180 Connect Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the fiscal year ended
December 31, 2007
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Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Commission File Number:
000-51456
180 CONNECT INC.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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20-2650200
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(State of
Incorporation)
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(IRS Employer Identification
Number)
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6501 E. Belleview Avenue
Englewood, Colorado 80111
(Address of principal executive
offices)
Registrants Telephone
Number:
(303) 395-6000
Securities registered pursuant
to Section 12(g) of the Act:
Common Stock, par value $0.0001
per share
Units, each consisting of one
share of Common Stock and two Warrants
Warrants, exercisable for Common
Stock at an exercise price of $5.00 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock, par value
$0.0001 per share, held by non-affiliates of the Registrant,
computed by reference to the closing price of such stock on
March 27, 2008 was $18,957,026.
As of March 27, 2008, there were 23,751,648 shares of
the Registrants Common Stock issued and outstanding which
excludes 1,768,504 exchangeable shares and 500,000 shares
of common stock held in the Companys treasury.
180 CONNECT
INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
INDEX
PART I
Corporate
Overview
We were organized as a Delaware blank check company in April
2005 under the name Ad.Venture Partners, Inc.
(AVP) for the purpose of acquiring,
through a merger, capital stock exchange, asset acquisition or
other similar business combination, one or more operating
businesses in the technology, media or telecommunications
industries. On August 24, 2007, we completed the
Arrangement (the Arrangement) with 180
Connect Inc., a corporation organized under the laws of Canada
(180 Connect (Canada)), whereupon 180
Connect (Canada) became our indirect, wholly-owned subsidiary
and we changed our name to 180 Connect Inc.
As used in this annual report, we, us,
our, 180 Connect Inc., the
Company and words of similar import refer to the
consolidated business of 180 Connect Inc. (formerly known as
Ad.Venture Partners, Inc.).
Industry
Trends
Our industry is comprised of national, regional and local
companies that provide services to meet the following needs:
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Growing Demand for High-Definition Television and Voice,
Video and Data Services.
DIRECTV®
Inc. (DIRECTV) satellite television
subscriptions and installations have grown substantially over
the last five years as the industry has gained acceptance in
part through offering high definition television and digital
video recorder capabilities, as well as attractive programming
such as NFL Sunday Ticket, NASCAR HotPass, and other exclusive
sports offerings. Cable companies continue to upgrade their
systems to provide for enhanced broadband services, including
voice over internet protocol, commonly called VOIP, as well as
improved video offerings, including high definition television,
video on demand and digital video recording. All of these
improved offerings drive increased need for at-home fulfillment
services, services which account for the vast majority of our
revenues.
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Increasing Need for Network Infrastructure Design,
Installation and Management. Municipalities, large housing
developments and complex organizations, such as airports, are
increasingly using advanced technology to expand operational
capabilities, reduce costs, attract business development and
drive additional revenue, among many other benefits. The
technology is complex, and they often turn to third-parties,
such as our Network Services division, to design the networks,
oversee installation and manage the network post-construction.
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Increasing Sophistication of New Home Technology and
Wiring. New home buyers are demanding and paying for
increasingly complex wiring to support next-generation home
entertainment, environmental and security controls. The Company
has a small but growing division that works with builders and
individuals to install new home and multi-dwelling unit
structured wiring.
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The 180 Connect
Solution
We employ a flexible, highly skilled workforce to provide
technical support services to the home entertainment,
communications, enterprise data and home integration service
industries. By providing such services, we allow our customers
to focus on their core competencies and product offerings.
We train, equip and employ technicians in each of our more than
85 operating locations to ensure the timely completion of our
services and to provide ongoing direct contact with our
customers and their subscribers. Our customers, which are home
entertainment, communications and data providers and
municipalities, engage us to respond to requests received from
their subscribers by assigning a service request, or work order,
to us. We typically receive work orders within twenty-four hours
of the carriers
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receipt of a service request, which are then assigned to a
technician. The technician is then dispatched to the
subscribers location and completes the service request.
Technicians typically require one to three hours to complete a
service request, depending upon the type of service required.
Upon completion, the technician contacts us
and/or the
customer and closes the work order. In addition, engineering and
design services are also completed based on the receipt of work
orders from our customers.
We provide our customers with the resources of a national
organization combined with the accessibility and flexibility of
a local technical support services provider. We are recognized
as a leading provider of technical support services, which we
believe is due to our focus on the following factors:
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Quality Service. We provide quality service
through our comprehensive training and supervision of our
technicians and through routine inspections by both us and our
customers of completed work. These routine inspections ensure
that completed work meets all applicable technical and
customer-specified standards. Our quality service is evidenced
by our high customer satisfaction ratings.
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Low Cost Provider. In order to effectively
compete with local technical support service providers, we
concentrate on maintaining a well-managed cost structure. We
achieve this by focusing extensively on a variable cost model.
As part of our initiatives, we have transferred administrative
functions such as payroll, human resources administration and
accounting from local and regional offices to a centralized
location. In this manner, we have been able to provide the
benefits of a local technical support services provider with the
economics of a national technical support services provider.
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National Footprint. We provide technical
support services to the satellite and cable, home building
industries and municipalities operating across the United States
and parts of Canada by utilizing a single operating standard to
ensure all of our customers are provided with the same level of
service, regardless of their location. We believe that as
consolidation among our cable and satellite customers continues,
our ability to provide reliable quality service on a national,
regional and local basis to those consolidated entities will be
a significant competitive advantage. Currently, we provide
installation, connection and technical support services in more
than 85 locations across the United States and parts of Canada.
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Our
Business
We provide installation, integration and fulfillment services to
the home entertainment, communications and home integration
service industries. The principal market for our services is the
United States. Our customers include providers of satellite,
cable and broadband media services as well as home builders,
developers and municipalities.
Consolidation in the media and communications industry has
created national carriers, many of whom provide an integrated
suite of advanced video, data and voice services to residential
and commercial subscribers. Many of these national carriers made
the strategic decision to outsource the majority of the physical
implementation of their services, leading to the creation of a
large and highly competitive technical support services
industry, of which we are a member.
We have evolved through a combination of internal growth and
acquisitions. With a staff of more than 4,000 skilled
technicians and 750 support personnel based in over 85 operating
locations in 22 states, we provide technical support
services at our customers subscribers homes and
businesses across the United States and parts of Canada. This
infrastructure allows us to provide consistent service and
utilize our expertise and resources to deploy increasingly
complex technologies over large networks in a cost efficient
manner.
Satellite
Services
We are one of the largest services providers for DIRECTV. We
have the non-exclusive right to provide services in the
installation and maintenance of DIRECTV system hardware in
22 states at specified rates per service pursuant to the
terms and conditions of our agreements with DIRECTV. There is no
minimum
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amount of services or compensation guaranteed to us under these
agreements. The agreements have a term of four years, and
automatically renew for consecutive one-year terms thereafter
unless either party gives notice to terminate at least ninety
days prior to the expiration of the then-current term. The
agreements may also be terminated by either party without cause
upon
180-days
prior notice. We are restricted under the agreements from
performing installations or providing services to competitors of
DIRECTV in the same markets where we provide services to
DIRECTV, without DIRECTVs consent. DIRECTV accounted for
84%, 84% and 86% of our consolidated revenues for the years
ended December 31, 2007, December 31, 2006 and
December 31, 2005, respectively. A 2007 study by J.D. Power
and Associates recognized DIRECTV for achieving one of the
highest levels of customer satisfaction in many of its markets.
We believe that the training and performance of our technicians
contributed to DIRECTVs high level of customer
satisfaction.
Cable
Services
Our cable services division is a substantial provider of
technical resources for major cable operators such as Time
Warner Inc. (Time Warner), Cox
Communications, Cablevision Systems Corp.
(Cablevision), Brighthouse Networks,
Wide open West (WoW) in the United
States and Rogers Communications Inc. (Rogers
Communications) in Canada. We have over 500
technicians operating from 12 branches who perform voice, video
and data installations, upgrades and maintenance services for
our cable customers.
Network
Services
180 Connect Network Services provides a One Source
Solution for fiber network and communication services. We
provide a fully integrated, turnkey solution that includes a
complete range of network design, integration, installation,
maintenance, project management and 24/7 network monitoring and
technical support services for telecommunication networks that
include: Fiber-to-the-premise, wireless, advanced copper and
LAN/WAN/MAN networks for municipal and city governments and
public and private development projects.
Home
Services
180 Connect Home Services is a leading low-voltage system
and lifestyle-technology integrator that provides installation,
sales and service to builders and residential developers. We
focus on superior customer service and on building long-term
business relationships with our customers. Our product and
service offerings include structured wiring, security system
installation, home theater and broadband, whole-house audio and
central vacuum deployment throughout the home.
Outlook
We believe substantial growth opportunities exist for a limited
number of national technical support service providers due to:
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the opportunity to increase market share by obtaining contracts
in new geographic territories;
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the opportunity to leverage our branch networks to provide home
installation of various technologies;
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the increasing demand by subscribers for advanced broadband
services such as high-speed data, digital video and internet
protocol telephony, satellite and cable services;
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the ability to increase market share by providing quality
service at a competitive price; and
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the increasing demand for network management consulting,
planning, engineering and construction-related services to
communications systems owners, operators and equipment suppliers
worldwide.
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The key components of our expansion strategy are the continued
focus on margin improvement, growth opportunities within the
existing branch operating network and identifying, acquiring and
integrating strategic acquisitions to increase geographic
coverage and extend service offerings to include complementary
product lines that can be offered from our existing network of
branch operations. Our operating model, combined with its size
and focus and management depth and experience allows us to
leverage organic growth and acquisition opportunities that
complement and enhance our current operations.
Seasonality
We need working capital to support seasonal variations in our
business. Our customers subscriber growth, and thus the
revenue earned by us, tends to be higher in the third and fourth
quarters of the year. We generally experience seasonal working
capital needs from approximately January through June. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation
Seasonality.
Safety and
Insurance/Risk Management
We are committed to ensuring that our employees perform their
work safely. We regularly communicate with our employees to
reinforce that commitment and to instill safe work habits. We
review all accidents and claims for our operations, examine
trends and implement changes in procedures to address safety
issues. Claims arising in our business generally include
workers compensation claims, various general liability and
damage claims, and claims related to vehicle accidents,
including personal injury and property damage. We self insure
against the risk of loss arising form our operations up to
certain deductible limits. Any amounts exceeding the maximum
amounts are covered by our umbrella insurance policy. See
Item 1A. Risk Factors Our actual losses
may exceed our insurance expense estimates,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation
Insurance Premium Deposits and Note 2 of Notes
to Consolidated Financial Statements Significant
Accounting Policies, Insurance Premium Deposits.
Competition
Our industry is highly competitive and highly fragmented. We
often compete with a number of companies in markets where we
operate, ranging from small local independent companies to large
national firms. Under our contractual agreement with DirecTV,
they are able to increase the number of markets we serve or the
amount of work we do within those markets, decrease the number
of markets or the volume of work, or enter the markets
themselves. Historically they have not provided fulfillment
services themselves, but they have publicly expressed an
interest in doing so in the future.
Relatively few significant barriers to entry exist in the
markets in which we operate and, as a result, any organization
that has adequate financial resources and access to technical
expertise may become a competitor. Some of our customers employ
personnel to perform infrastructure services of the type we
provide. We compete based upon our industry experience,
technical expertise, financial and operational resources,
nationwide and Canadian presence, industry reputation and
customer service. While we believe our customers consider a
number of factors when selecting a service provider, most of
their work is awarded through a bid process. Consequently, price
is often a principal factor in determining which service
provider is selected.
Availability of
Filings
We make all of our reports filed under the Securities Exchange
Act of 1934, as amended (the Exchange
Act) available, free of charge, on our web site at
www.180connect.net, as soon as reasonably practicable after
electronically filing with the Securities and Exchange
Commission (the SEC). The information
on or accessible through our website is not part of this Annual
Report on
Form 10-K.
Further, a copy of this Annual Report on
Form 10-K
is located at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. Information on
the operation of the Public Reference
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Room can be obtained by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding our
filings at www.sec.gov.
Risks Related to
Our Business and Industry
We have a
history of operating losses and may not be able to achieve
profitability.
We began operating our business in 2000 through the acquisition
of certain assets relating to the cable and satellite
industries. We had a loss from continuing operations of
$22.9 million for the year ended December 31, 2007, of
which approximately $12.0 million was related to the
Arrangement. Our net losses from continuing operations were
$8.8 million and $5.2 million for the years ending
December 31, 2006 and December 31, 2005, respectively.
If we are not profitable in the future, we may require
additional sources of financing to meet ongoing requirements. We
may continue to incur losses and remain unprofitable in the
future.
We rely on one
key customer for a substantial percentage of our
revenue.
DIRECTV accounted for 84%, 84% and 86% of our consolidated
revenues for the years ended December 31, 2007,
December 31, 2006 and December 31, 2005, respectively.
We are materially dependent on this customer and the loss of
this customer or a substantial reduction in the level of
services provided to this customer would have a material adverse
affect on us and the market price and value of our common
shares. A number of factors impact the services that this
customer or any of our other customers may require. Industry
consolidation, technological developments, economic cycles, and
internal budgetary constraints all affect the demand for our
services. Our contract with DIRECTV does not afford us the
exclusive right to provide our services to DIRECTVs
customers in the territories we serve, and the contract may be
terminated by either party upon 180 days notice. Our
contract with DIRECTV does not permit us to perform services for
competitors of DIRECTV in the same markets where we perform
services for DIRECTV without DIRECTVs consent. In
addition, our contract with DIRECTV can be cancelled on short
notice and DIRECTV is generally not obligated to purchase
additional services from us.
Historically, DIRECTV has not provided fulfillment services
itself; rather it has relied on companies such as 180 Connect
(generally referred to by DIRECTV as Home Service
Providers or HSPs) to complete the
fulfillment. Recently, DIRECTV has indicated an interest in
bringing some portion of their fulfillment services in-house. If
it were to do so at any significant scale, this could have a
material impact on our financial results and future prospects.
If we are
unable to retain trained personnel, we may be unable to provide
adequate service.
Our ability to provide quality service and to meet the demand
for our services depends upon our ability to retain an adequate
number of trained personnel. We operate in an industry
characterized by highly competitive labor markets and, similar
to many of our competitors, we experience high employee
turnover. It is possible that our labor expenses would increase
due to a shortage in the supply of skilled field technicians and
subcontractors and our efforts to reduce employee turnover.
Additionally, labor expenses may increase if we are required to
rely more extensively on overtime for our technicians to meet
the demands for our services or if our employees unionize. We
cannot be certain that we will be able to improve our employee
retention rates or maintain an adequate skilled labor force
necessary to operate efficiently and to support our growth
strategy. Failure to do so could impair our ability to operate
efficiently and to retain current customers and attract
prospective customers which would cause our business to suffer
materially. Additionally, the industry in which we operate is
characterized by significant changes in technology. New
technologies may replace existing technologies for transmission
of video, data and voice. In order to remain competitive, we
must continue to train our technicians to keep pace with
technological developments in the industry. If we are unable to
provide our technicians with adequate
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training in a timely manner, we may not be able to retain
customers or attract new customers and our financial situation
could be adversely affected.
Higher fuel
prices would increase our cost of doing business, and we may not
be able to pass along the added costs to
customers.
The price of fuel fluctuates based on events outside of our
control. Most of our contracts do not allow us to adjust our
pricing and therefore we have limited ability to pass higher
fuel costs to customers. Higher fuel costs may negatively impact
our financial condition and results of operations.
We depend on
key employees for management and operations.
We are dependent upon the retention of certain key executives
and employees. Our future success will depend upon our ability
to attract and retain additional qualified personnel to
identify, investigate and negotiate future acquisitions and
manage, oversee and staff acquired operations.
We are subject
to litigation and other disputes which may lead to
litigation.
We are subject to various actual and potential claims,
proceedings and lawsuits which may arise in the ordinary course
of business as well as four class action lawsuits in federal
court in Washington, California, and Oregon brought by current
and former employees alleging violations of state wage and hour
laws. Claimants can seek large damage awards and these claims
can involve potentially significant defense costs. We provide
reserves for those claims based on our current information and
legal advice. However, such reserves may be inadequate to cover
our losses relating to these claims and lawsuits and an adverse
decision in a lawsuit could have a material impact on our
financial condition and results of operations. See Item 3
of Part I of this
Form 10-K
for a description of the legal proceedings involving us and our
subsidiaries.
Our actual
losses may exceed our insurance expense estimates.
We maintain a self-insurance program for casualty coverage,
including workers compensation, automobile and general liability
coverage. As part of the self-insurance program, we are required
to pay up to $500,000 for each individual workers compensation
claim and up to $350,000 for each auto liability claim. The
aggregate limit is $29,295,000 for all workers compensation and
automobile liability claims. We are required to pay up to
$500,000 for each general liability claim for the period ended
April 30, 2008. We estimate, on an annual basis, our
potential liability for property and casualty claims, including
workers compensation, automobile and general liability claims
incurred within a particular policy year. These estimates take
into account policy loss limits and future anticipated payouts
on an individual claim basis and form the basis of our annual
insurance expense. We generally accrue for liability for losses
over a twelve-month period based on our then current estimate of
losses. In some cases, we may be required to make further
accruals and payments where actual losses in prior periods
exceed estimated amounts. If our estimates of potential
liability prove to be inaccurate, we could experience a
reduction in our profitability and liquidity and a weakening of
our financial condition.
We are subject
to competition and may not be able to maintain our position
within the industry.
We face competition from other providers of installation
services and may not be able to maintain or strengthen our
competitive position within the industry. There are a number of
factors that determine the level of competitive intensity in our
industry. First, there are relatively few barriers to entry into
the markets in which we operate. Therefore, any entity that has
sufficient financial resources and access to technical expertise
may become a competitor. Second, competitors may have lower cost
structures, which they are able to pass along to customers in
the form of lower rates. Third, some of our existing or
potential customers may themselves perform some of the same
services we perform. If we are unable to maintain or enhance our
competitive position and the quality of our service offering,
our business, operating results
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and financial condition may be adversely affected. There can be
no assurance that we will be able to compete successfully
against our current or future competitors.
Our revenue
and liquidity are subject to seasonal
fluctuations.
Our customers subscriber growth, and thus our revenue,
tends to be higher in the third and fourth quarters of the year.
While subscriber activity is subject to seasonal fluctuations,
it may also be affected by competition and varying amounts of
promotional activity undertaken by our customers. Additionally,
actual work order volume for any quarter may be lower than the
quarterly projections provided to us by our customers resulting
in increased levels of inventory and a decrease in revenue and
liquidity. There can be no assurance that we would have
sufficient liquidity or be able to obtain additional financing
on satisfactory terms, or at all, in the event a shortfall was
to occur in the future.
Our revolving credit facility (the Revolver)
requires a lockbox arrangement, which provides for all receipts
to be swept daily to reduce borrowings outstanding under the
credit facility. This arrangement, combined with the existence
of a subjective acceleration clause in the revolving credit
facility, requires that the borrowings under the Revolver be
classified a current liability on the balance sheet in
accordance with the Financial Accounting Standards Board
(FASB) Emerging Issues Task Force
Issue
No. 95-22,
Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement
(EITF 95-22).
There can be no assurance that we would have sufficient
liquidity or be able to obtain additional financing on
satisfactory terms, or at all, in the event the debt repayment
was accelerated.
Consolidation
of broadband carriers could result in a reduction of our
customer base.
From time to time, the home entertainment and communications,
cable, telecommunications, satellite and wireless industries
have experienced significant consolidation activity.
Consolidation among our customers could have the effect of
reducing the number of our current or prospective customers,
which could lead to increased dependence on a smaller number of
customers or the loss of customers who elect to use a competitor.
We have not
and do not expect to pay cash dividends which may cause the
price of our common stock to decline.
We have never paid a cash dividend on our common stock and do
not anticipate paying any cash dividends in the foreseeable
future. We intend to retain future cash earnings, if any, for
reinvestment in the development and expansion of our business. A
decision to pay cash dividends in the future will be made by our
Board of Directors and will be dependent on our financial
condition, results of operations, capital requirements and any
other factors our Board of Directors decides is relevant. As a
result, an investor will only recognize an economic gain on an
investment in our common stock from an appreciation in the price
of such common stock.
Failure to
successfully manage organic growth or growth through
acquisitions could negatively impact our business.
If we are unable to successfully manage our internal growth, our
revenue, profitability, operating results and financial
condition may be adversely affected. In addition, anticipated
cost savings may not materialize, and we may experience
operating losses. Our financial success could also be impaired
by the following risks if future acquisitions are not integrated
successfully:
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Substantial financial resources may be required to support
acquisitions, which could have otherwise been utilized in the
development of other aspects of our business;
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Acquisitions may result in liabilities and contingencies, which
could affect our operations; and
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We may incur significant expenses, or experience other financial
or operational problems if we are unable to successfully
integrate common systems and procedures with our current
operational, financial and management systems.
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No assurance can be given that our systems and procedures will
be adequate to support or integrate the expansion of operations
resulting from organic growth or an acquisition.
Risks Related to
Our Common Stock
The price of
our common stock is volatile and may be less than what you
originally paid for your shares of common stock.
The price of our common stock is volatile, and may fluctuate due
to factors such as:
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Actual or anticipated fluctuations in quarterly and annual
results;
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Mergers, consolidations and strategic alliances in the
communication and broadcast services industry;
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Market conditions in the equipment installation industry;
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Our earnings estimates and those of our publicly held
competitors; and
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The general state of the stock markets.
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The communication and broadcast services industry has been
highly unpredictable and volatile. The market for common stock
of companies in this industry may be equally volatile. Our
common stock may trade at prices lower than what you originally
paid for your shares.
The exercise
of our outstanding convertible securities will result in a
dilution of our current shareholders voting power and an
increase in the number of shares eligible for future resale in
the public market which may negatively impact the market price
of our shares.
As of March 27, 2008, we have outstanding the following
securities:
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Publicly-traded warrants to purchase up to 18,000,000 common
shares with an exercise price of $5.00 per share;
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An option to purchase up to 450,000 units (each unit
consisting of one common share and two warrants) at a price of
$7.50 per unit, held by Wedbush Morgan Securities Inc. (part of
which was transferred to Maxim Group LLC);
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Warrants to purchase up to 942,060 shares held by previous
lenders to the Company at an exercise price of $4.331 per share;
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A warrant to purchase up to 250,000 shares held by Laurus
Master Fund, Ltd. (Laurus) at an
exercise price of $3.00 per share;
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A warrant held by Laurus to purchase up to 150,000 shares
of our common stock at an exercise price of $3.00 per share;
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A warrant held by Creative Vistas Inc. to purchase
450,000 shares of our common stock at an exercise price of
$0.01 per share;
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A warrant to purchase up to 266,393 shares held by Magnetar
Capital Master Fund Ltd.
(Magnetar) at an exercise price of
$0.01 per share and
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2,294,650 stock options and other awards pursuant to our
2007-Long Term Incentive Plan (LTIP)
and prior stock option plans.
|
8
Exercise of these warrants and options will dilute our existing
shareholders voting interest, and would lead to an
increase in the number of shares eligible for resale in the
public market. Sales of substantial numbers of such shares in
the public market could adversely affect the market price of our
shares.
Our common
stock is traded on the OTC Bulletin Board, which may make
it more difficult for shareholders to dispose of or to obtain
accurate quotations as to the value of our common
stock.
Our common stock is quoted on the OTC Bulletin Board. As a
result, there may be no or only a limited public market for our
common stock and you may find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, our
common stock. In addition, the penny stock
regulations of the SEC might apply to transactions in the common
stock. A penny stock generally includes any
over-the-counter equity security that has a market price of less
than $5.00 per share. The SEC regulations require the delivery,
prior to any transaction in a penny stock, of a disclosure
schedule prescribed by the SEC relating to the penny stock. A
broker-dealer effecting transactions in penny stocks must make
disclosures, including disclosure of commissions, and provide
monthly statements to the customer with information on the
limited market in penny stocks. These requirements may
discourage broker-dealers from effecting transactions in penny
stocks. If the penny stock regulations were to become applicable
to transactions in shares of our common stock, they could
adversely affect your ability to sell or otherwise dispose of
your shares.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our corporate headquarters consist of an 18,500 square foot
leased facility located in Englewood, Colorado. As of
December 31, 2007, our operations were conducted from over
85 locations in 22 states. No individual facilities are
material to our operations as most of our services are performed
on the customers premises. In addition, suitable
alternative branch locations are available in substantially all
areas where we currently conduct business. We also own property
and equipment that, at December 31, 2007, had a net book
value of $34.9 million. This property and equipment
includes vans, tools, computers, office and other equipment. Our
equipment is acquired from various third-party vendors, none of
which we depend upon, and we did not experience any difficulties
in obtaining desired equipment.
|
|
Item 3.
|
Legal
Proceedings
|
We and our subsidiaries, Ironwood Communications, Inc.
(Ironwood) and Mountain Center, Inc.
(Mountain) are party to four class
action lawsuits in federal court in Washington, California and
Oregon brought by current and former employees alleging
violations of state wage and hour laws. A class has been
certified in the Washington class action pending in federal
court in Seattle, and a trial is scheduled for November 2008. A
motion to certify a class has been filed in the Oregon case
pending in federal court in Portland, but there has been no
decision yet on that motion. The two California class actions
are coordinated for discovery purposes before the same federal
court judge in the Central District of California (Riverside).
No class certification motion has been filed in either
California case, which are both in early stages of discovery.
In December 2006, thirteen technicians (the
Complainants) employed at our Farmingdale, New York
location filed harassment, discrimination and retaliation
charges against us with the Equal Employment Opportunity
Commission (the EEOC) alleging that we violated
Title VII of the Civil Rights Act of 1964. In September
2007, the EEOC issued a probable cause finding with respect to
an alleged discriminatory incident, the occurrence of which we
did not dispute. In our defense, we submitted evidence showing
that we promptly hired a neutral third party to investigate the
complained-of incident, that the incident was not racially
motivated and that notwithstanding the investigators
findings, the Company promptly discharged
9
the employee responsible for the incident. Notwithstanding, the
EEOC made a per se finding holding us responsible for the
conduct of the employee responsible for committing the
complained-of incident and concluded that we engaged in unlawful
discriminatory practices. The EEOC determined that all other
complaints of discrimination, harassment and retaliation,
including any discriminatory employment practices, were
unfounded and, thus, dismissed. Thereafter, in December 2007,
after failure to reach a settlement, the Complainants filed a
federal lawsuit against us in connection with their claims to
the EEOC. The complaint purports to bring claims under
Title VII, the Civil Rights Act of 1871, the 1991 Civil
Rights Act, and the New York State Executive Law
Section 290. In January 2008, we filed an answer to the
complaint denying each of the Complainants allegations.
We intend to vigorously contest each of these
claims. Other than with respect to the Washington
class action, no reserves have been recorded for these cases as
we are unable to estimate the amounts of probable and reasonably
estimable losses. Any reserves we have recorded may be
inadequate to cover our losses relating to these claims and
lawsuits and an adverse decision in a lawsuit could have a
material impact on our financial condition and results of
operations.
In addition to the foregoing, we are subject to a number of
individual employment-related lawsuits. No reserve has been
recorded for these cases as we are unable to estimate the amount
of probable and reasonably estimable losses. These lawsuits are
not expected to have a material impact on our results of
operations, financial position or liquidity.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our security holders
during the fourth quarter of 2007.
10
Part II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Shareholders
Matters and Issuer Purchases of Equity Securities
|
Market Information. Our units, which consist
of one share of our common stock, par value $0.0001 per share,
and two warrants, each to purchase an additional share of common
stock, are quoted on the OTC Bulletin Board under the
symbol CNCTU. Our common stock is quoted separately
on the OTC Bulletin Board under the symbol
CNCT. Our publicly-traded warrants are listed
separately on the OTC Bulletin Board under the symbol
CNCTW. Prior to August 24, 2007, our units,
common stock and warrants were quoted on the OTC
Bulletin Board under the symbols AVPAU,
AVPA and AVPAW, respectively.
The following tables set forth, for the calendar quarter
indicated, the quarterly high and low closing prices of our
units, common stock and warrants, respectively, as quoted on the
OTC Bulletin Board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
Units
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
6.45
|
|
|
$
|
5.85
|
|
|
$
|
6.90
|
|
|
$
|
6.04
|
|
Second Quarter
|
|
$
|
7.15
|
|
|
$
|
6.37
|
|
|
$
|
6.86
|
|
|
$
|
6.30
|
|
Third Quarter
|
|
$
|
6.80
|
|
|
$
|
3.45
|
|
|
$
|
6.30
|
|
|
$
|
6.09
|
|
Fourth Quarter
|
|
$
|
3.45
|
|
|
$
|
1.40
|
|
|
$
|
6.20
|
|
|
$
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
Common Stock
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
4.00
|
|
|
$
|
2.17
|
|
|
$
|
4.92
|
|
|
$
|
2.78
|
|
Second Quarter
|
|
$
|
4.83
|
|
|
$
|
3.25
|
|
|
$
|
4.25
|
|
|
$
|
2.33
|
|
Third Quarter
|
|
$
|
4.67
|
|
|
$
|
2.70
|
|
|
$
|
3.65
|
|
|
$
|
1.25
|
|
Fourth Quarter
|
|
$
|
2.68
|
|
|
$
|
1.26
|
|
|
$
|
2.95
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
Warrants
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
0.39
|
|
|
$
|
0.15
|
|
|
$
|
0.71
|
|
|
$
|
0.37
|
|
Second Quarter
|
|
$
|
0.67
|
|
|
$
|
0.315
|
|
|
$
|
0.65
|
|
|
$
|
0.36
|
|
Third Quarter
|
|
$
|
0.62
|
|
|
$
|
0.23
|
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
Fourth Quarter
|
|
$
|
0.40
|
|
|
$
|
0.08
|
|
|
$
|
0.36
|
|
|
$
|
0.19
|
|
Holders. As of March 27, 2008, there were
approximately 30 shareholders of record of our common stock.
Dividends. We have never paid any cash
dividends and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors regularly evaluates
our dividend policy based on our financial condition,
profitability, cash flow, capital requirements, and the outlook
for our business. We currently intend to retain any future
earnings for reinvestment and acquisitions.
Unregistered Securities Sold.
On November 9, 2007, the Company issued Magnetar Capital
Master Fund, Ltds (Magnetar) a warrant to
purchase 356,952 shares of common stock of the Company at
an exercise price of $0.01 per share in full satisfaction of
amounts owing by the Company to Magnetar in connection with
Magnetars agreement to vote the shares it held in AVP in
favor of the Arrangement at the August 24, 2007 AVP
shareholders meeting. Such warrant has a five year term and was
valued at $800,000 on November 9, 2007. In connection with
such issuance, the Company withheld 90,559 shares
underlying the warrant in order to satisfy U.S. tax
withholding requirements and remitted $202,961 to the Internal
Revenue Service on behalf of Magnetar. Accordingly, the warrant
is exercisable for 266,393 shares.
11
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth certain selected financial data
for the fiscal years ended December 31, 2007,
December 31, 2006, December 31, 2005,
December 25, 2004, and December 27, 2003. Subsequent
to December 31, 2005, we changed our year end accounting
period from a 52/53 week year to a calendar year basis. The
following selected financial data should be read together with
our consolidated financial statements and notes thereto as well
as Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 25,
|
|
|
December 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
379,768
|
|
|
$
|
331,175
|
|
|
$
|
278,641
|
|
|
$
|
210,275
|
|
|
$
|
82,316
|
|
Expenses(1)
|
|
|
360,483
|
|
|
|
317,672
|
|
|
|
278,477
|
|
|
|
207,535
|
|
|
|
78,701
|
|
Loss from continuing operations
|
|
|
(22,903
|
)
|
|
|
(8,826
|
)
|
|
|
(5,228
|
)
|
|
|
(3,731
|
)
|
|
|
(8,675
|
)
|
Net loss
|
|
$
|
(24,942
|
)
|
|
$
|
(14,589
|
)
|
|
$
|
(8,517
|
)
|
|
$
|
(7,451
|
)
|
|
$
|
(12,812
|
)
|
Loss per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.20
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.82
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(1.30
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(1.21
|
)
|
Total assets
|
|
$
|
158,284
|
|
|
$
|
165,444
|
|
|
$
|
173,471
|
|
|
$
|
161,871
|
|
|
$
|
87,317
|
|
Long term liabilities, excluding deferred tax
liabilities(2)
|
|
|
17,246
|
|
|
|
33,754
|
|
|
|
22,977
|
|
|
|
43,730
|
|
|
|
48,333
|
|
Shareholders equity
|
|
|
22,211
|
|
|
|
9,402
|
|
|
|
20,353
|
|
|
|
34,416
|
|
|
|
5.163
|
|
Cash dividends declared per common share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
(1) |
|
Includes: direct expenses, general and administrative expenses,
foreign exchange (gain) loss, and restructuring costs. |
|
(2) |
|
2006 amount has been restated as a result of the
reclassification of $20.5 million of long-term debt
reclassified to current portion of long-term debt. |
12
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
This Managements Discussion and Analysis
(MD&A) should be read in
conjunction with the accompanying audited consolidated financial
statements for the year ended December 31, 2007 and the
related notes thereto.
Certain information included herein is forward-looking and based
upon assumptions and anticipated results that are subject to
risks and uncertainties. Should one or more of these
uncertainties materialize or should the underlying assumptions
and estimates prove incorrect, actual results may vary
significantly from those expected. Reference should be made to
the section entitled Forward-Looking Statements.
Reference should also be made to Item 1A, Risk
Factors, of this Annual Report on
Form 10-K.
We generate substantially all of our revenue in the United
States for which we receive payment in U.S. dollars. We
prepare our consolidated financial statements in
U.S. dollars and in conformity with U.S. generally
acceptable accounting principles
(GAAP). Unless otherwise indicated,
all dollar amounts in this MD&A are expressed in
U.S. dollars. References to $ and
US$ are to U.S. dollars.
Certain amounts have been reclassified from the consolidated
financial statements previously presented to account for
discontinued operations and the reclassification of the Revolver
portion of long-term debt to current.
Introduction
We provide installation, integration and fulfillment services to
the home entertainment, communications and home integration
service industries. The principal market for our services is the
United States. Our customers include providers of satellite,
cable and broadband media services as well as home builders,
developers and municipalities.
Trends and
Uncertainties in our Business
DIRECTV
Historically, DIRECTV has not provided fulfillment services
itself; rather it has relied on companies such as 180 Connect
(generally referred to by DIRECTV as Home Service
Providers or HSPs) to complete the
fulfillment. Recently, DIRECTV has indicated an interest in
bringing some portion of their fulfillment services in-house. If
it were to do so at any significant scale, this could have a
material impact on our financial results and future prospects.
Labor
Class Action Proceedings
We are subject to various actual and potential claims,
proceedings and lawsuits which may arise in the ordinary course
of business as well as four class action lawsuits in federal
court in Washington, California, and Oregon brought by current
and former employees alleging violations of state wage and hour
laws. Claimants can seek large damage awards and these claims
can involve potentially significant defense costs. Any reserves
we have recorded may be inadequate to cover our losses relating
to these claims and lawsuits and an adverse decision in a
lawsuit could have a material impact on our financial condition
and results of operations.
Rising Fuel
Costs
The price of fuel fluctuates based on events outside of our
control. Most of our contracts do not allow us to adjust our
pricing and therefore we have limited ability to pass higher
fuel costs to our customers. Higher fuel costs may negatively
impact our financial condition and results of operations.
13
2007 Significant
Operating Events
Consummation
of the Plan of Arrangement
On August 24, 2007, the Arrangement was
consummated. Because the consummation of the
Arrangement resulted in more than 50% of our voting securities
being held by the shareholders of 180 Connect (Canada), the
Arrangement has been accounted for under the reverse acquisition
application of the equity recapitalization method of accounting
in accordance with GAAP for accounting and financial reporting
purposes. Under this method of accounting, AVP was treated as
the acquired company for financial reporting
purposes. In accordance with guidance applicable to these
circumstances, the Arrangement is considered to be a capital
transaction in substance. Accordingly, for accounting purposes,
the Arrangement was treated as the equivalent of 180 Connect
(Canada) issuing stock for the net monetary assets of AVP,
accompanied by a recapitalization. The net monetary assets of
AVP were recorded at their fair value, essentially equivalent to
historical costs, with no goodwill or other intangible assets
recorded. The accumulated deficit of 180 Connect (Canada) has
been carried forward after the closing of the Arrangement.
Operations prior to the closing for all periods presented are
those of 180 Connect (Canada). All common shares, warrants,
options and earning per share amounts related to transactions
and periods prior to August 24, 2007 have been restated in
these financial statements to reflect the 0.6 exchange ratio
applied to 180 Connect (Canada)s equity instruments.
Exercise and
Redemption of Convertible Debentures
On March 22, 2006, 180 Connect (Canada) completed a private
placement with a group of qualified, accredited institutional
investors of $10,686,101 of convertible debentures and warrants
(Note 13). During the second quarter of 2007, one of the
convertible debenture holders exercised its option to convert in
total $2,024,785 of principal under the convertible debenture
into 510,000 common shares.
The consummation of the Arrangement constituted an event of
default under 180 Connect (Canada)s convertible
debentures. In the third quarter of 2007, the convertible
debenture holders exercised their right to redeem the
convertible debentures in full. We paid the holders of the
convertible debentures $10,393,577, which included outstanding
principal and a 20% redemption premium, excluding accrued but
unpaid interest.
Reduction of
Letter of Credit
During 2007, as a result of a reduction in our insurance
obligations, we negotiated a reduction in our required letter of
credit (LOC). The LOC requirement,
which is collateralized with our restricted cash, was reduced by
$6.3 million. This reduction in our restricted cash balance
was offset by a $2.0 million increase in restricted cash as
collateral for bonds on projects currently in progress by our
network services operation.
On March 19, 2008, as a result of the reduction in our
insurance obligations, we negotiated a reduction in our LOC
requirement by approximately $2.0 million.
Seasonality
We need working capital to support seasonal variations in our
business. Our customers subscriber growth, and thus the
revenue earned by us, tends to be higher in the third and fourth
quarters of the year. We generally experience seasonal working
capital needs from approximately January through June. The
following chart sets forth our revenue distribution by quarter
for fiscal years 2005 through 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue distribution by quarter
|
|
Quarter 1
|
|
|
Quarter 2
|
|
|
Quarter 3
|
|
|
Quarter 4
|
|
|
Total
|
|
|
Year 2007
|
|
|
24.1
|
%
|
|
|
22.9
|
%
|
|
|
26.8
|
%
|
|
|
26.2
|
%
|
|
|
100
|
%
|
Year 2006
|
|
|
22.1
|
%
|
|
|
22.6
|
%
|
|
|
26.8
|
%
|
|
|
28.5
|
%
|
|
|
100
|
%
|
Year 2005
|
|
|
22.8
|
%
|
|
|
22.2
|
%
|
|
|
26.8
|
%
|
|
|
28.2
|
%
|
|
|
100
|
%
|
14
Significant
Accounting Policies
Critical
Accounting Estimates
The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenue and expense during the reporting
periods. The most significant assumptions made by management in
the preparation of our consolidated financial statements
include: (i) provisions for credit adjustments and doubtful
accounts to reflect credit exposures and unrecoverable amounts;
(ii) valuation allowances and impairment assessments for
various assets, including customer contracts and goodwill;
(iii) the useful life and residual value of property, plant
and equipment; (iv) deferred income taxes;
(v) accruals related to liabilities arising from legal
claims; and (vi) periodic estimates of ultimate liabilities
related to losses associated with workers compensation and
employment liability, business automotive liability and general
liability insurance claims. Actual results could differ as a
result of revisions to estimates and assumptions which may have
a material impact on financial results of future periods. The
policies described below are considered to be critical
accounting estimates, as they require significant estimation or
judgment. For additional information see Note 2,
Significant Accounting Policies, of our consolidated
financial statements included in Item 8.
Reserves
The majority of our revenues are earned from executing work
orders received from our customers. We are required to make an
estimate of an appropriate reserve on our receivables. We
consider factors such as the number of days the account is past
due, the status of an account with respect to our past
collection history, our historical charge backs as well as
penalties and changes in business circumstances. The estimated
reserve required is a matter of judgment and the actual loss
eventually sustained may be more or less than the estimate
depending on events which have yet to occur and which are
uncertain including future business and economic conditions.
Conditions causing deterioration or improvement in the aging of
accounts and collections or deterioration or improvement of
customer service will increase or decrease reserve expense.
Other
Intangible Assets
The intangible assets consist primarily of customer contracts
acquired from acquisitions. Intangible assets are evaluated for
impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. Such an
asset is considered impaired if the carrying amount of the asset
grouping including the intangible asset exceeds the sum of the
undiscounted cash flows expected to result from the use and
ultimate disposition of the assets. If such assets are
considered to be impaired, the impairment to be recognized is
the amount by which the carrying amount of the assets exceeds
fair value determined using a discounted cash flow model. While
our cash flow assumptions and estimated useful lives are
consistent with our business plans, significant judgment is
involved in determining cash flows including growth,
profitability projections and earnings multiples.
The acquired companies had existing contracts with their
customers at the time of the acquisition. These contracts
required us to provide installation and other services over a
period of time in a specific geographic area on an exclusive
basis for our customers. These contracts were recognized apart
from goodwill as these assets resulted from contractual or other
legal rights and these assets are capable of being separated or
divided from the acquired enterprise. As such, a value was
assigned to the future benefits to be realized from these
exclusive contractual agreements with our customers. We amortize
these contracts over a ten year period.
The fair value of the customer contracts was initially
determined by a third-party valuation company at the time of
acquisition of the entities to which the customer contracts were
related. The valuation company used the excess earnings approach
to value the customer relationships by projecting revenue and
expenses attributable to the current customer relationship. The
customer contracts were assigned a
15
ten year life based upon existing terms of the customer
contracts, the likely renewal periods for customer contracts and
barriers to entry for competitors that would make it unlikely
that our customers could find replacement service providers.
Customer contracts are amortized ratably over the life of the
customer contract.
We test customer contracts for recoverability when events or
changes in circumstances indicate that their carrying amount may
not be recoverable. Indicators of impairment would include loss
of customers, declining revenues or the closure of branches.
Recoverability is assessed based on the carrying amount of the
assets and their net recoverable value, which is generally
determined based on undiscounted cash flows expected to result
from the use and the eventual disposal of the assets. An
impairment loss is recognized to write the assets down to their
fair value.
When a contract is being tested for impairment, uncertainties
and risks inherent in the assumptions included in the future
cash flows include the revenue growth projection and expense
estimates. Management believes that the growth rate and expense
estimate assumptions used in the calculations of future cash
flows are reasonable.
Significant judgments in this area involve determining whether a
triggering event has occurred and the determination of the cash
flows for the assets involved and, when necessary, the discount
rate to be applied in determining fair value. As of
December 31, 2007, there were no events or circumstances
that indicated that an impairment may have occurred. Management
prepared a sensitivity analysis whereby the estimated revenues
and expenses were changed by 5% and noted that the results of
the analysis would not have resulted in the impairment of
customer contracts.
Goodwill
Prior to January 1, 2002, amounts allocated to goodwill
were amortized over five years. Subsequent to January 1,
2002, we test for impairment on an annual basis or more
frequently if events or changes in circumstances indicate that
the asset might have been impaired. We assess the recoverability
of the carrying value of our goodwill on an annual basis. As
part of our annual evaluation, we consider several factors
including operating results and trends, closure of branch
operations, changes in client relationships and general economic
conditions. The assumptions about future cash flows and growth
rates are based on our budget and business plans and varying
growth rate assumptions for periods beyond the long-term
business plan period. Significant changes in these factors could
result in an impairment of goodwill.
We assess goodwill for impairment at the satellite, cable and
home integration lines of our business. Discrete financial
information is available and reviewed by operating managers for
each component. To test for goodwill impairment, we use the
two-step impairment process. The first impairment test is to
compare the fair value of the component with its carrying
amount, including goodwill, in order to identify a potential
impairment. Fair value is calculated using a discounted cash
flow model where the estimated future cash flows are discounted
by the weighted average cost of capital. When the fair value of
a component exceeds its carrying amount, goodwill of the
component is considered not to be impaired and the second step
of calculating the impairment is unnecessary. If step one of the
test is not met, an impairment loss is recorded for the carrying
amount of the goodwill exceeding the implied fair value of that
goodwill.
Uncertainties and risks inherent in the assumptions included in
the future cash flows include revenue growth projection and
expense estimates and the discount rate used. The assumptions
used to calculate future cash flows are based on
managements best estimates but are subject to changes as
they are based on forward-looking information. Management
believes that the assumptions used in the calculations of future
cash flows are reasonable as the revenue growth rate selected by
management for use in the discounted cash flow model is lower
than the actual revenue growth rate for each component for the
last two fiscal years and the expense estimates include
projected increases year over year.
As of December 31, 2007, there have been no events or
circumstances that would indicate impairment has occurred.
Management prepared a sensitivity analysis whereby the estimated
revenues and
16
expenses were changed by 5% and noted that the results of the
analysis would not have resulted in the impairment of goodwill.
At the date of the last impairment test for each reporting unit,
the fair value exceeded the carrying value by more than 10%.
Leases
Leases have been classified as either capital or operating
leases. Leases which transfer substantially all of the benefits
and risks incidental to the ownership of assets are accounted
for as if there were an acquisition of an asset and incurrence
of an obligation at the inception of the lease and are accounted
for as capital leases. All other leases are accounted for as
operating leases wherein rental payments are expensed as
incurred.
If at inception a lease meets one or more of the following four
criteria, the lease is considered a capital lease.
|
|
|
|
1.
|
The lease transfers ownership of the property to the lessee by
the end of the lease term. This criterion is met in situations
in which the lease agreement provides for the transfer of title
at or shortly after the end of the lease term in exchange for
the payment of a nominal fee, for example, the minimum required
by statutory regulation to transfer title.
|
|
|
2.
|
The lease contains a bargain purchase option. A bargain purchase
option is one that allows the lessee, at his option, to purchase
the leased property for a price that, at the inception of the
lease, appears to virtually assure transfer of the property to
the lessee at the date the option becomes exercisable.
|
|
|
3.
|
The lease term is equal to 75% or more of the estimated economic
life of the leased property. However, if the beginning of the
lease term falls within the last 25% of the total estimated
economic life of the leased property, including earlier years of
use, this criterion shall not be used for purposes of
classifying the lease.
|
|
|
4.
|
The present value of the minimum lease payments, exclusive of
executory costs, at inception of the lease is at least
90 percent of the fair value of the leased property to the
lessor less any related investment tax credit retained by the
lessor. Executory costs are the normal costs of operating and
maintaining an asset. They include insurance, property taxes,
and maintenance and repair services. This criterion is also
subject to the 25% constraint noted in (3) above. The
present value of the minimum lease payments should be calculated
using the incremental borrowing rate, unless the rate implicit
in the lease can be determined and such rate is less than the
incremental borrowing rate.
|
In 2005, we entered into agreements with third party leasing
companies to lease over 2,200 vehicles pursuant to our fleet
expansion program. As of December 31, 2007, we have
approximately 3,000 vehicles included as capital lease
obligations in the consolidated financial statements.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
SFAS 109 requires deferred tax assets and liabilities to be
recognized for temporary differences between the tax basis and
financial reporting basis of assets and liabilities, computed at
the expected tax rates for the periods in which the assets or
liabilities will be realized, as well as for the expected tax
benefit of net operating loss and tax credit carryforwards. We
have recorded a valuation allowance against all of our United
States and foreign net deferred tax assets in jurisdictions
where we have incurred significant losses. We have in accordance
with SFAS 109 evaluated the recoverability of our net
deferred tax assets and concluded that it was more likely than
not that all of net deferred tax assets would not be realized
and recorded a valuation allowance accordingly. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which
those deferred tax assets become deductible, the timing and
amount of which is uncertain. We assess the recoverability of
our net deferred tax assets on a quarterly basis. If we
determine that it is more likely than not that we will realize a
portion or
17
all of our remaining net deferred tax assets, some portion or
all of the valuation allowance will be reversed with a
corresponding reduction in income tax expense in such period.
We have significant taxable losses available to be carried
forward into future years. However, due to the uncertainty of
realization of these losses and other deferred tax assets, we
have recorded a valuation allowance against all of those assets.
We do not foresee any significant tax expense except to our
Canadian subsidiary, Wirecomm Systems, Inc. which has taxable
income and has exhausted most of its deferred tax assets. Proper
accrual has therefore been made for the Canadian tax liability.
The majority of the Companys U.S. operations are
included in a federal consolidated tax return under
Section 1501 of the Internal Revenue Code and therefore,
most of our U.S. tax losses are available for future use
subject to Section 172 and Section 382 limitations.
The Company has not completed an analysis of limitations on the
future ability to use net operating losses under
Section 382. Such limitations could significantly impact
the amount of the Companys net operating loss carryforward
available to offset future taxable income. Due to a
restructuring completed by the Company in December, 2007,
certain net operating losses might also be limited under the
SRLY rules of the internal revenue code.
Material changes in valuation allowance during the year are
attributable to losses sustained during 2007 by our
U.S. subsidiaries. The deferred tax assets for all these
losses have been reserved for by a valuation allowance as we do
not expect them to be utilized in the near future.
Insurance
Premium Deposits
We maintain a self-insurance program for casualty coverage,
including workers compensation, automobile and general liability
coverage. Property coverage is insured by a leading insurance
carrier in the U.S. The program is administered by a
U.S.-based
insurance company. As part of the self-insurance program, we are
required to pay up to $100,000 in California and $500,000 in all
other States, for each individual workers compensation claim,
and up to $350,000 for each auto liability claim. The aggregate
limit is $29,295,000 for all workers compensation and automobile
liability claims. We are required to pay up to $500,000 for each
general liability claim incurred during the period ending
April 30, 2008. Any amounts exceeding the maximum amounts
are covered by our umbrella insurance policy. As is common with
these types of insurance programs, we are required to make
periodic estimates of our ultimate actuarially determined
liability, based on experience, claims filed and an estimate of
claims incurred but not yet reported. These estimates take into
account policy loss limits and future anticipated payouts on an
individual claims basis. We make periodic premium payments to
the program administrator to cover claim payments as well as
associated fixed costs.
We calculate the annual insurance cost using actuarial estimates
provided by third party service providers at the beginning of
the plan year. For the plan years prior to May 1, 2004 and
for the plan year starting on May 1, 2006, we are required
to pre-pay the full estimated costs of insurance for the plan
year. The accounting for those periods was to record a prepaid
asset for the payments made in advance of the plan year. The
prepaid asset was then amortized on a pro rata basis each month
during which the coverage was provided. For the plan years
beginning on May 1, 2004 and May 1, 2005, we entered
into an agreement with our insurance carrier which required us
to pay the fixed costs associated with the insurance plan
up-front, and pay the actual claim amounts as they were settled
by putting in place necessary collateral in the form of letters
of credit.
Commitments
and Contingencies
We are subject to various claims and contingencies related to
lawsuits, taxes and commitments under contractual and other
commercial obligations. We recognize liabilities for
contingencies and commitments when a loss is probable and
capable of being estimated. Significant changes in our
assumptions as to the likelihood and estimates of the amount of
a loss could result in recognition of an additional liability.
18
Relationship
with DIRECTV
DIRECTV revenue is recognized when the work orders are closed.
Our agreements with DIRECTV include mechanisms whereby the
amount due to us from DIRECTV may be reduced for certain
reasons. These reasons include a failure to complete a work
order as defined within the agreements, amounts paid to us in
error or credits issued to DIRECTV customers that were the
result of poor services provided by us. Based on historical
amounts for actual chargebacks, we calculate and record a
chargeback estimate and record this as a monthly expense and
reserve against service revenue. For the year ended
December 31, 2007, $5.7 million in chargebacks (1.5%
of revenue) was deducted from revenue as compared to
$5.0 million (1.5% of revenue) in 2006.
We recognize revenue from our role as a commissioned sales agent
regarding DIRECTVs direct broadcast services. Sales for
the year ended December 31, 2007 were $1.2 million
versus $1.0 million recorded in the year ended
December 31, 2006. Direct contribution margin
(DCM) recognized from this revenue
activity was $0.4 million for each of the years ended
December 31, 2007 and 2006.
Included in the DCM for the year ended December 31, 2006 is
the effect of approximately $1.1 million of excess
equipment costs resulting partially from inventory write-offs
and from the usage of more expensive equipment in the
installation process which was not reimbursed. The write-offs
are included as a direct cost as they represent inventory
shrinkage due to poor inventory management practices.
Financial
Review
Revenue from continuing operations is generated from providing
installation, integration, fulfillment and long-term maintenance
and support services to the home entertainment, communications
and home integration service industries. Our services are
engaged by our customers pursuant to ongoing contracts and on a
project-by-project
basis.
Direct cost of revenue is comprised primarily of direct labor
costs including amounts paid to our extensive labor force of
technicians and third party subcontractors. Also included in
direct costs are materials, supplies, insurance and costs
associated with operating vehicles.
General and administrative expenses consist of personnel and
related costs associated with our administrative functions,
professional fees, office rent and other corporate related
expenses.
Subsequent to December 31, 2005, we changed our year end
accounting period from a 52/53 week year to a calendar year
basis. The amounts presented below have been reclassified to
reflect the adjustments associated with our discontinued
operations. This financial information has been derived
principally from our audited consolidated financial statements.
This summary financial and operating information should be read
in conjunction with our audited consolidated financial
statements and the related notes together with the discussion
contained herein.
Selected
Financial Highlights Year and Quarter Ended
December 31, 2007
For the twelve months ended December 31, 2007 as compared
to the twelve months ended December 31, 2006:
Full Year
Highlights
|
|
|
|
|
Revenue grew to $379.8 million, an increase of
$48.6 million, or 14.7%, compared to revenue of
$331.2 million in 2006.
|
|
|
|
EBITDA from continuing
operations(1)
was $19.3 million, an increase of $5.8 million or 43%
compared to $13.5 million in 2006.
|
|
|
|
Total cash provided by operating activities was
$1.5 million, a decrease of $4.8 million from the cash
provided by operating activities of $6.3 million in 2006.
|
19
|
|
|
|
|
Loss from continuing operations was $22.9 million, an
increase of $14.1 million compared to a loss from
continuing operations of $8.8 million in 2006.
|
|
|
|
Net loss was $24.9 million, an increase of
$10.3 million compared to a net loss of $14.6 million
in 2006.
|
|
|
|
Net loss per share for the twelve months ended December 31,
2007 and December 31, 2006, respectively, is as follows:
|
|
|
|
|
|
Loss from continuing operations was $1.20 per share basic and
diluted compared to a loss from continuing operations of $0.60
per share basic and diluted in 2006.
|
|
|
|
Net loss was $1.30 per share basic and diluted compared to net
loss of $1.00 per share basic and diluted in 2006.
|
|
|
|
(1) |
|
EBITDA from continuing operations excludes depreciation,
amortization of customer contracts, interest and loan fees,
(gain) loss on change in fair value of derivative liabilities,
gain on the extinguishment of debt, (gain) loss on sale of
investments and assets, other expense and income tax expense
(benefit). EBITDA from continuing operations is a non-GAAP
measure and does not have a standardized meaning prescribed by
GAAP. Therefore, EBITDA from continuing operations is not likely
to be comparable to similar measures presented by other issuers.
See Non-GAAP Measures. Management believes that
this term provides a better assessment of cash flow from our
operations by eliminating the charges for depreciation and
amortization, which are non-cash expense items, (gain) loss on
sale of investments and assets, (gain) loss on fair market value
of derivative liabilities, gain on the extinguishment of debt,
and other expense which is not considered to be in the normal
course of operating activity. The comparative GAAP measure is
loss from continuing operations. A reconciliation of EBITDA from
continuing operations to loss from continuing operations is
contained in this MD&A under EBITDA from continuing
operations. |
20
Results of
Operations
Comparison of
Years Ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
Revenue
|
|
$
|
379,767,879
|
|
|
$
|
331,175,241
|
|
|
|
14.7
|
%
|
Direct expenses
|
|
|
341,108,774
|
|
|
|
297,073,863
|
|
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
margin(1)
|
|
|
38,659,105
|
|
|
|
34,101,378
|
|
|
|
13.4
|
%
|
General and
administrative(2)
|
|
|
19,223,846
|
|
|
|
19,675,497
|
|
|
|
(2.3
|
)%
|
Foreign exchange (gain) loss
|
|
|
(124,329
|
)
|
|
|
30,361
|
|
|
|
(509.5
|
)%
|
Restructuring costs
|
|
|
275,000
|
|
|
|
892,688
|
|
|
|
(69.2
|
)%
|
Depreciation
|
|
|
12,061,858
|
|
|
|
13,398,987
|
|
|
|
(10.0
|
)%
|
Amortization of customer contracts
|
|
|
3,681,499
|
|
|
|
3,712,673
|
|
|
|
(0.8
|
)%
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
16,272,393
|
|
|
|
10,043,504
|
|
|
|
62.0
|
%
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(1,233,001
|
)
|
|
|
|
|
(Gain) loss on sale of investments and assets
|
|
|
715,151
|
|
|
|
(726,086
|
)
|
|
|
(198.5
|
)%
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
5,020,945
|
|
|
|
(1,363,936
|
)
|
|
|
(468.1
|
)%
|
Other expense
|
|
|
3,579,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
(benefit)
|
|
|
(22,046,717
|
)
|
|
|
(10,329,309
|
)
|
|
|
113.4
|
%
|
Income tax expense (benefit)
|
|
|
856,576
|
|
|
|
(1,503,271
|
)
|
|
|
(157.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(22,903,293
|
)
|
|
|
(8,826,038
|
)
|
|
|
159.5
|
%
|
Loss from discontinued operations
|
|
|
(2,039,073
|
)
|
|
|
(5,762,800
|
)
|
|
|
(64.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(24,942,366
|
)
|
|
$
|
(14,588,838
|
)
|
|
|
71.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.20
|
)
|
|
$
|
(0.60
|
)
|
|
|
|
|
Diluted
|
|
$
|
(1.20
|
)
|
|
$
|
(0.60
|
)
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.30
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
Diluted
|
|
$
|
(1.30
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
|
|
|
(1) |
|
DCM consists of revenue less direct expenses and excludes
general and administrative expense, foreign exchange (gain)
loss, restructuring costs, depreciation, amortization of
customer contracts, interest and loan fees, (gain) loss on sale
of investments and assets, other expense, gain (loss) on change
in fair value of derivative liabilities, gain on extinguishment
of debt, and income tax expense (benefit). DCM is a non-GAAP
measure. The comparative GAAP measure is loss from continuing
operations. For a reconciliation of DCM to loss from continuing
operations, see Direct Contribution Margin. |
|
(2) |
|
General and administrative includes stock-based compensation of
$860,035 and $91,214, for the years ended December 31,
2007, and December 31, 2006, respectively. |
Revenue
Revenue for the year ended December 31, 2007 increased to
$379.8 million from $331.2 million for the year ended
December 31, 2006. This 14.7% increase reflects continued
growth in revenue resulting from DIRECTV channeling more work to
us through their home services provider network and increased
21
customer demand resulting from DIRECTVs initiatives to
promote high definition products sales and upgrades as well as
growth in our cable operations, home and network services
businesses. Work order volume from DIRECTV for the year ended
December 31, 2007, increased by 15.3% from the year ended
December 31, 2006. In addition to the benefits of this
increase in volume, there was also a favorable rate impact
realized in the year due to the rate increases initiated in the
second quarter of 2007. Different rates are earned for each type
of service completed and the mix of services (installations,
upgrades and service) impacts both the revenue per call and
number of service calls that may be completed. The financial
impact of the volume and rate increase, partially offset with
the less favorable rate and mix, was $42.4 million for the
year ended December 31, 2007.
For the year ended December 31, 2007, cable operations
continued to grow, particularly in Rogers Communications and
Time Warner, which experienced increases of 60% and 24%,
respectively, partially offset by a reduction in revenue at
certain other cable operations. Overall cable revenues for the
year ended December 31, 2007 were 10% greater than in the
year ended December 31, 2006. Revenue for our network
services business for the year ended December 31, 2007 were
2% greater than in the year ended December 31, 2006, and
revenue of our 180 Home business grew by 85% off a relatively
small base.
Revenue from the majority of our customers is recognized when
work orders are closed. Our contracts with our customers also
include mechanisms whereby we are not paid for certain work that
is not completed within the specifications of the contract.
Based upon historical payments, we calculate and estimate a
reserve against revenue each month. For the year ended
December 31, 2007, $5.7 million (1.5% of revenue) was
recorded as a deduction to revenue as compared to
$5.0 million (1.5% of revenue) for the year ended
December 31, 2006.
Direct
Contribution Margin
DCM, defined as revenue less direct operating expenses,
increased by $4.6 million, or 13.4%, from
$34.1 million for the year ended December 31, 2006 to
$38.7 million for the year ended December 31, 2007.
The increase in DCM is primarily due to the revenue growth
discussed above and reductions in insurance expense, partially
offset by an increase in fuel prices. DCM, as a percentage of
revenue DCM decreased from 10.3% in 2006 to 10.2% in 2007.
DCM is a non-GAAP measure. The comparable GAAP measure is loss
from continuing operations. Loss from continuing operations of
$22.9 million in the year ended December 31, 2007
increased by $14.1 million compared to loss from continuing
operations of $8.8 million in the year ended
December 31, 2006. The following is a reconciliation of DCM
to loss from continuing operations, the comparable GAAP measure.
22
Reconciliation
of DCM to Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Direct contribution
margin(1)
|
|
$
|
38,659,105
|
|
|
$
|
34,101,378
|
|
General and
administrative(2)
|
|
|
19,223,846
|
|
|
|
19,675,497
|
|
Foreign exchange (gain) loss
|
|
|
(124,329
|
)
|
|
|
30,361
|
|
Restructuring costs
|
|
|
275,000
|
|
|
|
892,688
|
|
Depreciation
|
|
|
12,061,858
|
|
|
|
13,398,987
|
|
Amortization of customer contracts
|
|
|
3,681,499
|
|
|
|
3,712,673
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
16,272,393
|
|
|
|
10,043,504
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(1,233,001
|
)
|
(Gain) loss on sale of investments and assets
|
|
|
715,151
|
|
|
|
(726,086
|
)
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
5,020,945
|
|
|
|
(1,363,936
|
)
|
Other expense
|
|
|
3,579,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
(benefit)
|
|
|
(22,046,717
|
)
|
|
|
(10,329,309
|
)
|
Income tax expense (benefit)
|
|
|
856,576
|
|
|
|
(1,503,271
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(22,903,293
|
)
|
|
$
|
(8,826,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
DCM consists of revenue less direct expenses and excludes
general and administrative expense, foreign exchange (gain)
loss, restructuring costs, (gain) loss on sale of investments
and assets, depreciation, amortization of customer contracts,
interest and loan fees, (gain) loss on change in fair value of
derivative liabilities, gain on extinguishment of debt, other
expense, and income tax expense (benefit). DCM is a non-GAAP
measure. See Non-GAAP Measures. The comparative
GAAP measure is loss from continuing operations. |
|
(2) |
|
General and administrative includes stock-based compensation of
$860,035 and $91,214, for the years ended December 31,
2007, and December 31, 2006, respectively. |
General and
Administrative Expenses, Restructuring Costs and Non-Cash
Stock-Based Compensation
General and administrative expenses were $19.2 million for
the year ended December 31, 2007, a decrease of
$0.5 million from the year ended December 31, 2006.
General and administrative expenses as a percentage of revenue
decreased to 5.0% for the year ended December 31, 2007 from
5.9% for the year ended December 31, 2006. The decrease in
general and administrative expenses is primarily due to lower
legal and professional fees in 2007. Stock-based compensation
was $0.9 million for the year ended December 31, 2007,
as a result of the grant of employee stock options, restricted
stock units, and share appreciation rights compared to
$0.1 million for the year ended December 31, 2006.
In addition to the general and administrative expenses above,
there were restructuring charges of approximately
$0.3 million and $0.9 million for the years ended
December 31, 2007 and December 31, 2006, respectively,
due to the completion of our relocation of our corporate offices
to Denver, Colorado.
EBITDA from
Continuing Operations
EBITDA from continuing operations for the year ended
December 31, 2007 increased to $19.3 million from
$13.5 million in the year ended December 31, 2006, an
increase of $5.8 million or 42.8%. This increase is
primarily attributed to an increase in direct contribution
margin discussed above. For the year ended December 31,
2007, EBITDA includes $0.9 million in non-cash compensation
expense related to our Long-Term Incentive Plan, as well as
$0.3 million for restructuring, $0.8 million for costs
incurred in
23
connection with the registration and listing of 180 Connect
(Canada)s shares on a U.S. exchange, which was
subsequently abandoned in connection with the Arrangement, and
non capitalized costs related to the consummation of the
Arrangement.
EBITDA is a non-GAAP measure. The comparable GAAP measure is
loss from continuing operations. Loss from continuing operations
was $22.9 million and $8.8 million for the years ended
December 31, 2007 and December 31, 2006, respectively.
The following is a reconciliation of EBITDA to loss from
continuing operations, the comparable GAAP measure.
Reconciliation
of EBITDA to Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
EBITDA from continuing
operations(1)
|
|
$
|
19,284,588
|
|
|
$
|
13,502,832
|
|
Depreciation
|
|
|
12,061,858
|
|
|
|
13,398,987
|
|
Amortization of customer contracts
|
|
|
3,681,499
|
|
|
|
3,712,673
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
16,272,393
|
|
|
|
10,043,504
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(1,233,001
|
)
|
(Gain) loss on sale of investments and assets
|
|
|
715,151
|
|
|
|
(726,086
|
)
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
5,020,945
|
|
|
|
(1,363,936
|
)
|
Other expense
|
|
|
3,579,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
(benefit)
|
|
|
(22,046,717
|
)
|
|
|
(10,329,309
|
)
|
Income tax expense (benefit)
|
|
|
856,576
|
|
|
|
(1,503,271
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(22,903,293
|
)
|
|
$
|
(8,826,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Non-GAAP Measures |
Depreciation
and Amortization of Customer Contracts
For the year ended December 31, 2007, depreciation expense
of $12.1 million represents a decrease of $1.3 million
from the year ended December 31, 2006. This decrease is
primarily attributable to the change in useful life of the
vehicles from 48 months in 2006 to 60 months in 2007
in order to better reflect the useful life of the asset.
Amortization of customer contracts was $3.7 million for the
years ended December 31, 2007 and December 31, 2006.
Other Income
and Expense and Interest and Loan Fees
Interest and loan fees were $16.3 million for the year
ended December 31, 2007, an increase of $6.2 million
over the year ended December 31, 2006. This increase is due
in part to a $1.4 million commitment fee and
$0.2 million management fee paid to Laurus to secure
additional financing to fund working capital prior to the
Arrangement. The amortization of deferred financing costs,
re-pricing of warrants, accretion attributed to the warrants
associated with the convertible debentures and Laurus long-term
debt financing also increased interest and loan fees by
approximately $4.6 million for the year ended
December 31, 2007.
During the third quarter of 2006, we recognized a gain of
$1.2 million on the extinguishment of debt that we had with
a previous lender. The gain was a result of our negotiations
with our prior lender reducing the amount of our final payment
including any accrued interest to an agreed upon amount below
what had previously been recorded by us.
24
The (gain) loss on sale of investments and assets reflects a
$1.4 million increase to the loss from continuing
operations for the year ended December 31, 2007 as compared
to year ended December 31, 2006. In the first quarter of
2006, we sold our interest in Control F-1 Corporation
(Control F-1) to Computer Associates
International, Inc. and Computer Associates Canada Company for
net proceeds of $1.3 million, which was recognized as a
pre-tax gain of $1.3 million in the year ended
December 31, 2006. The investment had been previously
written down to zero in 2004 due to prevailing market
conditions. In addition, we had a loss on the disposal of assets
of $0.7 million and $0.6 million for the year ended
December 31, 2007 and December 31, 2006, respectively.
The loss on fair value of derivative liabilities was
$5.0 million for the year ended December 31, 2007,
compared to a gain on fair value of derivative liabilities of
$1.4 million for the year ended December 31, 2006. In
the third quarter of 2007, the convertible debt holders redeemed
the convertible debt for cash. The loss on the fair market value
of the embedded derivatives for the year ended December 31,
2007 was $2.6 million, compared to a gain on the embedded
derivatives of $1.3 million in the comparable period in
2006. The gain on the fair value of the convertible debt
warrants was $0.9 million for the year ended
December 31, 2007 compared to a gain of zero for the year
ended December 31, 2006. For the year ended
December 31, 2007, the loss on the fair value of the public
warrants was $0.6 million as compared to zero for the year
ended December 31, 2006. In connection with the
Arrangement, two unrelated third parties agreed with180 Connect
(Canada) to purchase 400,000 and 100,000 shares,
respectively, of AVP and to vote these shares in favor of the
Arrangement at the August 24, 2007 AVP shareholders
meeting. 180 Connect (Canada) agreed to a make whole formula
with these individuals to be settled within 30 days of
consummation of the Arrangement. The consummation of the
Arrangement resulted in a $2.8 loss on the fair value of
derivative liabilities for the year ended December 31, 2007
compared to zero for the year ended December 31, 2006.
For the year ended December 31, 2007, we had
$3.6 million in other expenses, primarily attributed to
bonuses earned by certain of our directors and employees as a
result of the consummation of the Arrangement.
Income Tax
Expense (Benefit)
We recorded income tax expense of $0.9 million and an
income tax benefit of $1.5 million for the years ended
December 31, 2007 and December 31, 2006, respectively.
Loss from
Continuing Operations
Loss from continuing operations for the year ended
December 31, 2007 was $22.9 million compared to a loss
from continuing operations of $8.8 million for the year
ended December 31, 2006 for reasons discuss above.
Loss from
Discontinued Operations
Loss from discontinued operations related to the closure of
operations at certain non-profitable branches as well as certain
operations where the contracts with the customers were not
renewed for the year ended December 31, 2007 was
$2.0 million compared to loss from discontinued operations
of $5.8 million for the year ended December 31, 2006.
The revenue and expenses of these locations have been
reclassified as discontinued operations for all periods
presented.
Net
Loss
Net loss for the year ended December 31, 2007 was
$24.9 million compared to a net loss of $14.6 million
for the year ended December 31, 2006.
25
Results of
Operations
Comparison of
Years Ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
Revenue
|
|
$
|
331,175,241
|
|
|
$
|
278,640,517
|
|
|
|
18.9
|
%
|
Direct expenses
|
|
|
297,073,863
|
|
|
|
255,120,324
|
|
|
|
16.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
margin(1)
|
|
|
34,101,378
|
|
|
|
23,520,193
|
|
|
|
45.0
|
%
|
General and
administrative(2)
|
|
|
19,675,497
|
|
|
|
21,702,824
|
|
|
|
(9.3
|
)%
|
Foreign exchange (gain) loss
|
|
|
30,361
|
|
|
|
(18,692
|
)
|
|
|
(262.4
|
)%
|
Restructuring costs
|
|
|
892,688
|
|
|
|
1,672,485
|
|
|
|
(46.7
|
)%
|
Depreciation
|
|
|
13,398,987
|
|
|
|
6,147,874
|
|
|
|
118.0
|
%
|
Amortization of customer contracts
|
|
|
3,712,673
|
|
|
|
4,093,985
|
|
|
|
(9.3
|
)%
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
10,043,504
|
|
|
|
3,440,690
|
|
|
|
191.9
|
%
|
Gain on extinguishment of debt
|
|
|
(1,233,001
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of investments and assets
|
|
|
(726,086
|
)
|
|
|
(6,897,291
|
)
|
|
|
(89.5
|
)%
|
Impairment of goodwill and customer contracts
|
|
|
|
|
|
|
608,096
|
|
|
|
|
|
Gain on change in fair value of derivative liabilities
|
|
|
(1,363,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax Benefit
|
|
|
(10,329,309
|
)
|
|
|
(7,229,778
|
)
|
|
|
42.9
|
%
|
Income tax benefit
|
|
|
(1,503,271
|
)
|
|
|
(2,001,727
|
)
|
|
|
(24.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(8,826,038
|
)
|
|
|
(5,228,051
|
)
|
|
|
68.8
|
%
|
Loss from discontinued operations
|
|
|
(5,762,800
|
)
|
|
|
(3,288,604
|
)
|
|
|
75.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(14,588,838
|
)
|
|
$
|
(8,516,655
|
)
|
|
|
71.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.60
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
Diluted
|
|
$
|
(0.60
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.00
|
)
|
|
$
|
(0.59
|
)
|
|
|
|
|
Diluted
|
|
$
|
(1.00
|
)
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
(1) |
|
DCM consists of revenue less direct expenses and excludes
general and administrative expense, foreign exchange (gain)
loss, restructuring costs, depreciation, amortization of
customer contracts, interest and loan fees, gain on sale of
investments and assets, gain on change in fair value of
derivative liabilities, gain on extinguishment of debt,
impairment of goodwill and customer contracts and income tax
benefit. DCM is a non-GAAP measure. The comparative GAAP measure
is loss from continuing operations. For a reconciliation of DCM
to loss from continuing operations, see Direct
Contribution Margin. |
|
(2) |
|
General and administrative includes stock-based compensation of
$91,214 and $1,387,133 for the years ended December 31,
2006, and December 31, 2005, respectively. |
Revenue
Revenue for the year ended December 31, 2006 increased to
$331.2 million from $278.6 million for the year ended
December 31, 2005. This 18.9% increase reflects continued
growth in revenue resulting from DIRECTV channeling more work
through their home services provider network and increased
26
customer demand resulting from advanced product penetration as
well as growth in our cable, digital interiors and network
services businesses. Advanced product penetration refers to
installations and upgrades that we completed with DVR, HD or an
HD/DVR receiver. These increases are due to DIRECTVs
marketing efforts to promote the installation and upgrades. Work
order volume from DIRECTV for the year ended December 31,
2006 increased by 20.7% year over year. The benefits of this
increase were partially offset by the impact of a less favorable
mix. Different rates are earned for each type of service
completed and the mix of services (installations, upgrades and
service) impact both the revenue per call and number of service
calls that may be completed. The financial impact of the volume
increase, partially offset with the less favorable rate and mix,
was $36.5 million for the year ended December 31, 2006.
Throughout 2006 our cable operations continued to grow, adding
new operations serving customers such as WoW in Detroit and Time
Warner in Greensboro, and expanding current operations for our
customers Cablevision, Time Warner and Rogers Communications.
Additionally, the New Orleans operation servicing Cox
Communication has been completely rebuilt after hurricane
Katrina and is operating at pre-Katrina levels. We continued to
dedicate resources to supporting growth of our cable business
which resulted in a $12.1 million, or 35%, increase in
revenue over the prior year.
Revenue from the majority of our customers is recognized when
work orders are closed. Our contracts with our customers also
include mechanisms whereby we are not paid for certain work that
is not completed within the specifications of the contract.
Based upon historical payments, we calculate and estimate a
reserve against revenue each month. For the year ended
December 31, 2006, $5.0 million (1.5% of revenue) was
recorded as a deduction to revenue as compared to
$3.7 million (1.3% of revenue) for the year ended
December 31, 2005.
Direct
Contribution Margin
DCM, defined as revenue less direct operating expenses,
increased by $10.6 million, or 45.0%, from
$23.5 million in the year ended December 31, 2005 to
$34.1 million in the year ended December 31, 2006.
DCM, as a percentage of revenue, increased to 10.3% in 2006 from
8.4% in 2005.
This increase is due to the revenue growth in our satellite and
cable businesses as well as the consistently increasing
contribution from our network services, retail and 180 Home
businesses which accounted for over $2.2 million of the
improvement in 2006. We continued rolling out our perpetual
inventory system throughout our operations. The rollout was
completed in the second quarter of 2007. This system is expected
to improve our inventory process and reduce unnecessary costs
currently being incurred. The increase of DCM is also a result
of the lack of significant
start-up
operations in the cable business as well as the absence of the
effects of Hurricane Katrina, which temporarily closed
operations in Louisiana and Texas and resulted in nationwide
increases in fuel prices.
DCM is a non-GAAP measure. The comparable GAAP measure is loss
from continuing operations. Loss from continuing operations of
$8.8 million in the year ended December 31, 2006
increased by $3.6 million compared to loss from continuing
operations of $5.2 million in the year ended
December 31, 2005. See reconciliation of DCM to loss from
continuing operations, the comparable GAAP measure.
27
Reconciliation
of DCM to Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Direct contribution
margin(1)
|
|
|
34,101,378
|
|
|
|
23,520,193
|
|
General and administrative
|
|
|
19,675,497
|
|
|
|
21,702,824
|
|
Foreign exchange (gain) loss
|
|
|
30,361
|
|
|
|
(18,692
|
)
|
Restructuring costs
|
|
|
892,688
|
|
|
|
1,672,485
|
|
Depreciation
|
|
|
13,398,987
|
|
|
|
6,147,874
|
|
Amortization of customer contracts
|
|
|
3,712,673
|
|
|
|
4,093,985
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
10,043,504
|
|
|
|
3,440,690
|
|
Gain on extinguishment of debt
|
|
|
(1,233,001
|
)
|
|
|
|
|
Gain on sale of investments and assets
|
|
|
(726,086
|
)
|
|
|
(6,897,291
|
)
|
Impairment of goodwill and customer contracts
|
|
|
|
|
|
|
608,096
|
|
Gain on change in fair value of derivative liabilities
|
|
|
(1,363,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit
|
|
|
(10,329,309
|
)
|
|
|
(7,229,778
|
)
|
Income tax benefit
|
|
|
(1,503,271
|
)
|
|
|
(2,001,727
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(8,826,038
|
)
|
|
|
(5,228,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
DCM consists of revenue less direct expenses and excludes
general and administrative expense, foreign exchange (gain)
loss, restructuring costs, gain on sale of investments and
assets, depreciation, amortization of customer contracts,
interest and loan fees, gain on change in fair value of
derivative liabilities, gain on extinguishment of debt,
impairment of goodwill and customer contracts and income tax
benefit. DCM is a non-GAAP measure. See
Non-GAAP Measures. The comparative GAAP measure
is loss from continuing operations. |
|
(2) |
|
General and administrative includes stock-based compensation of
$91,214 and $1,387,133 for the years ended December 31,
2006, and December 31, 2005, respectively. |
General and
Administrative Expenses, Restructuring Costs and Stock-Based
Compensation
General and administrative expenses were $19.7 million for
the year ended December 31, 2006, a decrease of
$2.0 million or 9.3% from the year ended December 31,
2005. General and administrative expenses as a percentage of
revenue decreased from 7.8% for the year ended December 31,
2005 to 5.9% for the year ended December 31, 2006. The
decrease in general and administrative expenses is primarily due
to lower salary, consulting and travel expenses of approximately
$2.3 million, partially offset by certain non-capitalized
expenses related to the refinancing of our debt, legal and
professional fees related to our U.S. listing costs
totaling approximately $1.5 million. Stock-based
compensation was $0.1 million for the year ended
December 31, 2006, compared to $1.4 million for the
year ended December 31, 2005 due to stock compensation
related to the 2003 acquisition of the remaining 7% interest in
Cable Play Inc.
In addition to the general and administrative expenses above is
a restructuring charge of approximately $0.9 million for
employee severance and related costs associated with the
completion of the move of our back office operations and
corporate offices to Denver. The comparable period of 2005
reflects a restructuring charge of $1.7 million related to
the commencement of our move of our back office operations and
corporate offices.
EBITDA from
Continuing Operations
EBITDA from continuing operations for the year ended
December 31, 2006 increased to $13.5 million from
$0.2 million for the year ended December 31, 2005.
This $13.3 million increase is primarily attributed
28
to the increase in revenue and direct contribution margin
discussed above and the full effect of our fleet initiative
compared to the four month effect in 2005. The fleet initiative
transferred some of the vehicle costs to depreciation and
interest; this benefit was partially offset by higher fuel and
vehicle insurance costs which are included in EBITDA from
continuing operations. Additionally, we continue our efforts to
maximize the use of our current resources and operating
synergies.
EBITDA is a non-GAAP measure. The comparable GAAP measure is
loss from continuing operations. Loss from continuing operations
was $8.8 million and $5.2 million for the year ended
December 31, 2006 and December 31, 2005, respectively.
Reconciliation
of EBITDA to Loss from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
EBITDA from continuing
operations(1)
|
|
$
|
13,502,832
|
|
|
$
|
163,576
|
|
Depreciation
|
|
|
13,398,987
|
|
|
|
6,147,874
|
|
Amortization of customer contracts
|
|
|
3,712,673
|
|
|
|
4,093,985
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
10,043,504
|
|
|
|
3,440,690
|
|
Gain on extinguishment of debt
|
|
|
(1,233,001
|
)
|
|
|
|
|
Gain on sale of investments and assets
|
|
|
(726,086
|
)
|
|
|
(6,897,291
|
)
|
Impairment of goodwill and customer contracts
|
|
|
|
|
|
|
608,096
|
|
Gain on fair value of derivative liabilities
|
|
|
(1,363,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax benefit
|
|
|
(10,329,309
|
)
|
|
|
(7,229,778
|
)
|
Income tax benefit
|
|
|
(1,503,271
|
)
|
|
|
(2,001,727
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(8,826,038
|
)
|
|
$
|
(5,228,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Non-GAAP Measures |
Depreciation,
Amortization of Customer Contracts and Impairment of Goodwill
and Customer Contracts
During the year ended December 31, 2006, depreciation
expense of $13.4 million represents an increase of
$7.3 million from the similar period in 2005. This increase
is primarily attributable to the increase in our vehicle fleet
from approximately 750 owned vehicles in 2005, most of which
were fully depreciated, to approximately 2,600 owned vehicles.
Amortization of customer contracts of $3.7 million in the
year ended December 31, 2006 decreased by $0.4 million
from 2005 primarily due to the discontinuation and impairment of
certain operations during the second half of 2005.
Other Income
and Expense
Interest and loan fees were $10.0 million in 2006 and
increased by $6.6 million from 2005, primarily due the
completion of the refinancing of our debt and interest related
to a private placement of $10.7 million of convertible
debentures and warrants completed late in the first quarter of
2006. Interest expense also increased due to the financing
related to our newly acquired vehicle fleet. In the first
quarter of 2006, we completed our conversion from a privately
owned vehicle model to a Company owned vehicle model with the
purchase of approximately 2,600 vehicles. These vehicles have
been acquired through a capital lease program and are included
in the capital lease obligations set forth in our audited
consolidated financial statements for the year ended
December 31, 2006.
29
We recognized a gain of $1.2 million on the extinguishment
of debt that we had with our previous lender. The gain was a
result of our negotiations with that prior lender reducing the
amount of our final payment to an agreed upon amount below what
had previously been recorded by us.
We sold our interest in Control F-1 to Computer Associates
International, Inc. and Computer Associates Canada Company in
2006, for net proceeds of $1.3 million, which was
recognized as a pre-tax gain of $1.3 million. The
investment had been previously written down to zero in 2004 due
to prevailing market conditions. In 2006, we also had a loss of
$0.3 million on the disposal of assets, and a loss of
0.3 million on the refinancing of vehicles under capital
lease. The $6.9 million pre-tax gain on the sale of
investments and assets in 2005 was due to the gain on the sale
of Guest-Tek of $6.5 million and a $0.4 million gain
on the sale of a building.
The gain on fair value of derivative liabilities was
$1.4 million for the year ended December 31, 2006,
primarily due to the gain on the embedded derivatives of
$1.3 million compared to zero in 2005.
Income Tax
Benefit
For the year ended December 31, 2006, we recorded a net
$1.5 million income tax benefit, which includes a current
tax benefit of $0.1 million for state tax liabilities and a
deferred tax benefit of $1.6 million to record the
amortization of the deferred tax liability associated with
certain intangible assets (customer contracts) recognized as
part of the acquisition of a U.S. subsidiary and the
establishment of a deferred tax asset associated with
nondeductible liabilities in the subsidiary.
For the year ended December 31, 2005, we recorded a net
$2.0 million income tax benefit which consisted of a
U.S. federal and state current income tax benefit of
$0.5 million, a deferred U.S. federal and state income
tax benefit of $2.6 million and a Canadian income tax
provision of $1.1 million.
Loss from
Continuing Operations
Loss from continuing operations for the year ended
December 31, 2006 was $8.8 million compared to loss
from continuing operations of $5.2 million for the
comparable period of 2005.
Loss from
Discontinued Operations
Loss from discontinued operations for the year ended
December 31, 2006 was $5.8 million compared to loss
from discontinued operations of $3.3 million for the year
ended December 31, 2005 related to the closure of
operations at certain non-profitable branches as well as certain
operations where the contracts with the customers were not
renewed. The revenue and expenses of these locations have been
reclassified as discontinued operations for all periods
presented.
Net
Loss
Net loss for the year ended December 31, 2006 was
$14.6 million compared to a net loss of $8.5 million
for the year ended December 31, 2005.
Liquidity and
Capital Resources
Our primary sources of liquidity are our cash provided by our
operating activities and our borrowings under our credit
facilities. Cash provided by continuing operations for the year
ended December 31, 2007 was $1.5 million.
As a result of the Arrangement, we received $37.9 million
in proceeds and incurred $7.0 million in issuance costs.
The consummation of the Arrangement constituted an event of
default under 180 Connect (Canada)s convertible
debentures. In the third quarter of 2007, the holders of the
convertible debentures exercised their right to redeem the
convertible debentures in full. We paid the holders of the
convertible debentures $10,393,577, which included outstanding
principal and a 20% redemption premium, excluding accrued but
unpaid interest. On August 24, 2007, upon consummation of
the Arrangement, we repaid
30
Laurus $5.0 million principal on the term note. We also
used $0.2 million of the merger proceeds to purchase
500,000 shares of treasury stock and $2.8 million in
settlement of derivative liabilities. The remaining proceeds
will be used to fund working capital and corporate expenses.
Our revolving credit facility (the Revolver)
requires a lockbox arrangement, which provides for all receipts
to be swept daily to reduce borrowings outstanding under the
credit facility. This arrangement, combined with the existence
of a subjective acceleration clause in the revolving credit
facility, requires that the borrowings under the Revolver be
classified as a current liability on the balance sheet in
accordance with the Financial Accounting Standards Board
(FASB) Emerging Issues Task Force Issue
No. 95-22,
Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement
(EITF 95-22).
The amount outstanding under the Revolver was previously
classified as long-term debt as of December 31, 2006 and
the balance sheet has been restated to correct the
classification of the balance due under the Revolver to current
portion of long-term debt as of December 31, 2006
increasing the current portion of long-term debt by $20,534,422
to $26,502,096 from the amount previously reported of
$5,967,674. The restatement had no impact on previously reported
consolidated statements of operations, shareholders
equity, or cash flows.
The acceleration clause could allow the lender to forego
additional advances should they determine there has been a
material adverse change in the Companys financial position
or prospects reasonably likely to result in a material adverse
effect on the Companys business, condition (financial or
otherwise), operations, performance or properties. We believe
that no such material adverse change has occurred; further, as
of March 27, 2008, our lender had not informed us that any
such event had occurred.
Agreements
with Laurus
On August 1, 2006, 180 Connect, Inc., a Nevada corporation
and indirect, wholly-owned subsidiary of the company
(180 Connect (NV)) entered into a
Security and Purchase Agreement with Laurus for the refinancing
of its long-term debt. The original agreement provided up to
$57 million of debt comprised of a $37 million
revolving credit and over-advance facility and a
$20 million term facility, with an interest rate of prime
plus 3% on the revolving credit facility, subject to a minimum
interest rate of 10%, an interest rate of prime plus 5% on any
over-advance under the revolving credit facility, subject to a
minimum interest rate of 11% and an interest rate of prime plus
5% on the term facility, subject to a minimum interest rate of
12%. For the period from August 1, 2006 to July 31,
2007, 180 Connect (NV) was able to draw in excess of the
eligible trade receivables and inventory an over advance amount
up to $9 million but not to exceed an aggregate amount of
$37 million. Availability under the revolving facility
fluctuates daily based on receivables. As of March 20,
2008, 180 Connect (NV) had availability of $4.5 million
under the revolving facility, and the total balance outstanding
thereunder was $23.6 million. Monthly principal repayments
on the term loan of $666,667 commenced February 1, 2007,
and as of March 20, 2008, the term loan had a principal
balance of $5.7 million. Repayment of 180 Connect
(NV)s indebtedness to Laurus is secured by all of its real
and personal property.
180 Connect (NV) is not subject to any financial covenants
with respect to the credit facilities. However, 180 Connect (NV)
is subject to other covenants including certain restrictions on
it and its subsidiaries with respect to assuming or guaranteeing
additional indebtedness, forgiving any indebtedness, issuing any
preferred stock, purchasing stock (other than of a subsidiary),
making loans other than loans to employees or to its
subsidiaries, entering into a merger, consolidation or
reorganization, materially changing the nature of its business,
changing its accounting practices and disposing of its assets.
In addition, the failure to make required payments under the
facilities or other indebtedness, the failure to adhere to a
covenant or the occurrence of material adverse changes to its
business, bankruptcy, certain changes to its ownership or Board
of Directors, among other events, could result in an event of
default under the facilities. As of December 31, 2007, 180
Connect (NV) was in compliance with the covenants of its credit
facilities. 180 Connect (NV) obtained a consent and waiver from
Laurus with regards to the Arrangement as it constituted a
merger and change of control as defined in
Section 13(h)(viii) and 19(l) of the Security and Purchase
Agreement, respectively.
31
In addition, in August 2006, 180 Connect (Canada) issued a
warrant to Laurus to purchase up to 1,200,000 common shares for
nominal consideration of CDN$0.01 per share. On April 2,
2007, Laurus exercised its right under the warrant to purchase
the 1,200,000 common shares. Laurus agreed not to sell any
common shares issued upon exercise of the warrant until
July 31, 2007. Thereafter, Laurus may, at its election,
sell up to 150,000 common shares per calendar quarter (on a
cumulative basis) over each of the following eight quarters,
subject to applicable securities laws restrictions and
limitations.
On July 2, 2007, 180 Connect (NV) entered into an amendment
agreement with Laurus securing additional interim financing to
fund working capital until August 24, 2007. Pursuant to the
terms of the agreement, Laurus agreed to provide an additional
$8.0 million to 180 Connect (NV) as an increase to the
$37.0 million revolving loan, for a total revolving loan of
$45.0 million. As part of this agreement, Laurus also
agreed to extend the maturity of the existing $9.0 million
over-advance letter on a revolving loan from July 31, 2007
until August 24, 2007. At August 24, 2007, 180 Connect
(NV) had no outstanding borrowings under either the additional
$8.0 million revolving loan or the existing
$9.0 million over-advance facility.
In connection with the amendment agreement, Howard S. Balter and
Ilan M. Slasky, members of our Board of Directors, agreed to
provide a limited recourse guaranty for the additional financing
Laurus provided to 180 Connect (NV) by placing $7.0 million
in a brokerage account pledged to Laurus to be used solely to
purchase AVP shares.
Laurus also agreed to loan $10.0 million to a special
purpose corporation for the purpose of purchasing shares of AVP
common stock. The special purpose corporation is a third-party
arms-length corporation to both 180 Connect (Canada) and AVP.
Neither the special purpose corporation nor Laurus agreed to
make any specific amount of purchases or to vote any shares
purchased in any specific manner in connection with the
Arrangement.
As consideration for the guaranty and pledge, 180 Connect
(Canada) agreed to reimburse Messrs. Balter and Slasky up
to $150,000 for their fees and expenses in connection with the
guaranty and pledge.
On July 2, 2007, in connection with the amendment to the
credit facility, we issued a warrant to Laurus to purchase
600,000 shares of the 180 Connect (Canada)s common
stock at the exercise price of $4.35 per share, the adjusted
market price at the time of issue (the July
Warrant). Thereafter, on August 24, 2007, in
connection with consummation of the Arrangement, we issued to
Laurus a warrant to purchase 250,000 shares of our common
stock at the exercise price of $4.01 per share (the
August Warrant). Each of the July
Warrant and August Warrant has a five year term and is subject
to a one-year
lock-up.
Additionally, Laurus received a $200,000 management fee on the
$8.0 million increase to the revolver, and upon
consummation of the Arrangement, an additional $1.4 million.
During the third quarter of 2007, we entered into a settlement
agreement with Laurus with respect to a dispute over an alleged
misrepresentation and event of default under the provisions of
the Laurus debt agreements that Laurus alleged occurred as a
result of the repayment of the convertible dentures after
consummation of the Arrangement. Pursuant to the terms of the
settlement, we agreed to reduce the exercise price of the
warrants issued to Laurus. With respect to the July Warrant, the
exercise price for the first 450,000 shares of our common
stock exercised by Laurus was reduced from $4.35 to $0.01 per
share, and the exercise price of the remaining 150,000 warrants
was reduced from $4.35 to $3.00 per share. Laurus has agreed not
to sell any of our common shares issuable upon exercise of the
July Warrant for a period of twelve months following the date of
issuance of the warrants. In addition, the exercise price of the
August Warrant was reduced from $4.01 to $3.00 per share.
On January 22 and January 30, 2008, pursuant to the
Schedule 13D filed by Creative Vistas Inc., Laurus and its
affiliates sold 2,674,407 shares of our common stock and
their warrant to purchase 450,000 shares of our common
stock to Creative Vistas Inc., respectively.
32
Private
Placement
On March 22, 2006, 180 Connect (Canada) completed a private
placement to a group of institutional investors. For an
aggregate purchase price of $10.7 million, the investors
purchased convertible debentures and warrants to purchase
942,060 common shares. The convertible debentures accrued
interest at a rate of 9.33% per annum, payable quarterly, in
arrears, based on a
360-day
year. The debentures were to mature on March 22, 2011. In
addition, the debentures were to accelerate to maturity upon the
occurrence of a default on the debentures by 180 Connect
(Canada). The terms of the debentures allowed the investors, at
their discretion, to convert all or part of the debentures into
its common shares. The aggregate number of common shares to be
delivered upon such conversion was approximately
2.7 million shares, subject to adjustment in accordance
with the terms of the debentures and subject to additional
contractual limitations as described in the debentures. During
the second quarter of 2007, one of the institutional investors
of the convertible debentures and warrants exercised its option
to convert in total $2,024,785 of principal under the 9.33%
convertible debentures into 510,000 common shares. The
consummation of the Arrangement constituted an event of default
under 180 Connect (Canada)s convertible debentures. In the
third quarter of 2007, the lenders exercised their right to
redeem the convertible debentures in full. We paid the holders
of the convertible debentures $10,393,577, which included
outstanding principal and a 20% redemption premium, excluding
accrued but unpaid interest.
The warrants to purchase 942,060 common shares issued to the
investors in the private placement are exercisable until
March 21, 2010. The exercise price of the warrants is
$4.331; subject to adjustment in accordance with the terms of
the warrants (which adjustment is limited and capped as
described in the warrants). The warrants may be exercised
through a cashless exercise if there is no effective
registration statement covering the resale of the underlying
shares.
Vehicle
Leasing Arrangements
In 2005, 180 Connect (Canada) entered into agreements with third
party leasing companies to lease vehicles pursuant to its fleet
expansion program with initial obligations amounting to
$39.4 million. As of December 31, 2007, 180 Connect
(Canada) has approximately 3,000 vehicles under capital leases
with a remaining contractual capital lease obligation of
$28.6 million. These vehicles have been recorded as capital
leases in the consolidated balance sheets.
Cash Flow from
Operating Activities
For the years ended December 31, 2007 and December 31,
2006, cash provided by operating activities was
$1.5 million and $6.3 million, respectively. Inventory
increased by $4.4 million in 2007 primarily due to more
advanced equipment on hand. Restricted cash provided
$4.3 million primarily as a result of a negotiated
reduction in our required LOC for insurance obligations. Other
changes in non-cash working capital balances related to
operations contributed to the remainder of the decrease.
For the years ended December 31, 2006 and December 31,
2005, cash provided by (used in) operating activities was
$6.3 million and $(15.5) million, respectively. The
increase in cash provided by operating activities in 2006 was
due to an increase in depreciation, amortization and impairment
and amortization of deferred financing costs and accretion of
loan discount of $20.3 million. The increase in
depreciation, amortization and impairment related, primarily, to
the financing of our vehicle leases. The reduction in inventory
balances of $4.5 million was the result of improved
inventory management and payment terms. The payment terms for
equipment purchased from DIRECTV are
30-45 days
from the shipment date, depending upon the product type. These
terms have a positive affect on operating cash flows because
DIRECTV pays us for inventory consumed on average twenty days
after it is received. These positive cash flows were offset by
an increase in insurance premium deposits of $6.2 million
as we increased the collateral related to the renewal of our
insurance program. In 2005, accounts receivable increased by
$6.5 million and restricted cash increased by
$8.7 million as we increased the collateral related to the
renewal of our insurance program. An increase in accounts
payable and accrued liabilities of
33
$14.3 million and an increase in inventory of
$2.4 million were directly related to our business
relationship with DIRECTV.
Cash Flow from
Investing Activities
Our historical investing activities consisted primarily of the
purchase of property, plant and equipment and business
acquisitions and divestments.
For the years ended December 31, 2007 and December 31,
2006, cash used in investing activities was $3.4 million
and $1.4 million, respectively, which includes
$3.4 million and $2.7 million, respectively, for the
purchase of property, plant and equipment. In the year ended
December 31 2006, we realized net proceeds of $1.3 million
for the sale of our remaining interest in Control F-1.
In 2005, cash provided by investing activities was
$21.7 million. The increase in cash provided by investing
activities during the period was primarily attributable to the
sale of short term investments of $16.2 million, proceeds
from the sale of the common shares of Guest-Tek of
$10.0 million, and $2.0 million on sale of investment
in Wal-Mart Stores, offset by capital expenditures of
$5.7 million.
Cash Flow from
Financing Activities
Our financing activities have historically consisted primarily
of the use of revolving lines of credit, term loans, debentures,
capital leases and the issuance of equity. For the years ended
December 31, 2007 and December 31, 2006, cash used in
financing activities was $0.6 million and
$5.3 million, respectively. As a result of the Arrangement,
we received $37.9 million in proceeds and incurred
$7.0 million in issuance costs. As discussed above, in the
third quarter of 2007, the convertible debentures were redeemed
in full for 120% of the outstanding principal in the amount of
$10.4 million, excluding any accrued interest. In 2007, we
paid Laurus $12.3 million principal on the term note which
includes $5.0 million principal on the term note upon the
consummation of the Arrangement. In 2007, we also purchased
500,000 shares of treasury stock at cost of
$0.2 million and made $12.1 million in scheduled
vehicle lease payments. The refinancing of approximately 1,020
vehicles with a third-party leasing company under a capital
lease resulted in net proceeds of approximately
$3.5 million.
For the year ended 2006, cash used in financing activities was
$5.3 million. In the third quarter of 2006, the refinancing
of the long term debt provided $42.1 million used to
extinguish 180 Connect (Canada)s previous debt of
$32.9 million plus issuance costs of $3.5 million. In
2006, we completed a private placement of $10.7 million of
convertible debentures and warrants. This was offset by the
payment of $15.0 million for capital lease obligations
primarily related to our new fleet and the repayment of
$7.7 million of our long term debt pursuant to agreements
with our lenders.
In 2005, cash used in financing activities was
$15.3 million. Cash flow from financing activities in 2005
was attributable to the repayment of long-term debt of
$6.9 million, $5.0 million paid in connection with
capital lease financing associated with 180 Connect
(Canada)s new fleet in 2005 and a settlement with the
sellers of Mountain Center Inc (Mountain)
for $2.95 million relating to 180 Connect
(Canada)s purchase of that company. We also paid
$1.2 million to repurchase 175,320 shares which was
approved by our Board of Directors in 2005.
As of December 31, 2007, we did not have any restricted
cash invested in asset backed commercial paper. An assumed one
percentage point increase or decrease in interest rates would
have the effect of increasing or decreasing interest expense by
approximately $0.3 million for the year ended
December 31, 2007.
The working capital deficiency at December 31, 2007 was
due, primarily, to the
30-45 day
payment terms for inventory purchased from DIRECTV and the
approximately
20-day
receivable terms from DIRECTV for that inventory when it is
installed in the subscribers home and the reclassification
of our Revolver facility from long term debt to current.
34
We believe that cash flow from continuing operations and
availability under existing credit facilities will be sufficient
to meet our short-term and long-term requirements for ongoing
operations and planned growth. However, we derive a significant
portion of our revenue from a limited number of customers. A
decision by a major customer to discontinue, in whole or in
part, use of our services in the future may adversely affect our
capital resources. Also, there can be no assurance that we would
have sufficient liquidity or be able to obtain additional
financing on satisfactory terms, or at all, in the event the
Revolver repayment was accelerated. See Risk Factors
in Item 1A of this Annual Report on
Form 10-K.
Contractual
Obligations
We have long-term debt obligations, various operating leases and
purchase commitments for equipment. The amount of estimated
future payments under such agreement is detailed in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
Contractual Obligations Due by Period
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
Current portion of long-term
debt(1)
|
|
$
|
27,769,301
|
|
|
$
|
27,769,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Operating leases, real property
|
|
|
9,410,187
|
|
|
|
3,785,453
|
|
|
|
4,329,548
|
|
|
|
1,295,186
|
|
|
|
|
|
|
|
|
|
Operating leases, equipment and trucks
|
|
|
670,094
|
|
|
|
273,840
|
|
|
|
373,697
|
|
|
|
22,557
|
|
|
|
|
|
|
|
|
|
Capital leases, I/T Equipment
|
|
|
314,871
|
|
|
|
111,621
|
|
|
|
138,435
|
|
|
|
64,815
|
|
|
|
|
|
|
|
|
|
Capital leases
Vehicles(2)
|
|
|
30,846,650
|
|
|
|
12,716,285
|
|
|
|
16,634,237
|
|
|
|
1,496,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,011,103
|
|
|
$
|
44,656,500
|
|
|
$
|
21,475,917
|
|
|
$
|
2,878,686
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The current portion of long-term debt amounts in the schedule
above does not include interest because it is at variable rates.
The estimated interest expense for 2008,
2009-2010,
2011-2012
and thereafter is $2,066,459, $989,763 and zero, respectively.
We estimated interest expense based on current interest rates,
current balances and scheduled repayments. |
|
(2) |
|
Capital lease obligations include interest in the table above. |
Off-Balance Sheet
Obligations
For the consolidated financial statements presented there were
no off-balance sheet transactions entered into. Off-balance
sheet obligations include any contractual agreement with an
entity not reported on a consolidated basis with us. We did not
have any obligations under guaranteed contracts for financing
instruments, a retained or contingent interest in assets
transferred to an unconsolidated entity, any obligations under
derivative interests or any special purpose entity transactions.
Forward-Looking
Statements
This MD&A contains forward-looking statements which reflect
managements expectations regarding our future growth,
results of operations, performance and business prospects and
opportunities. Statements about our future plans and intentions,
results, levels of activity, performance, goals or achievements
or other future events constitute forward-looking statements.
Wherever possible, words such as may,
should, could, expect,
plan, intend, anticipate,
believe, estimate, predict
or potential or the negative or other variations of
these words, or other similar words or phrases, have been used
to identify these forward-looking statements. These statements
reflect managements current beliefs and are based on
information currently available to management. Forward-looking
statements involve significant risk, uncertainties and
assumptions. Many factors, including those discussed under
Item 1A, Risk Factors, of this Annual Report on
Form 10-K
could cause actual results, performance or achievements to
differ materially from the results discussed or implied in the
forward-looking statements. These factors should be considered
carefully and prospective investors should not place undue
reliance on the forward-looking
35
statements. Although the forward-looking statements contained in
this MD&A are based upon what management believes to be
reasonable assumptions, we cannot assure investors that actual
results will be consistent with these forward-looking
statements. These forward-looking statements are made as of the
date of this MD&A, and we assume no obligation to update or
revise them to reflect new events or circumstances, except as
required by law.
Non-GAAP Measures
The term Direct Contribution Margin consists of
revenue less direct expenses and excludes general and
administrative expense, foreign exchange loss (gain), (gain)
loss in sale of investments and assets, depreciation,
amortization of customer contracts, interest and loan costs,
(gain) loss on change in fair value of derivative liabilities,
gain on extinguishment of debt, other expense, and income tax
expense (benefit). DCM, as referred to in this discussion and
analysis, is a non-GAAP measure which does not have any
standardized meaning prescribed by GAAP and is therefore
unlikely to be comparable to similar measures presented by other
issuers. We believe that this term provides a better assessment
of the contribution of the field operations dealing directly
with our customers subscribers by eliminating:
(1) the general and administrative costs that are not part
of the direct costs of generating revenue; (2) the charge
for customer contracts and depreciation which are non-cash
expense items; and (3) (gain) loss on sale of investments and
assets, (gain) loss on change in fair value of derivative
liabilities, gain on extinguishment of debt, and other expense,
which are not considered to be in the normal course of operating
activity. Investors should be cautioned, however, that DCM
should not be construed as an alternative to loss from
continuing operations determined in accordance with GAAP as an
indicator of our performance. For a reconciliation of DCM to the
comparable GAAP measure, loss from continuing operations, see
Direct Contribution Margin.
The term EBITDA from continuing operations refers to
loss from continuing operations before deducting depreciation,
amortization of customer contracts, (gain) loss in sale of
investments and assets, interest and loan fees, (gain) loss on
change in fair value of derivative liabilities, gain on
extinguishment of debt, other expense, and income tax expense
(benefit). EBITDA from continuing operations, as referred to in
this MD&A, is a non-GAAP measure which does not have any
standardized meaning prescribed by GAAP and is therefore
unlikely to be comparable to similar measures presented by other
issuers. Management believes that EBITDA from continuing
operations provides a better assessment of cash flow from our
operations by eliminating: (1) the charge for depreciation,
and amortization of customer contracts which are non-cash
expense items and (2) (gain) loss on sale of assets, (gain) loss
on change in fair market value of derivative liabilities, gain
on extinguishment of debt, and other expense, which are not
considered to be in the normal course of operating activity. In
addition, financial analysts and investors use a multiple of
EBITDA from continuing operations for valuing companies within
the same sector, in order to eliminate the differences in
accounting treatment from one company to the next. Given that we
are in a growth stage, we believe the focus on EBITDA from
continuing operations gives the investor or reader of our
consolidated financial statements and MD&A more insight
into the operating capabilities of management and its
utilization of our operating assets. Management further believes
that EBITDA from continuing operations is also the best metric
for measuring our valuation. Investors should be cautioned,
however, that EBITDA from continuing operations should not be
construed as an alternative to income (loss) from continuing
operations determined in accordance with GAAP as an indicator of
our performance. For a reconciliation of EBITDA from continuing
operations to the comparable GAAP measure, being loss from
continuing operations, see EBITDA from Continuing
Operations.
We are exposed to market risk related to changes in interest
rates and fluctuations in foreign currency rates. Our long-term
debt is a variable rate credit facility that exposes us to
interest rate risk. The interest rates on our long-term debt
range from prime plus 3% to prime plus 5%, subject to a minimum
interest rate of 10% to 12%, and are therefore subject to risk
relating to interest rate fluctuations. An assumed one
percentage point increase or decrease in interest rates would
have the effect of increasing interest
36
expense by approximately $0.3 million. We have Canadian
subsidiaries included in our consolidated statements of
operations and consolidated balance sheets and we are subject to
fluctuations in the exchange rate of the Canadian dollar to the
U.S. dollar.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our consolidated financial statements and related notes and
Reports of Independent Registered Public Accounting Firms follow
on subsequent pages of this report
Form 10-K.
37
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of 180 Connect Inc.
We have audited the accompanying consolidated balance sheet of
180 Connect Inc. as of December 31, 2007, and the related
consolidated statements of operations, shareholders
equity, comprehensive loss, and cash flows for the year then
ended. Our audit also included the 2007 financial statement
schedule listed in the Index at Item 15. These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys 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 Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of 180 Connect Inc. at December 31,
2007, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Denver, Colorado
March 27, 2008
38
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of 180 Connect Inc.
We have audited the accompanying consolidated balance sheet of
180 Connect Inc. as of December 31, 2006, and the related
consolidated statements of operations, shareholders
equity, comprehensive loss, and cash flows for the years ended
December 31, 2006 and 2005. Our audits also included the
2006 and 2005 financial statement schedule listed in the Index
at Item 15. These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule 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 audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits 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 Companys 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, assessing the
accounting principles used and significant estimates made by
management, and 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 consolidated
financial position of 180 Connect Inc. at December 31,
2006, and the consolidated results of its operations and its
cash flows for the years ended December 31, 2006 and 2005
in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As described in Note 12 the consolidated balance sheet as
at December 31, 2006 has been restated.
|
|
|
|
|
/s/ Ernst & Young LLP
|
|
|
|
|
|
|
Toronto, Canada,
|
|
Chartered Accountants
|
April 20, 2007
|
|
Licensed Public Accountants
|
(except for note 12 as to which the date is March 27,
2008).
|
|
|
39
Consolidated
Financial Statements
180 Connect
Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated Note 12)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
366,449
|
|
|
$
|
2,904,098
|
|
Accounts receivable (less allowance for doubtful accounts of
$3,750,200 and $2,506,637, respectively)
|
|
|
48,378,339
|
|
|
|
48,934,952
|
|
Inventory
|
|
|
20,180,167
|
|
|
|
15,816,148
|
|
Restricted cash
|
|
|
10,169,108
|
|
|
|
14,503,000
|
|
Prepaid expenses and other assets
|
|
|
9,378,519
|
|
|
|
7,910,255
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
88,472,582
|
|
|
|
90,068,453
|
|
Property, plant and equipment
|
|
|
34,906,750
|
|
|
|
34,882,890
|
|
Goodwill
|
|
|
11,034,723
|
|
|
|
11,034,723
|
|
Customer contracts, net
|
|
|
21,391,257
|
|
|
|
25,072,756
|
|
Other assets
|
|
|
2,478,839
|
|
|
|
4,384,750
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
158,284,151
|
|
|
$
|
165,443,572
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
79,115,651
|
|
|
$
|
78,686,245
|
|
Current portion of long-term debt
|
|
|
27,769,301
|
|
|
|
26,502,096
|
|
Fair value of derivative financial instruments
|
|
|
122,168
|
|
|
|
4,065,729
|
|
Current portion of capital lease obligations
|
|
|
11,628,142
|
|
|
|
13,033,104
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
118,635,262
|
|
|
|
122,287,174
|
|
Income tax liability
|
|
|
191,580
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
12,264,621
|
|
Convertible debt
|
|
|
|
|
|
|
6,276,584
|
|
Capital lease obligations
|
|
|
17,246,267
|
|
|
|
15,213,112
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
136,073,109
|
|
|
|
156,041,491
|
|
Commitments and contingencies (Notes 12, 15, and 24)
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock $.0001 par value; authorized 100,000,000, at
December 31, 2007 and December 31, 2006 issued and
outstanding shares 25,520,152 and 14,685,976, respectively
|
|
|
2,552
|
|
|
|
1,469
|
|
Paid-in capital
|
|
|
130,096,083
|
|
|
|
91,871,813
|
|
Treasury stock, 500,000 shares and zero at
December 31, 2007 and December 31, 2006, respectively
|
|
|
(224,019
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(107,898,597
|
)
|
|
|
(82,956,231
|
)
|
Accumulated other comprehensive income
|
|
|
235,023
|
|
|
|
485,030
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
22,211,042
|
|
|
|
9,402,081
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
158,284,151
|
|
|
$
|
165,443,572
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
40
180 Connect
Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
379,767,879
|
|
|
$
|
331,175,241
|
|
|
$
|
278,640,517
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses
|
|
|
341,108,774
|
|
|
|
297,073,863
|
|
|
|
255,120,324
|
|
General and
administrative(1)
|
|
|
19,223,846
|
|
|
|
19,675,497
|
|
|
|
21,702,824
|
|
Foreign exchange loss (gain)
|
|
|
(124,329
|
)
|
|
|
30,361
|
|
|
|
(18,692
|
)
|
Restructuring costs
|
|
|
275,000
|
|
|
|
892,688
|
|
|
|
1,672,485
|
|
Depreciation
|
|
|
12,061,858
|
|
|
|
13,398,987
|
|
|
|
6,147,874
|
|
Amortization of customer contracts
|
|
|
3,681,499
|
|
|
|
3,712,673
|
|
|
|
4,093,985
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and loan fees
|
|
|
16,272,393
|
|
|
|
10,043,504
|
|
|
|
3,440,690
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(1,233,001
|
)
|
|
|
|
|
(Gain) loss on sale of investments and assets
|
|
|
715,151
|
|
|
|
(726,086
|
)
|
|
|
(6,897,291
|
)
|
Impairment of goodwill and customer contracts
|
|
|
|
|
|
|
|
|
|
|
608,096
|
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
5,020,945
|
|
|
|
(1,363,936
|
)
|
|
|
|
|
Other expense
|
|
|
3,579,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
(benefit)
|
|
|
(22,046,717
|
)
|
|
|
(10,329,309
|
)
|
|
|
(7,229,778
|
)
|
Income tax expense (benefit)
|
|
|
856,576
|
|
|
|
(1,503,271
|
)
|
|
|
(2,001,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(22,903,293
|
)
|
|
|
(8,826,038
|
)
|
|
|
(5,228,051
|
)
|
Loss from discontinued operations, net of income taxes of zero
|
|
|
(2,039,073
|
)
|
|
|
(5,762,800
|
)
|
|
|
(3,288,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(24,942,366
|
)
|
|
$
|
(14,588,838
|
)
|
|
$
|
(8,516,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.20
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.36
|
)
|
Diluted
|
|
$
|
(1.20
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.36
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.30
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.59
|
)
|
Diluted
|
|
$
|
(1.30
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.59
|
)
|
Weighted average number of shares outstanding basic
|
|
|
19,155,718
|
|
|
|
14,641,010
|
|
|
|
14,368,864
|
|
Weighted average number of shares outstanding diluted
|
|
|
19,155,718
|
|
|
|
14,641,010
|
|
|
|
14,368,864
|
|
|
|
|
(1) |
|
General and administrative includes stock-based compensation of
$860,035, $91,214 and $1,387,133 for the years ended
December 31, 2007, December 31, 2006, and
December 31, 2005, respectively. |
See accompanying notes
41
180 Connect
Inc.
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
Out-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hensive
|
|
|
|
|
|
|
standing
|
|
|
Common
|
|
|
Paid in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Income
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
(loss)
|
|
|
Total
|
|
|
Balances at December 25, 2004
|
|
|
14,296,622
|
|
|
$
|
1,430
|
|
|
$
|
86,878,322
|
|
|
$
|
|
|
|
$
|
(59,452,519
|
)
|
|
$
|
6,988,770
|
|
|
$
|
34,416,003
|
|
Issuance on exercise of stock options for cash
|
|
|
408,847
|
|
|
|
41
|
|
|
|
728,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728,332
|
|
Share repurchase
|
|
|
(175,320
|
)
|
|
|
(18
|
)
|
|
|
(759,810
|
)
|
|
|
|
|
|
|
(398,219
|
)
|
|
|
|
|
|
|
(1,158,047
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,387,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,387,133
|
|
Sale of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,503,740
|
)
|
|
|
(6,503,740
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,516,655
|
)
|
|
|
|
|
|
|
(8,516,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
14,530,149
|
|
|
|
1,453
|
|
|
|
88,233,936
|
|
|
|
|
|
|
|
(68,367,393
|
)
|
|
|
485,030
|
|
|
|
20,353,026
|
|
Issuance on exercise of stock options for cash
|
|
|
155,827
|
|
|
|
16
|
|
|
|
259,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,712
|
|
Issuance of warrants on long-term debt
|
|
|
|
|
|
|
|
|
|
|
3,286,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,286,967
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
91,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,214
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,588,838
|
)
|
|
|
|
|
|
|
(14,588,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
14,685,976
|
|
|
|
1,469
|
|
|
|
91,871,813
|
|
|
|
|
|
|
|
(82,956,231
|
)
|
|
|
485,030
|
|
|
|
9,402,081
|
|
Issuance on exercise of stock options for cash
|
|
|
46,467
|
|
|
|
4
|
|
|
|
77,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,511
|
|
Issuance on exercise of warrants for cash
|
|
|
1,200,000
|
|
|
|
120
|
|
|
|
17,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,260
|
|
Issuance on exercise of convertible debt
|
|
|
510,000
|
|
|
|
51
|
|
|
|
2,293,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,293,230
|
|
Net proceeds from reverse merger
|
|
|
9,577,709
|
|
|
|
958
|
|
|
|
37,932,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,933,165
|
|
Issuance costs attributed to reverse merger
|
|
|
|
|
|
|
|
|
|
|
(6,976,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,976,440
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
860,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
860,035
|
|
Issuance of warrants on long-term debt
|
|
|
|
|
|
|
|
|
|
|
2,803,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,803,296
|
|
Issuance of warrants in support of Arrangement
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
Acquisition of net assets of AVP
|
|
|
|
|
|
|
|
|
|
|
(7,099,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,099,514
|
)
|
Reclassification of the Public Warrants
|
|
|
|
|
|
|
|
|
|
|
7,516,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,516,810
|
|
Purchase of 500,000 shares of treasury stock
|
|
|
(500,000
|
)
|
|
|
(50
|
)
|
|
|
50
|
|
|
|
(224,019
|
)
|
|
|
|
|
|
|
|
|
|
|
(224,019
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250,007
|
)
|
|
|
(250,007
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,942,366
|
)
|
|
|
|
|
|
|
(24,942,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
25,520,152
|
|
|
$
|
2,552
|
|
|
$
|
130,096,083
|
|
|
$
|
(224,019
|
)
|
|
$
|
(107,898,597
|
)
|
|
$
|
235,023
|
|
|
$
|
22,211,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180 Connect
Inc.
Consolidated
Statements of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Net loss
|
|
$
|
(24,942,366
|
)
|
|
$
|
(14,588,838
|
)
|
|
$
|
(8,516,655
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(250,007
|
)
|
|
|
|
|
|
|
|
|
Sale of investment
|
|
|
|
|
|
|
|
|
|
|
(6,503,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(25,192,373
|
)
|
|
$
|
(14,588,838
|
)
|
|
$
|
(15,020,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
42
180 Connect
Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash provided by (used in) the following activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(22,903,293
|
)
|
|
$
|
(8,826,038
|
)
|
|
$
|
(5,228,051
|
)
|
Add (deduct) items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment
|
|
|
15,743,357
|
|
|
|
17,111,660
|
|
|
|
10,849,955
|
|
Non-cash interest expense
|
|
|
8,117,147
|
|
|
|
3,210,141
|
|
|
|
459,852
|
|
Stock-based compensation
|
|
|
860,035
|
|
|
|
91,214
|
|
|
|
1,387,133
|
|
Deferred income taxes
|
|
|
|
|
|
|
(1,561,031
|
)
|
|
|
(1,491,941
|
)
|
Settlement of derivative liability
|
|
|
(2,766,573
|
)
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
(1,233,001
|
)
|
|
|
|
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
5,020,945
|
|
|
|
(1,363,936
|
)
|
|
|
|
|
(Gain) loss on sale of investments and assets
|
|
|
715,151
|
|
|
|
(726,086
|
)
|
|
|
(6,897,291
|
)
|
Other
|
|
|
(177,050
|
)
|
|
|
(291
|
)
|
|
|
3,816
|
|
Changes in non-cash working capital balances related to
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
556,613
|
|
|
|
227,513
|
|
|
|
(6,464,271
|
)
|
Inventory
|
|
|
(4,364,019
|
)
|
|
|
4,486,519
|
|
|
|
(2,412,713
|
)
|
Other current assets
|
|
|
(1,222,516
|
)
|
|
|
338,030
|
|
|
|
(688,922
|
)
|
Insurance premium deposits
|
|
|
(16,195
|
)
|
|
|
(6,209,037
|
)
|
|
|
1,126,896
|
|
Other assets
|
|
|
(377,949
|
)
|
|
|
(37,035
|
)
|
|
|
(18,928
|
)
|
Settlement of class action lawsuit
|
|
|
|
|
|
|
|
|
|
|
(7,973,623
|
)
|
Settlement of certain wage practices
|
|
|
|
|
|
|
|
|
|
|
(1,217,639
|
)
|
Restricted cash
|
|
|
4,333,892
|
|
|
|
247,366
|
|
|
|
(8,696,719
|
)
|
Accounts payable and accrued liabilities
|
|
|
(9,660
|
)
|
|
|
2,375,179
|
|
|
|
14,320,065
|
|
Operating cash flows from discontinued operations
|
|
|
(1,966,397
|
)
|
|
|
(1,842,778
|
)
|
|
|
(2,597,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by (used in) operating activities
|
|
|
1,543,488
|
|
|
|
6,288,389
|
|
|
|
(15,539,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(3,373,257
|
)
|
|
|
(2,742,727
|
)
|
|
|
(5,656,286
|
)
|
Net proceeds from disposition of investments
|
|
|
|
|
|
|
1,327,693
|
|
|
|
10,968,388
|
|
Proceeds from sale of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
665,000
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
16,178,848
|
|
Business acquisition
|
|
|
|
|
|
|
|
|
|
|
(429,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash used in investing activities
|
|
|
(3,373,257
|
)
|
|
|
(1,415,034
|
)
|
|
|
21,726,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
(12,105,040
|
)
|
|
|
(15,010,698
|
)
|
|
|
(4,960,341
|
)
|
Repayment of debt
|
|
|
(12,333,337
|
)
|
|
|
(7,350,000
|
)
|
|
|
(6,908,003
|
)
|
Proceeds from share issuance
|
|
|
94,771
|
|
|
|
259,712
|
|
|
|
723,608
|
|
Net proceeds from reverse merger
|
|
|
37,933,165
|
|
|
|
|
|
|
|
|
|
Issuance costs on reverse merger
|
|
|
(6,976,440
|
)
|
|
|
|
|
|
|
|
|
Redemption of convertible debt
|
|
|
(10,393,577
|
)
|
|
|
|
|
|
|
|
|
Increase (decrease) in borrowings under the Revolver credit
facility
|
|
|
(101,160
|
)
|
|
|
(377,494
|
)
|
|
|
|
|
Issuance costs on long-term debt
|
|
|
|
|
|
|
(3,546,150
|
)
|
|
|
|
|
Net proceeds from refinancing of vehicles
|
|
|
3,470,714
|
|
|
|
2,127,542
|
|
|
|
|
|
Proceeds from issuance of convertible debt
|
|
|
|
|
|
|
10,686,101
|
|
|
|
|
|
Proceeds from refinancing of long-term debt
|
|
|
|
|
|
|
42,140,497
|
|
|
|
|
|
Extinguishment of long-term debt
|
|
|
|
|
|
|
(32,863,525
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
(224,019
|
)
|
|
|
|
|
|
|
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
(1,158,047
|
)
|
Settlement with selling shareholders of Mountain Center
Inc.
|
|
|
|
|
|
|
|
|
|
|
(2,950,000
|
)
|
Issuance costs paid on convertible debt
|
|
|
|
|
|
|
(1,388,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by (used in) financing activities
|
|
|
(634,923
|
)
|
|
|
(5,323,000
|
)
|
|
|
(15,252,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(72,957
|
)
|
|
|
291
|
|
|
|
39,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents during the
period
|
|
|
(2,537,649
|
)
|
|
|
(449,354
|
)
|
|
|
(9,026,680
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
2,904,098
|
|
|
|
3,353,452
|
|
|
|
12,380,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
366,449
|
|
|
$
|
2,904,098
|
|
|
$
|
3,353,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8,779,371
|
|
|
$
|
6,091,487
|
|
|
$
|
2,485,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
257,120
|
|
|
$
|
429,279
|
|
|
$
|
1,265,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
transactions:
For the years ended December 31, 2007,
December 31, 2006 and December 31, 2005, the Company
had additional capital lease obligations for vehicles of
$9,080,617, $6,401,900 and $39,403,406 respectively.
See accompanying notes
43
180 Connect
Inc.
Notes to
Consolidated Financial Statements
On August 24, 2007, the plan of arrangement (the
Arrangement) pursuant to the arrangement agreement
dated as of March 13, 2007, as amended, by and among
Ad.Venture Partners, Inc. (AVP), 180 Connect
Exchangeco Inc., a wholly owned subsidiary of the Company
(Purchaser) and 180 Connect Inc., a corporation
incorporated under the laws of Canada (180 Connect
(Canada)); was consummated. Pursuant to the Arrangement,
the Purchaser acquired all of the outstanding common shares of
180 Connect (Canada) in exchange for either shares of Company
common stock, exchangeable shares of Purchaser that are
exchangeable into shares of Company common stock at the option
of the holder (exchangeable shares), or a
combination of Company common stock and exchangeable shares of
Purchaser. Effective upon the consummation of the Arrangement,
AVP changed its name to 180 Connect Inc. (the
Company). Because the consummation of the
Arrangement resulted in more than 50% of the Companys
voting securities being held by the shareholders of 180 Connect
(Canada), the Arrangement has been accounted for under the
reverse acquisition application of the equity recapitalization
method of accounting in accordance with U.S. generally
accepted accounting principles (GAAP) for accounting
and financial reporting purposes. Under this method of
accounting, AVP was treated as the acquired company
for financial reporting purposes. In accordance with guidance
applicable to these circumstances, the Arrangement is considered
to be a capital transaction in substance. Accordingly, for
accounting purposes, the Arrangement was treated as the
equivalent of 180 Connect (Canada) issuing stock for the net
monetary assets of AVP, accompanied by a recapitalization. The
net monetary assets of AVP were recorded at their fair value,
essentially equivalent to historical costs, with no goodwill or
other intangible assets recorded. The accumulated deficit of 180
Connect (Canada) has been carried forward after the closing.
Operations prior to the closing for all periods presented are
those of 180 Connect (Canada). All common shares, warrants,
options and earning per share amounts related to transactions
and periods prior to August 24, 2007 have been restated in
these financial statements to reflect the 0.6 exchange ratio
applied to 180 Connect (Canada)s equity instruments.
Nature of the
Business
180 Connect Inc. (or the Company) provides
installation, integration and fulfillment services to the home
entertainment, communications and home integration service
industries. The principal market for the Companys services
is the United States. The Companys customers include
providers of satellite, cable and broadband media services as
well as home builders, developers and municipalities.
Consolidation in the media and communications industry has
created national carriers, many of whom provide an integrated
suite of advanced video, data and voice services to residential
and commercial subscribers. Many of these national carriers made
the strategic decision to outsource the majority of the physical
implementation of their services, leading to the creation of a
large and highly competitive technical support services
industry, of which the Company is a member.
The Company has evolved through a combination of internal growth
and acquisitions. With a staff of more than 4,000 skilled
technicians and 750 support personnel based in over 85 operating
locations in 22 states, the Company provides technical
support services at the customers subscribers homes
and businesses across the United States and parts of Canada.
This infrastructure allows the Company to provide consistent
service and utilize the Companys expertise and resources
to deploy increasingly complex technologies over large networks
in a cost efficient manner.
Seasonality
The Company needs working capital to support seasonal variations
in its business. Subscriber growth, and thus the revenue earned
by the Company, tends to be higher in the third and fourth
quarters of
44
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
the year. The Company generally experiences seasonal working
capital needs from approximately January through June.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Principles of
Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with GAAP and include the Companys
accounts and the Companys subsidiaries. All inter-company
items and transactions have been eliminated in consolidation.
Revenue
Recognition
The Company provides installation, integration and fulfillment
services to the home entertainment, communications and home
integration service industries. Revenue from services is
recognized when all of the following criteria are met:
persuasive evidence of an agreement exists, service has been
provided, the fee is fixed or determinable, and collection is
reasonably assured. Fulfillment revenues are recognized when
work orders are closed. A provision is recorded for estimated
billing discrepancies or penalties due to unsatisfactory
service. Revenue relating to certain equipment purchased from
DIRECTV®
Inc. (DIRECTV) for which the Company
is directly reimbursed is recorded on a net basis in accordance
with Emerging Issues Task Force Issue
No. 99-19:,
Recording Revenue Gross as a Principal Versus Net as an
Agent (EITF99-19)
Revenue for services provided to our cable customers is
contracted via work orders; revenue is recorded as services are
completed and work orders are closed. A provision is recorded
for estimated billing discrepancies.
The services provided to our network services and digital
interiors customers are for the installation of communication
systems. Revenues earned by these businesses are recognized upon
the completion of contractual obligations. Contracts may extend
over several months but often include discernible projects that
have stated completion milestones and contractual amounts that
are billed as these services are completed.
Allowance for
Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from uncollectible amounts.
Management specifically analyzes accounts receivable balances,
customer credit-worthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts.
Cash and Cash
Equivalents
The Company considers all highly liquid investments with a
remaining maturity at the date of purchase of three months or
less to be cash equivalents. There were no cash equivalents for
all periods presented.
Inventory
Inventory of materials, components and direct broadcast
satellite equipment is stated at the lower of cost or market,
determined on a
first-in,
first-out basis. Market is determined as replacement cost for
materials and components and net realizable value for direct
broadcast satellite equipment.
45
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Property,
Plant and Equipment
Property, plant and equipment are stated at cost, less
accumulated depreciation. Repairs and maintenance expenditures
are charged to operating expense as incurred. Depreciation is
calculated on a straight-line basis over the expected useful
lives of the property, plant and equipment as follows:
|
|
|
Vehicles
|
|
5 years, effective January 1, 2007; 4 years prior
thereto
|
Tools
|
|
2 years
|
Equipment
|
|
5 years
|
Computer equipment and software
|
|
3 years
|
Office furniture and equipment
|
|
5 -7 years
|
Leasehold improvements
|
|
Shorter of economic life or term of the lease
|
Software developed for internal use is capitalized in accordance
with American Institute of Certified Public Accountants
Statement of Position
98-1:
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and is amortized over its
estimated useful life of three years.
Deferred
Financing Costs
Deferred charges relating to financing costs and credit facility
arrangement fees associated with the issuance of long-term debt
are included in other assets and are amortized to interest
expense over the period to maturity of the related debt.
Insurance
Premium Deposits
The Company maintains a self-insurance program for property and
casualty coverage, including workers compensation, automobile
and general liability coverage. The program is administered by a
U.S. based insurance company. As part of the self insurance
program, The Company is required to pay up to $500,000 for each
individual workers compensation claim and up to $350,000 for
each auto liability claim. For the most recent plan year, the
amount payable by us was reduced to $100,000 for each individual
workers compensation claim in the state of California. The
aggregate limit is $29,295,000 for all workers compensation and
automobile liability claims. The Company is required to pay up
to $500,000 for each general liability claim for the period
ended April 30, 2008. Any amounts exceeding the maximum
amounts are covered by the Companys umbrella insurance
policy. As is common with these types of insurance programs, the
Company is required to make periodic estimates of its ultimate
actuarially determined liability, based on experience, claims
filed and an estimate of claims incurred but not yet reported.
These estimates take into account policy loss limits and future
anticipated payouts on an individual claims basis. The Company
makes periodic premium payments to the program administrator to
cover claim payments as well as fixed costs associated with the
administration of the plan. Such periodic payments can fluctuate
based on the loss experience and actuarial estimates.
The Company has restricted cash of $10,169,108 on deposit at
December 31, 2007, and $14,503,000 at December 31,
2006, primarily related to the Companys insurance plan
(Note 5). The sufficiency of the restricted cash amount is
determined by the insurance carrier and is based upon several
factors which include the Companys credit history, work
force characteristics and historical claim results.
The Company calculates the annual insurance cost using actuarial
estimates provided by third-party service providers at the
beginning of the plan year. For the current plan year and the
plan years prior to May 1, 2004, the Company was required
to pre-pay the full estimated costs of insurance for the plan
year. The accounting for these periods was to record a prepaid
asset for the payments made in advance of the plan year. The
prepaid asset is then amortized on a pro-rata basis each month
during which the coverage
46
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
is provided. For the plan years beginning on May 1, 2004
and May 1, 2005, the Company entered into an alternative
agreement with the Companys insurance carrier which
required the Company to pay the fixed costs associated with the
insurance plan upfront, and pay the actual claim amounts as they
were settled.
Goodwill
Goodwill represents the excess of the purchase price paid in a
business acquisition over the fair values of the identifiable
assets acquired and liabilities assumed. The Company tests for
goodwill impairment by reporting units on an annual basis and at
any other time if events occur or circumstances change that
suggest that goodwill could be impaired.
The Company uses the two-step impairment process. The fair value
of a reporting unit is compared with its carrying amount,
including goodwill, in order to identify a potential impairment.
When the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not to be
impaired and the second step is unnecessary.
If step one of the test is not met, an impairment loss is
recorded for the carrying amount of the goodwill exceeding the
implied value of that goodwill. Measurement of the fair value of
a reporting unit is based on a fair value measure using the sum
of the discounted estimated future cash flows (Note 9).
Intangible
Assets
Intangible assets primarily represent the value of customer
contracts acquired. All intangible assets are charged to
operations on a straight-line basis over their estimated useful
life of 10 years (Note 9).
Impairment or
Disposal of Long-Lived Assets
The Company tests long-lived assets or asset groups for
recoverability when events or changes in circumstances indicate
that their carrying amount may not be recoverable.
Recoverability is assessed based on the carrying amount of the
asset and their net recoverable value, which is generally
determined based on undiscounted cash flows expected to result
from the use and the eventual disposal of the asset if the
carrying amount of the net exceed its net recoverable value. An
impairment loss is recognized to write the asset down to its
fair value.
Income
Taxes
The Company accounts for income taxes using the liability
method, whereby deferred tax assets and liabilities are
determined based on differences between the financial reporting
and tax bases of assets and liabilities measured using income
tax rates and laws that are expected to be in effect when the
differences are expected to reverse. Income tax expense for the
period is the tax payable for the period and any change during
the period in deferred tax assets and liabilities. A valuation
allowance is provided to the extent that it is more likely than
not that deferred tax assets will not be realized.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting periods. The most
significant assumptions made by management in the preparation of
the Companys consolidated financial statements include
provisions for credit adjustments and doubtful accounts to
reflect credit exposures and unrecoverable amounts, valuation
allowances and impairment assessments for various assets
including customer contracts and goodwill, property, plant and
equipment, deferred income taxes, accruals related to
liabilities arising from legal claims, periodic estimates of
ultimate liabilities related to losses associated with workers
compensation and employment liability, business automotive
liability and general liability insurance claims. Actual
47
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
results could differ as a result of revisions to estimates and
assumptions which may have a material impact on financial
results of future periods.
Foreign
Currency Translation
The Companys functional currency is the U.S. dollar.
The financial statements of the foreign subsidiaries are
measured using the Canadian dollar as the functional currency.
Included in the Companys consolidated financial statements
are the results of the Canadian operations. Consequently,
monetary assets and liabilities of the wholly-owned subsidiaries
are translated into U.S. dollars at exchange rates in
effect at the consolidated balance sheet dates with non-monetary
assets and liabilities being translated into U.S. dollars
at historical exchange rates. Revenue and expense items were
translated at average exchange rates prevailing during the
period. The resulting gains or losses were reflected in net loss
for the period. Gains and losses resulting from translation are
recorded in accumulated other comprehensive income (loss).
Net Loss per
Share
Basic net loss per share is computed using the weighted average
number of common shares outstanding during the period. The
computation of diluted loss per share assumes the basic weighted
average number of common shares outstanding during the period is
increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of warrants and
stock options is determined using the treasury stock method. For
the periods ended December 31, 2007, December 31, 2006
and December 31, 2005, diluted loss per share is equivalent
to basic loss per share as the outstanding options and warrants
are anti-dilutive. The share counts discussed above include the
exchangeable shares outstanding after the consummation of the
Arrangement.
Leases
Leases have been classified as either capital or operating
leases. Leases which transfer substantially all of the benefits
and risks incidental to the ownership of assets are accounted
for as if there were an acquisition of an asset and incurrence
of an obligation at the inception of the lease and are accounted
for as capital leases. All other leases are accounted for as
operating leases wherein rental payments are expensed as
incurred.
Stock-Based
Compensation
In 2003, the Company adopted, on a prospective basis, Statement
of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). This statement requires that
compensation for all awards made to non-employees and certain
awards made to employees, including stock appreciation rights,
direct awards of stock and awards that call for settlements in
cash or other assets, be measured and recorded in the financial
statements at fair value over the vesting period.
Fair Value of
Derivative Financial Instruments
Under SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, (SFAS 133)
as amended, an embedded derivative included in a debt
agreement for which the economic characteristics and risks are
not clearly and closely related to the economic characteristics
of the debt host contract must be measured at fair value and
presented as a liability. Changes in fair value of the embedded
derivative are recorded in the consolidated statements of
operations at each reporting date. Embedded derivatives that
meet the criteria for bifurcation from the convertible debt and
that are therefore presented as liabilities and measured at fair
value consist of the holder conversion option and certain
contingent accelerated payment
48
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
conditions. These embedded derivatives are collectively fair
valued as a single compound embedded derivative.
Under GAAP, the warrants issued with the convertible debenture
are presented as a liability because they do not meet the
criteria of
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock,
(EITF 00-19)
for equity classification. Subsequent changes in fair
value are recorded in the consolidated statements of operations.
Change in
Accounting Estimate
In the first quarter of 2007, the Company changed the
depreciation period on its leased vehicles from 48 months
to 60 months, resulting in a decrease of approximately
$2.0 million in depreciation expense and an increase of
$0.10 in earnings per share for the year ended December 31,
2007. This change in accounting estimate was adopted to better
reflect the useful life of the asset and was applied
prospectively from January 1, 2007.
|
|
3.
|
IMPACT OF
RECENTLY ISSUED ACCOUNTING STANDARDS
|
In February 2006, the FASB issued SFAS 155,
Accounting for Certain Hybrid Financial Instruments,
an amendment of FASB Statements No. 133 and 140
(SFAS 155). This Statement:
|
|
|
|
|
Permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation.
|
|
|
|
Clarifies which interest-only strips and principal-only strips
are not subject to the requirements of Statement 133.
|
|
|
|
Establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation.
|
|
|
|
Clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives.
|
|
|
|
Amends SFAS 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument.
|
SFAS 155 is effective for all financial instruments
acquired or issued after the beginning of the Companys
fiscal year that commences on January 1, 2007. The
application of this pronouncement had no material impact on the
financial position or results of the Companys operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for
the fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position (FSP)
FAS 157-2,
Partial Deferral of the Effective Date of Statement 157,
which delays the effective date for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis. The FSP defers the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008. The Company does not expect the
provisions of this statement to have a material impact on the
Companys financial condition or results of operations.
In June 2006, FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in the
Companys financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes,
and
49
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
prescribes a minimum recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax provision taken or expected to be taken in
a tax return. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, and were
adopted by us effective January 1, 2007. The impact of
adoption of FIN 48 is disclosed in Note 19.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159),
including an amendment of SFAS 115. SFAS 159 permits
entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. The provisions of
SFAS 159 are effective for fiscal years beginning after
November 15, 2007. The Company is currently reviewing
SFAS 159, but have not yet determined whether the Company
will electively adopt it.
December 2007, the Financial Accounting Standards Board
(FASB) issued
SFAS No. 141(R), Business
Combinations. The new standard will significantly change
the financial accounting and reporting of business combination
transactions in the consolidated financial statements. It will
require an acquirer to recognize, at the acquisition date, the
assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at their full fair
values as of that date. In a business combination achieved in
stages (step acquisitions), the acquirer will be required to
remeasure its previously held equity interest in the acquiree at
its acquisition-date fair value and recognize the resulting gain
or loss in earnings. The acquisition-related transaction and
restructuring costs will no longer be included as part of the
capitalized cost of the acquired entity but will be required to
be accounted for separately in accordance with applicable GAAP
in the U.S. SFAS No. 141(R) applies prospectively
to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008.
In December 2007, the FASB issued
SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements.
(SFAS No. 160) This Statement clarifies the
definition of a non-controlling (or minority) interest and
requires that non-controlling interests in subsidiaries be
reported as a component of equity in the consolidated statement
of financial position and requires that earnings attributed to
the non-controlling interests be reported as part of
consolidated earnings and not as a separate component of income
or expense. However, it will also require expanded disclosures
of the attribution of consolidated earnings to the controlling
and non-controlling interests on the face of the consolidated
income statement. SFAS No. 160 will require that
changes in a parents controlling ownership interest, that
do not result in a loss of control of the subsidiary, are
accounted for as equity transactions among shareholders in the
consolidated entity therefore resulting in no gain or loss
recognition in the income statement. Only when a subsidiary is
deconsolidated will a parent recognize a gain or loss in net
income. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008, and will be
applied prospectively except for the presentation and disclosure
requirements that will be applied retrospectively for all
periods presented. The Company is currently evaluating the
impact of SFAS No. 160, to its financial position and
results of operations.
In March 2008, the FASB issued
SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities
(SFAS No. 161), an amendment of FASB Statement
No. 133. This statement applies to all derivative
instruments and non-derivative instruments that are designated
and qualify as hedging instrument pursuant to paragraphs 37
and 42 of Statement 133 and related hedge items accounted for
under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. Statement
161 requires entities to provide greater transparency through
additional disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and
related hedge items are accounted for under Statement 131 and
its related interpretations, and (c) how derivative
instruments and
50
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
related hedge items affect an entitys financial position,
results of operations, and cash flows. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2008, with early application
encouraged. This statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption.
The estimated fair values of financial instruments are based on
the relevant market prices and information available. These fair
value estimates are not indicative of the amounts that the
Company might receive or incur in actual market transactions.
The carrying values of cash and cash equivalents, accounts
receivable, insurance premium deposits, accounts payable and
accrued liabilities approximate their fair values due to the
relatively short periods to maturity of these financial
instruments. The carrying values of long-term debt and capital
lease obligations approximate their fair values as these
financial instruments bear market rates of interest, and as such
are subject to risk relating to interest rate fluctuations.
Credit exposure on financial instruments arises from the
possibility that a counterparty to an instrument fails to
perform. The Company performs ongoing credit evaluations of
customers and generally does not require collateral. Allowances
are maintained for potential credit losses. The Company is
economically dependent on one customer and the temporary or
permanent loss of this customer would have a material adverse
effect on the Companys results of operations and financial
condition (Note 26).
The Companys financial instruments include loans bearing
an interest rate based on the prime rate plus 3% to prime plus
5% subject to a minimum interest rate of 10% to 12%, and
are therefore subject to risk relating to interest rate
fluctuations.
As at December 31, 2007 and December 31, 2006, the
Company had restricted cash, in the form of term deposits of
approximately $10.2 million and $14.5 million,
respectively. These term deposits are used to collateralize
obligations associated with its insurance program and for
contractor licensing surety bonds in several states. Interest
earned of 3% to 5% on these funds is received monthly and is not
subject to restriction.
During 2007, as a result of a reduction in the Companys
insurance obligations, the Company negotiated a reduction in the
Companys required letter of credit
(LOC). The LOC requirement, which is
collateralized with the Companys restricted cash, was
reduced by $6.3 million. This reduction in the
Companys restricted cash balance was offset by a
$2.0 million increase in restricted cash as collateral for
bonds on projects currently in progress by the Companys
network services operation.
On March 19, 2008, as a result of the reduction in the
Companys insurance obligations, the Company negotiated a
reduction in the Companys LOC requirement by approximately
$2.0 million (Note 28).
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Direct broadcast satellite equipment
|
|
$
|
15,704,295
|
|
|
$
|
12,633,189
|
|
Materials and components
|
|
|
4,475,872
|
|
|
|
3,182,959
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,180,167
|
|
|
$
|
15,816,148
|
|
|
|
|
|
|
|
|
|
|
51
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Direct broadcast satellite equipment represents equipment
purchased from DIRECTV to service DIRECTVs customers.
Certain items of this inventory are directly reimbursed to us on
installation for an amount equal to the initial purchase price.
Therefore, no revenue or cost of sales is recorded with respect
to this inventory with the exception of a charge to direct
expenses for loss due to theft or damage.
|
|
7.
|
PREPAID EXPENSES
AND OTHER ASSETS
|
Prepaid expenses and other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Insurance premium deposits
|
|
$
|
6,871,402
|
|
|
$
|
6,855,207
|
|
Prepaid expenses
|
|
|
1,578,959
|
|
|
|
841,288
|
|
Miscellaneous receivables
|
|
|
928,158
|
|
|
|
213,760
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,378,519
|
|
|
$
|
7,910,255
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
PROPERTY, PLANT
AND EQUIPMENT
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost
|
|
|
|
|
|
|
|
|
Vehicles
|
|
$
|
48,839,563
|
|
|
$
|
49,307,080
|
|
Tools and equipment
|
|
|
4,788,606
|
|
|
|
4,629,918
|
|
Computer equipment and software
|
|
|
4,932,910
|
|
|
|
4,115,997
|
|
Office furniture and equipment
|
|
|
1,237,693
|
|
|
|
1,537,515
|
|
Leasehold improvements
|
|
|
757,698
|
|
|
|
602,592
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,556,470
|
|
|
$
|
60,193,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accumulated Depreciation
|
|
|
|
|
|
|
|
|
Vehicles
|
|
$
|
(18,569,648
|
)
|
|
$
|
(18,533,260
|
)
|
Tools and equipment
|
|
|
(2,873,335
|
)
|
|
|
(2,754,619
|
)
|
Computer equipment and software
|
|
|
(3,311,344
|
)
|
|
|
(2,738,050
|
)
|
Office furniture and equipment
|
|
|
(499,926
|
)
|
|
|
(960,480
|
)
|
Leasehold improvements
|
|
|
(395,467
|
)
|
|
|
(323,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(25,649,720
|
)
|
|
$
|
(25,310,212
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
34,906,750
|
|
|
$
|
34,882,890
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense charged to continuing operations for fiscal
years 2007, 2006 and 2005, was $12,061,858, $13,398,987 and
$6,147,874, respectively. Property, plant and equipment include
assets under capital leases of $30,547,016 net of
accumulated depreciation of $17,141,690 as of December 31,
2007 and $30,805,454 net of accumulated depreciation of
$15,761,508 as of December 31, 2006. The fiscal years ended
December 31, 2007, December 31, 2006 and
December 31, 2005, included depreciation of $72,675,
$232,289 and $11,159, respectively, in loss from discontinued
operations.
52
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
9.
|
GOODWILL AND
CUSTOMER CONTRACTS
|
The carrying amount of goodwill and customer contracts is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Goodwill
|
|
$
|
11,034,723
|
|
|
$
|
11,034,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Customer Contracts:
|
|
$
|
36,498,372
|
|
|
$
|
36,498,372
|
|
Accumulated amortization
|
|
|
(15,107,115
|
)
|
|
|
(11,425,616
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
21,391,257
|
|
|
$
|
25,072,756
|
|
|
|
|
|
|
|
|
|
|
Amortization expense charged to continuing operations for the
fiscal years ended December 31, 2007, December 31,
2006 and December 31, 2005, was $3,681,499, $3,712,673 and
$4,093,985, respectively. The fiscal years ended
December 31, 2007, December 31, 2006 and
December 31, 2005, included amortization of zero, $2,177,
and $3,451 respectively, in loss from discontinued operations.
Estimated future amortization expense is as follows:
|
|
|
|
|
2008
|
|
|
3,681,503
|
|
2009
|
|
|
3,681,503
|
|
2010
|
|
|
3,681,503
|
|
2011
|
|
|
3,681,503
|
|
Thereafter
|
|
|
6,665,245
|
|
|
|
|
|
|
Total
|
|
$
|
21,391,257
|
|
|
|
|
|
|
Goodwill impairment is deemed to exist if the net book value of
a reporting unit exceeds its estimated fair value. Goodwill
impairment is evaluated on an annual basis (or sooner if
indicators of impairment are identified) using the two-step
impairment process. As a result of the shutdown of certain
operating branch locations, the Company wrote off the remaining
goodwill and customer contracts associated with those branches.
In 2007, the Company did not record any impairment charges for
intangibles. For the year ended December 31, 2006, the
Company recorded a goodwill impairment charge of $313,202 and a
customer contract impairment charge of $177,201 in loss from
discontinued operations. In 2005, the Company recorded a
goodwill impairment charge of $196,886 and a customer contract
impairment charge of $716,785, of which $305,575 was included in
loss from discontinued operations in 2005.
The customer contracts represent the agreement between the
Company and the Companys customers to provide
installation, upgrade and repair services to the customers
subscribers. The contracts typically include exclusivity
agreements. The exclusivity agreements limit the Companys
ability to sign contracts with the Companys
customers competitors if the competitor sells the same
services in the same markets as the Companys current
customers. These contracts were recognized apart from goodwill
as the assets resulted from contractual or other legal rights
and are capable of being separated or divided from the acquired
enterprise. The acquired companies had existing contracts with
their customers at the time of the acquisition. These contracts
required us to provide installation and other services over a
period of time in a specific geographic area on an exclusive
basis for the Companys customers. As such, a value was
assigned to the future benefits to be realized from this
exclusive contractual agreement with the Companys
customers.
53
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred financing costs (net of accumulated amortization of
$3,518,681 and $1,590,620, respectively)
|
|
$
|
1,635,101
|
|
|
$
|
3,661,599
|
|
Security deposits
|
|
|
701,677
|
|
|
|
666,002
|
|
Other assets
|
|
|
142,061
|
|
|
|
57,149
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,478,839
|
|
|
$
|
4,384,750
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES
|
Accounts payable and accrued liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Equipment purchase liability
|
|
$
|
54,104,176
|
|
|
$
|
44,497,745
|
|
Accrued insurance
|
|
|
5,088,317
|
|
|
|
9,556,789
|
|
Trade accounts payable
|
|
|
6,392,663
|
|
|
|
8,461,228
|
|
Accrued payroll and employee benefits
|
|
|
5,060,507
|
|
|
|
7,238,919
|
|
Accrued costs for legal settlements (Note 25)
|
|
|
1,484,152
|
|
|
|
1,671,000
|
|
Taxes payable
|
|
|
1,232,045
|
|
|
|
584,659
|
|
Restructuring reserve (Note 19)
|
|
|
46,875
|
|
|
|
6,825
|
|
Other accrued expenses
|
|
|
5,706,916
|
|
|
|
6,669,080
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,115,651
|
|
|
$
|
78,686,245
|
|
|
|
|
|
|
|
|
|
|
The accounts payable and accrued liabilities amount includes
$54.1 million and $44.5 million as of
December 31, 2007 and December 31, 2006, respectively,
payable to DIRECTV, a major supplier of the equipment used by us
in the Companys installation business. The amount due from
DIRECTV once this equipment is installed is included in accounts
receivable and was $21.8 million and $17.9 million at
December 31, 2007 and 2006, respectively.
The Company is currently party to a class action lawsuit filed
in federal court in Seattle, Washington brought by current and
former employees. The claims relate to alleged violations of
Washington wage and hour laws. The class period dates back to
April 2002. As a result of this class action, the Company
established a reserve for estimated costs of $2.5 million
at December 31, 2005 (Note 24). As of
December 31, 2007, $1.5 million remained in this
reserve.
54
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
12.
|
LONG-TERM DEBT
AND COMMON STOCK PURCHASE WARRANTS
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
|
Revolving credit facility and over advance facility of up to
$37,000,000 bearing interest at prime plus 3% to 5%, subject to
a minimum interest rate of 10% to 11% with interest payable
monthly. The revolving credit facility is subject to the
Companys eligible trade receivables and inventory as per
the debt agreement and collateralized by the Companys real
and personal property. For the period of August 1, 2006 to
July 31, 2007, The Company was able to draw in excess of
the eligible trade receivables and inventory an over advance of
up to $9,000,000 but not to exceed an aggregate amount of
$37,000,000. At December 31, 2007, the interest rate of the
revolving credit facility was 10.75% with an effective interest
rate of 14.3%. At December 31, 2006, the interest rate for
the revolving credit facility was 11.25% and the interest rate
for the over advance facility was 13.25%, with an effective
interest rate of 12.21%. Repayment is due on or before
July 31, 2009. The credit facility may be borrowed, repaid,
and reborrowed in accordance with the terms of the Security and
Purchase Agreement. As of December 31, 2007 and
December 31, 2006, the Revolving credit facility has
$1,228,583 and $2,004,529 of unamortized discount attributed to
warrants issued to the Companys lender
|
|
$
|
20,433,263
|
|
|
$
|
19,758,475
|
|
Term note, bearing interest at prime plus 5%, subject to a
minimum interest rate of 12% and interest is payable monthly. At
December 31, 2007, the interest rate was 12.75% with an
effective interest rate of 20.4%. At December 31, 2006, the
interest rate was 13.25% with an effective interest rate of
17.5%. Repayments of the term note commenced on February 1,
2007 for $666,667 per month, with the final payment due on
July 31, 2009. As of December 31, 2007 and
December 31, 2006, the Term Note has $330,625 and $991,758
of unamortized discount attributed to warrants issued to the
Companys lender
|
|
|
7,336,038
|
|
|
|
19,008,242
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
27,769,301
|
|
|
|
38,766,717
|
|
Less: current portion
|
|
|
(27,769,301
|
)
|
|
|
(26,502,096
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
|
|
|
$
|
12,264,621
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the original terms of the debt agreement with
Laurus, 180 Connect (NV) a wholly-owned subsidiary
of the Company, had available a maximum amount of
$57 million of debt comprising a term facility of
$20 million and a combined revolving credit facility and
over-advance facility of up to $37 million. The revolving
credit facility is subject to the Companys eligible trade
receivables as per the debt agreement. For the period of
August 1, 2006 to July 31, 2007, 180 Connect (NV) was
able to draw in excess of the eligible trade receivables and
inventory an over-advance amount up to $9 million but not
to exceed an aggregate amount of $37 million. After
July 31, 2007, the over advance became part of the
revolving facility; this was further extended to August 24,
2007, as disclosed below. The interest rates on the new debt
range from prime plus 3% to prime plus 5%, subject to a minimum
interest rate of 10% to 12%, and are therefore subject to risk
relating to interest rate fluctuations. Monthly term loan
repayments
55
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
commenced February 1, 2007, for $666,667. As of
December 31, 2007, 180 Connect (NV) had availability of
$6.8 million under the revolving credit facility (the
Revolver).
The debt agreement states that there are no financial covenants
of 180 Connect (NV) with respect to such facilities but includes
other covenants and events of default typical for credit
facilities of this nature. This facility is collateralized by a
security interest in all of the assets of 180 Connect (NV). 180
Connect (NV) obtained a waiver from Laurus, with regards to the
Arrangement; as such the transaction constituted a merger and
change of control as defined in the debt agreement.
In August 2006, in connection with the debt agreement, 180
Connect (Canada) issued a warrant to Laurus to purchase up to
1,200,000 shares of common stock for nominal consideration
of Canadian $0.01 per share, having a term of seven years.
Laurus agreed not to sell any common shares of 180 Connect
(Canada) issuable upon exercise of the warrants for a period of
12 months following the date of issuance of the warrants.
Thereafter, Laurus may, at its option and assuming exercise of
the warrants, sell up to 150,000 common shares of 180 Connect
(Canada) per calendar quarter (on a cumulative basis) over each
of the following eight quarters. On April 2, 2007, Laurus
exercised its right under the warrants to purchase the 1,200,000
common shares.
The common stock purchase warrants were valued at $3,286,967,
net of issuance costs of $299,165, using the Black-Scholes
option pricing model using the following variables: volatility
of 76.64%, expected life of seven years, a risk free interest
rate of 4.5% and a dividend of zero. The fair value of the loan
was measured using a three-year maturity and the present value
of the cash payments of interest and principal due under the
terms of the debt agreement discounted at a rate of 17.5% which
approximates a similar non-convertible financial instrument with
comparable terms and risk. Under Emerging Issues Task Force
Issue EITF
No. 00-19
Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own
Stock (EITF
No. 00-19)
and Accounting Principles Board Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants (APB Opinion 14) the
fair value of warrants issued in connection with the stock
purchase warrants would be recorded as a reduction to the
proceeds from the issuance of long-term debt, with the offset to
additional paid-in capital. At December 31, 2007, the
Company had recorded $2,026,924 of accretion expense in the
consolidated statements of operations. The Company paid
$3,515,471 of issuance costs to complete the long-term debt
financing; these costs are in other assets and are being
amortized over the three-year period to maturity of the debt
agreement with Laurus.
On July 2, 2007, 180 Connect (NV) entered into an amendment
agreement with Laurus securing additional interim financing to
fund working capital until August 24, 2007.
Pursuant to the terms of the amendment agreement, Laurus agreed
to provide an additional $8.0 million to 180 Connect (NV)
as an increase to the $37.0 million revolving loan, for a
total revolving loan of $45.0 million. As part of this
agreement, Laurus also agreed to extend the maturity of the
existing $9.0 million over-advance on the revolving loan
from July 31, 2007 until August 24, 2007.
In connection with the amendment to the Laurus facility,
Messrs. Balter and Slasky, members of the Companys
Board of Directors, agreed to provide a limited recourse
guaranty for a portion of the additional financing Laurus
provided to 180 Connect (NV) by placing $7.0 million in a
brokerage account, which was pledged to Laurus. The guaranty was
not called upon and the funds were returned to
Messrs. Balter and Slasky. 180 Connect (Canada) agreed to
reimburse Messrs. Balter and Slasky up to $150,000 for
their fees and expenses in connection with the guaranty and
pledge.
On July 2, 2007, in connection with the amendment
agreement, 180 Connect (Canada) issued Laurus a warrant to
purchase 600,000 shares of 180 Connect (Canada)s
common stock at an exercise price of $4.35 per share, the
adjusted market price of 180 Connect (Canada)s common
stock at the time of issue (the July
Warrant). The July Warrant was valued at
$1,525,639, using the Black-Scholes option pricing
56
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
model using the following variables: volatility of 61%, expected
life of five years, a risk free interest rate of 4.25% and a
dividend of zero. Thereafter, on August 24, 2007, in
connection with consummation of the Arrangement, Laurus received
a warrant to purchase 250,000 shares of the Companys
common stock at an exercise price of $4.01 per share (the
August Warrant). The August Warrant
was valued at $558,258 using the same pricing model and
variables as the July Warrant described above. At
September 30, 2007, The Company recorded an expense in
interest and loan fees in the consolidated statements of
operations for $2,083,897 an increase to paid in capital,
respectively, as the bridge financing loans have expired.
During the third quarter of 2007, the Company entered into a
settlement with Laurus with respect to a dispute over an alleged
misrepresentation and event of default under the provisions of
the Laurus debt agreements that Laurus alleged occurred as a
result of the repayment of the convertible debentures after
consummation of the Arrangement. Pursuant to the terms of the
settlement, the Company agreed to reduce the exercise price of
the warrants issued by Laurus. With respect to the July Warrant,
the exercise price for the first 450,000 shares of the
Companys common stock exercised by Laurus was reduced from
$4.35 to $0.01 per share, and the remaining 150,000 shares
of common stock exercised by Laurus was reduced from $4.35 to
$3.00 per share. In addition, the exercise price of the August
Warrant was reduced from $4.01 to $3.00 per share. The common
stock purchase warrants were re-valued immediately before and
after the re-pricing, using the Black-Scholes option pricing
model using the following variables: volatility of 61%, expected
life of five years, a risk free interest rate of 4.25% and a
dividend of zero. The re-pricing of the warrants increased the
fair value of warrants by an additional $719,399 and is recorded
as an expense in interest and loan fees in the consolidated
statement of operations and increased paid-in capital.
Laurus also received a 2.5% management fee on the
$8.0 million increase to the revolver or $200,000 and a
$1.4 million commitment fee which was paid on
August 27, 2007, and expensed in interest and loan fees in
the consolidated statements of operations.
Upon consummation of the Arrangement, 180 Connect (NV) had no
outstanding balance on the additional $8.0 million
revolving loan or the existing $9.0 million over-advance
facility. Additionally, 180 Connect (NV) paid down
$5.0 million of principal on its term loan. For the year
ended December 31, 2007, 180 Connect (NV) repaid a total of
$12.3 million of term debt, $10.4 million of
convertible debt and a portion of its revolving credit facility,
which may be re-borrowed subject to the provisions of the debt
agreement.
Subsequent to the issuance of the Companys consolidated
financial statements as of and for the year ended
December 31, 2006, the Companys management determined
that an error existed in previously issued consolidated
financial statements. The Company determined that the long-term
debt for the Revolver credit facility should be classified as
current in accordance with FASB Emerging Issues
Task Force Issue
No. 95-22,
Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement
(EITF 95-22).
As a result, the accompanying fiscal 2006 financial statements
have been restated from amounts previously reported in
Form 8-K
filed on August 30, 2007. The restatement had no impact on
the previously report consolidated statements of operations,
shareholders equity or cash flows. A summary of the
effects of the restatement is as follows:
|
|
|
|
|
|
|
|
|
|
|
Previously Reported
|
|
|
As restated
|
|
|
|
December 31, 2006
|
|
|
December 31, 2006
|
|
|
Current portion of long-term debt
|
|
$
|
5,967,674
|
|
|
$
|
26,502,096
|
|
Long-term debt
|
|
|
32,799,043
|
|
|
|
12,264,621
|
|
The Revolver requires a lockbox arrangement, which provides for
all receipts to be swept daily to reduce borrowings outstanding
under the credit facility. This arrangement, combined with the
existence of a subjective acceleration clause in the revolving
credit facility, requires that the borrowings under the Revolver
be classified as a current liability on the balance sheet in
accordance with
EITF 95-22.
The
57
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
acceleration clause could allow the Companys lender to
forego additional advances should they determine there has been
a material adverse change in the Companys financial
position or prospects reasonably likely to result in a material
adverse effect on the Companys business, condition
(financial or otherwise), operations, performance or properties.
The Company believes that no such material adverse change has
occurred; further, as of March 27, 2008, the Companys
lender had not informed the Company that any such event had
occurred.
|
|
13.
|
CONVERTIBLE
DEBENTURES
|
On March 22, 2006, 180 Connect (Canada) completed a private
placement with a group of qualified, accredited institutional
investors of $10,686,101 of convertible debentures and warrants
(Note 14). During the second quarter of 2007, one of the
convertible debenture holders exercised its option to convert in
total $2,024,785 of principal under the convertible debentures
into 510,000 common shares (Note 16).
As of December 31, 2006 the convertible debentures were
bifurcated between convertible debt and fair value of derivative
financial instruments for $6,276,584 and $4,065,729,
respectively. The unamortized discount as of December 31,
2006 was $4,409,517.
The consummation of the Arrangement constituted an event of
default under 180 Connect (Canada)s convertible
debentures. In the third quarter of 2007, the convertible
debenture holders exercised their right to redeem the
convertible debentures in full. The Company paid the holders of
the convertible debentures $10,393,577, which included
outstanding principal and a 20% redemption premium, excluding
accrued but unpaid interest.
|
|
14.
|
WARRANTS AND
DERIVATIVE FINANCIAL INSTRUMENTS
|
The warrants issued in connection with the 180 Connect
(Canada)s March 22, 2006, private placement (the
PIPE Warrants) are presented as a
liability because they do not meet the criteria of
EITF 00-19
for equity classification. Subsequent changes in fair value are
recorded in the consolidated statements of operations. The PIPE
Warrants, which have a four-year term, are exercisable into
942,060 of the Companys common shares at an exercise price
of $4.3311 per share.
The Company determined the fair value of the PIPE Warrants at
December 31, 2007, using a Black-Scholes pricing model. The
following assumptions were used for the Black-Scholes pricing
model: an expected life of 2.25 years, volatility of 61%
and a risk-free rate of 4.25%.
Each of the publicly traded warrants issued in connection with
the initial public offering of AVP, (the Public
Warrants) and the unit purchase option issued to
the underwriters in connection with such initial public
offering, were initially classified as a derivative liability,
as required under EITF
No. 00-19,
because in the absence of explicit provisions to the contrary in
the warrant and purchase option agreement, the Company must
assume that the Company could be required to settle the warrants
and the unit purchase option on a net-cash basis, thereby
necessitating the treatment of the potential settlement
obligation as a liability. During the fourth quarter of 2007,
the Company entered into a Warrant Clarification Agreement which
amended the warrant agreement governing the public warrants to
clarify that no obligation exists for cash settlement of the
public warrants; a similar amendment was entered into with
respect to the unit purchase option allowing the public warrants
to be classified as equity.
As of December 31, 2007, the public warrants are recorded
as a credit to
paid-in-capital
for $7,516,810, which represents their fair market value at the
date when the clarification agreement was amended (the
Amendment Date). As of the Amendment
Date, the closing sale price for the warrants was $0.40,
resulting in a total warrant liability of $7,200,000.
58
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The Company determined the fair value of the unit purchase
options to be $316,810 at the Amendment Date using a
Black-Scholes pricing model adjusted to include a separate
valuation of the embedded warrants. The following assumptions
were used for the Black Scholes pricing model: an expected life
of 2.9 years, volatility of 62% and a risk-free rate of
4.02%. For the embedded warrants, the Company based the
valuation on the closing sale price for the public warrants as
of the amendment date adjusted by the percentage difference
between the valuations obtained using a Black-Scholes pricing
model (with the same assumptions) for the public warrants and
the embedded warrants.
In connection with the Arrangement, two unrelated third parties
agreed with 180 Connect (Canada) to purchase 400,000 and
100,000 shares, respectively, of common stock of AVP and to
vote these shares in favor of the Arrangement at the
August 24, 2007, AVP shareholders meeting. 180 Connect
(Canada) agreed to a make whole formula with these individuals
to be settled within 30 days of consummation of the
Arrangement. One of the individuals also received an option to
acquire 16,000 AVP shares for $0.01 per share from
Messrs. Balter and Slasky.
At the maturity date of this agreement, which was the
30th day following consummation of the Arrangement, 180
Connect (Canada)s make whole liability was
$2.8 million, and 180 Connect (Canada) agreed with each of
such parties, in lieu of satisfaction of the make whole
agreement, to repurchase the shares and the option held by such
parties for $3.0 million. The transaction resulted in a
loss of $2.8 million on the settlement of derivative
liabilities and $0.2 million has been recorded as a stock
repurchase. As of December 31, 2007, the option remains
outstanding.
On August 20, 2007, 180 Connect (Canada) offered to pay
Magnetar $800,000 in connection with Magnetars support of
180 Connect (Canada)s proposed Arrangement and, as a
shareholder of AVP, for Magnetar to agree to vote the shares it
held in AVP in favor of the Arrangement at the August 24,
2007, AVP shareholders meeting. On August 23, 2007,
Messrs. Balter and Slasky agreed to issue to Magnetar an
option to acquire 160,000 shares of AVP for $0.01 per share
in satisfaction of 180 Connect (Canada)s agreement with
Magnetar and 180 Connect (Canada) agreed to reimburse
Messrs. Balter and Slasky for such issuance, but such
option was never issued. On November 9, 2007, the Company
issued Magnetar a warrant exercisable for 356,952 shares of
common stock at an exercise price of $0.01 per share in full
satisfaction of amounts owing by us to Magnetar. Such warrant
was valued at $800,000 on November 9, 2007. In connection
with such issuance, the Company withheld 90,559 of the shares
underlying the warrant in order to satisfy U.S. tax
withholding requirements and remitted $202,961 to the Internal
Revenue Service on behalf of Magnetar. Accordingly, the warrant
will only be exercisable for 266,393 shares. At
December 31, 2007, the warrant was recorded as an expense
of $800,000 to interest and loan costs.
59
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following tables show the changes in the fair values of
derivative instruments recorded in the consolidated financial
statements for the year ended December 31, 2007 and
December 31, 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives of
|
|
|
|
|
|
|
|
|
|
PIPE
|
|
|
Public
|
|
|
Convertible
|
|
|
Stock
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Debt
|
|
|
Repurchase
|
|
|
Total
|
|
|
Fair value at March 22, 2006
|
|
$
|
1,076,693
|
|
|
$
|
|
|
|
$
|
4,352,972
|
|
|
$
|
|
|
|
$
|
5,429,665
|
|
Changes in fair value
|
|
|
(41,486
|
)
|
|
|
|
|
|
|
(1,322,450
|
)
|
|
|
|
|
|
|
(1,363,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, 2006
|
|
$
|
1,035,207
|
|
|
$
|
|
|
|
$
|
3,030,522
|
|
|
$
|
|
|
|
$
|
4,065,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, August 24, 2007
|
|
$
|
|
|
|
$
|
6,936,225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,936,225
|
|
Changes in fair value
|
|
|
(913,039
|
)
|
|
|
580,585
|
|
|
|
2,586,826
|
|
|
|
2,766,573
|
|
|
|
5,020,945
|
|
Settlement of derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,766,573
|
)
|
|
|
(2,766,573
|
)
|
Settled on conversion of debentures
|
|
|
|
|
|
|
|
|
|
|
(1,113,646
|
)
|
|
|
|
|
|
|
(1,113,646
|
)
|
Settled on redemption of debentures
|
|
|
|
|
|
|
|
|
|
|
(4,503,702
|
)
|
|
|
|
|
|
|
(4,503,702
|
)
|
Reclassification to
paid-in-capital
|
|
|
|
|
|
|
(7,516,810
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,516,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2007
|
|
$
|
122,168
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
122,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company lease offices, warehouse facilities and equipment
under various non-cancelable operating lease agreements which
expire on various dates through 2012.
Future minimum annual lease payments under such lease agreements
that have initial or remaining terms in excess of one year at
December 31, 2007 are as follows:
|
|
|
|
|
2008
|
|
$
|
4,059,293
|
|
2009
|
|
|
2,732,333
|
|
2010
|
|
|
1,970,912
|
|
2011
|
|
|
1,039,843
|
|
2012
|
|
|
277,900
|
|
|
|
|
|
|
|
|
$
|
10,080,281
|
|
|
|
|
|
|
Operating lease expenses for the fiscal years ended
December 31, 2007, December 31, 2006, and
December 31, 2005, were $3,944,780, $3,978,584 and
$4,039,214, respectively.
The Company has a contingent exposure on certain property leases
related to repairs
and/or
maintenance costs that the landlord, at its discretion, may
incur and charge to it.
60
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
At December 31, 2007, the future minimum annual payments
under capital lease obligations are as follows:
|
|
|
|
|
2008
|
|
$
|
12,827,906
|
|
2009
|
|
|
10,888,637
|
|
2010
|
|
|
5,884,035
|
|
2011
|
|
|
1,284,532
|
|
2012
|
|
|
276,411
|
|
|
|
|
|
|
Future minimum lease payments
|
|
|
31,161,521
|
|
Less: amount representing interest
|
|
|
2,287,112
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
28,874,409
|
|
Less: current portion
|
|
|
11,628,142
|
|
|
|
|
|
|
|
|
$
|
17,246,267
|
|
|
|
|
|
|
As of December 31, 2007, the Company has 2,977 vehicles
which relate to $28.6 million of remaining principal
related to capital lease obligations. The interest rates for the
remaining lease obligations are fixed interest rates range from
4.5% to 5.8%.
At December 31, 2006, the future minimum annual payments
under capital lease obligations are as follows:
|
|
|
|
|
2007
|
|
$
|
14,214,126
|
|
2008
|
|
|
11,332,805
|
|
2009
|
|
|
4,393,730
|
|
2010
|
|
|
121,597
|
|
|
|
|
|
|
Future minimum lease payments
|
|
|
30,062,258
|
|
Less: amount representing interest
|
|
|
1,816,042
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
28,246,216
|
|
Less: current portion
|
|
|
13,033,104
|
|
|
|
|
|
|
|
|
$
|
15,213,112
|
|
|
|
|
|
|
As of December 31, 2006, 180 Connect (Canada) acquired
2,589 vehicles which relate to $28.0 million of remaining
principal related to capital lease obligations. The interest
rates for the remaining lease obligations are both fixed and
variable. The fixed interest rates range from 5.2% through 6.2%
and the variable interest rates are determined quarterly using
the Merrill Lynch AA published trading Corporate Bond index plus
0.25%.
|
|
16.
|
STOCK-BASED
COMPENSATION AND CHANGES IN SHAREHOLDERS EQUITY
|
During 2007, the Company established the Long-Term Share
Compensation Plan (LTIP) for the
benefit of executive officers and key employees. The LTIP was
approved by the shareholders in conjunction with the
consummation of the Arrangement. The Companys outside
directors and consultants are not entitled to participate in the
LTIP. The LTIP was designed to: (i) strengthen the ability
to attract and retain qualified officers and employees, which
the Company and the Companys affiliates require;
(ii) encourage the acquisition of a proprietary interest in
us by such officers and employees, thereby aligning their
interests with the interests of the Companys shareholders;
and (iii) focus the Companys
61
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
management and the Companys affiliates on operating and
financial performance and total long-term shareholder return by
providing an increased incentive to contribute to the
Companys growth and profitability. Pursuant to the LTIP,
the Board of Directors may grant options to purchase common
shares, share appreciation rights and restricted stock units up
to 2,000,000 shares, of which 1,980,000 were granted during
the year ended December 31, 2007.
In addition to the LTIP, during the fourth quarter of 2006, 180
Connect (Canada)s Board of Directors granted
167,999 share appreciation rights to several of the
Companys officers and senior management. The share
appreciation rights have an exercise price of $2.50, expire
December 6, 2011 and are settleable in the Companys
common shares. The fair value of the share appreciation rights
is measured at the date of approval and compensation expense is
recorded over the vesting period. The share appreciation rights
were measured at August 24, 2007 (the date of approval) and
vest over a four-year term ending December 6, 2010. 180
Connect (Canada) had previously issued stock options or other
stock-based compensation which was assumed by us pursuant to the
terms of the Arrangement.
The Company used the Black-Scholes option pricing model to
estimate the fair value of stock options, restricted stock
units, and share appreciation rights and used the ratable method
to amortize compensation expense over the vesting period of the
grant. Pursuant to the LTIP, certain senior executives were
granted accelerated stock options and restricted stock units on
September 5, 2007 that vest over a three-year term. The
remaining stock options and restricted stock units granted on
September 5, 2007 vest over a four-year term.
Total non-cash stock compensation expense recorded as operating
expense for the year ended December 31, 2007,
December 31, 2006, and December 31, 2005 was $860,035,
$91,214 and $1,387,133, respectively. For the year ended
December 31, 2007, 46,467 options were exercised for
$77,511.
The fair value of each stock option, restricted stock unit, and
share appreciation right granted was estimated using the
following assumptions for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Year
|
|
|
4 Year
|
|
|
Share
|
|
|
|
3 Year
|
|
|
4 Year
|
|
|
Restricted
|
|
|
Restricted
|
|
|
Appreciation
|
|
|
|
Stock Options
|
|
|
Stock Options
|
|
|
Stock Units
|
|
|
Stock Units
|
|
|
Rights
|
|
|
Number granted
|
|
|
499,750
|
|
|
|
664,500
|
|
|
|
445,250
|
|
|
|
370,500
|
|
|
|
167,999
|
|
Stock price on day of grant
|
|
$
|
3.25
|
|
|
$
|
3.25
|
|
|
$
|
3.25
|
|
|
$
|
3.25
|
|
|
$
|
4.01
|
|
Exercise price
|
|
$
|
3.25
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
$
|
2.50
|
|
Expected life in years
|
|
|
4.5
|
|
|
|
4.75
|
|
|
|
3
|
|
|
|
3.25
|
|
|
|
3.75
|
|
Vesting period in years
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Interest free rate
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.44
|
%
|
Volatility
|
|
|
61.0
|
%
|
|
|
61.0
|
%
|
|
|
61.0
|
%
|
|
|
61.0
|
%
|
|
|
60.5
|
%
|
Forfeiture rate
|
|
|
18.0
|
%
|
|
|
18.0
|
%
|
|
|
18.0
|
%
|
|
|
18.0
|
%
|
|
|
18.0
|
%
|
Dividend
|
|
|
Zero
|
|
|
|
Zero
|
|
|
|
Zero
|
|
|
|
Zero
|
|
|
|
Zero
|
|
In connection with the 2003 acquisition of the remaining 7%
interest in Cable Play Inc., 180 Connect (Canada) exchanged
2,726,592 of its options for 3,181,922 options of those
previously granted by Cable Play Inc. The Company applied FASB
interpretation No. 44
(FIN 44), Accounting for
Certain Transactions Involving Stock Compensation. The
fair value of the unvested options granted at the date of
acquisition of $4,126,541 was recognized as compensation cost
over the remaining vesting periods and the Company recorded
compensation expense of zero, $91,214 and $1,321,681,
respectively for the year ended December 31, 2007,
December 31, 2006 and December 31, 2005, respectively.
The fair value of the options granted under the plan were
determined using the Black-Scholes pricing model. The risk-free
rate
62
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
interest rate was 4.21% to 5.45% with an expected life of 3 to
10 years. The expected volatility was 99% and a dividend
yield of zero.
As at December 31, 2007, the Company had 2,376,650 total
options, restricted stock units and share appreciation rights
outstanding to employees and directors (as of December 31,
2006 the Company had 349,946 stock options outstanding) to
purchase an equal amount of common shares. The options have a
life of up to 10 years from the date of grant. Vesting
terms and conditions are determined by the Board of Directors at
the time of grant and vesting terms range from three to five
years.
The following table summarizes the Companys stock option,
restricted stock units and share appreciation rights activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding, beginning of period
|
|
|
349,946
|
|
|
$
|
2.92
|
|
|
|
856,000
|
|
|
$
|
2.18
|
|
|
|
1,292,609
|
|
|
$
|
1.98
|
|
Granted
|
|
|
2,147,999
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(46,467
|
)
|
|
$
|
1.67
|
|
|
|
(155,828
|
)
|
|
$
|
1.67
|
|
|
|
(408,847
|
)
|
|
$
|
1.78
|
|
Cancelled
|
|
|
(74,828
|
)
|
|
$
|
1.67
|
|
|
|
(350,226
|
)
|
|
$
|
1.67
|
|
|
|
(27,762
|
)
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
2,376,650
|
|
|
$
|
2.10
|
|
|
|
349,946
|
|
|
$
|
2.92
|
|
|
|
856,000
|
|
|
$
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period
|
|
|
268,651
|
|
|
$
|
3.29
|
|
|
|
349,946
|
|
|
$
|
2.92
|
|
|
|
856,000
|
|
|
$
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options,
restricted stock units and share appreciation rights outstanding
as at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Contractual Life
|
|
|
Weighted Average
|
|
Security
|
|
Of Shares
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Restricted stock units under LTIP
|
|
|
801,750
|
|
|
|
3.67
|
|
|
|
|
|
Stock options granted during Cable Play Acquisition
|
|
|
268,651
|
|
|
|
2.86
|
|
|
$
|
3.29
|
|
Share appreciation rights
|
|
|
167,999
|
|
|
|
3.92
|
|
|
$
|
2.50
|
|
Stock options granted under LTIP
|
|
|
1,138,250
|
|
|
|
6.67
|
|
|
$
|
3.25
|
|
On April 2, 2007, Laurus exercised its right under the
warrant held by it to purchase 1,200,000 shares of 180
Connect (Canada)s common stock for $17,260, During the
second quarter of 2007, one of the holders of the convertible
debentures and PIPE Warrants exercised its option to convert in
total $2,024,785 of principal under the 9.33% convertible
debentures into 510,000 common shares. This decreased
convertible debt and embedded derivative liabilities and
increased paid-in capital by $2,452,205. In addition, $158,975
of the associated issuance costs were reclassified from other
assets to paid-in capital.
On August 24, 2007, the Arrangement was consummated. The
Arrangement is accounted for under the reverse acquisition
application of the equity recapitalization method of accounting
in accordance with GAAP.. As a result of the transaction, the
Company received $37,933,165 in proceeds net of AVPs
transaction costs related to the Arrangement and incurred
$6,976,440 in issuance costs attributed to equity. The
acquisition of the net assets of AVP reduced paid-in capital by
$7,099,514 primarily for the net
63
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
fair value of derivative financial instruments associated with
the public warrants that existed before the Arrangement of which
$7,516,810 was subsequently reclassified as paid-in capital
(Note 14).
In 2007, the Company re-purchased 500,000 shares of common
stock resulting in a charge to equity of $224,019
(Note 14), issued a total of 850,000 warrants to Laurus for
$2,803,296 (Note 12) and 356,952 warrants to Magnetar
for $800,000 (Note 13).
For the year ended December 31, 2007, the Company recorded
a $250,007 reduction to equity as foreign currency translation
adjustment related to one of the Companys Canadian
subsidiaries.
|
|
17.
|
RELATED-PARTY
TRANSACTIONS
|
During the second quarter of 2006, 180 Connect (Canada) entered
into a one-year agreement with a then member of its Board of
Directors for professional services to be provided in connection
with 180 Connect (Canada)s long-term debt refinancing and
strategic alternatives process. The agreement provided for
maximum base compensation of $300,000. During 2006, in addition
to base salary payments, the director earned and was paid
$240,000 in connection with 180 Connect (Canada)s debt
refinancing and a $210,000 discretionary bonus, of which $60,000
was paid in 2006, $150,000 was paid in the first quarter of
2007; and $185,000 was paid in the third quarter of 2007.
Restructuring costs and remaining reserve as at
December 31, 2007, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
|
|
|
Restructuring
|
|
|
|
|
|
Reserve
|
|
|
|
December 31,
|
|
|
Costs Incurred in
|
|
|
Paid During
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Rent
|
|
$
|
|
|
|
$
|
275,000
|
|
|
$
|
228,125
|
|
|
$
|
46,875
|
|
Moving expenses
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
Other
|
|
|
6,325
|
|
|
|
|
|
|
|
6,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring
|
|
$
|
6,825
|
|
|
$
|
275,000
|
|
|
$
|
234,950
|
|
|
$
|
46,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2007, there was a $0.3 million
charge for additional costs associated with completion of the
180 Connect (Canada)s relocation of its back office
operations and corporate offices to Denver related to a partial
lease termination.
Restructuring costs and remaining reserve as of
December 31, 2006, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
|
|
|
Restructuring
|
|
|
|
|
|
Reserve
|
|
|
|
December 31,
|
|
|
Costs Incurred in
|
|
|
Paid During
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Severance
|
|
$
|
549,987
|
|
|
$
|
560,173
|
|
|
$
|
1,110,160
|
|
|
$
|
|
|
Moving expenses
|
|
|
|
|
|
|
185,261
|
|
|
|
184,761
|
|
|
|
500
|
|
Rent expense
|
|
|
27,450
|
|
|
|
|
|
|
|
27,450
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
147,254
|
|
|
|
140,929
|
|
|
|
6,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring
|
|
$
|
577,437
|
|
|
$
|
892,688
|
|
|
$
|
1,463,300
|
|
|
$
|
6,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, there was an additional charge of $0.9 million for
employee severance and related costs associated with the 180
Connect (Canada)s relocation of its back office operations
and corporate offices to Denver.
64
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Restructuring costs and remaining reserve as of
December 31, 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
|
|
|
Restructuring
|
|
|
|
|
|
Reserve
|
|
|
|
December 31,
|
|
|
Costs Incurred in
|
|
|
Paid During
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Severance
|
|
$
|
|
|
|
$
|
1,439,339
|
|
|
$
|
889,352
|
|
|
$
|
549,987
|
|
Moving expenses
|
|
|
|
|
|
|
136,341
|
|
|
|
136,341
|
|
|
|
|
|
Rent expense
|
|
|
|
|
|
|
32,805
|
|
|
|
5,355
|
|
|
|
27,450
|
|
Other
|
|
|
|
|
|
|
64,000
|
|
|
|
64,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring
|
|
$
|
|
|
|
$
|
1,672,485
|
|
|
$
|
1,095,048
|
|
|
$
|
577,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, there was a charge of $1.7 million for employee
severance and related costs associated with the 180 Connect
(Canada)s relocation of its back office operations and
corporate offices to Denver. Employee severance as
$1.4 million and employee moving and other expenses were
$0.3 million.
The income tax expense (benefit) differs from the amount
computed by applying various statutory tax rates to loss from
continuing operations before income taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Tax benefit on loss from continuing operations at the U.S.
statutory rate of 35% for 2007, Canadian statutory rate for of
32.5% for 2006 and 33.75% for 2005
|
|
$
|
(7,716,351
|
)
|
|
$
|
(3,348,630
|
)
|
|
$
|
(2,484,253
|
)
|
State tax expense/(benefit)
|
|
|
298,493
|
|
|
|
|
|
|
|
|
|
Nondeductible items
|
|
|
121,996
|
|
|
|
518,086
|
|
|
|
523,246
|
|
Foreign rate differences
|
|
|
(1,148,240
|
)
|
|
|
(1,080,076
|
)
|
|
|
(688,308
|
)
|
Nontaxable portion of gain from sale of investment or loss from
discontinued operations
|
|
|
(2,039,073
|
)
|
|
|
(216,877
|
)
|
|
|
(1,100,588
|
)
|
Deferred tax asset valuation allowance
|
|
|
11,441,917
|
|
|
|
2,624,226
|
|
|
|
1,748,176
|
|
FIN 48 liability
|
|
|
191,580
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(293,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income tax expense/ (benefit)
|
|
$
|
856,576
|
|
|
$
|
(1,503,271
|
)
|
|
$
|
(2,001,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of income tax expense /(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense/ (benefit)
|
|
$
|
664,997
|
|
|
$
|
57,760
|
|
|
$
|
(509,786
|
)
|
Deferred income tax expense/ (benefit)
|
|
|
191,579
|
|
|
|
(1,561,031
|
)
|
|
|
(1,491,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/ (benefit)
|
|
$
|
856,576
|
|
|
$
|
(1,503,271
|
)
|
|
$
|
(2,001,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As the Companys ownership changed from Canadian to
U.S. in August 2007, the statutory rate for the
U.S. has been considered in calculating the tax expense/
(benefit) as above. The effective tax rate was 3.89% for the
year ended December 31, 2007, (14.55%) for the year ended
December 31, 2006 and (27.69%) for the year ended
December 31, 2005.
The Company recorded a net $0.9 million income tax expense
for the year ended December 31, 2007, which includes a
current tax expense of $0.3 million for state tax
liabilities, $0.4 million for federal taxes
65
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
payable by Mountain Center, Inc. and Wirecomm Systems, Inc.
Canada and $0.2 million for FIN 48 liabilities. At
this point in time a full valuation allowance has been recorded
against the deferred tax assets in Canada and the U.S since
these entities do not meet the more likely than not test to
recognize a deferred tax asset.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The components of the deferred tax
assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
23,779,903
|
|
|
$
|
19,616,110
|
|
Goodwill and customer contracts
|
|
|
10,762,763
|
|
|
|
6,703,610
|
|
Nondeductible reserves
|
|
|
3,776,315
|
|
|
|
6,737,751
|
|
Tax cost of venture investments in excess of carrying value
|
|
|
|
|
|
|
94,517
|
|
Undeducted share issuance costs
|
|
|
942,907
|
|
|
|
754,832
|
|
Derivative Financial Instruments
|
|
|
|
|
|
|
2,226,939
|
|
Other
|
|
|
35,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
39,296,985
|
|
|
$
|
36,133,760
|
|
Valuation allowance
|
|
|
(36,557,348
|
)
|
|
|
(25,115,431
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
2,739,637
|
|
|
$
|
11,018,328
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangibles
|
|
$
|
|
|
|
$
|
6,819,573
|
|
Capital assets
|
|
|
2,217,343
|
|
|
|
2,558,358
|
|
Original issue discount interest
|
|
|
522,294
|
|
|
|
|
|
Convertible Debenture
|
|
|
|
|
|
|
1,640,397
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
$
|
2,739,637
|
|
|
$
|
11,018,328
|
|
|
|
|
|
|
|
|
|
|
Due to uncertainty of the Companys ability to realize the
benefit of all of the deferred tax assets, the deferred tax
assets are fully offset by a valuation allowance.
The Company has net operating losses for U.S. Federal
income tax purposes of approximately $61,817,922, which will
begin to expire in 2022. The Companys ability to offset
future taxable income with these net operating losses could be
significantly impacted by the rules of Internal Revenue Code
Section 382, which limits the amount of net operating
losses available following a change in ownership. The Company
has not completed a study regarding the impact of
Section 382 on the Company. Additional limitations on the
ability to use these losses to offset future taxable income
could result from the Separate Return Loss Year rules of the
Internal Revenue Code.
The Company has net operating losses for various state income
tax purposes of approximately $42,682,094 which will begin to
expire in the year 2013. The Companys Canadian
subsidiaries have net operating losses for Canadian tax purposes
of approximately $8,735,565 which will begin to expire in Year
2009. All these net operating losses are subject to valuation
allowance.
On January 1, 2007, the Company adopted the provisions of
FIN 48. The initial application of FIN 48 to the
Companys tax positions had no material effect on the
Companys shareholders equity and therefore the Company did
not record a cumulative effect adjustment related to the
adoption of FIN 48. As a result of
66
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
applying the provisions of FIN 48, the Company recognized
an increase of $191,580 in the liability for unrecognized tax
benefits, and corresponding charge to Income tax expense.
The following table summarizes the activity related to our
unrecognized tax benefits:
|
|
|
|
|
Balance as at January 1, 2007
|
|
$
|
|
|
Increase related to current year tax positions
|
|
|
387,212
|
|
Decrease due to change in tax position
|
|
|
(195,632
|
)
|
|
|
|
|
|
Gross balance as at December 31, 2007
|
|
$
|
191,580
|
|
|
|
|
|
|
The entire amount of unrecognized tax benefit, if reversed, will
reduce the effective tax rate. The Company recorded a liability
for potential penalties and interest of $56,142 and $32,733
respectively for the year ended December 31, 2007. The
Company does not expect unrecognized tax benefits to change
significantly over the next twelve months.
The Company files U.S., state and foreign income tax returns in
jurisdictions with varying statutes of limitations. Years 2003
through 2007 generally remain subject to examination by federal
and most state tax authorities. In foreign jurisdictions, years
2003 through 2007 generally remain subject to examination by
their respective tax authorities.
The domestic versus foreign component of the Company
income or (loss) from continuing operations before income taxes
for the years ended December 31, 2007, 2006 and 2005, was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
|
|
$
|
(22,781,005
|
)
|
|
$
|
(8,641,077
|
)
|
|
$
|
(12,891,701
|
)
|
Foreign
|
|
|
734,288
|
|
|
|
(1,688,232
|
)
|
|
|
5,661,923
|
|
Total
|
|
$
|
(22,046,717
|
)
|
|
$
|
(10,329,309
|
)
|
|
$
|
(7,229,778
|
)
|
The Company has not provided for U.S. federal income and
foreign withholding taxes on undistributed earnings from
non-U.S. operations
as of December 31, 2007, because the Company intends to
reinvest such earnings indefinitely outside of the United States.
67
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table sets forth the computation of basic and
diluted loss per share for the fiscal years ended
December 31, 2007, December 31, 2006 and
December 31, 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(22,903,293
|
)
|
|
$
|
(8,826,038
|
)
|
|
$
|
(5,228,051
|
)
|
Loss from discontinued operations
|
|
|
(2,039,073
|
)
|
|
|
(5,762,800
|
)
|
|
|
(3,288,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(24,942,366
|
)
|
|
$
|
(14,588,838
|
)
|
|
$
|
(8,516,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per share
weighted average number of shares
|
|
|
19,155,718
|
|
|
|
14,641,010
|
|
|
|
14,368,864
|
|
Denominator for diluted income (loss) per share
adjusted weighted average shares and assumed conversion
|
|
|
19,155,718
|
|
|
|
14,641,010
|
|
|
|
14,368,864
|
|
Income (loss) per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted from continuing operations
|
|
$
|
(1.20
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(0.36
|
)
|
Basic and diluted from discontinued operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, net
|
|
$
|
(1.30
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted
loss per share is derived by using the weighted average number
of common shares during the period plus the effect of dilutive
stock options and warrants using the treasury stock method. For
the fiscal years ended December 31, 2007, December 31,
2006 and December 31, 2005 respectively, the diluted net
loss per share is equivalent to basic net loss per share as the
outstanding options, and warrants are anti-dilutive. The share
counts discussed above include the exchangeable shares
outstanding after consummation of the Arrangement.
The potential dilution of warrants, employee stock options,
restricted stock units and share appreciation rights could
result in an additional 23.8 million common shares
outstanding. The table below shows
68
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
the number of shares that would be outstanding if all potential
dilutive instruments were exercised or converted:
|
|
|
|
|
|
|
Number of Shares
|
|
|
Total outstanding shares as of December 31, 2007
|
|
|
25,520,152
|
|
Potentially Dilutive Securities
|
|
|
|
|
PIPE Warrants
|
|
|
942,060
|
|
Laurus Warrants
|
|
|
850,000
|
|
Magnetar Warrants
|
|
|
266,393
|
|
Employee stock options
|
|
|
1,406,901
|
|
Employee restricted stock units
|
|
|
801,750
|
|
Share appreciation rights
|
|
|
167,999
|
|
Public Warrants and Unit Options
|
|
|
19,350,000
|
|
|
|
|
|
|
Maximum Potential Diluted Shares Outstanding
|
|
|
49,305,255
|
|
|
|
|
|
|
|
|
21.
|
(GAIN) LOSS ON
SALE OF INVESTMENTS AND ASSETS
|
(Gain) loss on sale of investments and assets consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gain from investments
|
|
$
|
|
|
|
$
|
(1,320,193
|
)
|
|
$
|
(6,522,324
|
)
|
(Gain) loss on disposal of assets
|
|
|
253,410
|
|
|
|
297,960
|
|
|
|
(374,967
|
)
|
Refinancing of vehicles under capital lease
|
|
|
461,741
|
|
|
|
296,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
715,151
|
|
|
$
|
(726,086
|
)
|
|
$
|
(6,897,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, December 31,
2006 and December 31, 2005, the Company had a loss of
$253,410, $297,960 and zero, respectively, on the disposal of
leased vehicles.
For the fiscal year ended December 31, 2007,
December 31, 2006 and December 31, 2005, the Company
had a net loss on refinancing of vehicle capital leases of
$461,741, $296,147 and zero, respectively. The refinancing of
vehicles under capital leases involved the sale of vehicles
under the Companys capital lease obligations to a new
third-party leasing company. The loss on the refinancing of
vehicles under capital lease is primarily attributable to the
fair value of the asset being less than the undepreciated cost
of the vehicles at the time of the transaction.
During the first quarter of 2006, the Company sold its remaining
interest in Control F-1 Corporation (Control
F-1). This resulted in net proceeds of $1,327,693.
The investment had been previously written down to zero in 2004
due to prevailing market conditions. However, during the first
quarter of 2006, an agreement was reached between us and
Computer Associates International, Inc. and Computer Associates
Canada Company for the Companys holding in Control F-1.
The Company recognized a pre-tax gain of $1,320,193 on the sale
of the investment in the first quarter of 2006.
In 2005, the Company sold the Companys remaining interest
in Guest-Tek Interactive Entertainment Ltd.
(Guest-Tek) for net cash proceeds of
$9.0 million, of which the Company recognized a pre-tax
gain on the sale of approximately $6.5 million. During the
third quarter of 2005, the Company sold a building in
California. In connection with the sale, the Company recognized
a gain of $0.3 million.
69
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
For the year ended December 31, 2007, the Company had
$3.6 million in other expense, primarily attributed to
bonuses earned by certain of the Companys directors and
employees as a result of the closing of the Arrangement.
|
|
23.
|
DISCONTINUED
OPERATIONS
|
The Company discontinued operations at certain non-profitable
branches during 2007, 2006 and 2005. The revenues and expenses
for these locations have been reclassified as discontinued
operations for all periods presented on the consolidated
financial statements. The Company was able to determine the
financial results of the discontinued branches as financial
information is available for each branch. The operations and
cash flows of the branches have been eliminated from the ongoing
operations of the entity as a result of the dissolution of the
business and the Company will not have any significant
continuing involvement in the operations of the branches after
the operations were discontinued.
The Companys current assets for discontinued operations
consisted of accounts receivable of zero, zero and $214,410 for
the periods ended December 31, 2007, December 31, 2006
and December 31, 2005, respectively. Accounts payable and
accrued liabilities for discontinued operations was
approximately zero, $1.0 million and zero for the periods
ended December 31, 2007, December 31, 2006 and
December 31, 2005, respectively.
Consolidated
statements of operations from discontinued operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Revenue from discontinued operations
|
|
$
|
1,622,817
|
|
|
$
|
5,509,336
|
|
|
$
|
4,123,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and customer Contracts
|
|
$
|
|
|
|
$
|
490,403
|
|
|
$
|
305,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes of zero
|
|
$
|
(2,039,073
|
)
|
|
$
|
(5,762,800
|
)
|
|
$
|
(3,288,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share from discontinued operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughout all the reportable periods, the Company closed
certain branch locations throughout the U.S. As a result of
these closings, the Company recognized a loss from discontinued
operations excluding any impairment charge of $2,039,073,
$5,272,397 and $2,983,029 for the years ended December 31,
2007, December 31, 2006 and December 31, 2005,
respectively. The impairment charges reducing goodwill and
customer contracts were zero, $490,403 and $305,575 for the
years ended December 31, 2007, December 31, 2006 and
December 31, 2005, respectively. Revenues applicable to the
closed branches were $1,622,817, $5,509,336 and $4,123,005 for
the years ended December 31, 2007, December 31, 2006
and December 31, 2005, respectively.
The Company and the Companys subsidiaries, Ironwood and
Mountain, are party to four class action lawsuits in federal
court in Washington, California, and Oregon brought by current
and former employees alleging violations of state wage and hour
laws and a class action suit alleging violations of state
paycheck laws in federal court in California. The Company
established a reserve for estimated costs of $2.5 million
for the Washington class action, of which $1.5 million was
remaining as of December 31, 2007.
70
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In September 2007, The Company was named as a defendant in a
purported class action lawsuit in federal court in Orlando,
Florida. The claims relate to alleged violations of the federal
Fair Labor Standards Act. The purported class action period
relates back to September 2004 and seeks to certify a nationwide
class of similarly situated employees.
In October 2007, the Companys subsidiary, Ironwood, Inc.,
was named as a defendant in a purported class action lawsuit in
state court in Los Angeles, California, brought by current and
former employees. The claims relate to alleged violations of
California wage and hour laws. The purported class action period
allegedly relates back to October 2003, although the class
period may be limited to after June 30, 2004, by virtue of
settlement of previous wage and hour class action litigation in
California.
In December 2006, thirteen technicians (the
Complainants) employed at the Companys
Farmingdale, New York, location filed harassment, discrimination
and retaliation charges against us with the Equal Employment
Opportunity Commission (the EEOC) alleging that the
Company violated Title VII of the Civil Rights Act of 1964.
In September 2007, the EEOC issued a probable cause finding with
respect to an alleged discriminatory incident, the occurrence of
which the Company did not dispute. In the Companys
defense, the Company submitted evidence showing that the Company
promptly hired a neutral third party to investigate the
complained-of incident, that the incident was not racially
motivated and that notwithstanding the investigators
findings, the Company promptly discharged the employee
responsible for the incident. Notwithstanding, the EEOC made a
per se finding holding the Company responsible for the conduct
of the employee responsible for committing the complained-of
incident and concluded that the Company engaged in unlawful
discriminatory practices. The EEOC determined that all other
complaints of discrimination, harassment and retaliation,
including any discriminatory employment practices, were
unfounded and, thus, dismissed. Thereafter, in December 2007,
after failure to reach a settlement, the Complainants filed a
federal lawsuit against the Company in connection with their
claims to the EEOC. The complaint purports to bring claims under
Title VII, the Civil Rights Act of 1871, the 1991 Civil
Rights Act, and the New York State Executive Law
Section 290. In January 2008, the Company filed an answer
to the complaint denying each of the Complainants allegations.
The Company intends to vigorously contest each of these claims.
Other than with respect to the Washington class action, no
reserves have been recorded for these cases as the Company is
unable to estimate the amounts of probable and reasonably
estimable losses.
In addition to the foregoing, the Company is subject to a number
of individual employment-related lawsuits. No reserve has been
recorded for these cases as the Company is unable to estimate
the amount of probable and reasonably estimable losses. These
lawsuits are not expected to have a material impact on the
Companys results of operations, financial position or
liquidity.
|
|
25.
|
COMPARATIVE
CONSOLIDATED FINANCIAL STATEMENTS
|
Certain amounts in the comparative consolidated financial
statements have been reclassified from statements previously
presented to conform to the presentation of the 2007
consolidated financial statements, including amounts
reclassified related to discontinued operations and the
reclassification of the Revolver portion of long-term debt to
current (Note 12).
We provide installation, integration and fulfillment services to
the home entertainment, communications and home integration
service industries. As such the revenue derived from this
business is part of an integrated service offering provided to
the Companys customers and thus is reported as one
operating segment.
71
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The Companys operations are located in the United States
and Canada. Revenue is attributed to geographical segments based
on the location of the customers.
The following table sets out property, plant and equipment,
goodwill and customer contracts from continuing operations by
country as at December 31, 2007 and December 31, 2006,
and revenue from continuing operations for the fiscal years
ended December 31, 2007, December 31, 2006 and
December 31, 2005.
Geographic
information
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Property plant and equipment, goodwill and customer
contracts, net
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
1,441,250
|
|
|
$
|
1,468,494
|
|
United States
|
|
|
65,891,480
|
|
|
|
69,521,875
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,332,730
|
|
|
$
|
70,990,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
14,703,141
|
|
|
$
|
9,161,281
|
|
|
$
|
6,737,941
|
|
United States
|
|
|
365,064,738
|
|
|
|
322,013,960
|
|
|
|
271,902,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
379,767,879
|
|
|
$
|
331,175,241
|
|
|
$
|
278,640,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended December 31, 2007,
December 31, 2006 and December 31, 2005, one customer,
DIRECTV, accounted for approximately 84%, 84% and 86% of
consolidated revenues, respectively. This customer accounted for
78%, 76% and 89% of consolidated accounts receivable at
December 31, 2007, December 31, 2006, and
December 31, 2005, respectively.
The Company is economically dependent on DIRECTV and the loss of
DIRECTV as a customer would have a material adverse effect on
the Companys results of operations and financial condition.
|
|
27.
|
SELECTED
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
|
The following tables set forth the Companys selected
unaudited consolidated financial information for each of the
four quarters in the years ended December 31, 2007 and
December 31, 2006. In the opinion of management, this
information has been prepared on the same basis as the audited
consolidated financial statements and all necessary adjustments,
consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the
unaudited quarterly results when read in conjunction with the
Companys audited consolidated financial statements and the
notes to those statements. The amounts presented below have been
reclassified to reflect the adjustments associated with
72
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
the Companys discontinued operations and certain inventory
adjustments. The operating results for any quarter should not be
relied upon as any indication of results for any future period.
For the Year
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QTR 1
|
|
|
QTR 2
|
|
|
QTR 3
|
|
|
QTR 4
|
|
|
2007
|
|
|
Revenue
|
|
$
|
91,569,789
|
|
|
$
|
86,811,664
|
|
|
$
|
101,819,731
|
|
|
$
|
99,566,695
|
|
|
$
|
379,767,879
|
|
Direct expenses
|
|
|
82,942,171
|
|
|
|
78,420,072
|
|
|
|
89,111,547
|
|
|
|
90,634,984
|
|
|
|
341,108,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
margin(1)
|
|
|
8,627,618
|
|
|
|
8,391,592
|
|
|
|
12,708,184
|
|
|
|
8,931,711
|
|
|
|
38,659,105
|
|
General and
administrative(2)
|
|
|
5,037,953
|
|
|
|
4,709,882
|
|
|
|
4,281,328
|
|
|
|
5,194,683
|
|
|
|
19,223,846
|
|
Foreign exchange loss (gain)
|
|
|
11,138
|
|
|
|
(51,820
|
)
|
|
|
(72,760
|
)
|
|
|
(10,887
|
)
|
|
|
(124,329
|
)
|
Restructuring costs
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,000
|
|
Depreciation
|
|
|
2,716,533
|
|
|
|
2,758,895
|
|
|
|
3,048,805
|
|
|
|
3,537,625
|
|
|
|
12,061,858
|
|
Amortization of customer contracts
|
|
|
920,376
|
|
|
|
920,370
|
|
|
|
920,376
|
|
|
|
920,377
|
|
|
|
3,681,499
|
|
Interest and loan fees
|
|
|
2,976,134
|
|
|
|
3,234,758
|
|
|
|
7,800,981
|
|
|
|
2,260,520
|
|
|
|
16,272,393
|
|
(Gain) loss on sale of investments and assets
|
|
|
71,778
|
|
|
|
427,442
|
|
|
|
(7,336
|
)
|
|
|
223,267
|
|
|
|
715,151
|
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
2,786,391
|
|
|
|
1,903,270
|
|
|
|
887,062
|
|
|
|
(555,778
|
)
|
|
|
5,020,945
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
4,379,459
|
|
|
|
(800,000
|
)
|
|
|
3,579,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax
|
|
|
(6,167,685
|
)
|
|
|
(5,511,205
|
)
|
|
|
(8,529,731
|
)
|
|
|
(1,838,096
|
)
|
|
|
(22,046,717
|
)
|
Income tax expense
|
|
|
74,000
|
|
|
|
178,444
|
|
|
|
130,583
|
|
|
|
473,549
|
|
|
|
856,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(6,241,685
|
)
|
|
|
(5,689,649
|
)
|
|
|
(8,660,314
|
)
|
|
|
(2,311,645
|
)
|
|
|
(22,903,293
|
)
|
Gain (loss) from discontinued operations
|
|
|
252,618
|
|
|
|
37,706
|
|
|
|
(15,648
|
)
|
|
|
(2,313,749
|
)
|
|
|
(2,039,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(5,989,067
|
)
|
|
$
|
(5,651,943
|
)
|
|
$
|
(8,675,962
|
)
|
|
$
|
(4,625,394
|
)
|
|
$
|
(24,942,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing
operations:(3)
|
Basic and diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(1.20
|
)
|
Net loss per
share:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.30
|
)
|
|
|
|
(1) |
|
DCM consists of revenue less direct expenses and excludes
general and administrative expense, foreign exchange (gain)
loss, restructuring costs, stock-based compensation, (gain) loss
on sale of investments and assets, depreciation, amortization of
customer contracts, interest and loan fees, (gain) loss on
change in fair market value of derivative liabilities, other
expense, and income tax expense. DCM is a non-GAAP measure. See
Non-GAAP Measures. The comparative GAAP measure
is loss from continuing operations. See Non
GAAP Measures. |
|
(2) |
|
General and administrative includes stock-based compensation of
$0, $0, $227,019, $633,016 for the three months ended
March 31, 2007, June 30, 2007, September 30, 2007
and December 31, 2007, respectively, and $860,035 for the
year ended December 31, 2007. |
|
(3) |
|
Net loss per share is computed independently for each of the
quarters presented and the summation of quarterly amounts does
not necessarily equal the total net loss per share reported for
the year. |
73
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
For the Year
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QTR 1
|
|
|
QTR 2
|
|
|
QTR 3
|
|
|
QTR 4
|
|
|
2006
|
|
|
Revenue
|
|
$
|
73,290,601
|
|
|
$
|
74,822,784
|
|
|
$
|
88,831,021
|
|
|
$
|
94,230,835
|
|
|
$
|
331,175,241
|
|
Direct expenses
|
|
|
68,602,789
|
|
|
|
67,581,220
|
|
|
|
77,769,243
|
|
|
|
83,120,611
|
|
|
|
297,073,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution
margin(1)
|
|
|
4,687,812
|
|
|
|
7,241,564
|
|
|
|
11,061,778
|
|
|
|
11,110,224
|
|
|
|
34,101,378
|
|
General and
administrative(2)
|
|
|
4,262,715
|
|
|
|
5,049,115
|
|
|
|
4,712,862
|
|
|
|
5,650,805
|
|
|
|
19,675,497
|
|
Foreign exchange loss (gain)
|
|
|
13,805
|
|
|
|
(10,303
|
)
|
|
|
(469
|
)
|
|
|
27,328
|
|
|
|
30,361
|
|
Restructuring costs
|
|
|
392,879
|
|
|
|
|
|
|
|
|
|
|
|
499,809
|
|
|
|
892,688
|
|
Depreciation
|
|
|
3,186,359
|
|
|
|
3,355,460
|
|
|
|
3,397,032
|
|
|
|
3,460,136
|
|
|
|
13,398,987
|
|
Amortization of customer contracts
|
|
|
920,376
|
|
|
|
939,077
|
|
|
|
929,727
|
|
|
|
923,493
|
|
|
|
3,712,673
|
|
Interest and loan fees
|
|
|
1,775,580
|
|
|
|
2,251,375
|
|
|
|
2,898,538
|
|
|
|
3,118,011
|
|
|
|
10,043,504
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,233,001
|
)
|
|
|
|
|
|
|
(1,233,001
|
)
|
(Gain) loss on sale of investments and assets
|
|
|
(1,336,454
|
)
|
|
|
86,291
|
|
|
|
135,696
|
|
|
|
388,381
|
|
|
|
(726,086
|
)
|
(Gain) loss on change in fair value of derivative liabilities
|
|
|
(886,393
|
)
|
|
|
2,051,968
|
|
|
|
(4,599,330
|
)
|
|
|
2,069,819
|
|
|
|
(1,363,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from continuing operations before income tax
|
|
|
(3,641,055
|
)
|
|
|
(6,481,419
|
)
|
|
|
4,820,723
|
|
|
|
(5,027,558
|
)
|
|
|
(10,329,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
72,800
|
|
|
|
(34,000
|
)
|
|
|
(96,965
|
)
|
|
|
(1,445,106
|
)
|
|
|
(1,503,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from continuing operations
|
|
|
(3,713,855
|
)
|
|
|
(6,447,419
|
)
|
|
|
4,917,688
|
|
|
|
(3,582,452
|
)
|
|
|
(8,826,038
|
)
|
Loss from discontinued operations
|
|
|
(610,825
|
)
|
|
|
(735,725
|
)
|
|
|
(439,551
|
)
|
|
|
(3,976,699
|
)
|
|
|
(5,762,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(4,324,680
|
)
|
|
$
|
(7,183,144
|
)
|
|
$
|
4,478,137
|
|
|
$
|
(7,559,151
|
)
|
|
$
|
(14,588,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing
operations:(3)
|
Basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.33
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.60
|
)
|
Diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.60
|
)
|
Net income (loss) per
share:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.30
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
0.30
|
|
|
$
|
(0.51
|
)
|
|
$
|
(1.00
|
)
|
Diluted
|
|
$
|
(0.30
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.51
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
(1) |
|
DCM consists of revenue less direct expenses and excludes
general and administrative expense, foreign exchange (gain)
loss, restructuring costs, non-cash stock-based compensation,
(gain) loss on sale of investments and assets, depreciation,
amortization of customer contracts, interest and loan fees,
(gain) loss on fair market value of derivatives, gain on
extinguishment of debt, and income tax expense (benefit). DCM is
a non-GAAP measure. See Non-GAAP Measures. The
comparative GAAP measure is loss from continuing operations. |
|
(2) |
|
General and administrative includes stock-based compensation of
$91,214, $0, $0, $0 for the three months ended March 31,
2006, June 30, 2006, September 30, 2006 and
December 31, 2006, respectively, and $91,214 for the year
ended December 31, 2006. |
|
(3) |
|
Net income (loss) per share is computed independently for each
of the quarters presented and the summation of quarterly amounts
does not necessarily equal the total net loss per share reported
for the year. |
Interest and loan fees in the third quarter of 2007 include a
$1.4 million commitment fee and a $0.2 million
management fee paid to Laurus for an amendment to secure
additional financing to fund working capital prior to the
consummation of the Arrangement. The third quarter of 2007, also
includes
74
180 Connect
Inc.
Notes to
Consolidated Financial
Statements (Continued)
approximately $2.8 million of interest and loan fees
related to the issuance and re-pricing of warrants to Laurus.
Other expenses in the third quarter of 2007 included
$3.6 million earned by certain of the Companys
directors and employees as a result of the closing of the
Arrangement and $0.8 million related to Magnetars
support of the Arrangement, this $0.8 million was
reclassified as interest and loan cost in the fourth quarter of
2007 when the Company issued warrants in lieu of cash.
Direct expenses for the first quarter of 2006 is approximately
$1.1 million of excess material costs resulting partially
from inventory write-offs and from the usage of more expensive
equipment in the installation process which was not reimbursed
by DIRECTV.
In the first quarter of 2006, the Company recognized a gain on
investments of $1.3 million related to the sale of its
remaining interest in Control F-1 (Note 21). The investment
had been written down to zero in the fourth quarter of 2004, due
to prevailing market conditions.
On February 20, 2008, the Companys Board of Directors
received an unsolicited proposal from Creative Vistas, Inc. to
acquire all of the Companys outstanding capital stock for
$3.00 per share payable one-half in cash and one-half in
Creative Vistas, Inc. common stock. The Companys Board of
Directors is evaluating the proposal. There can be no assurance
that this evaluation will lead to any transaction.
Subsequent to December 31, 2007, the Companys Board
of Directors appointed a Special Committee comprised of
independent directors of the Board, with a mandate to consider
and review strategic alternatives for the Company, including
transaction proposals that have been or may be received from
time to time. The Special Committee has retained investment
bankers to assist in this process and is considering a number of
alternatives to improve shareholder value. The Board of
Directors has not set any deadline for completing the review of
its strategic options and may ultimately determine that its
current business plan is the best means to build and deliver
shareholder value.
On March 19, 2008, as a result of the reduction in the
Companys insurance obligations, the Company negotiated a
reduction in the Companys LOC requirement by approximately
$2.0 million.
75
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended
December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
charged to
|
|
|
|
|
|
|
|
|
|
beginning
|
|
|
costs and
|
|
|
|
|
|
Balance at
|
|
|
|
of year
|
|
|
expenses
|
|
|
Deductions
|
|
|
end of year
|
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
1,883,746
|
|
|
$
|
3,649,981
|
|
|
$
|
(4,366,417
|
)(a)
|
|
$
|
1,167,310
|
|
2006
|
|
|
1,167,310
|
|
|
|
5,029,188
|
|
|
|
(3,689,861
|
)(a)
|
|
|
2,506,637
|
|
2007
|
|
|
2,506,637
|
|
|
|
5,671,702
|
|
|
|
(4,428,139
|
)(a)
|
|
|
3,750,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance for Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
17,887,000
|
|
|
$
|
4,206,355
|
|
|
$
|
|
|
|
$
|
22,093,355
|
|
2006
|
|
|
22,093,355
|
|
|
|
3,022,076
|
|
|
|
|
|
|
|
25,115,431
|
|
2007
|
|
|
25,115,431
|
|
|
|
11,441,917
|
|
|
|
|
|
|
|
36,557,348
|
|
|
|
|
(a) |
|
Deductions represent receivables that were charged off to the
allowance during the year. |
76
|
|
Item 9.
|
Changes
In and Disagreements With Accountants and Accounting and
Financial Disclosures
|
There have been no changes in or disagreements with accountants
on accounting and financial disclosures within the meaning of
Item 304 of
Regulation S-K.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our management carried out an evaluation, with the participation
of our principal executive officer and principal financial
officer, of the effectiveness of our disclosure controls and
procedures as of December 31, 2007. Based upon that
evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and
procedures were not effective as of such date because of the
existence of a material weakness in our internal control over
financial reporting related to the proper classification of our
debt, as described below.
Managements
Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining a
system of internal control over financial reporting as defined
in
Rule 13a-15(f)
and 15(d)-15(e) under the Exchange Act. Our system of internal
control is designed to provide reasonable assurance that the
reported financial information is presented fairly, that
disclosures are adequate and that the judgments inherent in the
preparation of financial statement are reasonable. There are
inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and
overriding of controls. Consequently, an effective internal
control system can only provide reasonable, not absolute
assurance, with respect to reporting financial information.
Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time.
A material weakness (within the meaning of the PCAOB Auditing
Standard No. 5) is a control deficiency or combination
of control deficiencies, such that there is a reasonable
possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected
on a timely basis.
Our management conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the
framework in, Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. This assessment identified a material
weakness in our internal control over financial reporting
related to the lack of appropriate review in determining the
proper classification of our debt. Specifically, we failed to
identify and properly apply the requirements of Emerging Issues
Task Force Issue
No. 95-22,
Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement
(EITF 95-22).
Based on this assessment, management concluded that our internal
control over financial reporting was ineffective as
December 31, 2007.
This annual report does not include an attestation report of the
companys registered public accounting firm regarding
internal control over financial reporting. Managements
report was not subject to attestation by the companys
registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the company
to provide only managements report in this annual report.
Remediation
Plan Related to 2007
10-K
Material Weakness
We have enhanced our technical review process to ensure that we
identify all applicable accounting pronouncements and reflect
their guidance in our financial statements.
77
Change in
Internal Control over Financial Reporting
Other than as noted above, there were no changes in our internal
controls during the year ended December 31, 2007, that have
materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information concerning our directors, executive officers and
corporate governance will be filed on an amendment to this
Form 10-K
not later than 120 days after the end of our fiscal year.
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 402 of
Regulation S-K
regarding executive compensation will be filed on an amendment
to this
Form 10-K
not later than 120 days after the end of our fiscal year.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
|
Information concerning the ownership of certain of the
Companys beneficial owners and management and related
stockholder matters will be filed on an amendment to this
Form 10-K
not later than 120 days after the end of our fiscal year.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information concerning relationships and related transactions
will be filed on an amendment to this
Form 10-K
not later than 120 days after the end of our fiscal year.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information concerning principal accountant fees and services
will be filed on an amendment to this
Form 10-K
not later than 120 days after the end of our fiscal year.
78
Part IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following documents are filed as part of this Report:
|
|
|
|
1.
|
Financial Statements. The following
consolidated financial statements of 180 Connect Inc. and
subsidiaries are included in Item 8:
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006
|
|
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
|
Consolidated Statements of Shareholders Equity and
Comprehensive Loss for the Years Ended December 31, 2007,
2006 and 2005
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
|
|
2.
|
Financial Statement Schedules. The following
consolidated financial statement schedule of 180 Connect Inc. is
included in Item 8: Schedule II Valuation and
Qualifying Accounts
|
|
|
3.
|
Exhibits. The Exhibits on the accompanying
Index to Exhibits are filed as part of, or incorporated by
reference into, this Annual Report on
Form 10-K.
|
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
180 CONNECT INC.
Peter Giacalone
Chief Executive Officer and Director
Date: March 31,
2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Peter
Giacalone
Peter
Giacalone
|
|
Chief Executive Officer and Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/ M.
Brian McCarthy
M.
Brian McCarthy
|
|
Chairman of the Board of Directors
|
|
March 31, 2008
|
|
|
|
|
|
/s/ David
Hallmen
David
Hallmen
|
|
Director
|
|
March 31,2008
|
|
|
|
|
|
/s/ Byron
Osing
Byron
Osing
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/ Jiri
Modry
Jiri
Modry
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/ Howard
S. Balter
Howard
S. Balter
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/ Ilan
Slasky
Ilan
Slasky
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/ Lawrence
Askowitz
Lawrence
Askowitz
|
|
Director
|
|
March 31, 2008
|
|
|
|
|
|
/s/ Thomas
Calo
Thomas
Calo
|
|
Director
|
|
March 31, 2008
|
80
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
2
|
.1
|
|
Arrangement Agreement, dated March 13, 2007, by and among
180 Connect Exchangeco Inc. (formerly 6732097 Canada Inc.),
Ad.Venture Partners, Inc. and 180 Connect Inc. (a Canadian
corporation)(1)
|
|
2
|
.2
|
|
Plan of Arrangement, dated March 13, 2007, by and among 180
Connect Exchangeco Inc. (formerly 6732097 Canada Inc.),
Ad.Venture Partners, Inc. and 180 Connect Inc. (a Canadian
corporation)(1)
|
|
2
|
.3
|
|
Amendment No. 1, dated as of July 2, 2007, to the
Arrangement Agreement, dated March 13, 2007, by and among
180 Connect Exchangeco Inc. (formerly 6732097 Canada Inc.),
Ad.Venture Partners, Inc. and 180 Connect Inc. (a Canadian
corporation)(3)
|
|
2
|
.4
|
|
Amendment No. 2, dated as of August 6, 2007, to the
Arrangement Agreement, dated March 13, 2007, by and among
180 Connect Exchangeco Inc. (formerly 6732097 Canada Inc.),
Ad.Venture Partners, Inc. and 180 Connect Inc. (a Canadian
corporation)(3)
|
|
2
|
.5
|
|
Voting and Exchange Trust Agreement, dated as of
March 13, 2007, by and among 180 Connect Exchangeco Inc.
(formerly 6732097 Canada Inc.), Ad.Venture Partners, Inc. and
Valiant Trust Company(1)
|
|
2
|
.6
|
|
Support Agreement, dated as of March 13, 2007, by and among
Ad.Venture Partners, Inc., 1305699 Alberta ULC and 6732097
Canada Inc.(1)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of 180 Connect
Inc.(2)
|
|
3
|
.2
|
|
By-laws of 180 Connect Inc.(2)
|
|
4
|
.1
|
|
Specimen Unit Certificate(2)
|
|
4
|
.2
|
|
Specimen Common Stock Certificate(2)
|
|
4
|
.3
|
|
Specimen Warrant Certificate(2)
|
|
4
|
.4
|
|
Warrant Agreement by and among Continental Stock
Transfer & Trust Company and Ad.Venture Partners,
Inc.(2)
|
|
4
|
.5
|
|
Form of Unit Purchase Option granted to Wedbush Morgan
Securities Inc.(2)
|
|
9
|
.1
|
|
Form of Voting Agreement entered into as of March 13, 2007
by and between Ad.Venture Partners, Inc. and each of
Messrs. Giacalone, Hallmen, McCarthy, Osing, Roszak and
Simunovic(1)
|
|
9
|
.2
|
|
Form of Parent Voting Agreement entered into as of
March 13, 2007 by and between 180 Connect Inc. (a Canadian
corporation) and each of Messrs. Balter, Slasky, Askowitz
and Kalish(1)
|
|
10
|
.1
|
|
Letter Agreement, dated as of April 12, 2005, by and
between Howard S. Balter and Ad.Venture Partners, Inc.(2)
|
|
10
|
.2
|
|
Letter Agreement, dated as of April 12, 2005, by and
between Ilan M. Slasky and Ad.Venture Partners, Inc.(2)
|
|
10
|
.3
|
|
Letter agreement between Wedbush Morgan Securities Inc. and
Howard S. Balter(2)
|
|
10
|
.4
|
|
Letter Agreement between Wedbush Morgan Securities Inc. and Ilan
M. Slasky(2)
|
|
10
|
.5
|
|
Warrant Purchase Agreement among Wedbush Morgan Securities, Inc.
and each of Howard S. Balter and Ilan M. Slasky(2)
|
|
10
|
.6
|
|
Form of Affiliate Agreement entered into as of March 13,
2007 by each of Messrs. Giacalone, Hallmen, McCarthy,
Osing, Roszak and Simunovic in favor and for the benefit of
Ad.Venture Partners, Inc.(1)
|
|
10
|
.7
|
|
Securities Purchase Agreement, dated March 21, 2006, by and
among 180 Connect Inc. (a Canadian corporation) and Midsummer
Investment Ltd., Radcliffe SPC, Ltd., and CAMOFI Master LDC(3)
|
|
10
|
.8
|
|
Registration Rights Agreement, dated March 21, 2006, by and
among 180 Connect Inc. (a Canadian corporation) and Midsummer
Investment Ltd., Radcliffe SPC, Ltd., and CAMOFI Master LDC(3)
|
81
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10
|
.9
|
|
Replacement Common Stock Purchase Warrant, dated August 24,
2007, issued to Midsummer Investment Ltd. to purchase
528,948 shares of common stock of the Company(4)
|
|
10
|
.10
|
|
Replacement Common Stock Purchase Warrant, dated August 24,
2007, issued to Radcliffe SPC, Ltd. to purchase
206,556 shares of common stock of the Company(4)
|
|
10
|
.11
|
|
Replacement Common Stock Purchase Warrant, dated August 24,
2007, issued to CAMOFI Master LDC to purchase
206,556 shares of common stock of the Company(4)
|
|
10
|
.12
|
|
Replacement 9.33% Convertible Debenture, dated
August 24, 2007, issued to Midsummer Investment Ltd. by the
Company in the amount of $3,975,248.48(4)
|
|
10
|
.13
|
|
Replacement 9.33% Convertible Debenture, dated
August 24, 2007, issued to Radcliffe SPC, Ltd. by the
Company in the amount of $2,343,033.56(4)
|
|
10
|
.14
|
|
Replacement 9.33% Convertible Debenture, dated
August 24, 2007, issued to CAMOFI Master LDC by the Company
in the amount of $2,343,033.56(4)
|
|
10
|
.15
|
|
Amended and Restated Registration Rights Agreement, dated as of
August 24, 2007, by and among 180 Connect, Inc. and each of
the Insiders listed therein(4)
|
|
10
|
.16
|
|
Security and Purchase Agreement, dated July 31, 2006, by
and among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation), Mountain Center, Inc., JJ&V Communications,
Inc., Tumbleweed HS Inc., Piedmont Telecommunications Inc., 180
Digital Interiors, Inc., HD Complete, Inc., Ironwood
Communications Inc. and Queens Cable Contractors, Inc.(3)
|
|
10
|
.17
|
|
Secured Non-Convertible Revolving Note, dated July 31,
2006, in the principal amount of $37,000,000, by and among 180
Connect Inc. (a Nevada corporation), Mountain Center, Inc.,
JJ&V Communications, Inc., Tumbleweed HS Inc., Piedmont
Telecommunications Inc., 180 Digital Interiors, Inc., HD
Complete, Inc., Ironwood Communications Inc. and Queens Cable
Contractors, Inc.(3)
|
|
10
|
.18
|
|
Secured Non-Convertible Revolving Term Note, dated July 31,
2006, in the principal amount of $20,000,000, by and among 180
Connect Inc. (a Nevada corporation), Mountain Center, Inc.,
JJ&V Communications, Inc., Tumbleweed HS Inc., Piedmont
Telecommunications Inc., 180 Digital Interiors, Inc., HD
Complete, Inc., Ironwood Communications Inc. and Queens Cable
Contractors, Inc.(3)
|
|
10
|
.19
|
|
Overadvance Letter, dated July 31, 2006, by Laurus Master
Fund, Ltd., agreed and accepted by 180 Connect Inc. (a Nevada
corporation), Mountain Center, Inc., JJ&V Communications,
Inc., Tumbleweed HS Inc., Piedmont Telecommunications Inc., 180
Digital Interiors, Inc., HD Complete, Inc., Ironwood
Communications Inc. and Queens Cable Contractors, Inc.(3)
|
|
10
|
.20
|
|
Canadian Guaranty of 180 Connect Inc. (a Canadian corporation)
dated July 31, 2006(3)
|
|
10
|
.21
|
|
Guaranty of Wirecomm America, Inc. dated July 31, 2006(3)
|
|
10
|
.22
|
|
Stock Pledge Agreement, dated July 31, 2006, by and among
Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation) and Wirecomm America, Inc.(3)
|
|
10
|
.23
|
|
Share Pledge Agreement, dated July 31, 2006, by and among
Laurus Master Fund, Ltd., 180 Connect Inc. (a Canadian
corporation) and Wirecomm Systems Inc.(3)
|
|
10
|
.24
|
|
Master Security Agreement, dated July 31, 2006, by and
between Wirecomm Systems Inc. and Laurus Master Fund, Ltd.(3)
|
|
10
|
.25
|
|
Canadian Master Security Agreement, dated July 31, 2006, by
and among Wirecomm Systems Inc., 180 Connect Inc. (a Canadian
corporation) and Laurus Master Fund, Ltd.(3)
|
|
10
|
.26
|
|
Amended and Restated Secured Non-Convertible Revolving Note,
dated July 2, 2007, to the Secured Non-Convertible
Revolving Note, dated July 31, 2006, by and among Laurus
Master Fund, Ltd., 180 Connect Inc. (a Nevada corporation),
Mountain Center, Inc., JJ&V Communications, Inc.,
Tumbleweed HS Inc., Piedmont Telecommunications Inc., 180
Digital Interiors, Inc., HD Complete, Inc., Ironwood
Communications Inc. and Queens Cable Contractors, Inc.(3)
|
|
10
|
.27
|
|
Common Stock Purchase Warrant, dated July 31, 2006, issued
to Laurus Master Fund, Ltd. to purchase 2,000,000 shares of
180 Connect Inc.s (a Canadian corporation) common stock(3)
|
82
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10
|
.28
|
|
Amended and Restated Common Stock Purchase Warrant, dated
July 2, 2007, issued to Creative Vistas Inc. to purchase up
to 450,000 shares of the Companys common stock(*)
|
|
10
|
.29
|
|
Amended and Restated Common Stock Purchase Warrant, dated
July 2, 2007, issued to Laurus Master Fund, Ltd. to
purchase up to 150,000 shares of the Companys common
stock(*)
|
|
10
|
.30
|
|
Amended and Restated Warrant Certificate, dated August 24,
2007, issued to Laurus Master Fund, Ltd. to purchase up to
250,000 shares of the Companys common stock(*)
|
|
10
|
.31
|
|
Letter Agreement, dated July 2, 2007, by and among 180
Connect Inc. (a Canadian corporation), Howard S. Balter and Ilan
M. Slasky(3)
|
|
10
|
.32
|
|
Reaffirmation and Ratification Agreement, dated July 2,
2007, by and among 180 Connect Inc. (a Nevada corporation),
Mountain Center, Inc., JJ&V Communications, Inc.,
Tumbleweed HS Inc., Piedmont Telecommunications Inc., 180
Digital Interiors, Inc., HD Complete, Inc., Ironwood
Communications Inc. and Queens Cable Contractors, Inc., 180
Connect Inc. (a Canadian corporation), Wirecomm Systems Inc. and
Wirecomm America Inc.(3)
|
|
10
|
.33
|
|
Amendment Agreement, dated July 2, 2007, by and among
Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation), Mountain Center, Inc., JJ&V Communications,
Inc., Tumbleweed HS Inc., Piedmont Telecommunications Inc., 180
Digital Interiors, Inc., HD Complete, Inc., Ironwood
Communications Inc. and Queens Cable Contractors, Inc.(3)
|
|
10
|
.34
|
|
Common Stock Purchase Warrant, dated July 2, 2007, by and
between Laurus Master Fund, Ltd. and the Company(3)
|
|
10
|
.35
|
|
Tri-Party Letter Agreement, dated July 10, 2007, by and
among Laurus Master Fund, Ltd., 180 Connect Inc. (a Canadian
corporation), Howard S. Balter and Ilan M. Slasky(3)
|
|
10
|
.36
|
|
Home Services Provider Agreement, dated May 1, 2007,
between DirecTV, Inc., a California corporation and 180 Connect
Inc.(*)(^)
|
|
10
|
.37
|
|
Home Services Provider Agreement, dated May 1, 2007,
between DirecTV, Inc., a California corporation and Mountain
Center, Inc.(*)(^)
|
|
10
|
.38
|
|
Form of Stock Appreciation Rights Agreement(3)
|
|
10
|
.39
|
|
Executive Employment Agreement, dated August 1, 2007, by
and between Mark Burel and 180 Connect Inc. (a Nevada
corporation)(3)
|
|
10
|
.40
|
|
Executive Employment Agreement, dated December 1, 2006, by
and between Steven Westberg and 180 Connect Inc. (a Nevada
corporation)(3)
|
|
10
|
.41
|
|
Executive Employment Agreement, dated July 1, 2006, by and
between Peter Giacalone and 180 Connect Inc. (a Nevada
corporation)(3)
|
|
10
|
.42
|
|
Amended Director Employment Agreement, dated September 30,
2006, by and between M. Brian McCarthy and 180 Connect Inc. (a
Nevada corporation)(3)
|
|
10
|
.43
|
|
Letter Agreement, dated August 3, 2007, by and between M.
Brian McCarthy and 180 Connect Inc. (a Nevada corporation)(3)
|
|
10
|
.44
|
|
Executive Employment Agreement, dated October 17, 2007, by
and between Kyle Hall and 180 Connect Inc. (a Nevada
corporation(*)
|
|
10
|
.45
|
|
Form of Stock Option Agreement(5)
|
|
10
|
.46
|
|
Form of Restricted Stock Units Agreement(5)
|
|
10
|
.47
|
|
2007 Long-Term Incentive Plan(5)
|
|
10
|
.48
|
|
Warrant to Purchase Common Stock, dated November 9, 2007,
issued to Magnetar Capital Master Fund, Ltd. to purchase up to
356,952 shares of the Companys common stock(*)
|
|
10
|
.49
|
|
Amended and Restated 180 Connect Inc. Equity Plan for
Non-Employee Directors(*)
|
|
10
|
.50
|
|
Unit Purchase Option Clarification Agreement, dated as of
September 30, 2007, by and between 180 Connect Inc. and
Wedbush Morgan Securities Inc.(*)
|
|
10
|
.51
|
|
Warrant Clarification Agreement, dated as of September 30,
2007, by and between 180 Connect Inc. and Continental Stock
Transfer & Trust Company(*)
|
83
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10
|
.52
|
|
Form of Note issued by Ad.Venture Partners, Inc. to each of
Howard S. Balter and Ilan M. Slasky(6)
|
|
21
|
.1
|
|
Subsidiaries of 180 Connect Inc.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm(*)
|
|
23
|
.2
|
|
Consent of Independent Registered Public Accounting Firm(*)
|
|
31
|
.1
|
|
Section 302 Certification from Peter Giacalone(*)
|
|
31
|
.2
|
|
Section 302 Certification from Steven Westberg(*)
|
|
32
|
.1
|
|
Section 906 Certification from Peter Giacalone and Steven
Westberg(*)
|
|
|
|
(1) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
(SEC File
No. 000-51456)
filed with the Commission on March 15, 2007. |
|
(2) |
|
Incorporated by reference to the Companys Registration
Statement on
Form S-1
(SEC File
No. 333-124141)
filed with the Commission on April 18, 2005, as amended on
May 27, 2005, July 1, 2005, August 8, 2005,
August 17, 2005, and August 24, 2005. |
|
(3) |
|
Incorporated by reference to the Companys Registration
Statement on
Form S-4
(Sec File
No. 333-142319)
filed with the Commission on April 24, 2007, as amended on
June 11, 2007, July 11, 2007, July 12, 2007,
August 3, 2007 and August 9, 2007. |
|
(4) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
(SEC File
No. 001-33670)
filed with the Commission on August 30, 2007. |
|
(5) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
(SEC File
No. 001-33670)
filed with the Commission on September 10, 2007. |
|
(6) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
(SEC File
No. 000-51456)
filed with the Commission on January 30, 2007. |
|
(*) |
|
Filed herewith |
|
(^) |
|
Certain provisions of this exhibit have been omitted and filed
separately with the Commission pursuant to an application for
confidential treatment under
Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as
amended. |
84