Holding”), Cancable Inc., Cancable, Inc., Cancable XL Inc., XL Digital Services Inc. (“XL Digital”), 2141306 Ontario Inc., Iview Holding Corp. (“Iview Holding”), and Iview Digital Solutions Inc. (“Iview DSI”). The consolidated balance sheets as at December 31, 2006 and statement of operations and cash flows for the year end December 31, 2006 include the accounts of CVAS, AC Acquisition, AC Technical, Cancable Holding, Cancable, Inc., Iview Holding and Iview DSI. All material inter-company accounts, transactions and profits have been eliminated.
Reclassifications
Certain amounts from the December 31, 2006 financial statements have been reclassified to conform to the current year’s presentation.
Liquidity and going concern
Our consolidated condensed financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have incurred a loss of $581,606 for the year ended December 31, 2007 and have an accumulated deficit of $12,445,468 at December 31, 2007.
We have outstanding term loans aggregating $15,805,777, together with common stock options and warrants, held by Laurus. We do not currently have the ability to repay the notes in the event of a demand by the holder. Furthermore, we granted a security interest to Laurus in substantially all of our assets and, accordingly, in the event of any default under our agreements with Laurus, they could conceivably attempt to foreclose on our assets, which could cause us to terminate our operations. As of December 31, 2007, there were 6,570,096 shares of common stock issuable upon the exercise of warrants and 129,155 shares issuable upon the exercise of options which were issued to Laurus. Additionally, there were 49 shares of common stock of Cancable Holding issuable upon the exercise of options and 20 shares of common stock of Iview Holding issuable upon the exercise of options to Laurus.
Over the next twelve months the Company believes that its existing capital will be sufficient to sustain its operations. Management plans to seek additional capital in the future to fund operations, growth and expansion through additional equity, debt financing or credit facilities. The Company has had early stage discussions with investors about potential investment in the Company at a future date. No assurance can be made that such financing would be available, and if available it may take either the form of debt or equity. In either case, the financing could have a negative impact on our financial condition and our shareholders. The Company has introduced cost cutting initiatives within the Administration, Project and Selling departments to improve efficiency within the Company and also improve cash flow. The Company has also increased its rates for service provided by AC Technical by 20 percent to improve gross margins. This is in line with our competitors. The Company also expects to see the benefits of its research and development efforts within the next 12 months as it starts to introduce its own line of customized products to the industry. These products and technologies are expected to improve gross margins. The Company believes that it will be eligible for research and development tax credits at year end for its research and development efforts during the year and these are additional sources of cash flow for the Company. The Company is also negotiating longer credit terms with its suppliers from days to 60 to 75 days. For all the reasons mentioned above, we believe that we have adequate short term borrowing capability and that we will be able to sustain our operations and continue as a going concern for a reasonable period of time although there can be no assurance of this.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Cash and Cash Equivalents
The Company considers all cash and highly liquid investments purchased with an initial maturity of three months or less to be cash and cash equivalents.
The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash and cash equivalents.
The Company’s cash and cash equivalents were $1,960,340 and $3,560,181 as at December 31, 2007 and 2006.
The Company has deposits at two financial institutions in the amount of $1,034,700 amd $1,022,800 as at December 31, 2007 and 2006.
Accounts Receivable
The Company extends credit to its customers based upon a written credit policy. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate for the amount of probable credit losses in the Company’s existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Investment Tax Credits
Investment tax credits are accrued when qualifying expenditures are made and there is reasonable assurance that the credits will be realized. Investment tax credits earned with respect to current expenditures for qualified research and development activities are included in the statement of operations as a reduction of expenses. Tax credits earned with respect to capital expenditures are applied to reduce the cost of the related capital assets.
Research and Development Expenditures
Research and development costs (other than capital expenditures) are expensed as incurred. Expenditures are reduced by any related investment tax credits.
Advertising cost
Advertising cost are expensed as incurred. Total advertising cost was approximately $46,000 and $42,000 for the year ended December 31, 2007 and 2006.
Inventory
Inventory consists of materials and supplies and is stated at the lower of cost and market value. Cost is generally determined on the first in, first out basis. The inventory is net of estimated obsolescence, and excess inventory based upon assumptions about future demand and market conditions. Inventory consists principally of parts, materials and supplies.
Property and Equipment
Property and equipment is stated at original cost. Expenditures for improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed when incurred. Depreciation per annum is computed over the estimated useful life as follows:
Industrial condominium
4% declining balance basis
Leasehold improvements
lesser of 5 years or the term of the lease straight-line basis
Office equipment
20% declining balance basis or 3 years straight-line method
Office equipment under capital leases
years straight-line method
Furniture and fixtures
20% declining balance basis or 3 years straight-line method
Furniture and fixtures under capital leases
years straight-line method
Computer hardware and software
30% declining balance basis or 3 years straight-line method
Computer hardware and software under
capital leases
years straight-line method
Vehicles
years straight-line basis
Vehicles under capital leases
years straight-line basis
Tools and equipment
years straight-line basis
Customer Relationships and Trade Name
Customer relationships and trade name represents the acquisition cost of acquired customer relationships and trade name of Cancable and XL Digital are recorded at cost less accumulated amortization. Amortization for customer relationships and trade name is provided on a straight-line basis over the period of expected benefit of 5 and 3 years. The Company reviews the revenues from the customer list at each balance sheet date to determine whether circumstances indicate that the carrying amount of the asset should be assessed. Management determined there was no impairment at December 31, 2006 and 2007. Amortization charged to operations aggregated $637,539 in 2007 and $600,000 in 2006.
Long-Lived Assets
The Company reviews its long-lived assets for impairment at each balance sheet date and whenever events or changes in circumstances indicate that the carrying amount of an asset should be assessed. To determine if an impairment exists, the Company estimates the future undiscounted cash flows expected to result from the use of the asset being reviewed for impairment. If the sum of these expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The amount of the impairment recognized is determined by estimating the fair value of the assets and recording a loss for the excess of the carrying value over the fair value. Management determined there was no impairment at December 31, 2006 and 2007.
Goodwill
Goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred. Statement of Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, (“SFAS No. 142”) requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill so calculated, an impairment loss is recognized in an amount equal to the excess. Management determined there was no impairment at December 31, 2006 and 2007.
Deferred Financing Costs
Deferred financing costs represent costs directly related to obtaining of financing. Deferred financing costs are amortized over the term of the related indebtedness using the effective interest method.
Issuance of Equity Instruments for Services
In December 2004, the FASB issued SFAS 123 (revised 2004) “Share-Based Payment”. This Statement requires that the cost resulting from all share-based transactions be recorded in the financial statements. The Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions. The Statement replaces SFAS 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. The provisions of this Statement were effective for the Company beginning with its fiscal year ending December 31, 2006. Stock-based awards to non-employees are accounted for in accordance with the provisions of the FASB issued SFAS 123 (revised 2004) “Share-Based Payment” and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services.
Revenue Recognition
Contract Revenue
Software Related Services - Software related services include services to customize or enhance the software so that the software performs in accordance with specific customer requirements. As these services are essential to provide the required functionality, revenue from these arrangements is recognized in accordance Statement of Position (SOP) 81-1, “Accounting for Certain Construction Type and Certain Production Type Contracts, using either the percentage-of-completion method or the completed contract method. The percentage-of-completion method is used when the required services are quantifiable, based on the estimated number of labor hours necessary to complete the project, and under that method revenues are recognized using labor hours incurred as the measure of progress towards completion but is limited to revenue that has been earned by the attainment of any milestones included in the contract. The completed contract method is used when the required services are not quantifiable, and under that method revenues are recognized only when we have satisfied all of our product and/or service delivery obligations to the customer.
Security Systems - Security systems revenue consists of fees generated from consulting, audit, review, planning, engineering and design, supply of hardware systems installation and project management. Revenue from contracts where performance extends beyond one or more accounting periods is recognized in accordance with SOP 81-1, SEC Staff Accounting Bulletin 104, “Update of Codification of Staff Accounting Bulletins” and EITF 00-21, “Revenue Arrangements with Multiple Deliverables”. The recognition of revenue reflects the degree of completeness based upon project drawings, project schedules, progress of actual installation and are further validated by visual observations by product managers, quality inspectors and construction advisors, if applicable. When the current estimated costs to complete indicate a loss, such losses are immediately recognized for accounting purposes. Some projects have the equipment and installation as separate elements specified in the contracts. The revenue is recognized when each element has been satisfied in accordance with SOP81-1 and SEC Staff Accounting Bulletin 104, which are the delivery of the equipment and completion of installation process. The fair value of each element was based on the price charged when it is sold on a standalone basis.
For contracts of shorter duration, revenue is generally recognized when services are performed. Contractual terms may include the following payment arrangements: fixed fee, full-time equivalent, milestone, and time and material. In order to recognize revenue, the following criteria must be met:
·
Signed agreement - The agreement must be signed by the customer.
·
Fixed Fee - The signed agreement must specify the fees to be received for the services.
·
Delivery has occurred - Delivery is substantiated by time cards and where applicable, supplemented by an acceptance from the customer that milestones as agreed in the statement have been met.
·
Collectibility is probable - The Company conducts a credit review for significant transactions at the time of the engagement to determine the credit-worthiness of the customer. Collections are monitored over the term of each project, and if a customer becomes delinquent, the revenue may be deferred.
Service Revenue
Service revenue consists of fees generated by providing monitoring services, preventive maintenance and technical support, product maintenance and upgrades and regional broadband and cable service. Monitoring services and preventive maintenance and technical support are generally provided under contracts for terms varying from one to six years. A customer typically prepays monitoring services and preventive maintenance and technical support fees for an initial period, and the related revenue is deferred and generally recognized over the term of such initial period. Rates for product maintenance and upgrades are generally provided under time and material contracts. Revenue for these services is recognized in the period in which the services are provided
Warranty
The Company carries a reserve based upon historical warranty claims experience. Additionally, warranty accruals are established on the basis of anticipated future expenditures as specific warranty obligations are identified and they are charged against the accrual. Expenditures exceeding such accruals are expensed direct to cost of sales.
Earning (loss) per share
The Company applies SFAS No. 128, “Earnings Per Share”. Basic earning (loss) per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common stock issuable upon exercise of stock options and warrants and conversion of debt using the treasury stock method. Adjustments to earnings per share calculation include reversing interest related to the convertible debts and changes in derivative instruments.
Financial Instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturities of those instruments. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of term notes convertible notes and notes payable are also approximate fair value except notes payable due to The Burns Trust and the Navaratnam Trust and related party balances for which the fair value is not determinable.
We review the terms of convertible debt and equity instruments we issue to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. Generally, where the ability to physical or net-share settle the conversion option is deemed to be not within the control of the company, the embedded conversion option is required to be bifurcated and accounted for as a derivative financial instrument liability.
In connection with the sale of convertible debt and equity instruments, we may also issue freestanding options or warrants. Additionally, we may issue options or warrants to non-employees in connection with consulting or other services they provide. Although the terms of the options and warrants may not provide for net-cash settlement, in certain circumstances, physical or net-share settlement is deemed to not be within the control of the company and, accordingly, we are required to account for these freestanding options and warrants as derivative financial instrument liabilities, rather than as equity.
Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, we use the Black-Scholes option pricing model to value the derivative instruments.
Any discount from the face value of the convertible debt instrument resulting from the allocation of part of the proceeds to embedded derivative instruments and/or freestanding options or warrants is amortized over the life of the instrument through periodic charges to income, using the effective interest method.
Credit Risk
The Company’s financial assets that are exposed to credit risk consist primarily of cash and equivalents and accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the generally short payment terms.
Foreign Currency Translation
The Company maintains its accounts in United States dollars and in Canadian dollars for Canadian-based subsidiaries. The financial statements have been translated into United States dollars in accordance with SFAS. No. 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts has been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported separately as a component of comprehensive income. The gain and losses resulting from any inter-company balances with different functional currencies would be recognized in statement of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability approach in accordance with SFAS No. 109, Accounting for Income Taxes. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The provision for income taxes consists of an amount for the taxes currently payable and a provision for the tax consequences deferred to future periods.
Comprehensive Income
Comprehensive income equals net income plus other comprehensive income. Other comprehensive income refers to foreign currency translation adjustments.
Accounting Estimates
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard establishes a standard definition for fair value, establishes a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption of this statement is not expected to have any material effect on our financial position or results of operations.
SFAS - ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)’
In September 2006, the FASB issued Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R), or FAS 158. This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to (a) recognize the funded status of a benefit plan-measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation-in its statement of financial position; (b) recognize, as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FAS 87, Employers’ Accounting for Pensions, or FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions; (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions); and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. This statement is not expected to have a significant effect on our financial statements.
SFAS - ‘The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115’
In February 2007, the FASB issued Financial Accounting Standard No. 159 The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 or FAS 159. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of this Statement apply only to entities that elect the fair value option.
The following are eligible items for the measurement option established by this Statement:
1. Recognized financial assets and financial liabilities except:
a.
An investment in a subsidiary that the entity is required to consolidate
b.
An interest in a variable interest entity that the entity is required to consolidate
c.
Employers’ and plans’ obligations (or assets representing net overfunded positions) for pension benefits, other postretirement benefits (including health care and life insurance benefits), post employment benefits, employee stock option and stock purchase plans, and other forms of deferred compensation arrangements.
d.
Financial assets and financial liabilities recognized under leases as defined in FASB Statement No. 13, Accounting for Leases.
e.
Deposit liabilities, withdrawable on demand, of banks, savings and loan associations, credit unions, and other similar depository institutions
f.
Financial instruments that are, in whole or in part, classified by the issuer as a component of shareholder’s equity (including “temporary equity”). An example is a convertible debt security with a noncontingent beneficial conversion feature.
2. Firm commitments that would otherwise not be recognized at inception and that involve only financial instruments
3. Nonfinancial insurance contracts and warranties that the insurer can settle by paying a third party to provide those goods or services
4. Host financial instruments resulting from separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument.
The fair value option:
1. May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
2. Is irrevocable (unless a new election date occurs)
3. Is applied only to entire instruments and not to portions of instruments.
The Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. We have not yet determined what effect, if any, adoption of this Statement will have on our financial position or results of operations.
SAB 108 - ‘Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements’
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on the consideration of the effects of prior year unadjusted errors in quantifying current year misstatements for the purpose of a materiality assessment. Adoption of this statement is not expected to have any material effect on our financial position or results of operations.
FIN 48 - ‘Accounting for Uncertainty in Income Taxes’
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, an interpretation of SFAS No. 109. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, we shall initially recognize tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. We shall initially and subsequently measure such tax positions as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include an annual tabular roll-forward of unrecognized tax benefits. We will adopt this interpretation as required in 2007 and will apply its provisions to all tax positions upon initial adoption with any cumulative effect adjustment recognized as an adjustment to retained earnings. Adoption of this statement is not expected to have any material effect on our financial position or results of operations.
EITF 00-19-2, "Accounting for Registration Payment Arrangements".
In December 2006, the FASB issued Staff Position FSP EITF 00-19-2, "Accounting for Registration Payment Arrangements". This statement is effective for existing registration payment arrangements as of January 1, 2007, with earlier application permitted in previously-unissued financial statements. As discussed in Note 8 and as permitted by the FSP, we adopted the provisions of this FSP in our fourth quarter of 2006, resulting in re-classification of certain of our outstanding warrants from derivative instrument liabilities to equity.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. The Company has not yet determined the impact, if any, of SFAS 160 on its consolidated financial statements.
2.
Acquisitions
In January 2006, the Company entered into an agreement, through its wholly owned newly formed Delaware subsidiary, Cancable Holding Corp. (“Cancable Holding”), to acquire all of the issued and outstanding shares of capital stock and any other equity interests of Cancable Inc., an Ontario corporation (“Cancable”). To finance the acquisition, subsidiaries of the Company entered into a loan agreement with Laurus Master Fund, Ltd., a Cayman Islands Company, to which the Company became a guarantor.
The Company, Cancable, Cancable Holding, Covington Capital Corporation (“Covington”) and BMO Capital Corporation (“BMO”) entered into a Stock Purchase Agreement for the purchase by Cancable Holding of all the issued and outstanding shares of capital stock and any other equity interests of Cancable.
Cancable and Cancable Holding entered into a series of agreements with Laurus whereby Cancable issued to Laurus a secured term note (the “Cancable Note”) in the amount of $6,865,000 and Cancable Holding issued to Laurus a related option to purchase up to 49 shares of common stock of Cancable Holding (up to 49% of the outstanding shares of Holding) at a price of $0.01 per share (the “Option”). The Cancable Note is secured by all of the assets of the Company and its subsidiaries. The principal amount of the Cancable Note bears interest at prime rate plus one and three quarters percent with a minimum rate of seven percent. Cancable and Cancable Holding have granted Laurus a right of first refusal with respect to any debt or equity financings for a period of 180 days after closing.
The Transaction described in above relating to the acquisition of Cancable was accounted for as a business combination in accordance with SFAS No. 141. A summary of the Transaction is presented below:
Fair value of net tangible assets acquired
In October 2007, the Company entered into an agreement, through our wholly owned newly formed Ontario subsidiary, Cancable XL Inc. (“Cancable XL”), to acquire all of the issued and outstanding shares of capital stock and any other equity interests of XL Digital Services Inc. (“XL Digital”), an Ontario corporation. The total consideration to be paid by Cancable XL for the shares of XL Digital will be an amount equal to the earnings before interest, taxes, depreciation and amortization derived from the carrying on of its business by XL Digital for the twelve month period after the completion of the acquisition times 2.5. The consideration will be paid in notes, warrants to acquire stock of the Company and cash, with the total balance due on January 5, 2009. A portion of the purchase price will be paid in January, 2008 in the amount of $303,030 which was classified as other note payable. The balance was paid subsequent to the year ended December 31, 2007. In 2009, the remaining purchasing price will be payable in cash not less than $200,000 and/or issuance of additional penny warrants with a nominal purchase price to acquire stock in the capital of the Company..
The Transaction described above relating to the acquisition of XL Digital was accounted for as a business combination in accordance with SFAS No. 141. A summary of the Transaction is presented below:
Fair value of net tangible assets acquired
The unaudited results of operations of XL Digital have been included in the results of operations of the Company for the period from October 1, 2007 to December 31, 2007, had the acquisition of XL Digital taken place on January 1, 2007, the consolidated unaudited results of operations would have been as follows:
XL Digital was incorporated in 2007 and no proforma information for 2006 will be provided.
3.
Prepaid Expenses
The balance consists of the following:
4.
Related Party Transactions
Balances due from related parties are as follows:
During the year, $166,495 (2006 - $202,500) in consulting fees were paid to Companies controlled by the CEO. In addition, $149,921 (2006 - $188,700) in consulting fees was paid to the Company controlled by the president’s spouse.
In September 2004, the Company issued two promissory notes with an aggregate principal amount of $3,300,000. On September 30, 2004, the Company repaid an aggregate of $1,800,000 of the principal balance. The outstanding principal bears interest at 3% per annum with no fixed terms of repayment and payable on demand. However, pursuant to the Laurus Financing, these notes have been subordinated to the Company’s obligations to Laurus. The notes each with an amount of $750,000 are due to The Burns Trust (the president is one of the beneficiaries of the trust) and the Navaratnam Trust (the CEO is one of the beneficiaries of the trust), respectively. During the period ended June 30, 2006, the above two notes payable have been transferred to Malar Trust Inc. (the Company’s CEO is the shareholder of Malar Trust Inc.).
6.
Intangible Assets
For the year ended December 31, 2007, the amortization of intangible assets was $637,539 (2006 - $600,000). The amortization for the next five years are as follows:
7.
Deferred Financing Costs, Net
Deferred financing costs are associated with the Company’s term notes from Laurus Master Fund, Ltd., a Cayman Islands company. The balance carried forwarded from December 31, 2005 was written off in the amount of $600,479 as the entire revolving notes and convertible notes issued on September 30, 2004 were repaid. For the year ended December 31, 2007, the amortization of deferred financing cost was approximately $182,430 (2006 - $186,261).
The estimated amortization expense for each of the next five fiscal years and thereafter is as follows:
8.
Term Notes
In January 2006, concurrently with the closing of the acquisition of Cancable Inc., the Company entered into a series of agreements with Laurus whereby Cancable issued to Laurus a secured term note (the “Cancable Note”) in the amount of $6,865,000 and Cancable Holding issued to Laurus a related option to purchase up to 49 shares of common stock of Cancable Holding (up to 49% of the outstanding shares of Cancable Holding) at a price of $0.01 per share (the “Option”). The loan is secured by all of the assets of the Company and its subsidiaries.
The Cancable Note bears interest at the prime rate plus 1.75% with a minimum rate of seven percent. Interest accrued on the term note but was not payable until February 1, 2006. Interest is calculated on the basis of a 360 day year. The minimum monthly payment on the term note is $81,726 commencing from October 1, 2006. The Company is not obligated, except upon an event of default, to pay more than 25% of the Principal Amount prior to December 31, 2011.
In February 2006, the Company and its subsidiaries, Iview Holding and Iview DSI entered into a series of agreements with Laurus pursuant to a refinancing transaction whereby the Company issued to Laurus a secured term note (the “Company Note”) in the amount of $8,250,000, Iview DSI issued to Laurus a secured term note (the “Iview Note”) in the amount of $2,000,000, the Company issued to Laurus a related warrant to purchase up to 2,411,003 shares of common stock of the Company (up to 7.5% of the outstanding shares of the Company) at a price of $0.01 per share (the “Warrant”) and Iview Holding issued to Laurus a related option to purchase up to 20 shares of common stock of Holding (up to 20% of the outstanding shares of Holding) at a price of $0.01 per share (the “Option”). The loans are secured by all of the assets of the Company and its subsidiaries.
The Company Note bears interest at the prime rate plus 2% with a minimum rate of seven percent. Interest accrued on the term note but was not payable until April 1, 2006. Interest is calculated on the basis of a 360 day year. The minimum monthly payment on the term note is $137,500 commencing March 1, 2007 to February 1, 2009. $4,950,000 is payable on the maturity date. The Company has issued warrants to purchase up to 1,080,000 shares of common stock of the Company at a price from $0.90 to $2.73 per share to defer the principal repayment from March 1, 2007 to December 1, 2007.
The Iview Note bears interest at the prime rate plus 2% with a minimum rate of seven percent. Interest accrued on the term note but was not payable until April 1, 2006. Interest is calculated on the basis of a 360 day year. The minimum monthly payment on the term note is $8,333 commencing March 1, 2007 to February 1, 2011. $1,600,000 is payable on the maturity date. The Company is not obligated, except upon an event of default, to pay more than 25% of the Principal Amount prior to December 31, 2011.
Simultaneously with the closing of this refinancing transaction, the Company paid off the entire outstanding principal amount and all obligations due to Laurus under the Secured Convertible Term Note dated September 30, 2004, the Secured Convertible Minimum Borrowing Note dated September 30, 2004 and the Secured Revolving Note dated September 30, 2004 (collectively, the “2004 Notes”) and such 2004 Notes were subsequently cancelled.
Interest on the term note for the year ended December 31, 2007 was $1,645,138 (2006: $1,683,900).
The principal payments for the next five years are as follows:
9.
Net Financing Expenses
10.
Obligation Under Capital Leases
The future minimum lease payments are as follows:
Interest expense for the year related to capital assets was $364,408 (2006 - $254,005).
The Company's provision for (recovery of) income taxes is comprised as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2007 and 2006 are presented below:
12.
Warranty
As part of the installation, the Company has provided its customers with warranties. The warranties generally extend ninety days labor and one year on equipment from the date of project completion.
13.
Shareholders’ (Deficit)
The Company has total authorized share capital of 50,000,000 preferred shares, no par value and 100,000,000 common shares, no par value.
During the period ended March 31, 2006, the Company entered into two consulting agreements by issuing 125,000 shares stock in consideration for investor relations services rendered with the fair value of $65,000. Total recognized consulting expenses relating to the above shares are $65,000. Additionally, the Company entered into another consulting agreement by issuing 75,000 shares in consideration for advisory service rendered with the fair value of $41,250. Total recognized advisory service expenses relating to the above shares are $41,250.
During the period ended June 30, 2006, the Company entered into three consulting agreements by issuing 70,880 shares stock in consideration for investor relations and consulting services rendered with the fair value of $52,050. Total recognized consulting expenses relating to the above shares are $52,050.
During the period ended September 30, 2006, the Company entered into a consulting agreement by issuing 41,665 shares stock in consideration for investor relations and consulting services rendered with the fair value of $28,749. Total recognized consulting expenses relating to the above shares was $28,749. Additionally, the Company issued 7,000 common shares to the officer of A.C. Technical with the fair value of $2,100. The expense was recorded under general and administration expenses.
During the period ended December 31, 2006, the Company entered into a consulting agreement by issuing 49,998 shares stock in consideration for investor relations and consulting services rendered with the fair value of $15,999. Total recognized consulting expenses relating to the above shares was $15,999. Additionally, the Company issued 243,307 common shares to the legal counsel with the fair value of $97,325. The expense was recorded under general and administration expenses. The Company also issued 215,517 and 323,275 shares to 1608913 Ontario Inc. and Nationwide for the payment of the consulting fees with a fair value of $215,517.
During the period ended March 31, 2007, the Company entered into one consulting agreements by issuing 16,666 shares in consideration for investor relations services rendered with the fair value of $6,999. Additionally, the Company issued 258,500 shares with the fair value of $253,330 to the executive officers of Cancable Inc., a subsidiary of the Company. Included in the balance, $138,929 was recorded in 2006 financial statements as General and Administrative expenses.
During the period ended June 30, 2007, the Company entered into a consulting agreement and issued 90,000 shares in consideration for investor relations services rendered with the fair value of $171,300. Additionally, the Company issued 29,280 shares to Laurus for the exercise of the warrants issued on February 13, 2006 for cash aggregating $293.
During the period ended September 30, 2007, the Company entered into a consulting agreement by issuing 93,850 shares in consideration for investor relations and consulting services rendered with the fair value of $239,148. Included in the balance, $9,648 was recorded in 2006 General and Administrative expenses. Additionally, the Company issued 625,469 shares to Laurus for the exercise of the options and warrants and 4,000 shares to the employees for the exercise of the employee stock options for cash aggregating $8,240.
During the period ended December 31, 2007, the Company entered into a consulting agreement and issued 90,000 shares in consideration for investor relations and consulting services rendered with the fair value of $218,700. Additionally, the Company issued 1,500 shares to a previous employee with the fair value of $3,150 and 32,000 shares to the employees for the exercise of the employee stock options for cash aggregating $20,160.
Options
On June 30, 2006, the Company granted 2,317,000 options to purchase a maximum of 2,317,000 shares of common stock to employees. The options allow the holders to buy the Company’s common stock at a price of $0.63 per share and expire on June 30, 2011. During the year 2007, the Company granted 1,226,000 options to purchase common stock to employees. These options allow the holders to buy the Company’s common stock at a price between $0.90 to $2.59 which will be expire in 2012 .
The Company’s Stock Option Plan is intended to provide incentives for key employees, directors, consultants and other individuals providing services to the Company by encouraging their ownership of the common stock of the Company and to aid the Company in retaining such key employees, directors, consultants and other individuals upon whose efforts the Company’s success and future growth depends and in attracting other such employees, directors, consultants and individuals.
The Plan is administered by the Board of Directors, or its Compensation Committee. Under the Plan, options on a total of 4,000,000 shares of common stock may be issued. Shares of common stock covered by options which have terminated or expired prior to exercise are available for further options under the Plan. The maximum aggregate number of shares of Stock that may be issued under the Plan as “incentive stock options” is 3,500,000 shares. No options may be granted under the Plan after June 30, 2011; provided, however, that the Board of Directors may at any time prior to that date amends the Plan.
Options under the Plan may be granted to key employees of the Company, including officers or directors of the Company, and to consultants and other individuals providing services to the Company. Options may be granted to eligible individuals whether or not they hold or have held options previously granted under the Plan or otherwise granted or assumed by the Company. In selecting individuals for options, the Committee may take into consideration any factors it may deem relevant, including its estimate of the individual’s present and potential contributions to the success of the Company.
The Committee may, in its discretion, prescribe the terms and conditions of the options to be granted under the Plan, which terms and conditions need not be the same in each case, subject to the following:
a. Option Price. The price at which each share of common stock covered by an option granted under the Plan may be purchased may not be less than the market value per share of the common stock on the date of grant of the option. The date of the grant of an option shall be the date specified by the Committee in its grant of the option, which date will normally be the date the Committee determines to make such grant.
b. Option Period. The period for exercise of an option shall in no event be more than five years from the date of grant. Options may, in the discretion of the Committee, be made exercisable in installments during the option period.
c. Exercise of Options. For the purpose of assisting an Optionee to exercise an option, the Company may make loans to the Optionee or guarantee loans made by third parties to the Optionee, on such terms and conditions as the Board of Directors may authorize. In no event shall any option be exercisable more than five years from the date of grant thereof.
d. Lock-Up Period. Without the consent of the Company, an Optionee may not sell more than fifty percent of the shares issued under the Plan for a period of two years from the date that the Optionee exercises the option. The Committee may impose such other terms and conditions, not inconsistent with the terms of the Plan, on the grant or exercise of options, as it deems advisable.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, using the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock, and other factors. The Company uses historical data to estimate employee termination within the valuation model. Because the Company has not previously granted options to employees, for purposes of the valuation model, the Company has assumed that the life of the options will be equal to one-half of the combined vesting period and contractual life (i.e., that employees will exercise the options at the midpoint between the vesting and expiry date of the options). The risk-free rates used to value the options are based on the U.S. Treasury yield curve in effect at the time of grant.
At December 31, 2007 options to purchase 3,222,000 shares of common stock were outstanding. These options vest ratably in annual installments, over the four year period from the date of grant. As of December 31, 2007, there was $1,350,473 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the four year vesting period. 473,500 options were vested as of December 31, 2007. The cost recognized for the year end December 31, 2007 was $176,123 (2006:$63,560) which was recorded as general and administration expenses.
In valuing the options issued, the following assumptions were used
A summary of option activity under the Plan during the period ended December 31, 2007 is presented below:
Warrants
We use the Black-Scholes option pricing model to value warrants issued to non-employees, based on the market price of our common stock at the time the warrants are issued. All outstanding warrants may be exercised by the holder at any time. During the year ended December 31, 2007, in connection with financing arrangements, the Company issued warrants to purchase 1,080,000 shares of common stock. The fair value of the warrants of $895,044 was measured using the Black-Scholes option pricing model using the following assumptions: risk free interest rate of 3.25% to 4.93%, expected dividend yield of 0%, volatility of 45%, share price of $0.90 to $2.73 and expected life of 4 years.
As of December 31, 2007, we had the following options and warrants outstanding:
14.
Major Customers
During the year ended December 31, 2007 and 2006, the Company derived 61.0% and 61.4%of its revenue from a single customer. The accounts receivable from this customers comprises 33% (2006: 19%) of the total trade receivable balance as at December 31, 2007 and 2006.
15.
Segment Information
We determine and disclose our segments in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”, which uses a “management” approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the reportable segments. Our management reporting structure provides for the following segments:
Cancable
Cancable Inc. (“Cancable”) and its wholly owned subsidiary XL Digital Servcies, Inc. is a Canadian based entity in the business of providing deployment and servicing of broadband technologies in both residential and commercial markets. The Cancable service offering, network deployment, IT integration, and support services, enable the cable television and telecommunications industries to deliver a high quality broadband experience to their customers. Cancable’s clients rely on Cancable’s knowledge and expertise to rapidly deploy the latest technologies to support advanced cable services, cable broadband Internet access and DSL. Services provisioned include new installations, reconnections, disconnections, service upgrades and downgrades, inbound technical call center sales and trouble resolution for cable Internet subscribers, and network servicing for broadband video, data, and voice services for residential, business, and commercial marketplaces.
AC Technical
A.C. Technical Systems Ltd. (“AC Technical”), a corporation incorporated under the laws of the Province of Ontario, is engaged in the engineering, design, installation, integration and servicing of various types of security systems.
Iview DVSI
Iview Digital Solutions Inc. (“Iview DVSI”), a corporation incorporated under the laws of the Province of Ontario, is a newly formed subsidiary incorporated in late 2005 to focus on providing video surveillance products and technologies to the market.
The following table presents financial information with respect to the segments that management uses to make decisions. We acquired Cancable as of January 1, 2006 and its results are included from that date.
(1)
Corporate expenses primarily include certain stock-based compensation for consulting and advisory services, which we do not internally allocate to our segments because they are related to our common stock and are non-cash in nature.
Revenues by geographic destination and product group were as follows:
All revenue generated by the Company was in Canada.
16.
Commitments
The Company has entered into contracts for certain consulting services providing for monthly payments with the Companies controlled by the CEO and the president’s spouse. In addition, the Company has also entered into an operating lease for its premises, vehicles, computers and office equipment. The total minimum annual payments for the next five years are as follows:
Rental for 2007 and 2006 was approximately $203,000 and $252,000.
17.
Subsequent Events
Subsequent to year end, the Company issued 324,000 warrants to Laurus to defer the monthly principal repayment from January to March 2008.
On January 22, 2008, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Erato Corporation (“Erato”) pursuant to which the Company purchased and acquired from Erato 2,674,407 shares of common stock, par value $0.0001 per share (the “Shares”), of 180 Connect Inc., a Delaware corporation, for an aggregate purchase price of $6,017,416 paid by the Company by delivery to Erato of (i) no less than 2,195,720 duly and validly issued shares of common stock of the Registrant and (ii) a common stock purchase warrant, exercisable into up to 812,988 shares of common stock of the Registrant at an exercise price of $0.01 per share.
On January 22, 2008 the Company entered into a letter agreement with Erato for Erato to provide up to Twelve Million Dollars ($12,000,000) in financing to the Company on such terms and conditions as the Registrant and Erato shall mutually agree (the “Bridge Financing”). All proceeds from the Bridge Financing may only be used by the Company for the purpose of financing a third party. The Company does not currently have an agreement to provide financing to such third party. Erato is currently an investor in such third party and, through its parent, Laurus Master Fund Ltd., a current investor in the Company. In consideration of the letter agreement, the Company issued to Erato a warrant to purchase up to 1,738,365 shares of common stock of the Company at an exercise price of $0.01 per share.
On January 30, 2008, the Company entered into a Warrant Purchase Agreement with Laurus Master Fund, Ltd., Erato Corporation, Valens U.S. Fund, LLC and Valens Offshore SPV I, Ltd. (collectively, the “Sellers”) pursuant to which the Registrant purchased and acquired from the Sellers, warrants to purchase 450,000 shares of common stock at an exercise price of $0.01 per share of 180 Connect Inc., a Delaware corporation (the “180 Connect Warrants”).
Also on January 30, 2008, the Company entered into a non-binding letter of intent with Valens U.S. Fund, LLC (the “Letter Agreement”) in which Valens U.S. Fund, LLC confirmed its current intention to provide up to $4,000,000 in financing to a subsidiary of the Registrant. The Letter Agreement is only an expression of the present intentions of the parties and no binding legal obligation will exist until the parties sign a definitive agreement.
The aggregate purchase price paid by the Company in exchange for the 180 Connect Warrants and the Letter Agreement was $1,597,500 paid by the Company by delivery to the Sellers of common stock purchase warrants, exercisable in the aggregate into up to 798,750 shares of common stock of the Registrant at an exercise price of $0.01 per share. The purchase price was allocated by the Company as follows: (a) $1,012,500 or $2.25 per share was paid by the Company for the 180 Connect Warrants by delivery to the Sellers of warrants to purchase 506,250 shares of common stock of the Company at an exercise price of $0.01 per share and (b) the Company paid to the Sellers for the Letter Agreement warrants to purchase 292,500 shares of common stock of the Company.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Our prior auditors, BDO Dunwoody, LLP, resigned on February 28, 2006. On or about the same time, we engaged Stark Winter Schenkein & Co., LLP, as our principal independent accountant. The decision to change accountants was made with the approval of our board of directors.
During the most recent two fiscal years and prior to the resignation of our prior auditors on February 28, 2006, the Company had not consulted with Stark Winter Schenkein & Co., LLP on any issue including the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was provided that was an important factor considered by us in reaching a decision as to our accounting, auditing or financial reporting issues.
No report of BDO Dunwoody, LLP on our financial statements for either of the past two fiscal years contained an adverse opinion, a disclaimer of opinion or a qualification or was modified as to uncertainty, audit, scope or accounting principles.
We believe and we have been advised by BDO Dunwoody, LLP that it concurs in such belief that, during our two most recent fiscal years and any subsequent interim period through the date of their resignation on February 28, 2006, we did not have any disagreement on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of BDO Dunwoody, LLP, would have caused it to make reference in connection with its report on our financial statements to the subject matter of this disagreement.
No report of BDO Dunwoody, LLP on our financial statements for the years ended December 31, 2004 contained an adverse opinion, a disclaimer of opinion or a qualification or was modified as to uncertainty, audit, scope or accounting principles. During the years ended December 31, 2004 and any subsequent interim period the former accountant’s resignation, February 28, 2006, there were no “reportable events” within the meaning of Item 304(a)(1) of Regulation S-B promulgated under the Securities Act.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow timely decisions regarding required disclosure. As of December 31, 2007, the end of the period covered by this annual report on Form 10K-SB, our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our disclosure controls and procedures, as such terms are defined under rules 13a-15(e) and 15d-15(e) promulgated under Securities Exchange Act of 1934, as amended. Based on this assessment, our management concluded that our disclosure controls and procedures were effective as of the end period covered by this annual report.
Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness over internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework issued in 1992, to evaluate the effectiveness of our internal control over financial reporting. Based upon that framework management has determined that our internal control over financial reporting is effective
Changes in Internal Control Over Financial Reporting There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None
Item 10.
Item 10.
Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
Directors and Executive Officers
Name
Age
Position
Sayan Navaratnam
Chairman, Chief Executive Officer and Director
Dominic Burns
President and Director
Heung Hung Lee
Chief Financial Officer and Secretary
Sayan Navaratnam-Director, Chairman and Chief Executive Officer: Mr. Navaratnam serves as our chairman and Chief Executive Officer. He is responsible for creating a platform for growth and the management of the overall vision and growth of the Company and its subsidiaries. He is also responsible for managing the relationship between us and our key funding partner. Mr. Navaratnam's mandate is to develop and enhance our portfolio of subsidiaries and technologies. Mr. Navaratnam graduated from University of Toronto with a Double Specialist degree in Economics and Political Science. He has eight years of experience in technology development and integration specific to the security industry. He also has three years of experience in telecommunications with Bell Canada. He was the CEO of Satellite Communications Inc., and its research arm Satellite Advanced Technologies, from 1997-2000. Mr. Navaratnam was responsible for coordinating and financing research and development projects and played a key role in strategic partnerships, mergers, and licensing technologies. Mr. Navaratnam was the Chief Operating Officer in ASPRO Technologies Ltd. from 2000-2003. He also proposed and implemented a strategic marketing campaign to license and distribute a new line of "wavelet" products from ASPRO. Mr. Navaratnam joined AC Technical as Chief Executive Officer in 2003. Mr. Navaratnam was a member of Innovator's Alliance of Ontario, Alliance of Exporters and manufacturers of Ontario. Mr. Navaratnam and AC Technical were recognized with an award for one of the Top 100 fastest growing companies in Canada, from 1999 through 2003, by Profit 100.
Dominic Burns-Director and President: Mr. Burns is our President and Director. He founded AC Technical in 1991. He completed his Electrical Apprenticeship program at one of the premier firms in Northern Ireland. He graduated from Belfast College of Technology with honors in City and Guilds Electrical Theory and Regulations. Mr. Burns also holds a diploma in radio and navigation systems. He has an extensive understanding of quality controls in the avionics industry and has been a pioneer in transferring some of the high standards and controls set in the avionics industry to the security integration market. He has been the President of AC Technical since its inception. He has been primarily responsible for expanding the firm's presence in Canada. Mr. Burns has also designed a number of internal technical and marketing programs to expand AC Technical's sales and technical capabilities. Mr. Burns has over 20 years of experience in the security integration industry. Mr. Burns has been a director of our company since September 30, 2004.
Heung Hung Lee-Chief Financial Officer and Secretary: Ms. Lee joined AC Technical in July 2004 and she has more than 10 years experience in international public accounting primarily with large international accounting firms. She has advanced knowledge in financial statements disclosure and audit issues and has extensive international business experience in countries such as the United States, Hong Kong SAR and the Peoples' Republic of China. She was a manager at BDO Dunwoody LLP from 1999 to 2004. Ms. Lee holds a Bachelor of Business degree from Monash University in Australia. She is a Chartered Accountant in Canada and qualified CPA in Australia. Ms. Lee has been the Chief Financial Officer of our company since September 30, 2004. Ms. Lee is responsible for review of financials of subsidiaries and creating and implementing strong financial systems within the group of companies. Ms. Lee is also an important member in our growth strategy as she is highly involved in creating a platform for growth within Creative Vistas, Inc.
Code of Ethics
The Company has adopted a code of ethics for officers and employees, which applies to, among others, the Company’s principal executive officer, principal financial officer, and controller, and which is known as the code of ethics. The Company has also adopted certain ethical principles and policies for its directors, which are set forth in the code of ethics. The Company will provide copies of the code of ethics without charge upon request made to Creative Vistas, 2100 Forbes Street, Unit 8-10 Whitby, Ontario, Canada L1N 9T3 or by calling (905) 666-8676.
Item 11.
Item 11.
Executive Compensation
The following summary compensation table set forth all compensation paid by us during the three years ended December 31, 2007 for services rendered in all capacities by the Chief Executive Officer of the Company and the only other executive officer who received total salary and bonus exceeding $100,000 in any of such years.
Employment Agreements
On June 1, 2004, AC Technical entered into a consulting agreement with 1608913 Ontario Inc. and Dominic Burns. Pursuant to this agreement, 1608913 Ontario is to provide the exclusive services of Mr. Burns to us for the following compensation:
·
From October 1, 2004 until December 31, 2004 compensation at the rate of $210,900 (CAD$250,000);
·
From January 1, 2005 until December 31, 2005 the sum of $232,000 (CAD$275,000);
·
From January 1, 2006 until December 31, 2006 the sum of $253,100 (CAD$300,000);
·
From January 1, 2007 until December 31, 2007 the sum of $274,200 (CAD$325,000);
·
From January 1, 2008 until December 31, 2008 the sum of $295,300 (CAD$350,000); and
·
From January 1, 2009 until December 31, 2009 the sum of $316,400 (CAD$375,000).
In addition, 1608913 Ontario is entitled to a bonus payable upon our attaining the annual gross revenue targets specified in the agreement for the calendar years 2004 through 2009. The bonus is 0.5% of the annual gross revenue targets for 2004 and 1% of the annual gross revenue target for 2005 through 2009. An additional bonus of 2% will be paid for each additional increment of $421,800 (CAD$500,000) annual gross revenue beyond the revenue target in any given year. Mr. Burns’ spouse is the only beneficial owner of 1608913 Ontario.
On June 1, 2004, AC Technical entered into a consulting agreement with Nationwide Solutions Inc. and Sayan Navaratnam. Pursuant to this agreement, Nationwide is to provide the exclusive services of Mr. Navaratnam to us for the following compensation:
·
From October 1, 2004 until December 31, 2004 compensation at the rate of $253,100 (CAD$300,000) per annum;
·
From January 1, 2005 until December 31, 2005 the sum of $278,400 (CAD$330,000);
·
From January 1, 2006 until December 31, 2006 the sum of $306,300 (CAD$363,000);
·
From January 1, 2007 until December 31, 2007 the sum of $336,900 (CAD$399,300);
·
From January 1, 2008 until December 31, 2008 the sum of $370,600 (CAD$439,230); and
·
From January 1, 2009 until December 31, 2009 the sum of $409,300 (CAD$485,153).
In addition, Nationwide is entitled to a bonus payable upon our attaining the annual gross revenue targets specified in the agreement for the calendar years 2004 through 2009. The bonus is 0.5% of the annual gross revenue targets for 2004 and 1% of the annual gross revenue target for 2005 through 2009. An additional bonus of 2% will be paid for each additional increment of $421,800 (CAD$500,000) annual gross revenue beyond the revenue target in any given year. Mr. Navaratnam is the only beneficial owner of Nationwide.
Ontario Inc. and Nationwide Solutions Inc. were structured for the personal tax benefit of Mr. Burns and Mr. Navaratnam, respectively. Under Canadian tax law, there are potential income tax benefits to Mr. Burns and Mr. Navaratnam from structuring their relationship to us as Consulting Agreements between us and each of 1608913 Ontario Inc. and Nationwide Solutions Inc. instead of them being employed directly by us. This structure does not have any effect on Creative Vistas.
The consulting services provided to us by Mr. Navaratnam and Mr. Burns related to the management of the Company including sales and marketing, project management, technology development, finance, operations, mergers and acquisitions, engineering design and other management services required by us.
We have a standard employment contract with our employee that is reviewed on an annual basis. Of the persons who currently are parties to this employment agreement, only Ms. Lee currently falls under the category of executive staff. There are no employment contracts with the CEO and the President. In each standard employment contract, we have included the terms of employment, remuneration, fringe benefits, vacation, confidentiality, non-solicitation and termination of employment.
We have a stock option plan which was adopted during the second quarter of 2006.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information with respect to the beneficial ownership of our common stock as of December 31, 2007 of each executive officer, each director, and each shareholder in addition to any shareholders known to be the beneficial owner of 5% or more of our Common Stock and all officers and directors as a group. As of December 31, 2007, Laurus Master Fund, Ltd. beneficially owned 1,399,449 shares of our Common Stock. The securities owned by Laurus Master Fund, Ltd. contain a provision that Laurus may not, subject to certain exceptions, at any time beneficially own more than 4.99% of our outstanding common stock. We and Laurus have agreed that, other than on days’ notice or upon the occurrence of an event of default, this provision may not be waived. Absent this limitation, Laurus would beneficially additionally own 6,699,251 shares of our common stock, which is comprised of 129,155 shares under the option and 6,570,096 shares under the warrant.
The address of the above listed persons is c/o Creative Vistas, 2100 Forbes Street, Unit 8-10 Whitby, Ontario, Canada L1N 9T3.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth certain information relating to our option plans as of December 31, 2007:
Share Option and Other Compensation Plans
Stock Option Plan
Our Stock Option plan (“the Plan”) was adopted by our Board and approved by our shareholders in June 30, 2006. Our Stock option Plan provides for the grant of options to key employees of the Company, including officers or directors of the Company, and to consultants and other individuals providing services to the Company.
Share Reserve. A total of 4,000,000 shares of common stock, no par value, of the Company (the “Stock”) are authorized for issuance under the Stock Option plan as of December 31, 2007. Shares of Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Stock covered by options which have terminated or expired prior to exercise shall be available for further options hereunder. The maximum aggregate number of shares of Stock that may be issued under the Plan under “incentive stock options” is 3,500,000 shares.
Administration of Awards. The Plan shall be administered by the Board of Directors, or Compensation Committee of the Board of Directors or a subcommittee of the Compensation Committee appointed by the Compensation Committee, or by any other committee designated by the Board of Directors to administer the Plan (the committee or subcommittee administering the Plan is hereinafter referred to as the “Committee”). For purposes of administration, the Committee, subject to the terms of the Plan, shall have plenary authority to establish such rules and regulations, to make such determinations and interpretations, and to take such other administrative actions as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including all Optionees, any other holders of options and their legal representatives and beneficiaries.
Options may be granted to eligible individuals whether or not they hold or have held options previously granted under the Plan or otherwise granted or assumed by the Company. In selecting individuals for options, the Committee may take into consideration any factors it may deem relevant, including its estimate of the individual’s present and potential contributions to the success of the Company. Service as an employee, director, officer or consultant of or to the Company shall be considered employment for purposes of the Plan (and the period of such service shall be considered the period of employment for purposes of Section 5(d) of this Plan); provided, however, that incentive stock options may be granted under the Plan only to an individual who is an “employee” (as such term is used in Section 422 of the Code) of the Company.
Stock options. The Committee shall, in its discretion, prescribe the terms and conditions of the options to be granted hereunder, which terms and conditions need not be the same in each case, subject to the following:
(a)Option Price . The price at which each share of Stock covered by an option granted under the Plan may be purchased shall not be less than the Market Value (as defined in Section (c) hereof) per share of Stock on the date of grant of the option. The date of the grant of an option shall be the date specified by the Committee in its grant of the option.
(b)Option Period . The period for exercise of an option shall in no event be more than five years from the date of grant. Options may, in the discretion of the Committee, be made exercisable in installments during the option period. Any shares not purchased on any applicable installment date may be purchased thereafter at any time before the expiration of the option period.
(c)Exercise of Options . In order to exercise an option, the Optionee shall deliver to the Company written notice specifying the number of shares of Stock to be purchased, together with cash or a certified or bank cashier’s check payable to the order of the Company in the full amount of the purchase price therefore; provided that, for the purpose of assisting an Optionee to exercise an option, the Company may make loans to the Optionee or guarantee loans made by third parties to the Optionee, on such terms and conditions as the Board of Directors may authorize. For purposes of the Plan, the Market Value per share of Stock shall be the last sale price regular way on the date of reference, or, in case no sale takes place on such date, the average of the closing high bid and low asked prices regular way, in either case on the principal national securities exchange on which the Stock is listed or admitted to trading, or if the Stock is not listed or admitted to trading on any national securities exchange, the last sale price reported on the National Market System of the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) on such date, or the last sale price reported on the NASDAQ SmallCap Market on such date, or the average of the closing high bid and low asked prices in the over-the-counter market on such date, whichever is applicable, or if there are no such prices reported on NASDAQ or in the over-the-counter market on such date, as furnished to the Committee by any New York Stock Exchange member selected from time to time by the Committee for such purpose. If there is no bid or asked price reported on any such date, the Market Value shall be determined by the Committee in accordance with the regulations promulgated under Section 2031 of the Code, or by any other appropriate method selected by the Committee. If the Optionee so requests, shares of Stock purchased upon exercise of an option may be issued in the name of the Optionee or another person. An Optionee shall have none of the rights of a stockholder until the shares of Stock are issued to him.
(d) Effect of Termination of Employment . An option may not be exercised after the Optionee has ceased to be in the employ of the Company, except in the following circumstances:
(i) If the Optionee’s employment is terminated by action of the Company, or by reason of disability or retirement under any retirement plan maintained by the Company, the option may be exercised by the Optionee within three months after such termination, but only as to any shares exercisable on the date the Optionee’s employment so terminates;
(ii) In the event of the death of the Optionee during the three month period after termination of employment covered by (i) above, the person or persons to whom his rights are transferred by will or the laws of descent and distribution shall have a period of one year from the date of his death to exercise any options which were exercisable by the Optionee at the time of his death; and
(iii) In the event of the death of the Optionee while employed, the option shall thereupon become exercisable in full, and the person or persons to whom the Optionee’s rights are transferred by will or the laws of descent and distribution shall have a period of one year from the date of the Optionee’s death to exercise such option. In no event shall any option be exercisable more than five years from the date of grant thereof. Nothing in the Plan or in any option granted pursuant to the Plan (in the absence of an express provision to the contrary) shall confer on any individual any right to continue in the employ of the Company or continue as a consultant or interfere in any way with the right of the Company to terminate his employment or consulting arrangement at any time.
(e) Limitation on Transferability of Options . Except as provided in this Section (e), during the lifetime of an Optionee, options held by such Optionee shall be exercisable only by him and no option shall be transferable other than by will or the laws of descent and distribution. The Committee may, in its discretion, provide that options held by an Optionee, other than incentive stock options, may be transferred to or for the benefit of a member of his immediate family. For purposes hereof, the term “immediate family” shall mean an Optionee’s spouse and children (both natural and adoptive), and the direct lineal descendants of his children.
(f) Adjustments for Change in Stock Subject to Plan . In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustments, if any, as it deems appropriate in the number and kind of shares subject to the Plan, in the number and kind of shares covered by outstanding options, or in the option price per share, or both, and, in the case of a merger, consolidation or other transaction pursuant to which the Company is not the surviving corporation or pursuant to which the holders of outstanding Stock shall receive in exchange therefore shares of capital stock of the surviving corporation or another corporation, the Committee may require an Optionee to exchange options granted under the Plan for options issued by the surviving corporation or such other corporation.
(g )Treatment of Options Upon Occurrence of Certain Events . The Committee may, in its discretion, provide in the case of any option granted under the Plan that, in connection with any merger or consolidation which results in the holders of the outstanding voting securities of the Company (determined immediately prior to such merger or consolidation) owning, directly or indirectly, less than a majority of the outstanding voting securities of the surviving corporation (determined immediately following such merger or consolidation), or any sale or transfer by the Company of all or substantially all its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then outstanding voting securities of the Company, such option shall terminate within a specified number of days after notice to the Optionee thereunder, and each such Optionee shall receive, with respect to each share of Stock subject to such option, an amount equal to the excess, if any, of the Market Value of such shares immediately prior to such merger, consolidation, sale, transfer or exchange over the exercise price per share of such option; and that such amount shall be payable in cash, in one or more kinds of property (including the property, if any, payable in the transaction) or a combination thereof, as the Committee shall determine in its sole discretion.
(h) Registration, Listing and Qualification of Shares of Stock . Each option shall be subject to the requirement that if at any time the Board of Directors shall determine that the registration, listing or qualification of the shares of Stock covered thereby upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Stock thereunder, no such option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. The Company may require that any person exercising an option shall make such representations and agreements and furnish such information as it deems appropriate to assure compliance with the foregoing or any other applicable legal requirement.
(i) Lock-Up Period - Without the consent of the Company an Optionee may not sell more than fifty percent of the shares issued under the Plan for a period of two years from the date that the optionee exercises the option. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of options, as it deems advisable.
Additional Provisions Applicable to Stock Option Plan . The Committee may, in its discretion, grant options under the Plan to eligible employees which constitute “incentive stock options” within the meaning of Section 422 of the Code; provided, however, that (a) the aggregate Market Value of the Stock with respect to which incentive stock options are exercisable for the first time by the Optionee during any calendar year shall not exceed the limitation set forth in Section 422(d) of the Code; and (b) notwithstanding anything to the contrary in Section 5, if the Optionee owns on the date of grant securities possessing more than 10% of the total combined voting power of all classes of securities of the Company or of any parent or subsidiary of the Company, the price per share shall not be less than 110% of the Market Value per share on the date of grant and the period of exercise shall not be longer than five years from the date of grant.
Amendment and Termination . No option shall be granted hereunder after June 30, 2011; provided, however, that the Board of Directors may at any time prior to that date terminate the Plan. The Board of Directors may at any time amend the Plan or any outstanding options. No termination or amendment of the Plan may, without the consent of an Optionee, adversely affect the rights of such Optionee under any option held by such Optionee.
Item 13.
Item 13.
Certain Relationships and Related Transactions
On September 29, 2004, pursuant to a Stock Purchase Agreement with The Burns Trust (our president is one of the beneficiaries of the trust) and The Navaratnam Trust (our CEO is one of the beneficiaries of the trust), as sellers, A.C. Technical Systems Ltd. and A.C. Technical Acquisition Corp., as purchasers, AC Acquisition acquired all of the issued and outstanding shares of AC Technical from The Burns Trust and The Navaratnam Trust for consideration consisting of promissory notes in the aggregate amount of $3,300,000. AC Technical became an indirect subsidiary of the Company and a wholly owned direct subsidiary of AC Acquisition. $1,800,000 has been paid to The Burns Trust and The Navaratnam Trust through part of the funding from Laurus. As at December 31, 2004, the aggregate outstanding payables to The Burns Trust and the Navaratnam Trust were $1,500,000 in the form of 3% promissory notes with no fixed repayment date and these notes are payable upon demand. However, pursuant to the Laurus financing, these notes have been subordinated to the Company’s obligations to Laurus. The notes each with an amount of $750,000 are due to The Burns Trust (our president is one of the beneficiaries of the trust) and the Navaratnam Trust (our CEO is one of the beneficiaries of the trust), respectively. Interest expense for both of these notes payable recognized for the year was $45,000 (2004:$11,250). During the period ended June 30, 2006, the above two notes payable have been transferred to Malar Trust Inc. (the Company’s CEO is the shareholder of Malar Trust Inc.). See Note 4 of the Financial Statements for the year ended December 31, 2007.
Item 14.
Item 14.
Principal Accountant Fees and Services
The following table sets forth the aggregate fees for professional services rendered to us for the years ended December 31, 2007 and 2006 by our principal accounting firms, Stark Winter Schenkein & Co., LLP and BDO Dunwoody LLP:
(a)
Audit Fees. Fees for audit services billed in 2007 and 2006 consisted of the audit of our annual consolidated financial statements, reviews of our quarterly consolidated financial statements, statutory audits, consents and services that are normally provided in connection with statutory and regulatory filing or engagement. All fees were payable to Stark Winter Schenkein & Co., LLP for both fiscal years.
(b)
Audit-Related Fees. Fees for audit-related services billed in 2006 in preparation of Form 8-K and Form S-8 which were paid to Stark Winter Schenkein & Co., LLP $5,000 and BDO Dunwoody, LLP was approximately $15,000. There are no other material audit-related fees in 2007.
(c)
Tax Fees. Fees for tax services billed in 2007 and 2006 consisting of assistance with our federal, state, local and foreign jurisdiction income tax returns. We have additionally sought consultation and advice related to various taxes compliance planning projects. Approximately $23,000 in tax fees were payable to MDS LLP. The tax fees for 2006 was payable to Paul Chan & Associate.
(d)
All Other Fees. No material other fees were billed in 2006 and 2005.
We do not have an audit committee; however, our board of directors is required to provide advance approval of any non-audit services, other than those of a de minimus nature, to be performed by our auditors, provided that such services are not otherwise prohibited by law. We do not have a formal pre-approval policy.
All the fees for 2007 and 2006 were pre-approved by the board of directors prior to the auditors’ engagement for these services.
Item 15.
Item 15.
Exhibits
3.1*
Articles of Incorporation, as amended to date, incorporated by reference to the Registrant’s Form 8-K/A filed February 2, 2005
3.2*
By-laws of the Registrant incorporated by reference to the Registrant’s Form 10-SB filed May 10, 2000
4.1*
Securities Purchase Agreement, dated February 13, 2006, by and among Laurus Master Fund, Ltd., Creative Vistas, Inc., Iview Holding Corp. and Iview Digital Video Solutions Inc. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.2*
Secured Term Note, dated February 13, 2006, issued by Creative Vistas, Inc. to Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.3*
Secured Term Note, dated February 13, 2006, issued by Iview Digital Video Solutions Inc. to Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.4*
Option, dated February 13, 2006, issued by Iview Holding Corp. to Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.5*
Warrant, dated February 13, 2006, issued by Creative Vistas, Inc. to Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.6*
Amended and Restated Guaranty, dated February 13, 2006 by and among Creative Vistas, Inc., Cancable Inc., Cancable Holding Corp., Cancable, Inc., A.C. Technical Systems Ltd., Creative Vistas Acquisition Corp., Iview Holding Corp. and Iview Digital Video Solutions Inc. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.7*
Amended and Restated Guaranty, dated February 13, 2006 between Brent W. Swanick and Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.8*
Side Agreement, dated February 13, 2006 between Iview Digital Video Solutions, Inc., Iview Holding Corp., Creative Vistas Acquisition Corp. and Laurus Master Fund, Ltd incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.9*
Joinder and Confirmation of Security Agreement, dated February 13, 2006 among Iview Holding Corp., Cancable Inc., Cancable Holding Corp., Cancable, Inc., A.C. Technical Systems Ltd., Creative Vistas Acquisition Corp., Iview Digital Video Solutions Inc., and Creative Vistas, Inc. delivered to Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.10*
First Amendment to Securities Purchase Agreement, dated February 13, 2006, by and among Cancable Inc., Cancable Holding Corp. and Laurus Master Fund, Ltd. for the purpose of amending the terms of that certain Securities Purchase Agreement by and among Cancable Inc., Cancable Holding Corp. and Laurus, dated as of December 31, 2005 incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
4.11*
Registration Rights Agreement, dated as of February 13, 2006, by and between Creative Vistas, Inc. and Laurus Master Fund, Ltd. incorporated by reference to the Registrant’s Form 8-K filed February 17, 2006.
10.1*
Stock Option Plan, incorporated by reference to the Registrant’s Form S-8 filed October 6 2006
10.2*
Rogers Cable Commmunications Inc. and Canacble Inc. for the provision of installation activities and service activities.
10.3*
Common Stock Purchase Warrant, dated January 22, 2008, issued by Creative Vistas, Inc. to Erato Corporation for the Right to Purchase 812,988 Shares of Common Stock of Creative Vistas, Inc. incorporated by reference to the Registrant’s Form 8-K filed February 28, 2008.
10.4*
Stock Purchase Agreement, dated January 22, 2008, between Creative Vistas, Inc. and Erato Corporation. incorporated by reference to the Registrant’s Form 8-K filed February 28, 2008.
10.5*
Common Stock Purchase Warrant, dated January 22, 2008, issued by Creative Vistas, Inc. to Erato Corporation for the Right to Purchase 1,738,365 Shares of Common Stock of Creative Vistas, Inc. incorporated by reference to the Registrant’s Form 8-K filed February 28, 2008.
10.6+
Letter Agreement dated January 22. 2008 between Creative Vistas, Inc. and Erato Corporation.
10.7*
Warrant Purchase Agreement, dated January 30, 2008 between Creative Vistas, Inc., Laurus Master Fund, Ltd., Erato Corporation, Valens U.S. Fund, LLC and Valens Offshore SPV I, Ltd. incorporated by reference to the Schedule 13 D filed by the Registrant with respect to 180 Connect Inc. dated February 1, 2008.
10.8*
Amended and Restated Common Stock Purchase Warrant dated July 2, 2007 issued to Laurus Master Fund, Ltd. by 180 Connect Inc. incorporated by reference to the Schedule 13 D filed by the Registrant with respect to 180 Connect Inc. dated February 1, 2008.
10.9*
Common Stock Purchase Warrant, dated January 30, 2008, issued by Creative Vistas, Inc. to Erato Corporation for the Right to Purchase 2,350 Shares of Common Stock of Creative Vistas, Inc. incorporated by reference to the Schedule 13 D filed by the Registrant with respect to 180 Connect Inc. dated February 1, 2008.
10.10*
Common Stock Purchase Warrant, dated January 30, 2008, issued by Creative Vistas, Inc. to Valens U.S. SPV I, LLC for the Right to Purchase 214,033 Shares of Common Stock of Creative Vistas, Inc. incorporated by reference to the Schedule 13 D filed by the Registrant with respect to 180 Connect Inc. dated February 1, 2008.
10.11*
Common Stock Purchase Warrant, dated January 30, 2008, issued by Creative Vistas, Inc. to Valens Offshore SPV I, Ltd. for the Right to Purchase 582,367 Shares of Common Stock of Creative Vistas, Inc. incorporated by reference to the Schedule 13 D filed by the Registrant with respect to 180 Connect Inc. dated February 1, 2008.
10.12+
Non-binding Letter of Intent between Creative Vistas, Inc. and Valens U.S. Fund, LLC
21.1+
List of all subsidiaries
31.1+
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
32.2+
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
* Previously filed and incorporated by reference
+ Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.