OTTAWA, May 10 /CNW Telbec/ - Allen-Vanguard Corporation (the "Company"
or "Allen-Vanguard") (TSX:VRS) of Ottawa, Canada announces its financial
results for the second quarter ended March 31, 2005. All financial information
is in Canadian dollars.
Revenue for the quarter ended March 31, 2005 was $13.5 million, compared
to $17.5 million in the previous quarter, and $3.0 million in the same quarter
a year earlier. EBITDA(1) was slightly above break-even in the quarter,
compared to $2.9 million in the previous quarter, and a loss of $0.1 million
in the prior year quarter.
For the six month period ended March 31, 2005, revenue was $31.0 million
and EBITDA was $3.0 million, compared to revenue of $3.7 million and a loss of
$0.9 million in the prior year period.
Net earnings were impacted by the amortization of the remaining balance
of $0.4 million attributed to orders on hand in respect of acquisitions
completed in fiscal year 2004. This expense totaled $2.0 million in the
previous quarter. Amortization of intangible assets is not deductible for tax
purposes, which is why the Company's income tax provision, based on an
effective rate of 36%, appears to be a greater than expected percentage of
earnings before income taxes.
The Company recorded a loss excluding the non-cash charge for
amortization of intangible assets, of $0.2 million or $(0.01) per share for
the quarter ended March 31, 2005. On the same basis, earnings were
$1.5 million or $0.06 per share in the previous quarter, the loss was
$0.1 million or $0.00 per share in the prior year quarter.
Allen-Vanguard recorded a net loss for the quarter of $0.7 million or
$(0.03) per share, and a net loss of $1.4 million or $(0.06) per share for the
six month period ended March 31, 2005, compared to a net loss of $0.1 million
or $(0.00) for the prior year quarter, and a net loss of $0.8 million or
($0.05) per share in the six month period ended March 31, 2004.
"We are continuing to build Allen-Vanguard as a leader and business of
substance in our area" said Roy Peers-Smith, President and CEO of Allen-
Vanguard. "Much of the work undertaken in the past few months has been
involved with the rounding out of the integration of our acquired businesses
so that we have a stronger platform upon which to accelerate some of the
successes that we have demonstrated to date. In the previous two quarters,
Allen-Vanguard achieved record revenue and EBITDA. Lower sales in the second
quarter were in line with management's expectations. Timing of the shipment of
material contracts will continue to be a factor in our quarterly performance
for the foreseeable future."
Mr. Peers-Smith added, "There were many positive developments in the
second quarter, including an order valued at $5 million to equip an Asian
military group with an integrated equipment and service package, and an order
for $1.2 million to supply Allen-Vanguard's HAL(R) system to the U.S.
military. As well, we announced a teaming agreement with Foster-Miller Inc. of
Waltham, Massachusetts for the purpose of submitting a significant proposal to
the U.S. Army for the supply of Electronic Counter Measures ("ECM"). We are
confident that we are on the right track, pursuing organic growth from our
existing product lines around the globe, while selectively considering
opportunities for alliances and acquisitions, particularly in the United
States."
Financial Statements and the Management Discussion and Analysis for the
quarter ended March 31, 2005 are attached.
Allen-Vanguard will be hosting an investor and analyst conference call
and webcast at 9:00 am May 10, 2005. Dial-in numbers: (416) 640-4127 or 1-800-
814-4941
Web access
www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)1117160
or Access from allen-vanguard.com
For those unable to listen to the call live, a replay will be available
for two week period beginning at 11:00 on May 10, 2005. The replay phone
numbers are 1-877-289-8525 and the access code is 21123142(pound key).
(1) Earnings before interest, taxes, amortization, foreign exchange and
amalgamation expenses
About Allen-Vanguard
Allen-Vanguard Corporation and its subsidiaries worldwide operate under
the brand "Allen-Vanguard". The Company develops and markets technologies,
tools and training for defeating and minimizing the effects of hazardous
devices and materials, whether Chemical, Biological, Radiological, Nuclear or
Explosive (CBRNE). The Company's equipment is in service with leading security
and military forces in more than 120 countries. This includes a complete range
of remote intervention robots for hazardous applications, vehicle barrier
systems, suspect package containers and Electronic Counter-Measures (ECM)
equipment for jamming remote detonation of terrorist devices. The Company is a
world leader in the development, manufacturer and sale of specialty security
equipment for Explosive Ordnance Disposal (EOD), and is the sole, worldwide
licensee and/or developer of patented technologies such as the Universal
Containment System and CASCAD Foam for blast mitigation, decontamination of
bio-chemical warfare agents, and personal protective gear. Head office
operations are located in Ottawa, Ontario, Canada, with manufacturing
operations in Ottawa and Stoney Creek, Ontario; Tewkesbury, U.K.; and Cork,
Ireland, and sales offices in Canada, the U.S., the U.K. and Asia. The
Company's shares are listed on The Toronto Stock Exchange (TSX:VRS). The web
site is www.allen-vanguard.com .
This press release may contain forward-looking statements relating to,
among other things, the Company's expectations concerning future product
demand and growth opportunities and customer acceptance of Company's
products. These forward-looking statements are neither promises nor
guarantees, but involve risks and uncertainties that may cause actual
results to differ materially from those in the forward-looking
statements. The Company disclaims any obligation to publicly update or
revise any such statements. The Toronto Stock Exchange has neither
approved nor disapproved the contents of this press release.
To find out more about Allen-Vanguard Corporation (TSX: VRS), visit our
website at www.allen-vanguard.com .
<<
ALLEN-VANGUARD CORPORATION
(Formerly Vanguard Response Systems Inc.)
CONSOLIDATED BALANCE SHEETS March 31, September 30,
(UNAUDITED) 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Audited)
ASSETS
Current
Cash and cash equivalents $ - $ 937,077
Accounts receivable 13,342,299 9,872,332
Inventories 10,798,993 10,794,512
Prepaid expenses and sundry assets 1,269,868 2,138,688
-------------------------------------------------------------------------
25,411,160 23,742,609
Future income taxes 707,000 680,000
Property, plant and equipment 2,892,142 2,350,232
Goodwill (Note 4) 40,716,887 36,378,708
Intangible assets (Note 5) 3,083,738 5,717,352
-------------------------------------------------------------------------
$ 72,810,927 $ 68,868,901
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Bank indebtedness (Note 6) $ 6,839,167 $ 4,903,422
Accounts payable and accrued charges 6,569,639 5,933,266
Income taxes payable 1,962,297 481,566
Deferred revenue 938,367 3,756,108
Current portion of long term debt (Note 7) 416,902 411,839
Current portion of obligations under
capital leases 313,865 311,361
Current portion of deferred consideration
(Note 8) 344,242 125,600
Notes payable (Note 9) 3,660,480 3,660,480
-------------------------------------------------------------------------
21,044,959 19,583,642
Long term debt (Note 7) 1,110,808 1,356,674
Obligations under capital leases 183,891 352,075
Deferred consideration (Note 8) 994,996 1,187,579
Convertible debentures (Note 10) 899,590 999,476
-------------------------------------------------------------------------
24,234,244 23,479,446
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 11) 46,826,397 42,231,588
Equity portion of convertible debentures
(Note 10) 68,090 9,804
Contributed surplus (Note 12) 2,825,606 1,938,000
Cumulative translation adjustment 110,368 233,680
Retained earnings (deficit) (1,253,778) 976,383
-------------------------------------------------------------------------
48,576,683 45,389,455
-------------------------------------------------------------------------
$ 72,810,927 $ 68,868,901
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
On behalf of the Board
Alain Lambert William L. Hess Q.C.
ALLEN-VANGUARD CORPORATION
(Formerly Vanguard Response Systems Inc.)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
(UNAUDITED)
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance,
beginning
of period $ (514,797) $ 217,806 $ 976,383 $ 922,195
Retroactive
adjustment
related to
stock-based
compensation
of prior periods - - (788,936) -
-------------------------------------------------------------------------
(514,797) 217,806 187,447 922,195
Net loss (738,981) (73,249) (1,441,225) (777,638)
-------------------------------------------------------------------------
Balance,
end of period $ (1,253,778) $ 144,557 $ (1,253,778) $ 144,557
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
ALLEN-VANGUARD CORPORATION
(Formerly Vanguard Response Systems Inc.)
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 13,455,231 $ 2,965,375 $ 30,973,974 $ 3,688,898
Cost of sales 7,886,520 1,576,580 17,565,273 2,129,057
-------------------------------------------------------------------------
Gross profit 5,568,711 1,388,795 13,408,701 1,559,841
-------------------------------------------------------------------------
Expenses
Selling and
administration 5,021,373 1,415,408 9,570,442 2,359,349
Research and
development costs 499,994 62,104 877,488 116,294
Reorganization
costs - 20,413 - 251,680
Interest on long
term debt 226,384 - 268,023 -
Other interest
(income) (91,680) (23,794) (8,760) 14
Foreign exchange
loss (gain) (69,249) 2,139 76,088 31,068
Amortization of
property, plant
and equipment 188,276 13,574 388,958 25,574
Amortization of
intangible assets 554,594 9,900 2,732,687 9,900
-------------------------------------------------------------------------
6,329,692 1,499,744 13,904,926 2,793,879
-------------------------------------------------------------------------
Loss before
income taxes (760,981) (110,949) (496,225) (1,234,038)
-------------------------------------------------------------------------
Provision for
(recovery of)
income taxes
Current (61,000) (12,400) 972,000 (12,400)
Future 39,000 (25,300) (27,000) (444,000)
-------------------------------------------------------------------------
(22,000) (37,700) 945,000 (456,400)
-------------------------------------------------------------------------
Net loss $ (738,981) $ (73,249) $ (1,441,225) $ (777,638)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net loss per
share (Note 16) $ (0.03) $ (0.00) $ (0.06) $ (0.05)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
ALLEN-VANGUARD CORPORATION
(Formerly Vanguard Response Systems Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SOURCES (USES)
OF CASH
Operating
activities
Net loss $ (738,981) $ (73,249) $ (1,441,225) $ (777,638)
Items not
involving cash
Amortization 742,870 23,474 3,121,645 35,474
Stock-based
compensation
expense 49,670 - 98,670 -
Future income
taxes 39,000 (25,300) (27,000) (444,000)
-------------------------------------------------------------------------
92,559 (75,075) 1,752,090 (1,186,164)
Change in non-cash
working capital
items (2,416,180) (4,261,200) (3,801,266) (2,599,708)
-------------------------------------------------------------------------
Cash used in
operating
activities (2,323,621) (4,336,275) (2,049,176) (3,785,872)
-------------------------------------------------------------------------
Investing activities
Purchase of
property, plant
and equipment (403,521) (446) (930,867) (19,780)
Acquisitions (75,359) (7,295,927) (338,179) (7,295,927)
Cash effect of
translation of
foreign
subsidiary (222,758) - (123,312) -
Deferred
consideration 15,498 - 26,059 -
Acquisition of
other intangible
assets (45,489) (125,861) (99,073) (125,861)
-------------------------------------------------------------------------
Cash used in
investing
activities (731,629) (7,422,234) (1,465,372) (7,441,568)
-------------------------------------------------------------------------
Financing activities
Increase in
loans payable - 306,820 - 306,820
Decrease in
long term debt (81,521) - (240,803) (455,000)
Obligations under
capital lease (171,016) - (165,680) -
Repayment of
debentures 4,800 (1,700,000) (41,600) (667,743)
Proceeds from
issuance of
Common shares
and warrants 777,634 24,732,199 1,062,009 25,060,199
Cost of issuance
of Common shares - - (467,200) -
Payment of
finders fee - - - (86,250)
-------------------------------------------------------------------------
Cash provided
by financing
activities 529,897 23,339,019 146,726 24,158,026
-------------------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents (2,525,353) 11,580,510 (3,367,822) 12,930,586
Cash and cash
equivalents,
beginning
of period (4,313,814) 1,804,314 (3,471,345) 454,238
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ (6,839,167) $ 13,384,824 $ (6,839,167) $ 13,384,824
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash $ - $ 745,112 $ - $ 745,112
Term deposits - 13,513,542 - 13,513,542
Bank indebtedness (6,839,167) (873,830) (6,839,167) (873,830)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ (6,839,167) $ 13,384,824 $ (6,839,167) $ 13,384,824
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other cash flow
information:
Interest paid $ 34,950 $ 8,000 $ 159,450 $ 31,808
Income taxes
paid 44,650 82,000 123,850 132,000
Repayment of
long term debt
by the issuance
of inventory - - - 480,000
The accompanying notes are an integral part of the consolidated financial
statements
ALLEN-VANGUARD CORPORATION
(Formerly Vanguard Response Systems Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. Description of business
On February 10, 2005 the Company amalgamated with its wholly owned
subsidiary, EOD Performance Inc., by way of Articles of Amalgamation, with the
resulting company being named Allen-Vanguard Corporation.
The Company develops and markets proprietary technologies, tools and
training for defeating and minimizing the effects of hazardous devices and
materials, whether Chemical, Biological, Radiological, Nuclear or Explosive
(CBRNE). The Company's equipment is in service with military and security
forces around the world. Products include remote intervention robots,
Electronic Counter-Measures (ECM) equipment for jamming remote detonation of
terrorist devices, blast mitigation and specialty security equipment for
Explosive Ordnance Disposal (EOD), decontaminant foam and systems for
neutralizing biological, chemical and radioactive agents, personal protective
wear and vehicle barrier systems. The Company holds patents, trade secrets or
exclusive license rights on many of its core technologies and products.
2. Significant accounting policies
Basis of accounting
The unaudited interim consolidated financial statements are in accordance
with Canadian generally accepted accounting principles ("GAAP"). The
preparation of financial statements in accordance 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 balance sheet date and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
The accounting policies and practices applied are consistent with those
applied in the September 30, 2004 audited annual financial statements. The
unaudited interim consolidated financial statements should be read in
conjunction with those annual financial statements.
In the opinion of management, all adjustments considered necessary for
fair and consistent presentation of the interim consolidated financial
statements have been included. Due to the nature of the Company's sales cycle
and the size of individual orders, the results reported in these interim
consolidated financial statements should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
Principles of consolidation
The consolidated financial statements include the results of the Company
and the following wholly-owned subsidiaries, with effect from the dates
indicated:
Vanguard Response Systems (UK) Limited (incorporated August 12, 2004)
Vanguard Protective Technologies Inc. ("VPTI") (acquired March 5, 2004)
PW Allen Holdings Ltd. ("PWA") (acquired August 12, 2004)
Allen-Vanguard Ltd. (formerly PW Allen & Company Ltd.)
Allen-Vanguard Inc. (formerly PW Allen Inc.)
Allen-Vanguard Ireland Ltd. (formerly Kentree Ltd.)
P.W. Allen (India) pvt Ltd.
Internal Security Technology Ltd.
All inter-company transactions and balances have been eliminated on
consolidation.
Revenue recognition
Revenue from the sale of goods and equipment is recognized at the point
at which the risks and rewards of ownership have been transferred to the
customer, which is the point when the goods are shipped. Revenue from training
and consulting services is recognized in the period in which the services have
been rendered.
Advance payments received from customers, in excess of revenue
recognized, are classified as deferred revenue.
Translation of foreign currencies
The monetary assets and liabilities of the Company denominated in foreign
currencies are translated at the rates of exchange at the balance sheet date.
Revenues and expenses are translated at the average exchange rate prevailing
during the year. Exchange gains or losses are included in operations.
Assets and liabilities of foreign subsidiaries are translated at exchange
rates prevailing at the balance sheet date. The revenues and expenses are
translated at average exchange rates prevailing during the year. Cumulative
gains and losses on translations are deferred and included as a separate
component of shareholders' equity.
Stock-based compensation
The Company has a stock-based compensation plan, which is described in
Note 11(iii).
Effective October 1, 2004, the Company adopted recommendations of The
Canadian Institute of Chartered Accountants with respect to the accounting for
stock-based compensation and other stock-based payments, using the fair value-
based method. Under the fair value method, compensation costs attributable to
awards to Company employees are measured at fair value at the date of the
grant, amortized over the vesting period on a straight-line basis, and charged
to earnings with a related credit to Contributed Surplus. Consideration paid
by employees on exercise of stock options is recorded as share capital.
The effect of this change in accounting policy, which has been adopted
retroactively without restatement, is described in Note 12.
Goodwill
Goodwill is calculated as the excess of the fair value of consideration
paid over the fair value of tangible and intangible assets acquired and
liabilities assumed. Goodwill is tested for impairment annually. An impairment
test would also be performed in any period in which events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment would be recognized at that time, to the extent that the carrying
amount exceeds the undiscounted future net cash flows expected from its use.
Intangible assets
Intangible assets resulting from acquisitions are initially recorded at
fair value, which is estimated by management based on the expected discounted
future cash flows associated with the products acquired. Orders on hand are
amortized over the period of fulfillment of the order and other intangible
assets are amortized on a straight-line basis over 10 years.
The costs of patents applied for by the Company, but which have not yet
been granted are capitalized, and are amortized only once the patent has been
granted. A provision is made against the costs of patents applied for which
may not be awarded.
Financial instruments
The carrying amounts of the Company's financial instruments, consisting
of cash and cash equivalents, accounts receivable, bank indebtedness, accounts
payable and accrued charges, obligations under capital leases, deferred
consideration, notes payable, convertible debentures and long term debt,
approximate their fair values unless otherwise disclosed.
Unless otherwise noted, it is management's opinion that the Company is
not exposed to significant interest or credit risks.
Comparative figures
Certain reclassifications for the year ended September 30, 2004 and the
six month period ended March 31, 2004 have been made for the purpose of
comparability
3. Amalgamations
On November 17, 2003, NBC Team Ltd. ("NBC") effected a business
combination and amalgamated with Canadian Public Venture Equities I Inc.
("Equities I") to create Vanguard Response Systems Inc. (the "Company"). The
business combination constituted a Qualifying Transaction of Equities I, as
defined in Policy 2.4 of the TSX Venture Exchange Inc. Corporate Finance
Manual, and the Company was listed on The Toronto Stock Exchange on November
24, 2003. The business combination was completed following a secondary
offering and a private placement financing for the Company.
As a result of the amalgamation, control of the Company passed to the
former shareholders of NBC. This type of share exchange, referred to as a
"reverse takeover", deems NBC to be the acquirer for accounting purposes and
the acquisition was accounted for by the purchase method.
The Company was amalgamated with EOD Performance Inc. as described in
Note 1.
4. Goodwill
Balance, September 30, 2004 $ 36,378,708
Contingent consideration for EOD acquisition,
Note 11(i)(a) 4,000,000
Adjustment to cost of acquisition 338,179
-------------------------------------------------------------------------
Balance, March 31, 2005 $ 40,716,887
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Any contingent consideration that is payable in a future period regarding
other acquisitions, will be recorded as additional purchase consideration at
that time, with a corresponding adjustment to goodwill.
5. Intangible assets
March 31, September 30,
2005 2004
Net Net
Accumulated Carrying Carrying
Cost Amortization Amount Amount
-------------------------------------------------------------------------
Orders on hand $ 2,562,000 $ (2,562,000) $ - $ 2,439,900
Technical
drawings and
patents 2,032,031 (342,572) 1,689,459 1,796,202
Brand value 1,100,000 (80,721) 1,019,279 1,086,250
Assembled sales
agent network 250,000 (15,625) 234,375 246,875
Customer list 150,000 (9,375) 140,625 148,125
-------------------------------------------------------------------------
$ 6,094,031 $ (3,010,293) $ 3,083,738 $ 5,717,352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company is in the process of obtaining third-party valuations of
certain acquired intangible assets and their useful economic lives and thus
the carrying amounts are subject to refinement.
6. Bank indebtedness
March 31, September 30,
2005 2004
-------------------------------------------------------------------------
Revolving operating facility, to a maximum
of $5m, due on demand, interest at prime
plus 0.75% per annum, secured by a general
security agreement over the Canadian assets
of the Company. Subsequent to March 31, 2005,
the facility was repaid in full $ 1,868,087 $ 2,100,000
(see Note 17 - Subsequent events)
Revolving operating facility, to a maximum
of $4.5m, interest at bank prime plus 2.25%
per annum, secured by a general security
agreement over the non-Canadian assets of
the Company 4,971,080 2,803,422
-------------------------------------------------------------------------
$ 6,839,167 $ 4,903,422
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Long term debt
March 31, September 30,
2005 2004
-------------------------------------------------------------------------
Bank term loan, interest at prime plus 2%
per annum, $336,636 of principal repayable
per annum, secured by a general security
agreement over the non-Canadian assets of
the Company $ 1,300,850 $ 1,542,904
Loan payable to a director of a subsidiary,
non-interest bearing, unsecured 226,860 225,609
-------------------------------------------------------------------------
1,527,710 1,768,513
Less: amount due within one year (416,902) (411,839)
-------------------------------------------------------------------------
$ 1,110,808 $ 1,356,674
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Principal repayments over the next five years are as follows:
Year ended March 31, 2006 $ 416,902
2007 416,902
2008 378,838
2009 242,728
2010 72,340
-------------------------------------------------------------------------
$ 1,527,710
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Deferred consideration
The deferred consideration is payable to the vendors in an acquisition
completed by PWA, prior to PWA itself being acquired by the Company. The
deferred consideration is payable based on performance targets being achieved
by the acquired company. It is management's opinion, that the performance
targets will be met. The amount is payable in cash, is non-interest bearing,
unsecured and repayable as follows:
Year ended March 31, 2006 $ 344,242
2007 414,887
2008 395,577
2009 184,532
-------------------------------------------------------------------------
$ 1,339,238
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Notes payable
The notes are unsecured, bear interest at 9% per annum and are repayable
in two equal installments in May and September 2005. An arrangement fee of
$50,000 will become payable on maturity of the notes. See Note 17 - Subsequent
events.
10. Convertible debentures
On May 28, 2004, the Company entered into an alliance with a strategic
advisory firm based in the United States to market products that improve
emergency preparedness and response capability against CBRNE devices or
materials. The firm has invested $967,680 (U.S. $800,000) of its strategic
advisory fees in the Company in the form of an unsecured debenture bearing
interest at the rate of 5% per annum, payable semi-annually, and convertible
at the holder's option into a maximum of 333,003 Common Shares of the Company
at a price of $4.00 per share. The debenture has a two year term, and is
repayable, in United States dollars, in full upon maturity unless the holder
requests early repayment at anytime after one year from the date of issue.
The debenture is allocated between debt and equity, in accordance with
the substance of the instrument. Under this method the debt component is
measured at its fair value, discounted at the interest rate that would be
payable on a non-convertible debenture, at the time of issue, with the
remaining proceeds received being assigned to the equity component. The debt
component is valued at $899,590 (September 30, 2004 - $999,476) and the equity
component at $68,090 (September 30, 2004 - $9,804).
11. Capital stock
(i) Common shares
The authorized capital stock of the Company consists of an unlimited
number of Common Shares. Capital stock issued and outstanding includes the
following:
Three months ended Six months ended
March 31, 2005 March 31, 2005
-------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
-------------------------------------------------------------------------
Balance, beginning
of period 26,391,136 $ 46,048,763 25,499,253 $ 42,231,588
Common shares
issued (a) - - 800,000 4,000,000
Issued on
exercise of
warrants 142,903 571,612 164,953 659,812
Issued on
exercise of
options 127,069 206,022 196,902 402,197
Costs related
to exercise of
warrants in
prior period - - - (467,200)
-------------------------------------------------------------------------
Balance, end
of period 26,661,108 $ 46,826,397 26,661,108 $ 46,826,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) The Common shares were issued in full and final settlement of the
contingent consideration for the acquisition of EOD, and resulted in
a corresponding increase in the value of goodwill (see Note 4)
arising on the acquisition. The shares are valued at $5.00 per
share, being the closing share price on the day before the Common
shares were issued.
Three months ended Six months ended
March 31, 2005 March 31, 2005
-------------------------- --------------------------
Number of Number of
Shares Amount Shares Amount
-------------------------------------------------------------------------
Balance, beginning
of period 12,615,715 $ 1,556,303 32,857,142 $ 1,314,553
Shares issued for
agent fee (a) - - 325,000 113,750
-------------------------------------------------------------------------
Balance immediately
before
amalgamation 12,615,715 1,556,303 33,182,142 1,428,303
On amalgamation
Exchange of
Equities I shares
for Company
shares (b) - - 1,541,667 320,000
Exchange of NBC
shares for
Company (c)
- cancelled - - (33,182,142) -
- new issued - - 11,060,714 -
Options exercised
by agents - - 13,334 8,000
Costs related to
public offering
and qualifying
transaction - - - (200,000)
Private placement
Private
placement (d) 9,000,000 27,000,000 9,000,000 27,000,000
Costs related to
private placement - (2,218,451) - (2,218,451)
Options exercised 28,425 20,650 28,425 20,650
-------------------------------------------------------------------------
Balance, end of
period 21,644,140 $ 26,358,502 21,644,140 $ 26,358,502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Immediately prior to completion of the business combination, NBC paid
its advisor a fee of $200,000 through cash proceeds of $86,250 and by
the issue of 325,000 common shares of NBC, valued at $113,750.
(b) The shareholders of Equities I received an aggregate of 1,541,667 of
the Company's Common Shares in exchange for their 4,625,000 common
shares, being all the issued and outstanding shares of Equities I.
(c) The shareholders of NBC received an aggregate of 11,060,714 of the
Company's Common Shares in exchange for their 33,182,142 common
shares, being all the issued and outstanding shares of NBC.
(d) The private placement consisted of 9,000,000 units at a price of
$3 per unit, see Note 11 (ii) Private placement warrants. Each unit
comprises one Common Share and one half of one warrant.
(ii) Warrants
Private placement warrants
At March 31, 2005, the Company has 2,584,768 warrants outstanding
(September 30, 2004 - 2,749,721). Each warrant entitles the holder to purchase
one Common Share at a price of $4 per share and can be exercised at any time
until September 5, 2005, at which time any unexercised warrants will expire.
PWA acquisition warrants
The consideration for the PWA acquisition included 1,400,000 share
purchase warrants. Each warrant entitles the holder to purchase one Common
Share at a price of $4.75 per share. The warrants vest in equal tranches on
the three subsequent anniversaries of the acquisition date and, once vested,
are exercisable at any time until August 12, 2008, at which time any
unexercised warrants will expire. At March 31, 2005, none of the warrants were
exercisable.
(iii) Stock options
A summary of the Company's stock options outstanding and the changes
during the periods are presented below:
Three months ended Six months ended
March 31, 2005 March 31, 2005
-------------------------- --------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding,
beginning of
period 2,854,594 $ 3.24 2,524,427 $ 3.23
Granted - - 400,000 3.23
Exercised (127,069) (1.54) (196,902) (2.04)
-------------------------------------------------------------------------
Outstanding,
end of period 2,727,525 $ 3.32 2,727,525 $ 3.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable,
end of period 1,485,378 $ 2.89
-------------------------------------------------------------------------
Three months ended Six months ended
March 31, 2004 March 31, 2004
-------------------------- --------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding,
beginning
of period 1,521,190 $ 1.00 4,028,572 $ 3.23
Assumed on
amalgamation - - 575,000 0.20
Exchanged on
amalgamation
- cancelled - - (4,603,572) (0.33)
- new issued - - 1,534,524 0.99
Granted 109,000 3.50 109,000 3.50
Exercised (435,215) 0.69 (448,549) 0.69
-------------------------------------------------------------------------
Outstanding, end
of period 1,194,975 $ 1.57 1,194,975 $ 1.57
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end
of period 572,775 $0.82
-------------------------------------------------------------------------
The following table summarizes information for stock options outstanding
at March 31, 2005:
March 31, 2005 March 31, 2004
-----------------------------------------------------
Remaining Remaining
Number Life Number Life
Exercise Price Outstanding (Years) Outstanding (Years)
-------------------------------------------------------------------------
$ 0.60 - - 21,250 0.08
0.60 15,665 3.25 136,667 4.25
1.05 356,932 3.67 515,200 4.67
1.05 121,429 0.50 142,858 1.50
1.75 30,000 3.67 30,000 4.67
2.55 - - 40,000 4.67
3.00 40,000 3.67 40,000 4.67
3.00 567,000 0.50 - -
3.23 400,000 4.67 - -
3.44 95,000 4.00 95,000 5.00
3.47 90,000 4.08 - -
3.50 40,000 3.67 40,000 4.67
3.57 80,000 3.67 80,000 4.67
3.93 16,500 4.00 14,000 5.00
4.00 40,000 3.67 40,000 4.67
4.00 315,000 0.50 - -
4.20 370,000 4.33 - -
4.25 50,000 4.42 - -
5.00 99,999 1.24 - -
-------------------------------------------------------------------------
$ 0.60-5.00 2,727,525 2.70 1,194,975 4.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Contributed surplus
March 31, September 30,
2005 2004
-------------------------------------------------------------------------
Balance, beginning of period $ 1,938,000 $ -
Retroactive adjustment related to value of
stock-based compensation of prior periods 788,936 -
-------------------------------------------------------------------------
2,726,936 -
Issue of warrants as part consideration for
PWA acquisition - 1,938,000
Value associated with stock-based
compensation expense for the period 98,670 -
-------------------------------------------------------------------------
Balance, end of period $ 2,825,606 $ 1,938,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The stock-based compensation was estimated using the Black-Scholes option
pricing model, with the following assumptions: Dividend yield (Nil); Expected
volatility (0.40); Risk-free interest rate (4.5%) and Weighted average life of
4.6 years.
13. Concentration of risks
Credit risk
Included in accounts receivable at March 31, 2005, is a balance of
$4.6 million in respect of the Iraq equipment supply contract. The customer is
a Cyprus-based corporation contracted by the end-user, the Iraqi Ministry of
Interior. It is the Company's customary practice to seek letters of credit to
guarantee payment on international contracts. However, due to the political
instability in Iraq, it was not possible to obtain such a letter of credit.
The customer has made advance payments totaling $8 million on the contract. To
reduce collection risk on the remaining balance, the Company has accepted
alternative security, including: a mechanism to take joint custody over the
payment from the end-user, security over certain assets and a pledge of shares
representing a 49% interest in the Cyprus-based corporation and a voting trust
over the remaining 51% interest until the total outstanding account receivable
balance has been collected
Except for the Iraq equipment supply contract, there is no particular
concentration of credit risk due to the geographic distribution of the
Company's customers. Management is of the opinion that any risk of credit loss
is significantly reduced due to the financial strength of the Company's major
customers. The Company performs ongoing credit reviews of all customers
requiring credit, and negotiates prepayments, letters of credit, loss
protection insurance or other security arrangements in support of amounts
receivable under international sales contracts.
Foreign currency risk
The Company is exposed to currency risk as a significant volume of its
transactions are denominated in U.S. Dollars, European Euros and British
Pounds. Unfavourable changes in the applicable exchange rate may impact
earnings, accounts receivable, accounts payable and loans payable.
14. Segmented information
The Company's products and services, as described in Note 1, are produced
and marketed to a global customer base differentiated primarily by geographic
region based on the location of the customer. The Company sells and
distributes its products and services through two sales organizations:
Americas and International. The Company's operations comprise one reportable
business segment.
Revenue and certain assets are analyzed geographically as follows:
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
(000's) (000's) (000's) (000's)
Revenue by geographic
area
Europe / Middle East $ 6,078 $ 113 $ 12,073 $ 335
U.S.A. 3,203 829 8,550 972
Canada 3,397 1,371 4,704 1,727
Asia / Pacific 748 652 4,795 655
Other 29 - 852 -
-------------------------------------------------------------------------
$ 13,455 $ 2,965 $ 30,974 $ 3,689
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, September 30,
2005 2004
-------------------------------------------------------------------------
(000's) (000's)
Capital assets and goodwill by geographic area
Canada $ 9,504 $ 7,247
USA 316 138
Europe / Middle East 33,768 31,324
Other 21 20
-------------------------------------------------------------------------
$ 43,609 $ 38,729
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the six months ended March 31, 2005, three customers accounted for
Company sales of $11,637,000 or 37%. In the six months ended March 31, 2004,
no individual customer accounted for 10% or more of Company sales.
15. Income tax
The reconciliation of income tax computed at statutory tax rates to the
provision for income taxes is as follows:
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
Loss before
provision for
income taxes $ (760,981) $ (110,949) $ (492,225) $ (1,234,038)
Basic income
tax rate 36.2% 36.2% 36.2% 36.2%
-------------------------------------------------------------------------
Computed income
tax expense (275,475) (40,164) (178,185) (446,722)
Effect on income
tax resulting from:
Intangible asset
amortization not
deductible for
tax purposes 195,880 - 983,880 -
Other accounting
charges 5,520 - 78,120 -
Other 52,075 2,464 61,185 (9,678)
-------------------------------------------------------------------------
Provision for
income taxes $ (22,000) $ (37,700) $ 945,000 $ (456,400)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At March 31, 2005, the Company has approximately $1,964,000 of Canadian
Federal and Provincial non-capital loss carry forwards, which expire as
follows:
Year ended September 30, 2014 $ 1,766,000
2015 198,000
Future income taxes reflect the 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
future income tax asset are as follows:
March 31, September 30,
2005 2004
-------------------------------------------------------------------------
Net operating loss carry forward $ 689,000 $ 662,000
Tax basis of capital assets 18,000 18,000
-------------------------------------------------------------------------
Future income tax asset $ 707,000 $ 680,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The potential income tax benefits relating to the future tax assets are
recognized in the financial statements to the extent that their realization
meets the requirements of the "more likely than not" test under the liability
method of accounting for income taxes.
16. Net loss per share
Net loss per share is computed using the following weighted average
numbers of outstanding Common Shares:
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
Weighted
average shares
outstanding 26,526,122 15,625,190 26,087,216 13,836,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The diluted net loss per share has not been presented as there would be
an anti-dilutive effect.
The weighted average number of shares for 2004 has been restated to
reflect the change in the number of shares following the share exchange on
amalgamation described in Note 11, notes (b) and (c) relating to the tables
describing the six months ended March 31, 2004.
17. Subsequent events
(a) Effective April 1, 2005, the Company secured credit facilities
totaling approximately $16 million (GBP7 million) from the Bank of
Scotland ("BoS").
The facilities consist of (i) a term loan in the amount of
$11.4 million (GBP5 million), repayable in equal quarterly
instalments over a 5 year period, bearing interest at BoS Base Rate
plus 2.25%, and (ii) a working capital facility in the amount of
$4.6 million (GBP2 million), repayable on demand, and bearing
interest at BoS Base Rate plus 2.0%.
To date the Company has utilized the new credit facilities to
refinance existing bank indebtedness (see Note 6).
(b) On May 9, 2005, the Company renegotiated the repayment terms of the
notes payable, which are described in Note 9.
18. Related party transactions
During the period, the Company engaged in transactions in the normal
course of operations with companies controlled by certain directors of the
Company. Transactions and balances not otherwise disclosed are as follows:
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
-------------------------------------------------------------------------
Cost of sales
- materials $ 26,204 $ 130,526 $ 90,356 $ 147,362
March 31, September 30,
2005 2004
-------------------------------------------------------------------------
Accounts payable and accrued charges 6,099 8,649
Costs related to the acquisitions of
EOD and VPTI and related financing - 200,000
These transactions are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related parties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Second Quarter Ended March 31, 2005 (Canadian Dollars)
The following discussion and analysis ("MD&A") should be read in
conjunction with the unaudited consolidated financial statements of Allen-
Vanguard Corporation ("Allen-Vanguard" or the "Company") for the period ended
March 31, 2005, included elsewhere in this Second Quarter Report. The MD&A
should also be read in conjunction with Allen-Vanguard's 2004 Annual Report
including the audited consolidated financial statements for the fiscal year
ended September 30, 2004, and with its other securities filings available on
www.sedar.com . Allen-Vanguard reports its consolidated financial statements
in accordance with Canadian generally accepted accounting principles. The
abbreviation "FY" refers to the fiscal year ended September 30 and "Q" refers
to a quarterly period within a fiscal year.
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING INFORMATION
Certain statements made in the MD&A, including, without limitation,
statements relating to the Company's expectations concerning future
revenues and earnings, market conditions and the sufficiency of capital
and liquidity, constitute forward-looking statements. Allen-Vanguard
believes these statements to be true based on its knowledge as of May 9,
2005. These forward- looking statements are subject to risks and
uncertainties, many of which are beyond Allen-Vanguard's control, which
may cause future results to differ materially from those expected. Allen-
Vanguard does not undertake or accept any obligation to release publicly
any updates or revisions to any forward- looking statements to reflect
any change in the Company's expectations, except as prescribed by
applicable securities laws.
BUSINESS RISKS AND UNCERTAINTIES
As described in the Business Risks and Uncertainties section of Allen-
Vanguard's 2004 Annual Report, numerous factors could cause the Company's
results to differ materially from those in the forward-looking statements,
including, without limitation, period to period fluctuations of revenue and
operating expenses, technological change, government and military spending
levels, competition, environmental hazards, intellectual property issues,
dependence on key personnel, financing and acquisition capabilities, and
exposure to foreign currency movements.
NON-GAAP FINANCIAL MEASURES
This MD&A provides comments on certain non-GAAP financial measures.
Readers should be cautioned that this information should not be confused with
or used as an alternate for performance determined in accordance with GAAP.
Allen-Vanguard believes that these measures provide useful supplemental
information. However, these financial measures have no standardized meaning
prescribed by GAAP and therefore may not be comparable to similar measures
presented by other companies.
EBITDA - Earnings before interest, taxes, amortization, foreign
exchange and reorganization expense.
Adjusted EPS, basic - Basic earnings per share, adjusted for
amortization of intangible assets.
BUSINESS DESCRIPTION & MARKET CONDITIONS
Allen-Vanguard develops and markets technologies, tools and training for
defeating and minimizing the effects of hazardous devices and materials,
whether Chemical, Biological, Radiological, Nuclear or Explosive ("CBRNE").
The Company's equipment is in service with leading security and military
forces in more than 120 countries.
Products include a complete range of remote intervention robots for
hazardous applications, vehicle barrier systems, suspect package containers
and Electronic Counter-Measures ("ECM") equipment for jamming remote
detonation of terrorist devices. Allen-Vanguard develops, manufactures and
markets specialty security equipment for Explosive Ordnance Disposal, and is
the sole, worldwide licensee and/or developer of patented technologies such as
the Universal Containment System and CASCAD Foam for blast mitigation,
decontamination of bio-chemical warfare agents, and personal protective gear.
Head office operations are located in Ottawa, Ontario, Canada, with
manufacturing operations in Ottawa and Stoney Creek, Ontario; Tewkesbury,
U.K.; and Cork, Ireland, and sales offices in Canada, the U.S., the UK and
southeast Asia. The Company's shares are listed on The Toronto Stock Exchange
(TSX:VRS).
The primary market for Allen-Vanguard's products is the emergency
preparedness and response ("EP&R") market, and specifically organizations and
personnel who must prepare for the contingency of an incident involving
improvised explosive devices, or devices that may contain chemical, biological
or radiological agents. A secondary market for Allen-Vanguard is the military,
where the Company's products are used in theatres of conflict around the
world.
The industry is threat-driven, and has experienced considerable evolution
over the past several decades as terrorist groups have developed more
sophisticated Improvised Explosive Devices ("IEDs") which may include bio-
chemical or radiological agents, and may be detonated remotely by cell phone
or radio controlled initiation. This evolving threat is driving expenditure on
countermeasures as a high priority in most parts of the world, with the U.S.
making up about half of world spending.
While the elimination of terrorist threats abroad and tightened homeland
security is a high priority for many governments around the world, the actual
flow of funds is subject to the establishment of specific spending priorities
and delegations of authority by the umbrella bodies to intermediary
departments and agencies, which in turn must develop detailed program
guidelines. These layers of administration greatly reduce the speed of fund
movement and increase the complexity of the regulatory framework and this can
impact the timing of sales. Industry vendors must follow a multi-faceted sales
and marketing approach, building relationships with senior public policy
makers, intermediary department and agency personnel, relevant associations
and industry groups, and end-user customers. The sales cycle may be
characterized as lengthy and complex.
CORPORATE DEVELOPMENTS
Over the past year, Allen-Vanguard has been fundamentally transformed
through a series of acquisitions and financing transactions which have greatly
increased its revenue, overheads, and asset and capital bases. These
transactions are discussed in detail in the 2004 Annual Report, and are
summarized as follows:
Q1 2004
- Amalgamation of NBC Team Ltd. and Canadian Public Venture Equities I
Inc. to form Vanguard Response Systems Inc.
- Listing on The Toronto Stock Exchange
- Completion of an issue of common shares (the "First Private
Placement") which raised net proceeds of $1.2 million.
Q2 2004
- Completion of an issue of 9 million units at a price of $3.00 per
unit (the "Second Private Placement"), each unit consisting of one
common share and one-half of one warrant, with each whole warrant
entitling the holder to purchase one common share at a price of
$4.00 per share for a period of 18 months from the date of issue.
Net proceeds were approximately $25 million.
- Acquired 100% of the outstanding shares of EOD Performance Inc.
("EOD"), an Ottawa-based manufacturer of compact mobile robots. The
purchase consideration was $7.2 million; consisting of cash on
closing of $6.6 million and acquisition costs of $0.6 million, plus
up to an additional $12 million in contingent cash and share
payments (the "EOD Contingent Payments") based on EOD's sales
performance.
- Acquired 100% of the outstanding shares of Vanguard Protective
Technologies Inc. ("VPTI" - formerly Bosik Holdings Ltd. and its
affiliates); an Ottawa-based company engaged in the development of
vehicle barrier, land mine protective seats and suspect package
containment products. The purchase consideration was $1.1 million;
consisting of cash on closing of $1.0 million and acquisition costs
of $0.1 million, plus up to an additional $8.5 million in contingent
cash payments based on the manufacturing margin achieved on VPTI's
product sales subsequent to January 31, 2005.
Q3 2004
- Entered into a strategic advisory contract (the "U.S. Strategic
Advisory Contract") with Giuliani Partners LLC to assist with
marketing the Company's products in the United States. Giuliani
Partners LLC invested US$0.8 million of its strategic advisory fees
in the Company in the form of an unsecured two-year debenture
bearing interest at the rate of 5% per annum, payable semi-annually,
and convertible at the holder's option into the Company's common
shares at a price of CDN $4.00 per share. The holder of the
debenture may request early repayment at any time after May 3, 2005.
Q4 2004
- Acquired 100% of the outstanding shares of PW Allen Holdings Ltd.
("PWA"); a Tewkesbury, U.K.-based manufacturer and integrator of
explosive ordnance disposal bomb search and detection equipment,
bomb technician tools and ECM equipment. The purchase consideration
was $30.6 million, consisting of cash on closing of $14.5 million,
notes payable of $4.0 million (the "PWA Notes Payable"), common
shares of $8.5 million, warrants valued at $1.9 million and
acquisition costs of $1.7 million. Each of the 1.4 million warrants
issued entitle the holder to purchase one common share of Allen-
Vanguard at a price of $4.75. Additional consideration of up to pnds
stlg 1 million in cash and up to 659,000 common shares of Allen-
Vanguard may become payable to the PWA vendors, contingent on
certain performance targets being achieved. The cash consideration
was funded using a combination of cash on hand, banking facilities
of both Allen-Vanguard and PWA, and proceeds of approximately $7
million from the exercise of warrants granted in connection with the
Second Private Placement.
Q2 2005
- Amalgamation of Vanguard Response Systems Inc. and EOD Performance
Inc. to form Allen-Vanguard Corporation.
Given the impact of the preceding acquisitions and financing
transactions, detailed comparisons of Q2 2005 figures against Q2 2004 are not
meaningful, so this MD&A will include select comparisons of Q2 2005 figures to
Q1 2005 to provide a better indication of changes in Allen-Vanguard's
financial condition and operating results.
Allen-Vanguard's key priorities in FY 2005 are as follows:
1. Capitalize on cross-selling and marketing opportunities to drive
revenue growth in both the Americas and International sales
territories,
2. Analyze manufacturing, assembly and distribution costs within the
Company's plant locations to determine whether efficiencies can be
achieved by establishing global production centres for specific
products, and
3. Supplement Allen-Vanguard's current technologies through targeted
product development initiatives and select acquisitions. The
Company's product development effort will focus on technologies
with near-term market potential, and partial funding will be sought
through government partnership and tax credit programs.
OPERATING RESULTS
Selected Quarterly Financial Information (Unaudited)
(Amounts in millions of Canadian dollars,
except share amounts and per share amounts)
Fiscal 2005 Fiscal 2004
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue $ 13.5 $ 17.5 $ 11.6 $ 5.0 $ 3.0 $ 0.7
-------------------------------------------------------------------------
Gross profit 5.6 7.8 6.2 1.6 1.4 0.2
-------------------------------------------------------------------------
EBITDA 0.0 2.9 1.4 (0.1) (0.1) (0.8)
-------------------------------------------------------------------------
Amortization of
intangible assets 0.6 2.2 0.2 0.0 0.0 0.0
-------------------------------------------------------------------------
Provision for
income taxes 0.0 1.0 0.5 0.0 0.0 (0.4)
-------------------------------------------------------------------------
Net earnings
(loss) (0.7) (0.7) 0.9 (0.1) (0.1) (0.7)
-------------------------------------------------------------------------
EPS, basic $ (0.03) $ (0.03) $ 0.04 $ (0.00) $ (0.0) $ (0.06)
-------------------------------------------------------------------------
Adjusted EPS,
basic $ (0.01) $ 0.06 $ 0.05 $ (0.0) $ (0.0) $ (0.06)
-------------------------------------------------------------------------
Operating cash
flow 0.1 1.7 1.5 (0.4) (0.1) (1.1)
-------------------------------------------------------------------------
Capital
expenditures 0.4 0.5 0.2 0.2 0.0 0.0
-------------------------------------------------------------------------
Working capital 4.4 5.4 4.8 19.3 18.2 3.2
-------------------------------------------------------------------------
Total assets 72.8 74.3 69.3 31.4 31.7 5.2
-------------------------------------------------------------------------
Shares outstanding
(millions) 26.7 26.4 25.5 21.8 21.6 12.6
(I) Revenue
Allen-Vanguard's revenue base is comprised of equipment and service
orders aligned according to the following categories:
(i) Recurring orders of conventional EOD equipment from bomb squads
around the world, with a typical order value of less than
$200,000.
(ii) Initial orders of advanced technologies, such as the Company's
universal containment system or ECM equipment, for trial against
emerging CBRNE threats. Such contracts would generally be in the
range of $100,000 to $500,000. Allen-Vanguard may receive
additional revenue from training on such contracts.
(iii) Roll-out order quantities following successful trial of the
Company's advanced technologies, with an order value in the
$500,000 to $5 million range. Such contracts may involve
integrated packages of Allen-Vanguard's products, and include a
substantial training component.
(iv) Contracts to undertake research and development activities
relating to the Company's core technologies, generally funded by
government or military organizations. Such contracts are often
structured on a full-cost recovery basis including overheads, and
would typically be in the range of $200,000 to $1 million.
The timing of order fulfillment in categories (iii) and (iv) above can
result in substantial fluctuations in revenue from quarter to quarter.
In addition to the preceding revenue components, Allen-Vanguard is
pursuing teaming arrangements with larger contractors to bid on major program
tenders, primarily in the U.S. homeland security and military sectors. Such
programs could potentially generate substantial revenues, but Allen-Vanguard
lacks the manufacturing, support and financing capacity to compete on a stand-
alone basis against major defence industry players. The Company recently
teamed with Boston based Foster-Miller Inc. to submit a bid on the U.S. Army's
CREW2 tender for ECM equipment and support services for Iraq.
Revenue by geographic region is set out in the following table:
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
Q2 2005 Q1 2005 Q2 2004
-------------------------------------------------------------------------
Region
-------------------------------------------------------------------------
Canada $ 3.4 $ 1.3 $ 1.4
-------------------------------------------------------------------------
United States 4.4 5.4 0.8
-------------------------------------------------------------------------
Europe / Middle-East 5.1 6.1 0.1
-------------------------------------------------------------------------
Asia / Pacific 0.6 4.0 0.7
-------------------------------------------------------------------------
Other - 0.7 -
-------------------------------------------------------------------------
Total $ 13.5 $ 17.5 $ 3.0
-------------------------------------------------------------------------
Revenue was $13.5 million in Q2 2005 compared to $17.5 million in Q1
2005. The contract for equipping and training the Iraqi police force (the
"Iraq Contract") accounted for revenue of $4.3 million in Q2 2005 compared to
$3.6 million in Q1 2005.
Revenue generated in North America totaled $7.8 million in Q2 2005
compared to $6.7 million in Q1 2005. Revenue attributed to Canada was
particularly strong in Q2 2005 due to a major order of personal protective
wear and several R&D contracts with Canadian government and military
organizations. As well, sales of Allen-Vanguard's hook and line equipment were
up considerably in Q2 2005.
Excluding the Iraq Contract, revenue generated outside North America
totaled $1.4 million in Q2 2005 compared to $7.2 million in Q1 2004. Contracts
with Malaysia and Indonesia for remote intervention equipment provided revenue
of $3.6 million in Q1 2005, but there were no similar size contracts shipped
in Q2 2005. In March 2005, Allen-Vanguard announced a contract valued at
$5 million to equip an Asian military group with an integrated equipment and
service package, and an order for $1.2 million to supply Allen-Vanguard's
HAL(R) system to the U.S. military.
(III) Gross Margin
Gross margin was 41% of Q2 2005 revenue compared to 44% in Q1 2005 and
47% in Q2 2004. There is a considerable margin range across the Company's
product groups, and consequently the sales mix can skew overall gross margin
from period to period. As noted above, a greater proportion of revenue was
derived from sales of personal protective equipment and R&D contracts, which
have lower gross margins than products such as ECM or the Universal
Containment System. The year-to-date gross margin of 43% is within the range
43% to 48% which the Company expects to achieve in FY 2005.
(IV) Operating Expenses
Selling and administration
Selling and administration expense was $5.0 million in Q2 2005, compared
to $4.5 million in Q1 2005 and $1.4 million in Q2 2004. The Company recovered
$0.2 million of selling and administration expense in Q1 2005 through a tax
credit. The remaining increase of $0.3 million in Q2 2005 consisted primarily
of costs related to Allen-Vanguard's annual shareholders meeting, increased
audit, travel and stock-based compensation expenses, and costs associated with
the implementation of an enterprise resource planning system.
Staff costs comprised almost 50% of selling and administration expense in
the first six months of FY 2005. Other noteworthy items were liability
insurance premiums and fees paid under the U.S. Strategic Advisory Contract,
which collectively represented a further 12% of selling and administration
expenses.
Research and development
Research and development expense was $0.5 million in Q2 2005, compared to
$0.4 million in Q1 2005 and $0.1 million in Q2 2004. The increase from the
previous quarter is entirely attributed to a higher Canadian tax credit
recovery in Q1 2005. Allen-Vanguard will continue to focus its R&D activities
on projects with near-term market potential, and where possible, take
advantage of government funding programs and tax credits which significantly
reduce the net project cost.
Amortization
Amortization expense totaled $0.7 million in Q2 2005, of which
$0.6 million represented amortization of intangible assets. This compares to
amortization expense of $2.4 million in Q1 2005, with amortization of
intangible assets accounting for $2.2 million of the total.
Allen-Vanguard follows the purchase method of accounting for
acquisitions, as mandated by Section 1581 of the CICA Handbook. Under this
method, the purchase consideration is first allocated to the fair value of
tangible assets acquired. Any excess consideration is then allocated to
intangible assets to the extent that these can be separately identified.
Section 1581 provides extensive examples of intangible assets that must be
considered for value allocation, including items such as brand names, customer
lists, order backlog, and intellectual property such as patents, trade
secrets, and technical know-how. Any residual purchase consideration remaining
after recognizing these intangible assets is allocated to goodwill.
The value allocated to intangible assets must be amortized over the
expected useful lives of the assets, whereas the residual value allocated to
goodwill is not subject to amortization. Goodwill is, however, subject to an
annual impairment test.
As disclosed in Note 4 of Allen-Vanguard's FY 2004 audited financial
statements pertaining to acquisitions completed during the year, a total of
$5.6 million was allocated to intangible assets, of which $2.6 million was
assigned to orders on hand and the balance was assigned to technical drawings,
brand value, sales and distribution network and customer lists. The latter
items have relatively long useful lives, and are being amortized over a period
of 10 years. However, orders on hand at the acquisition dates have for the
most part been fulfilled at the end of the second quarter, and consequently
the Company amortized $2.0 million related to these orders in Q1 2005 and the
remaining balance of $0.4 million in Q2 2005. Going forward, amortization
expense related to the other intangible assets acquired will be approximately
$0.1 million per quarter.
Foreign exchange and Interest
Allen-Vanguard recorded a net foreign exchange gain of $0.1 million in Q2
2005, compared to a loss of $0.1 million in Q1 2005. The Company conducts
transactions and carries monetary assets and liabilities in Canadian and U.S.
dollars, British pounds, and Euros. The Company translates the financial
statements of its U.K., U.S. and Irish subsidiaries using the current rate
method pursuant to Section 1650 of the CICA Handbook.
Net interest expense was $0.1 million in Q2 2005, equal to the Q1 2005
figure.
(V) Earnings Measures
Earnings before interest, amortization, foreign exchange and amalgamation
costs (EBITDA) was slightly above break-even in Q2 2005, compared to
$2.9 million in Q1 2005 and a loss of $0.1 million in Q2 2004. Due to the
magnitude of amortization of intangible assets, Allen-Vanguard incurred a loss
before income tax expense of $0.8 million in Q2 2005 compared to a profit of
$0.3 million in Q1 2005 and a loss of $0.1 million in Q2 2004.
The Company recorded a net income tax recovery of less than $0.1 million
in Q2 2005, compared to an expense of $1.0 million in Q1 2005. The basic
income tax rate was consistent from quarter to quarter at 36%. Amortization of
intangible assets is non-deductible for tax purposes, which is the reason why
it appears that the Company's tax provision in Q1 2005 exceeded earnings
before income taxes.
Adjusted EPS, basic was $(0.01) in Q2 2005 compared to $0.06 in Q1 2005.
The net loss for Q2 2005 was $0.7 million or $0.03 per share, compared to
a net loss of $0.7 million or $0.03 per share in Q1 2005 and a net loss of
$0.1 million or $0.00 per share in Q2 2004.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
The principal components of Q2 2005 cash flow are as follows:
(I) Cash Flow from Operating Activities
Operating cash flow, defined as net earnings adjusted for non-cash items,
was $0.1 million in Q2 2005, compared to $1.7 million in Q1 2005 and $(0.1)
million in Q2 2004. The factors affecting net earnings and the material non-
cash items were discussed in the preceding section.
Changes in non-cash working capital used cash of $2.0 million in Q2 2005,
compared to a use of $1.4 million in Q1 2005. The Q2 2005 changes consisting
primarily of the following:
- Included in accounts receivable is a balance of $4.6 million in
respect of the Iraq Contract. The customer is a Cyprus-based
corporation contracted by the end-user, the Iraqi Ministry of
Interior. It is the Company's customary practice to seek letters of
credit to guarantee payment on international contracts. However, due
to the political instability in Iraq, it was not possible to obtain
such a letter of credit. The customer has made advance payments
totaling $8 million on the contract. To reduce collection risk on
the balance, Allen-Vanguard has accepted alternative security
including a mechanism to take joint custody over the payment from
the end-user, security over certain assets and a pledge of shares
representing a 49% interest in the Cyprus-based corporation and a
voting trust over the remaining 51% interest until the full
receivable is collected.
A key objective of Allen-Vanguard is to rapidly expand international
sales, but this will occasionally entail accepting increased credit
risk due to the political environment in which the customer
operates. Before accepting such contracts, the Company will continue
to review all options for obtaining prepayments, balance of payment
guarantees, loss protection insurance and other security
arrangements.
The $4.6 million Iraq Contract receivable more than offset a
reduction of $3.6 million in other accounts receivable, resulting in
a $1.0 million net increase in receivable in Q2 2005.
- Inventories decreased by $0.4 million through the quarter, and the
Company does not anticipate that any material investment in
additional inventory will be required to support projected sales
levels.
- Prepaid expenses and sundry assets decreased by $1.8 million in Q2
2005, as the Company expenses the advance payments made under both
its U.S. Strategic Advisory Contract and to a U.K. based sub-
contractor involved in the Iraq Contract.
- Accounts payable decreased by $3.0 million in Q2 2005, primarily due
to payments made to suppliers involved in the Iraq, Malaysia and
Indonesia contracts.
- Deferred revenue decreased by $1.1 million as the Company recognized
earned revenue on the Iraq contract.
(II) Investing Activities
Purchases of property, plant and equipment totaled $0.4 million in Q2
2005, compared to $0.5 million in Q1 2005. Leasehold improvements associated
with the Company's Tewkesbury and Ottawa facilities, and information
technology investments represented the majority of capital expenditures.
Allen-Vanguard expects quarterly capital spending to increase marginally
for the remainder of FY 2005 as leasehold improvements in Tewkesbury are
completed.
(III) Financing Activities
Cash provided by financing activities totaled $2.3 million in Q2 2005,
compared to cash used of $0.4 million in Q1 2005.
Allen-Vanguard generated $0.8 million in cash from common shares issued
in respect of warrants and options exercised during Q2 2005, compared to
$0.3 million in Q1 2005. There are approximately 2.6 million warrants issued
in connection with the Second Private Placement that remain outstanding with
an exercise price of $4.00.
(IV) Liquidity and Capital Resources
Allen-Vanguard had bank indebtedness, net of cash, of $6.8 million at
March 31, 2005 compared to $4.3 million at December 31, 2004. The Company had
cash and term deposits of $13.4 million at March 31, 2004 as this was
immediately following the Second Private Placement, EOD and VPTI acquisitions
but prior to the PWA acquisition.
Non-cash working capital totaled $11.2 million at March 31, 2005,
compared to $9.8 million at December 31, 2004 and $4.8 million at March 31,
2004.
Allen-Vanguard had common shares outstanding of 26.7 million and fully
diluted shares outstanding of 33.6 million at the end of Q2 2005. The
Company's ratio of net debt as a percentage of debt plus equity was 22% at the
end of Q2 2005 compared to 18% at the end of Q1 2005.
The Company believes that it has sufficient liquidity to carry out its
business plan, and if required could supplement its existing financial
resources, subject to prevailing market conditions, through additional equity
or debt offerings.
SUBSEQUENT EVENT
On April 1, 2005, the Company secured credit facilities totaling
approximately $16 million (GBP 7 million) from the Bank of Scotland ("BoS").
The facilities consist of (i) a term loan in the amount of $11.4 million
(GBP 5 million), repayable in equal quarterly instalments over a 5 year
period, bearing interest at BoS Base Rate plus 2.25%, and (ii) a working
capital facility in the amount of $4.6 million (GBP 2 million), repayable on
demand, and bearing interest at BoS Base Rate plus 2.0%.
To date the Company has utilized the new credit facilities to refinance
existing bank indebtedness.
On May 9, 2005, the Company renegotiated the terms of the PWA Notes
Payable, as described in Note 9 to the Q2 2005 financial statements.
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